<PAGE>
As filed with the Securities and Exchange Commission on November 14, 1997
Registration No. 33-26305
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. ___ [ ]
POST-EFFECTIVE AMENDMENT NO. 32 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 34 [X]
_____________________________________________
COMPASS CAPITAL FUNDS /SM/
(Formerly, The PNC/(R)/ Fund)
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
Bellevue Corporate Center Brian Kindelan, Esq. copy to:
400 Bellevue Parkway PNC Bank Corp. Gary S. Schpero, Esq.
Suite 100 1600 Market Street Simpson Thacher & Bartlett
Wilmington, Delaware 19809 28th Floor 425 Lexington Avenue
(Address of Principal Philadelphia, PA 19103 New York, New York 10017
Executive Offices) (Name and Address of
Registrant's Telephone Number Agent for Service)
(302) 792-2555
</TABLE>
_____________________________________________
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Registrant has previously registered an indefinite number of shares of
beneficial interest under the Securities Act of 1933, as amended, pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant's
24f-2 Notice for the fiscal year ended September 30, 1996 for all investment
portfolios was filed on November 26, 1996.
<PAGE>
COMPASS CAPITAL FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number
Form N-1A, Prospectus Statement of Additional
Part A Caption Information Caption
- ---------- --------------------------------------------- ------------------------------------
<S> <C> <C>
1 Cover Page
2 What Are The Expenses Of The Portfolios? Expenses
3(a) What are the Portfolios' Financial Performance Information
Highlights?
3(b) Not Applicable
3(c) How Is Performance Calculated?
4(a),(b) Cover Page; What Are The Portfolios?; What Investment Policies;
Additional Investment Policies And Risks Additional Information Concerning
Apply?; What Are The Portfolios' Shares
Fundamental Investment Limitations?; How Is
The Fund Organized?
4(c) What Are The Portfolios?; What Additional Investment Policies
Investment Policies And Risks Apply?
5 Who Manages The Fund? Trustees and Officers
5A Not Applicable
6(a),(b),(c) What Are The Shareholder Features Of The Shareholder and Trustee Liability
Fund?; How Frequently Are Dividends And of
Distributions Made To Investors?; How Is The the Fund; Additional Information
Fund Organized? Concerning Shares; Miscellaneous
6(d) Not Applicable
6(e) How Can I Get More Information?
6(f) How Frequently Are Dividends And
Distributions Made To Investors?
6(g) How Are Fund Distributions Taxed? Taxes
6(h) What Pricing Options Are Available To
Investors?
7(a) How Are Shares Purchased? How are Shares Purchase And Redemption
Purchased And Redeemed? Information
7(b) How Is Net Asset Value Calculated?; What Is Purchase And Redemption
The Schedule Of Sales Charges And Information
Exemptions?
7(c) What Is The Schedule Of Sales Charges And
Exemptions?
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Number
Form N-1A, Prospectus Statement of Additional
Part A Caption Information Caption
- ----------- --------------------------------------------- ------------------------------------
<S> <C> <C>
7(d) How Are Shares Purchased?; How Are Shares
Purchased And Redeemed?
7(e) Not Applicable
7(f) Who Manages The Fund? Investment Advisory,
Administration, Distribution And
Servicing Arrangements
7(g) What Is The Schedule Of Sales Charges And
Exemptions?
8(a),(b),(c), How Are Shares Redeemed?; How Are Purchase And Redemption
(d) Shares Purchased And Redeemed? Information
9 Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Number
Form N-1A, Prospectus Statement of Additional
Part B Caption Information Caption
- ------------ --------------------------------------------- ---------------------------------
<S> <C> <C>
10 Cover Page
11 Table of Contents
12 Not Applicable
13(a),(b),(c) What Additional Investment Policies And Investment Policies
Risks Apply?
13(d) Not Applicable
14(a) Trustees And Officers
14(b) Not Applicable
14(c) Trustees And Officers
15(a) How Is The Fund Organized? Miscellaneous
15(b) Not Applicable
15(c) Trustees And Officers
16 Who Manages The Fund? Investment Advisory,
Administration, Distribution and
Servicing Arrangements
17(a) Portfolio Transactions
17(b) Not Applicable
17(c) Portfolio Transactions
17(d) Not Applicable
17(e) Not Applicable
18(a) What Are The Shareholder Features Of The Additional Information
Fund?; How Frequently Are Dividends And Concerning
Distributions Made To Investors?; How Is The Shares
Fund Organized?
18(b) Not Applicable
19(a) How Are Shares Purchased?; How Are Shares Purchase And Redemption
Redeemed?; How Are Shares Purchased And Information
Redeemed?; What Are The Shareholder
Features Of The Fund?
19(b) How Is Net Asset Value Calculated Valuation Of Portfolio Securities
19(c) Purchase And Redemption
Information
20 How Are Fund Distributions Taxed? Taxes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Number
Form N-1A, Prospectus Statement of Additional
Part B Caption Information Caption
- ----------- --------------------------------------------- ------------------------------------
<S> <C> <C>
21(a) Who Manages The Fund? Investment Advisory,
Administration, Distribution And
Servicing Arrangements
21(b) Not Applicable
21(c) Not Applicable
22(a) Not Applicable
22(b) How Is Performance Calculated? Performance Information
23 Not Applicable
</TABLE>
Part C
------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
EXPLANATORY NOTE
The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the Money Market, Municipal Money Market, U.S. Treasury
Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market and New
Jersey Municipal Money Market Portfolios, and the Large Cap Value Equity, Large
Cap Growth Equity, Mid-Cap Value Equity, Mid-Cap Growth Equity, Small Cap Value
Equity, Small Cap Growth Equity, International Equity, International Emerging
Markets, Select Equity, Index Equity and Balanced Portfolios, each dated January
1, 1997, are incorporated by reference to the Registrant's filing of definitive
copies under Rule 497 under the Securities Act of 1933, as amended (the
"Securities Act"), on January 22, 1997.
The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the International Small Cap Equity Portfolio, each dated
August 20, 1997, are incorporated by reference to the Registrant's filing of
definitive copies under Rule 497 under the Securities Act on September 3, 1997.
The prospectus for the shares of the Multi-Sector Mortgage Securities Portfolio
III, dated January 1, 1997, is incorporated by reference to the Registrant's
filing of a definitive copy under Rule 497 under the Securities Act on January
27, 1997.
The prospectus for the shares of the BlackRock Strategic Portfolio I and the
BlackRock Strategic Portfolio II, dated March 3, 1997, as supplemented on
September 9, 1997, is incorporated by reference to the Registrant's filing of a
definitive copy under Rule 497 under the Securities Act on September 9, 1997.
The statement of additional information for the International Small Cap Equity
Portfolio, dated August 20, 1997, is incorporated by reference to the
Registrant's filing of a definitive copy under Rule 497 under the Securities Act
on September 3, 1997.
The statement of additional information for the Multi-Sector Mortgage Securities
Portfolio III, dated January 1, 1997, is incorporated by reference to the
Registrant's filing of a definitive copy under Rule 497 under the Securities Act
on January 27, 1997.
The statement of additional information for the BlackRock Strategic Portfolio I
and the BlackRock Strategic Portfolio II, dated March 3, 1997, as supplemented
on September 9, 1997, is incorporated by reference to the Registrant's filing of
a definitive copy under Rule 497 under the Securities Act on September 9, 1997.
<PAGE>
January , 1998
- --------------------------------------------------------------------------------
THE BOND PORTFOLIOS INVESTOR SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASKING THE KEY
QUESTIONS
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 4
What Are The Portfolios' Financial Highlights?............... 9
What Are The Portfolios?..................................... 20
What Are The Differences Among The Portfolios?............... 21
What Types Of Securities Are In The Portfolios?.............. 22
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 23
What Additional Investment Policies And Risks Apply?......... 24
Who Manages The Fund?........................................ 37
What Pricing Options Are Available To Investors?............. 41
What Are The Key Considerations In Selecting A Pricing
Option?..................................................... 43
How Are Shares Purchased?.................................... 44
How Are Shares Redeemed?..................................... 45
What Are The Shareholder Features Of The Fund?............... 47
What Is The Schedule Of Sales Charges And Exemptions?........ 49
How Is Net Asset Value Calculated?........................... 54
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 54
How Are Fund Distributions Taxed?............................ 55
How Is The Fund Organized?................................... 58
How Is Performance Calculated?............................... 59
Other Information On The High Yield Portfolio Management
Team........................................................ 61
How Can I Get More Information?.............................. 62
</TABLE>
This Prospectus contains information about the Compass Capital
bond Portfolios that a prospective investor needs to know before
investing. Please keep it for future reference. A
Statement of Additional Information dated January , 1998 has
been filed with the Securities and Exchange Commission (the
"SEC"). The Statement of Additional Information may be obtained
free of charge from the Fund by calling (800) 441-7762. The
Statement of Additional Information, as supplemented from time to
time, is incorporated by reference into this Prospectus.
THE COMPASS CAPITAL HIGH YIELD PORTFOLIO MAY INVEST UP TO 100% OF
ITS NET ASSETS IN NON-INVESTMENT GRADE DEBT SECURITIES, COM-MONLY
REFERRED TO AS "JUNK BONDS." JUNK BONDS ARE CONSIDERED TO BE
SPECULATIVE, AND ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS,
THAN THOSE FOUND IN HIGHER RATED SECURITIES. PURCHASERS SHOULD
CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO PRIOR TO INVESTING. SEE "WHAT ARE THE PORTFO-
LIOS?", "WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY--
HIGH YIELD SECURITIES" AND "APPENDIX B--DESCRIPTIONS OF RATING
CATEGORIES."
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY
OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT IN-
VESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS ARE INTENDED
ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE BOND PORTFOLIOS OF COMPASS CAPITAL FUNDS
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 33 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to
seek their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of 12 in-
vestment portfolios (the "Portfolios") that provide investors
with a broad spectrum of investment alternatives within the
fixed income sector. Eight of these Portfolios invest in tax-
able bonds, and four of these Portfolios invest in tax-exempt
bonds. A detailed description of each Portfolio begins on page
20.
COMPASS PERFORMANCE LIPPER PEER GROUP
CAPITAL BENCHMARK
PORTFOLIO
LOW DURATION Merrill 1-3 Short-Intermediate
BOND Year Treasury Investment Grade Debt
(PREVIOUSLY Index
CALLED THE
SHORT
GOVERNMENT
BOND
PORTFOLIO)
INTERMEDIATE Lehman Intermediate U.S. Government
GOVERNMENT Brothers
BOND Intermediate
Government
Index
INTERMEDIATE Intermediate Investment
BOND Lehman Grade Debt Funds
Brothers
Intermediate
Government/Corporate
Index
CORE BOND Intermediate Investment
Lehman Grade Debt
Aggregate
Index
GOVERNMENT Lehman General U.S. Government
INCOME Mortgage
Index/10 Year
Treasury
MANAGED Corporate Debt A-Rated
INCOME Lehman
HIGH YIELD Aggregate
Index
Lehman High High Yield
Yield Index
INTERNATIONAL Salomon Non- International Income
BOND U.S. Hedged
World
Government
Bond Index
Lehman General Municipal Debt
TAX-FREE Municipal
INCOME Bond Index
PA TAX-FREE Lehman Local PA Municipal Debt
INCOME GO Index
NJ TAX-FREE Lehman Local NJ Municipal Debt
INCOME GO Index
OH TAX FREE Lehman Local OH Municipal Debt
INCOME GO Index
UNDERSTANDING THE
THE COMPASS
CAPITAL BOND This Prospectus has been crafted to provide detailed, accurate
PORTFOLIOS and comprehensive information on the Compass Capital Portfo-
lios. We intend this document to be an effective tool as you
explore different directions in fixed income investing.
CONSIDERING
THE RISKS IN There can be no assurance that any mutual fund will achieve its
BOND investment objective. Some or all of the Portfolios may pur-
INVESTING chase mortgage-related, asset-backed, foreign, high yield and
illiquid securities; enter into repurchase and reverse repur-
chase agreements and engage in leveraging techniques; lend
portfolio securities to third parties; and enter into futures
contracts and opinions. Each of the Pennsylvania, New Jersey
and Ohio Tax-Free Income Portfolios (the "State-Specific Tax-
Free Portfolios") concentrates in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the perfor-
mance of a smaller number of securities than the other Portfo-
lios, which are considered diversified. See "What Additional
Investment Policies And Risks Apply?" The High Yield and the
Low Duration Bond Portfolios invest in high yield securities
which are considered high risk securities. See "What Additional
Investment Policies And Risks Apply?--High Yield Securities."
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased" and "How Are Shares
CAPITAL Redeemed?"
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Investor Shares
of the Portfolios for the fiscal year ended September 30, 1997 as a percentage
of average daily net assets. The figures shown for each Portfolio except the
Low Duration Bond and Managed Income Portfolios have been restated to reflect
current expenses and fee waivers. [Because no Investor B or Investor C Shares
of the Intermediate Bond Portfolio, no Investor C Shares of the Managed Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income
Portfolios] and no Investor A, Investor B or Investor C Shares of the High
Yield Portfolio were outstanding during the fiscal year ended September 30,
1997, the figures shown for those share classes under "Other expenses" are es-
timates for the current fiscal year. An example based on the summary is also
shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE
DURATION BOND GOVERNMENT BOND INTERMEDIATE
PORTFOLIO PORTFOLIO BOND PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 3.0% None None 4.0% None None 4.0% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .30% .30% .30% .30% .30% .30% .30% .30% .30%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee
waivers)(/3/) .72 .72 .72 .72 .72 .72 .72 .72 .72
--- --- --- --- --- --- --- --- ---
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .32 .32 .32 .32 .32
--- --- --- --- --- --- --- --- ---
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.02% 1.77% 1.77% 1.02% 1.77% 1.77% 1.02% 1.77% 1.77%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.80%, .80% and .82%, respectively, for Investor A Shares; and (ii) .80%,
.80% and .82% respectively, for Investor B Shares and Investor C Shares;
and "Total Portfolio operating expenses" would be: (iii) 1.30%, 1.30% and
1.32%, respectively, for Investor A Shares; and (iv) 2.05%, 2.05% and
2.07%, respectively, for Investor B Shares and Investor C Shares. The Port-
folios do not expect to incur 12b-1 fees in excess of .005% with respect to
Investor A Shares (otherwise payable at the maximum rate of .10%) during
the current fiscal year. See "What are the Portfolios' Financial High-
lights?" for information about interest paid by the Portfolios in connec-
tion with their investment activity.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" Long-term investors in Investor Shares may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the National Association of Securities Dealers, Inc. ("NASD").
4.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS? (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MANAGED
CORE BOND GOVERNMENT INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 4.0% None None 4.5% None None 4.5% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .30% .30% .30% .30% .30% .30% .35% .35% .35%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee
waivers)(/3/) .72 .72 .72 .72 .72 .72 .70 .70 .70
--- --- --- --- --- --- --- --- ---
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .32 .32 .32 .32 .32 .32 .30 .30 .30
--- --- --- --- --- --- --- --- ---
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.02% 1.77% 1.77% 1.02% 1.77% 1.77% 1.05% 1.80% 1.80%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.81%, .94% and .75%, respectively, for Investor A Shares; and (ii) .81%,
.94% and .75%, respectively, for Investor B Shares and Investor C Shares;
and "Total Portfolio operating expenses" would be: (iii) 1.31%, 1.44% and
1.25%, respectively, for Investor A Shares; (iv) 2.06%, 2.19% and 2.00%,
respectively, for Investor B Shares; and (v) 2.06%, 2.19% and 2.00%, re-
spectively, for Investor C Shares. The Portfolios do not expect to incur
12b-1 fees in excess of .005% with respect to Investor A Shares (otherwise
payable at the maximum rate of .10%) during the current fiscal year. See
"What are the Portfolios' Financial Highlights?" for information about in-
terest paid by the Portfolios in connection with their investment activity.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" Long-term investors in Investor Shares may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
5.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS? (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH YIELD INTERNATIONAL BOND TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 5.0% None None 5.0% None None 4.0% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .xx% .xx% .xx% .50% .50% .50% .30% .30% .30%
12b-1
fees(/3/)(/4/) .xx .xx .xx .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee waivers and
expense
reimbursements)(/3/) 0.00 .75 .75 .95 .95 .95 .72 .72 .72
---- --- --- --- --- --- --- --- ---
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .xx .xx .xx .55 .55 .55 .32 .32 .32
--- --- --- --- --- --- --- --- ---
Total Portfolio
operating
expenses
(after fee
waivers and
expense
reimbursements)(/3/) .xx% .xx% .xx% 1.45% 2.20% 2.20% 1.02% 1.77% 1.77%
=== === === ==== ==== ==== ==== ==== ====
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55%, .50% and .50%, respec-
tively, and administration fees would be .23% for each class of each Port-
folio. In addition, the Expense Summary reflects reimbursements made to the
Tax-Free Income Portfolio by the adviser. PAMG and the Portfolios' adminis-
trators are under no obligation to waive fees or reimburse expenses, but
have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
xx%, 1.03% and .84%, respectively, for Investor A Shares; (ii) xx%, 1.03%
and .84%, respectively, for Investor B Shares and Investor C Shares; and
"Total Portfolio operating expenses" would be: (iii) xx%, 1.58% and 1.34%,
respectively, for Investor A Shares; and (iv) xx% 2.33% and 2.09%, respec-
tively, for Investor B Shares and Investor C Shares. The Portfolios do not
expect to incur 12b-1 fees in excess of .005% with respect to Investor A
Shares (otherwise payable at the maximum rate of .10%) during the current
fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are the Key Considerations in Selecting a Pricing Op-
tion?" Long-term investors in Investor Shares may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
6.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS? (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA NEW JERSEY OHIO
TAX-FREE INCOME TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-
End Sales
Charge(/1/)
(as a
percentage of
offering price) 4.0% None None 4.0% None None 4.0% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a
percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING
EXPENSES (AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/3/) .30% .30% .30% .30% .30% .30% .30% .30% .30%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee waivers and
expense
reimbursements)(/3/) .67 .72 .67 .72 .72 .72 .72 .72 .72
--- --- --- --- --- --- --- --- ---
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .27 .32 .55 .32 .32 .32 .27 .32 .32
--- --- --- --- --- --- --- --- ---
Total Portfolio
operating
expenses
(after fee
waivers and
expense
reimbursements)(/3/) .97% 1.77% 1.77% 1.02% 1.77% 1.77% 1.02% 1.77% 1.77%
=== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the portfo-
lios. Without waivers, advisory fees would be .50% and administration fees
would be .23% for each class of each Portfolio. PAMG and the Portfolios'
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to waive fees and reimburse ex-
penses during the remainder of the current fiscal year as necessary to
maintain the Portfolios' total operating expenses at the levels set forth
in the table. Without waivers, "Other operating expenses" would be: (i)
.76%, .84% and .85%, respectively, for Investor A Shares and Investor B
Shares; and (ii) .81%, .84% and .85% for Investor C Shares; and "Total
Portfolio operating expenses" would be: (iii) 1.26%, 1.34% and 1.35% for
Investor A Shares; (iv) 2.06%, 2.09% and 2.10% for Investor B Shares; and
for Investor C Shares. The Portfolios do not expect to incur 12b-1 fees in
excess of .005% with respect to Investor A Shares (otherwise payable at the
maximum rate of .10%) during the current fiscal year.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" Long-term investors in Investor Shares may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
7.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) 5% annual return, (2) redemption at the end of each time
period and (3) with respect to Investor B Shares only, no redemption at the end
of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio
A Shares* $40 $61 $ 85 $151
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
Intermediate Government Bond
Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
Intermediate Bond Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
Core Bond Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
Government Income Portfolio
A Shares* 55 76 99 164
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
Managed Income Portfolio
A Shares* 55 77 100 167
B Shares (Redemption)** 63 94 120 182***
B Shares (No Redemption) 18 57 97 182***
C Shares 18 57 97 212
High Yield Portfolio
A Shares x x x x
B Shares (Redemption)** x x x x
B Shares (No Redemption) x x x x
C Shares x x x x
International Bond Portfolio
A Shares* 64 94 125 215
B Shares (Redemption)** 67 106 140 234***
B Shares (No Redemption) 22 69 118 234***
C Shares 22 69 118 253
Tax-Free Income Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
Pennsylvania Tax-Free Income
Portfolio
A Shares* 50 70 91 154
B Shares (Redemption)** 63 93 119 177***
B Shares (No Redemption) 18 56 96 177***
C Shares 18 56 96 208
New Jersey Tax-Free Income
Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
Ohio Tax-Free Income Portfolio
A Shares* 50 71 94 160
B Shares (Redemption)** 63 93 119 179***
B Shares (No Redemption) 18 56 96 179***
C Shares 18 56 96 208
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the begin-
ning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of the Investor B Shares to Investor A Shares after
seven years.
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
8.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountants. The financial statements
of the Core Bond Portfolio and the Low Duration Bond Portfolio
(formerly, the Short Government Bond Portfolio) for the year
ended June 30, 1995 were audited by other auditors. Please re-
fer to a revised auditor's report under "Other Information"
which makes reference to the audits performed by those other
auditors. This financial information should be read together
with those financial statements. Further information about the
performance of the Portfolios is available in the Fund's annual
shareholder reports. Both the Statement of Additional Informa-
tion and the annual shareholder reports may be obtained from
the Fund free of charge by calling (800) 441-7762. During the
periods shown, [no Investor B or Investor C Shares of the In-
termediate Bond Portfolio, no Investor C Shares of the Managed
Income, Pennsylvania Tax-Free Income, New-Jersey Tax-Free In-
come and Ohio Tax-Free Income Portfolios] and no Investor A or
Investor B or Investor C Shares of the High Yield Portfolio
were outstanding.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR B INVESTOR C
INVESTOR A SHARES SHARES SHARES
APRIL 1, 1996 JANUARY 13, 1996/1/
YEAR ENDED THROUGH THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1997 1997
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.79 $ 9.91
--- ------ ------ --- ---
Net investment income 0.25 0.10
Net realized and
unrealized loss on
investments (0.01) (0.12)
--- ------ ------ --- ---
Net increase from
investment operations 0.24 (0.02)
--- ------ ------ --- ---
Distributions from net
investment income (0.24) (0.10)
Distributions from net
realized capital gains -- --
--- ------ ------ --- ---
Total dividends and
distributions (0.24) (0.10)
--- ------ ------ --- ---
NET ASSET VALUE, END OF
PERIOD $ 9.79 $ 9.79
=== ====== ====== === ===
Total investment
return/3/ 2.46% (0.15)%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.02%/2/,/4/ 1.01%/2/,/4/
Excluding waivers 1.30%/2/ 1.21%/2/
Net investment income
Excluding waivers 5.20%/2/ 4.94%/2/
SUPPLEMENTAL DATA:
4.92%/2/ 4.74%/2/
PORTFOLIO TURNOVER 228% 185%
NET ASSETS, END OF
PERIOD (IN THOUSANDS) $ 938 $ 719
</TABLE>
+This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Low Duration Bond
Portfolio") of The BFM Institutional Trust Inc., which was organized as a Mary-
land business corporation. On January 13, 1996, the assets and liabilities of
the Predecessor Low Duration Bond Portfolio were transferred to this Portfolio,
and were combined with the assets of a pre-existing portfolio of investments
maintained by the Fund.
/1/Commencement of investment operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Including interest expense, ratios would have been % for the year ended
September 30, 1997, 1.12% for the year ended September 30, 1996 and 1.34% for
the year ended March 31, 1996.
9.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR INVESTOR
INVESTOR A SHARES B SHARES C SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 5/11/92/1/ YEAR YEAR
ENDED ENDED ENDED ENDED ENDED THROUGH ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/97 9/30/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.03 $ 9.64 $10.60 $10.46 $10.05
--- ------ ------ ------ ------ ------ --- ---
Income from investment
operations
Net investment income 0.55 0.55 0.53 0.54 0.24
Net gain (loss) on
investments (both
realized and
unrealized) (0.13) 0.39 (0.87) 0.16 0.41
--- ------ ------ ------ ------ ------ --- ---
Total from investment
operations 0.42 0.94 (0.34) 0.70 0.65
--- ------ ------ ------ ------ ------ --- ---
LESS DISTRIBUTIONS
Distributions from net
investment income (0.53) (0.55) (0.52) (0.54) (0.24)
Distributions from net
realized capital gains - - - - (0.10) (0.02) - -
--- ------ ------ ------ ------ ------ --- ---
Total distributions (0.53) (0.55) (0.62) (0.56) (0.24)
--- ------ ------ ------ ------ ------ --- ---
NET ASSET VALUE AT END OF
PERIOD $ 9.92 $10.03 $ 9.64 $10.60 $10.46
=== ====== ====== ====== ====== ====== === ===
Total return 4.36%/3/ 9.98%/3/ (3.36)%/3/ 6.84%/3/ 6.64%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $5,903 $9,802 $8,508 $7,666 $1,484
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.95%/4/ 0.70%/4/ 0.65% 0.76% 0.80%/2/
Before
advisory/administration
fee waivers 1.25% 1.07% 1.05% 0.84% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.64% 5.67% 5.24% 5.19% 5.28%/2/
Before
advisory/administration
fee waivers 5.35% 5.30% 4.84% 5.11% 5.28%/2/
PORTFOLIO TURNOVER RATE 580% 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Including interest expense, ratios would have been % for the year ended
September 30, 1997, 1.14% for the year ended September 30, 1996 and 0.70% for
the year ended September 30, 1995.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR INVESTOR
INVESTOR A SHARES B SHARES C SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 5/20/94/1/ YEAR YEAR
ENDED ENDED ENDED THROUGH ENDED ENDED
9/30/97 9/30/96 9/30/95 9/30/94 9/30/97 9/30/97
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $9.43 $ 9.05 $ 9.23
----- ----- ------ ------ ----- -----
Income from investment
operations
Net investment income 0.52 0.54 0.20
Net gain (loss) on
investments (both
realized and
unrealized) (0.09) 0.38 (0.17)
----- ----- ------ ------ ----- -----
Total from investment
operations 0.43 0.92 0.03
----- ----- ------ ------ ----- -----
LESS DISTRIBUTIONS
Distributions from net
investment income (0.51) (0.54) (0.21)
Distributions from net
realized capital gains (0.03) - - - -
----- ----- ------ ------ ----- -----
Total distributions (0.54) (0.54) (0.21)
----- ----- ------ ------ ----- -----
NET ASSET VALUE AT END OF
PERIOD $9.32 $ 9.43 $ 9.05
===== ===== ====== ====== ===== =====
Total return 4.74%/3/ 10.35%/3/ 0.31%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $9.35 $ 647 $ 87
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.97%/4/ 0.76%/4/ 0.85%/2/
Before
advisory/administration
fee waivers 1.27% 1.19% 1.28%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.83% 5.89% 5.35%/2/
Before
advisory/administration
fee waivers 5.53% 5.55% 4.92%/2/
PORTFOLIO TURNOVER RATE 670% 262% 92%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Including interest expense, ratios would have been % for the year ended
September 30, 1997, 1.27% for the year ended September 30, 1996 and 0.84% for
the year ended September 30, 1995.
11.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES INVESTOR B SHARES C SHARES
FOR THE FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD PERIOD
YEAR 4/1/96 1/31/96/1/ YEAR 4/1/96 3/18/96/1/ YEAR
ENDED THROUGH THROUGH ENDED THROUGH THROUGH ENDED
9/30/97 9/30/96 3/31/96 9/30/97 9/30/96 3/31/96 9/30/97
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.61 $ 9.99 $ 9.61 $ 9.58
----- ------ ------ ----- ------ ------ -----
Net investment income 0.28 0.08 0.26 0.01
Net realized and
unrealized gains on
investments (0.06) (0.38) (0.07) 0.03
----- ------ ------ ----- ------ ------ -----
Net (decrease) increase
from investment
operations 0.22 (0.30) 0.19 0.04
----- ------ ------ ----- ------ ------ -----
Dividends from net
investment income (0.28) (0.08) (0.25) (0.01)
Distributions from net
realized capital gains - - - - - - - -
Total dividends and
distributions (0.28) (0.08) - - - -
----- ------ ------ ----- ------ ------ -----
NET ASSET VALUE, END OF
PERIOD $ 9.55 $ 9.61 $ 9.55 $9.61
===== ====== ====== ===== ====== ====== =====
Total investment
return/3/ 2.36% (2.96)% 1.98% 0.33%
RATIOS TO AVERAGE NET
ASSETS:
Expenses/2/ 1.02%/4/ 1.02%/4/ 1.72%/4/ 1.77%/4/
Excluding waivers/2/ 1.31% 1.27% 2.01% 2.02%
Net investment income/2/ 6.29% 5.43% 5.68% 4.71%
Excluding waivers/2/ 6.00% 5.19% 5.39% 4.46%
SUPPLEMENTAL DATA:
Portfolio turnover 308% 723% 308% 723%
Net assets, end of
period (in thousands) $ 320 $ 80 $1,497 $ 77
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed In-
come Portfolio, a separate investment portfolio (the "Predecessor Core Bond
Portfolio") of The BFM Institutional Trust Inc., which was organized as a
Maryland business corporation. On January 13, 1996, the assets and liabili-
ties of the Predecessor Core Bond Portfolio were transferred to this Portfo-
lio, which had no prior operating history.
/1Commencement/of investment operations of share class.
/2Annualized./
/3Neither/front-end sales load nor contingent deferred sales load is reflected
in total return.
/4Including/interest expense, ratios for the Investor A and Investor B Classes
would have been % and %, respectively, for the year ended September 30,
1997, 1.27% and 2.00%, respectively, for the period ended September 30, 1996,
and 1.11% and 1.86% for the period ended March 31, 1996. For the periods
prior to March 31, 1996, interest income was presented net of interest ex-
pense.
12.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES INVESTOR B SHARES C SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 10/03/94/1/ YEAR YEAR 10/03/94/1/ YEAR
ENDED ENDED THROUGH ENDED ENDED THROUGH ENDED
9/30/97 9/30/96 9/30/95 9/30/97 9/30/96 9/30/95 9/30/97
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.68 $10.00 $10.68 $ 10.00
----- ------ ------ ----- ------- ------- -----
Income from investment
operations
Net investment income 0.68 0.55 0.60 0.50
Net gain (loss) on
investments (both
realized and
unrealized) (0.22) 0.68 (0.21) 0.68
----- ------ ------ ----- ------- ------- -----
Total from investment
operations 0.46 1.23 0.39 1.18
----- ------ ------ ----- ------- ------- -----
LESS DISTRIBUTIONS
Distributions from net
investment income (0.66) (0.55) (0.59) (0.50)
Distribution in excess
of net investment
income
Distributions from net
realized capital gains (0.28) - - (0.28) - -
Distributions in excess
of net realized gains - - - - - - - -
----- ------ ------ ----- ------- ------- -----
Total distributions (0.94) (0.55) (0.87) (0.50)
----- ------ ------ ----- ------- ------- -----
NET ASSET VALUE AT END OF
PERIOD $10.20 $10.68 $10.20 $ 10.68
===== ====== ====== ===== ======= ======= =====
Total return 4.43%/3/ 14.27%/3/ 3.68%/3/ 13.52%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $3,651 $2,990 $11,119 $10,188
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.91%/4/ 0.37%/2/, /4/ 1.64%/4/ 1.05%/2/, /4/
Before
advisory/administration
fee waivers 1.67% 1.81%/2/ 2.40% 2.50%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 8.59% 6.89%/2/ 7.81% 6.17%/2/
Before
advisory/administration
fee waivers 7.83% 5.44%/2/ 7.05% 4.72%/2/
PORTFOLIO TURNOVER RATE 434% 258% 434% 258%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
/4/Including interest expense, ratios for the Investor A and Investor B Shares
would have been % and %, respectively, for the year ended September 30,
1997, 2.96% and 3.69%, respectively, for the year ended September 30, 1996, and
0.92% and 1.60%, respectively, for the period ended September 30, 1995.
13.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES B SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 2/05/92/1/ YEAR
ENDED ENDED ENDED ENDED ENDED THROUGH ENDED
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/97
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.38 $ 9.79 $ 11.18 $10.74 $10.40
----- ------- ------- ------- ------ ------ -----
Income from investment
operations
Net investment income 0.59 0.60 0.57 0.66 0.46
Net gain (loss) on
investments (both
realized and
unrealized) (0.20) 0.60 (1.19) 0.57 0.34
----- ------- ------- ------- ------ ------ -----
Total from investment
operations 0.39 1.20 (0.62) 1.23 0.80
----- ------- ------- ------- ------ ------ -----
LESS DISTRIBUTIONS
Distributions from net
investment income (0.58) (0.60) (0.60) (0.66) (0.46)
Distribution in excess
of net investment
income - - (0.01) (0.02) - - - -
Distributions from net
realized capital gains (0.10) - - (0.14) (0.13) - -
Distributions in excess
of net realized gains - - - - (0.01) - - - -
----- ------- ------- ------- ------ ------ -----
Total distributions (0.68) (0.61) (0.77) (0.79) (0.46)
----- ------- ------- ------- ------ ------ -----
NET ASSET VALUE AT END OF
PERIOD $ 10.09 $ 10.38 $ 9.79 $11.18 $10.74
===== ======= ======= ======= ====== ====== =====
Total return 3.83%/3/ 12.74%/3/ (5.76)%/3/ 12.13%/3/ 7.86%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $11,193 $11,977 $10,921 $7,252 $1,417
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.05% 1.05% 1.00% 0.84% 0.80%/2/
Before
advisory/administration
fee waivers 1.29% 1.25% 1.22% 0.88% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.67% 5.96% 5.66% 6.09% 6.28%/2/
Before
advisory/administration
fee waivers 5.44% 5.76% 5.44% 6.05% 6.28%/2/
PORTFOLIO TURNOVER RATE 638% 203% 61% 72% 56%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
14.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES INVESTOR C SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 4/22/96/1/ YEAR 4/19/96/1/ YEAR 9/11/96/1/
ENDED THROUGH ENDED THROUGH ENDED THROUGH
9/30/97 9/30/96 9/30/97 9/30/96 9/30/97 9/30/96
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.37 $11.36 $11.58
------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.26 0.22 0.02
Net (loss) gain on
investments (both
realized and
unrealized) 0.32 0.33 0.12
------ ------ ------ ------ ------ ------
Total from investment
operations 0.58 0.55 0.14
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.24) (0.20) (0.01)
Distributions from net
realized capital gains - - - - - -
In Excess of Net
Realized Gains - - - - - -
------ ------ ------ ------ ------ ------
Total distributions (0.24) (0.20) (0.01)
------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END
OF PERIOD $11.71 $11.71 $11.71
====== ====== ====== ====== ====== ======
Total return/3/ 5.13% 4.90% 1.24%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 176 $ 136 $ 19
Ratios of expenses to
average net assets 1.45%/2/ 2.09%/2/ 1.53%/2/
Excluding waivers 1.86%/2/ 2.49%/2/ 1.93%/2/
Ratios of net
investment income to
average net assets 5.29%/2/ 4.61%/2/ 2.79%/2/
Excluding waivers 4.88%/2/ 4.21%/2/ 2.38%/2/
PORTFOLIO TURNOVER RATE 108% 108% 108%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. The assets and liabilities of the Prede-
cessor International Bond Portfolio were transferred to this Portfolio, which
had no prior operating history, on February 13, 1996. For the periods pre-
sented, this Portfolio received Sub-advisory services from another company
that was unaffiliated with PAMG and BlackRock.
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
15.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
<CAPTION>
INVESTOR
INVESTOR B SHARES C SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR YEAR 5/14/90/1/
ENDED ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
FOR THE
PERIOD
YEAR 7/18/96/1/ YEAR
ENDED THROUGH ENDED
9/30/97 9/30/96 9/30/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
AT BEGINNING OF
PERIOD $10.61 $10.04 $11.31 $10.60 $10.33 $ 9.91 $10.00
----- ------ ------ ------ ------ ------ ------ ------
Income from
investment
operations
Net investment
income 0.45 0.48 0.48 0.55 0.58 0.64 0.25
Net gain (loss)
on investments
(both realized
and unrealized) 0.21 0.59 (0.93) 0.83 0.49 0.46 (0.11)
----- ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations 0.66 1.07 (0.45) 1.38 1.07 1.10 0.14
----- ------ ------ ------ ------ ------ ------ ------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.43) (0.48) (0.48) (0.55) (0.59) (0.66) (0.23)
Distributions
from net
realized
capital gains - - (0.02) (0.34) (0.12) (0.21) (0.02) - -
----- ------ ------ ------ ------ ------ ------ ------
Total
distributions (0.43) (0.50) (0.82) (0.67) (0.80) (0.68) (0.23)
----- ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE
AT END OF PERIOD $10.84 $10.61 $10.04 $11.31 $10.60 $10.33 $ 9.91
===== ====== ====== ====== ====== ====== ====== ======
Total return 6.94%/3/ 10.99%/3/ (4.19)%/3/ 13.48%/3/ 10.67%/3/ 11.40%/3/ 1.40%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $4,873 $6,591 $6,972 $7,831 $7,349 $3,510 $4,044
Ratios of
expenses to
average net
assets
After
advisory/administration
fee waivers 1.04% 1.00% 0.95% 0.57% 0.53% 1.00% 1.00%/2/
Before
advisory/administration
fee waivers 1.37% 1.78% 2.18% 1.36% 1.67% 1.89% 1.70%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers 4.67% 4.74% 4.53% 5.06% 5.56% 6.23% 6.56%/2/
Before
advisory/administration
fee waivers 4.35% 3.96% 3.30% 4.27% 4.42% 5.34% 5.86%/2/
PORTFOLIO
TURNOVER RATE 268% 92% 40% 71% 38% 95% 18%
<S> <C> <C> <C>
NET ASSET VALUE
AT BEGINNING OF
PERIOD $ 10.74
------- ------------- --------
Income from
investment
operations
Net investment
income 0.08
Net gain (loss)
on investments
(both realized
and unrealized) 0.10
------- ------------- --------
Total from
investment
operations 0.18
------- ------------- --------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.08)
Distributions
from net
realized
capital gains - -
------- ------------- --------
Total
distributions (0.08)
------- ------------- --------
NET ASSET VALUE
AT END OF PERIOD $ 10.84
======= ============= ========
Total return 1.72%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $ 10
Ratios of
expenses to
average net
assets
After
advisory/administration
fee waivers 1.65%/2/
Before
advisory/administration
fee waivers 1.98%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers 3.84%/2/
Before
advisory/administration
fee waivers 3.51%/2/
PORTFOLIO
TURNOVER RATE 268%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
16.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 12/1/92/1/ YEAR YEAR 10/03/94/1/
ENDED ENDED ENDED ENDED THROUGH ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/97 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.33 $ 9.82 $ 10.70 $ 10.00 $10.33 $ 9.82
----- ------- ------- ------- ------- ----- ------ ------
Income from investment
operations
Net investment income 0.48 0.48 0.52 0.42 0.40 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.11 0.51 (0.85) 0.73 0.11 0.51
----- ------- ------- ------- ------- ----- ------ ------
Total from investment
operations 0.59 0.99 (0.33) 1.15 0.51 0.93
----- ------- ------- ------- ------- ----- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.48) (0.48) (0.52) (0.42) (0.40) (0.42)
Distributions from net
realized capital gains - - - - (0.03) (0.03) - - - -
----- ------- ------- ------- ------- ----- ------ ------
Total distributions (0.48) (0.48) (0.55) (0.45) (0.40) (0.42)
----- ------- ------- ------- ------- ----- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 10.44 $ 10.33 $ 9.82 $ 10.70 $10.44 $10.33
===== ======= ======= ======= ======= ===== ====== ======
Total return 5.81%/3/ 10.30%/3/ (3.06)%/3/ 11.69%/3/ 15.23%/3/ 9.69%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $38,031 $42,775 $46,563 $35,934 $7,974 $4,008
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.00% 0.98% 0.41% 0.07%/2/ 1.74% 1.57%/2/
Before
advisory/administration
fee waivers 1.30% 1.30% 1.01% 0.95%/2/ 2.03% 1.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.58% 4.88% 5.06% 5.19%/2/ 3.81% 4.07%/2/
Before
advisory/administration
fee waivers 4.29% 4.56% 4.46% 4.31%/2/ 3.51% 3.75%/2/
PORTFOLIO TURNOVER RATE 119% 66% 30% 40% 119% 66%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
17.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 2/1/96 1/26/96/1/ YEAR 7/2/96/1/
ENDED THROUGH THROUGH ENDED THROUGH
9/30/97 9/30/96 1/31/96 9/30/97 9/30/96
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.61 $11.54 $11.15
----- ------ ------ ----- ------
Income from investment
operations
Net investment income 0.34 - - 0.09
Net (loss) gain on
investments (both
realized and
unrealized) (0.34) 0.07 0.12
----- ------ ------ ----- ------
Total from investment
operations 0.00 0.07 0.21
----- ------ ------ ----- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.34) - - (0.09)
Distributions from net
realized capital gains - - - - - -
----- ------ ------ ----- ------
Total distributions (0.34) - - (0.09)
----- ------ ------ ----- ------
NET ASSET VALUE AT END OF
PERIOD $11.27 $11.61 $11.27
===== ====== ====== ===== ======
Total return/3/ (0.01)% 0.63% 2.04%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 894 $ 14 $ 30
Ratios of expenses to
average net assets 1.01%/2/ 1.02%/2/ 1.74%/2/
Excluding waivers 1.33%/2/ 1.36%/2/ 2.06%/2/
Ratios of net investment
income to average net
assets 4.29%/2/ 2.79%/2/ 3.48%/2/
Excluding waivers 3.98%/2/ 2.45%/2/ 3.16%/2/
PORTFOLIO TURNOVER RATE 109% 26% 109%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Bond Fund, a separate investment portfolio (the "Predecessor New Jersey
Tax-Free Income Portfolio") of Compass Capital Group, which was organized as
a Massachusetts business trust. On January 13, 1996, the assets and liabili-
ties of the Predecessor New Jersey Tax-Free Income Portfolio were transferred
to this Portfolio, which had no prior operating history.
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
18.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 12/1/92/1/ YEAR YEAR 10/13/94/1/
ENDED ENDED ENDED ENDED THROUGH ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/97 9/30/96 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.05 $ 9.60 $10.53 $10.00 $10.05 $ 9.58
----- ------ ------ ------ ------ ----- ------ ------
Income from investment
operations
Net investment income 0.46 0.52 0.53 0.36 0.38 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.10 0.45 (0.91) 0.53 0.10 0.47
----- ------ ------ ------ ------ ----- ------ ------
Total from investment
operations 0.56 0.97 (0.38) 0.89 0.48 0.89
----- ------ ------ ------ ------ ----- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.46) (0.52) (0.53) (0.36) (0.38) (0.42)
Distributions from net
realized capital gains - - - - (0.02) - - - - - -
----- ------ ------ ------ ------ ----- ------ ------
Total distributions (0.46) (0.52) (0.55) (0.36) (0.38) (0.42)
----- ------ ------ ------ ------ ----- ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.15 $10.05 $ 9.60 $10.53 $10.15 $10.05
===== ====== ====== ====== ====== ===== ====== ======
Total return/3/ 5.66% 10.46% (3.75)% 9.10% 4.78% 9.33%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $2,833 $3,303 $3,825 $2,386 $ 161 $ 106
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.91% 0.38% 0.10% 0.07%/2/ 1.66% 1.17%/2/
Before
advisory/administration
fee waivers 1.50% 1.45% 1.49% 2.58%/2/ 2.26% 2.25%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.57% 5.42% 5.18% 4.90%/2/ 3.80% 4.48%/2/
Before
advisory/administration
fee waivers 3.98% 4.35% 3.79% 2.39%/2/ 3.21% 3.41%/2/
PORTFOLIO TURNOVER RATE 136% 63% 61% 36% 136% 63%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is reflected
in total return.
19.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of 12
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the fixed income
sector. Eight of these Portfolios invest solely in taxable
bonds and four of these Portfolios invest in tax-exempt
bonds.
In certain investment cycles and over certain holding peri-
ods, a fund that invests in any one of these styles may per-
form above or below the market. An investment program that
combines these multiple disciplines allows investors to se-
lect from among these various product options in the way that
most closely fits the individual's investment goals and sen-
timents.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 Year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Government Income, Managed
Income and International
Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
High Yield To seek current income by investing
primarily in non-investment grade debt
securities. Debt securities of less
than investment grade are considered
"high risk" securities (commonly
referred to as "junk bonds").
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax-Free and, to the extent possible for each
Income and Ohio Tax-Free State-Specific Tax-Free Portfolio,
Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
20.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year Treasury 3-5 Years Investment Grade B
Bond Index Spectrum
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't Index
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Gov't/Corp Spectrum
Index
Core Bond 5-10 Years Investment Grade BBB
Lehman Aggregate Index Spectrum
Gov't Income Lehman Mortgage Index/ 10-15 Years Gov't/Agency AAA
10 Year Treasury
Managed 5-10 Years Investment Grade BBB
Income Lehman Aggregate Index Spectrum
High Yield Lehman High Yield Index 8-12 Years Non-Investment Grade C
Spectrum
International Salomon Non-U.S. Hedged 5-15 Years AA, AAA, BBB
Bond World Government Bond Gov't/Agency
Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
NJ Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
OH Tax-Free 10-15 Years Investment Grade BBB
Income Lehman Local GO Index Spectrum
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
**The Portfolios' sub-adviser will normally attempt to structure the Portfolios
to have comparable durations to the benchmarks. Duration, which measures price
sensitivity to interest rate changes, is not necessarily equal to average matu-
rity.
21.
<PAGE>
- --------------------------------------------------------------------------------
WHAT TYPES OF SECURITIES ARE IN THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securi-
ties at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may
or may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under
normal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ HIGH SECURITIES/
AGENCY COMMERCIAL YIELDS CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ SECURITIES RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Bond Yes Yes Yes Elig. Elig. Elig. Elig. Elig. Elig.
Intermediate Gov't Bond Yes Yes Yes Elig. Yes Elig. No No Elig.
Intermediate Bond Yes Yes Yes Elig. Yes Yes No No Elig.
Core Bond Yes Yes Yes Elig. Yes Yes No Elig. Elig.
Gov't Income Yes Yes Yes Elig. Yes Yes No No Elig.
Managed Income Yes Yes Yes Elig. Yes Yes No Elig. Elig.
High Yield Yes Yes No No Yes Yes Yes Elig. No
International Bond Elig. Elig. Elig. Elig. Elig. Elig. No Yes Elig.
Tax-Free Income Temp. No No No No No No No Yes
PA Tax-Free Income Temp. No No No No No No No Yes
NJ Tax-Free Income Temp. No No No No No No No Yes
OH Tax Free Income Temp. No No No No No No No Yes
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
22.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any change to a Portfolio's investment
objective. No assurance can be provided that a Portfolio will achieve its in-
vestment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio (as defined below), invest less than
80% of its net assets in Municipal Obligations (as defined below), except
during defensive periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), more than 5% of its total assets to be invested in securities of
any one issuer, except that up to 50% of a Portfolio's total assets may be in-
vested without regard to this limitation so long as no more than 25% of the
Portfolio's total assets are invested in any one issuer (except U.S. Government
securities).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
23.
<PAGE>
- -------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- -------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Intermediate Government Bond
Portfolio and Government Income Portfolio will be rated in the highest rating
category at the time of purchase or, if unrated, of comparable quality as de-
termined by the Portfolios' sub-adviser. Securities acquired by the other
Portfolios will be rated investment grade at the time of purchase (within the
four highest rating categories by Standard & Poor's Ratings Group ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch
Investor Services, Inc.) or, if unrated, of comparable quality as determined
by the Portfolios' sub-adviser. Securities rated "Baa" on "BBB" are generally
considered to be investment grade although they have speculative characteris-
tics. If a security's rating is reduced below the minimum rating that is per-
mitted for a Portfolio, the Portfolio's sub-adviser will consider whether the
Portfolio should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Intermediate Government
Bond Portfolio and Government Income Portfolio (the "Government Portfolios")
will invest at least 65% of their total assets in obligations issued or guar-
anteed by the U.S. Government, its agencies or instrumentalities and related
repurchase agreements during normal market conditions. Under normal market
conditions, the International Bond Portfolio will invest at least 65% of its
total assets in the debt obligations of foreign issuers located in at least
three different foreign countries. The Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the
"State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and pos-
sessions of the United States, the District of Columbia and their political
sub-divisions, agencies, instrumentalities and authorities and related tax-ex-
empt derivative securities the interest on which is exempt from regular Fed-
eral income tax and is not an item of tax preference for purposes of the Fed-
eral alternative minimum tax ("Municipal Obligations"). In addition, each
State-Specific Tax-Free Portfolio intends to invest at least 65% of its net
assets in Municipal Obligations of issuers located in the particular state in-
dicated by its name ("State-Specific Obligations"). The Tax-Free Income Port-
folio intends to invest no more than 25% of its net assets in Municipal Obli-
gations of issuers located in the same state. During temporary defensive peri-
ods each Tax-Free Portfolio may invest without limitation in securities that
are not Municipal Obligations and may hold without limitation uninvested cash
reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. Each of the Managed Income and Core Bond
Portfolios may invest up to 10% of its total assets and the Low Duration Bond
Portfolio may invest up to 20% of its total assets in debt securities of for-
eign issuers and may hold from time to time various foreign currencies pending
investment or conversion into U.S. dollars. Some of these Portfolios may have
the characteristics of futures contracts. In addition, each Portfolio may en-
gage in foreign currency exchange transactions to seek to protect against
changes in the level of future exchange rates which would adversely affect the
Portfolio's performance. These investments and transactions involving foreign
securities, currencies, options (including options that relate to foreign cur-
rencies), futures, hedging and cross-hedging are described below and under
"Interest Rate and Currency Transactions" and "Options and Futures Contracts."
Investing in securities of foreign issuers involves considerations not typi-
cally associated with investing in securities of companies organized and oper-
ated in the United States. Because foreign securities generally are denomi-
nated and pay dividends or interest in foreign currencies, the value of a
Portfolio that invests in foreign securities will be affected favorably or un-
favorably by changes in currency exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies
in the U.S. or abroad could result in appreciation or
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depreciation of portfolio securities and could favorably or adversely affect a
Portfolio's operations. In general, less information is publicly available with
respect to foreign issuers than is available with respect to U.S. companies.
Most foreign companies are also not subject to the uniform accounting and fi-
nancial reporting requirements applicable to issuers in the United States.
While the volume of transactions effected on foreign stock exchanges has in-
creased in recent years, it remains appreciably below that of the New York
Stock Exchange. Accordingly, a Portfolio's foreign investments may be less liq-
uid and their prices may be more volatile than comparable investments in secu-
rities in U.S. companies. In addition, there is generally less government su-
pervision and regulation of securities exchanges, brokers and issuers in for-
eign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
HIGH YIELD SECURITIES. The High Yield Portfolio will invest primarily in the
full spectrum of "high yield" or non-investment grade debt securities, commonly
known to investors as "junk bonds." The Low Duration Bond Portfolio may invest
in non-investment grade fixed income or convertible securities when the Portfo-
lio's sub-adviser believes that the investment characteristics of such securi-
ties make them desirable in light of the Portfolio's investment objective and
current portfolio mix, so long as under normal market conditions, no more than
20% of its total assets are invested in non-investment grade debt securities,
and such securities are rated "B" or higher at the time of purchase by at least
one major rating agency.
High yield securities are bonds that are issued by a company whose credit rat-
ing (based on rating agencies' evaluation of the likelihood of repayment) ne-
cessitates offering a higher coupon and yield on its issues when selling them
to investors who may otherwise be hesitant in purchasing the debt of such a
company. While generally providing greater income and opportunity for gain,
non-investment grade debt securities may be subject to greater risks than secu-
rities which have higher credit ratings, including a high risk of default, and
their yields will fluctuate over time. High yield securities will generally be
in the lower rating categories of recognized rating agencies (rated Ba or lower
by Moody's or BB or lower by Standard & Poor's) or will be non-rated. The
credit rating of a high yield security does not necessarily address its market
value risk, and
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ratings may from time to time change, positively or negatively, to reflect de-
velopments regarding the issuer's financial condition. High yield securities
are considered to be speculative with respect to the capacity of the issuer to
timely repay principal and pay interest or dividends in accordance with the
terms of the obligation and may have more credit risk than higher rated securi-
ties.
While the market values of high yield securities tend to react less to fluctua-
tions in interest rates than do those of higher rated securities, the values of
high yield securities often reflect individual corporate developments and have
a high sensitivity to economic changes to a greater extent than do higher rated
securities. Issuers of high yield securities are often in the growth stage of
their development and/or involved in a reorganization or takeover. The compa-
nies are often highly leveraged (have a significant amount of debt relative to
shareholders' equity) and may not have available to them more traditional fi-
nancing methods, thereby increasing the risk associated with acquiring these
types of securities. In some cases, obligations with respect to high yield se-
curities are subordinated to the prior repayment of senior indebtedness, which
will potentially limit a Portfolio's ability to fully recover principal or to
receive interest payments when senior securities are in default. Thus, invest-
ors in high yield securities have a lower degree of protection with respect to
principal and interest payments then do investors in higher rated securities.
During an economic downturn, a substantial period of rising interest rates or a
recession, highly leveraged issuers of high yield securities may experience fi-
nancial distress possibly resulting in insufficient revenues to meet their
principal and interest payment obligations, to meet projected business goals
and to obtain additional financing. An economic downturn could also disrupt the
market for lower-rated securities and adversely affect the value of outstanding
securities, the Portfolio's net asset value and the ability of the issuers to
repay principal and interest. If the issuer of a security held by a Portfolio
defaulted, the Portfolio may not receive full interest and principal payments
due to it and could incur additional expenses if it chose to seek recovery of
its investment.
The secondary markets for high yield securities are not as liquid as the sec-
ondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and partici-
pants in the markets are mostly institutional investors, including insurance
companies, banks, other financial institutions and mutual funds. In addition,
the trading volume for high yield securities is generally lower than that for
higher rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in
the condition of a particular issuer. Under certain economic and/or market con-
ditions, a Portfolio may have difficulty disposing of certain high yield secu-
rities due to the limited number of investors in that sector of the market. An
illiquid secondary market may adversely affect the market price of the high
yield security, which may result in increased difficulty selling the particular
issue and obtaining accurate market quotations on the issue when valuing a
Portfolio's assets. Market quotations on high yield securities are available
only from a limited number of dealers, and such quotations may not be the ac-
tual prices available for a purchase or sale.
The high yield markets may react strongly to adverse news about an issuer or
the economy, or to the perception or expectation of adverse news, whether or
not it is based on fundamental analysis. Additionally, prices for high yield
securities may be affected by legislative and regulatory developments. These
developments could adversely affect a Portfolio's net asset value and invest-
ment practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value and liquidity of out-
standing high yield securities, especially in a thinly traded market. For exam-
ple, federal legislation requiring the divestiture by federally insured savings
and loan associations of their investments in high yield bonds and limiting the
deductibility of interest by certain corporate issuers of high yield bonds ad-
versely affected the market in recent years.
When the secondary market for high yield securities becomes more illiquid, or
in the absence of readily available market quotations for such securities, the
relative lack of reliable objective data makes it more difficult to value a
Portfolio's securities, and judgment plays a more important role in determining
such valuations. Increased illiquidity in the junk bond market, in combination
with the relative youth and growth of the
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market for such securities, also may affect the ability of a Portfolio to dis-
pose of such securities at a desirable price. Additionally, if the secondary
markets for high yield securities contract due to adverse economic conditions
or for other reasons, certain of a Portfolio's liquid securities may become il-
liquid and the proportion of the Portfolio's assets invested in illiquid secu-
rities may significantly increase.
The Low Duration Bond Portfolio may invest in securities rated "B" and above or
determined by the sub-adviser to be of comparable quality. Such securities are
considered to have the current capacity to meet interest and principal pay-
ments, but have a greater vulnerability to default than higher rated securi-
ties. Adverse business, financial or economic conditions will likely impair ca-
pacity or willingness to pay interest and principal. The High Yield Portfolio
may invest in securities rated "C" and above or determined by the sub-adviser
to be of comparable quality. Securities rated "C" are considered highly specu-
lative and may be used to cover a situation where the issuer has filed a bank-
ruptcy petition but debt service payments are continued. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposure to adverse conditions.
The rating assigned by a rating agency evaluates the safety of a non-investment
grade security's principal and interest payments, but does not address market
value risk. Because such ratings of the ratings agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, the sub-adviser performs its own analysis of the issuers
whose non-investment grade securities the Portfolio holds. Because of this, the
Portfolio's performance may depend more on the sub-adviser's own credit analy-
sis than in the case of mutual funds investing in higher-rated securities. For
a description of these ratings, see Appendix B.
In selecting non-investment grade securities, the sub-adviser considers factors
such as those relating to the creditworthiness of issuers, the ratings and per-
formance of the securities, the protections afforded the securities and the di-
versity of the Portfolio. The sub-adviser continuously monitors the issuers of
non-investment grade securities held by the Portfolio for their ability to make
required principal and interest payments, as well as in an effort to control
the liquidity of the Portfolio so that it can meet redemption requests. If a
security's rating is reduced below the minimum credit rating that is permitted
for a Portfolio, the Portfolio's sub-adviser will consider whether the Portfo-
lio should continue to hold the security.
In the event that a Portfolio investing in high yield securities experiences an
unexpected level of net redemptions, the Portfolio could be forced to sell its
holdings without regard to the investment merits, thereby decreasing the assets
upon which the Portfolio's rate of return is based.
The expense ratio of the High Yield Portfolio can be expected to be higher than
those of Portfolios investing primarily in investment grade securities. The
costs attributable to investing in the high yield markets are usually higher
for several reasons, such as higher investment research costs and higher com-
mission costs.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
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Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that is not yet as marketable as
more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest on which is paid solely from revenues of similar projects. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. The Tax-Free Portfolios may also invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participations, beneficial interests in trusts and partnership interests.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Tax-Free Portfolio and affect its
share price.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its service providers will rely on such opinions and will
not review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative securities, or
the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in residential and commercial
mortgage-related and other asset-backed securities (i.e., securities backed by
home equity loans, installment sale contracts, credit card receivables or other
assets) issued by governmental entities and private issuers.
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The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. In most cases, however, payments of principal are applied
to the CMO classes in the order of their respective stated maturities, so that
no principal payments will be made on a CMO class until all other classes hav-
ing an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are con-
verted thereafter to interest-paying securities. They may also include planned
amortization classes ("PACs") which generally require, within certain limits,
that specified amounts of principal be applied on each payment date, and gener-
ally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws which give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may normally be prepaid at any
time because the underlying assets (i.e., loans) generally may be prepaid at
any time. In calculating the average weighted maturity of a Portfolio, the ma-
turity of mortgage-related and other asset-backed securities held by the Port-
folio will be based on estimates of average life which take prepayments into
account. The average life of a mortgage-related instrument, in particular, is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities as the result of scheduled principal payments
and mortgage prepayments. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a Portfolio will generally be at
lower rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears Mortgage) or mortgage-related securities contain-
ing loans or mortgages originated by PNC Bank, National Association ("PNC
Bank") or its affiliates. It is possible
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that under some circumstances, PNC Mortgage Securities Corp. or its affiliates
could have interests that are in conflict with the holders of these mortgage-
backed securities, and such holders could have rights against PNC Mortgage Se-
curities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives all or most of the interest are generally higher than prevailing market
yields on other mortgage-related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments. Additionally, current federal tax law requires the holder of certain
zero coupon bonds to accrue income with respect to these securities prior to
the receipt of cash payments. To maintain its qualification as a regulated in-
vestment company and avoid liability for federal income and excise taxes, a
Portfolio may be required to distribute income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvanta-
geous circumstances in order to generate cash to satisfy these distribution re-
quirements. See "How Are Fund Distributions Taxed?"
PAY-IN-KIND BONDS. Pay-in-kind, or PIK, bonds are bonds which pay interest
through the issuance of additional debt or equity securities. Similar to zero
coupon obligations, pay-in-kind bonds also carry additional risk as holders of
these types of securities realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, a Portfolio may
obtain no return at all on its investment. The market price of pay-in-kind
bonds is affected by interest rate changes to a greater extent, and therefore
tends to be more volatile, than that of securities which pay interest in cash.
Additionally, current federal tax law requires the holder of certain pay-in-
kind bonds to accrue income with respect to these securities prior to the re-
ceipt of cash payments. To maintain its qualification as a regulated investment
company and avoid liability for federal income and excise taxes, a Portfolio
may be required to distribute income accrued with respect to these securities
and may have to dispose of portfolio securities under disadvantageous circum-
stances in order to generate cash to satisfy these distribution requirements.
See "How Are Fund Distributions Taxed?"
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks,
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and may acquire commercial obligations issued by Canadian corporations and Ca-
nadian counterparts of U.S. corporations, as well as Europaper, which is U.S.
dollar-denominated commercial paper of a foreign issuer. Bank obligations may
include certificates of deposit, notes, bankers' acceptances and fixed time de-
posits. These obligations may be general obligations of the parent bank or may
be limited to the issuing branch or subsidiary by the terms of a specific obli-
gation or by government regulation. The Portfolios may also make interest-bear-
ing savings deposits in commercial and savings banks in amounts not in excess
of 5% of their respective total assets.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the Government National Mort-
gage Association are supported by the United States' full faith and credit;
others such as those of the Federal National Mortgage Association and the Stu-
dent Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit Banks
or the Federal Home Loan Mortgage Corporation are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government-sponsored agencies or instrumen-
talities if it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios may enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of their holdings, as a duration manage-
ment technique or to protect against an increase in the price of securities a
Portfolio anticipates purchasing at a later date. The Portfolios intend to use
these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of inter-
est on a notional principal amount from the party selling such interest rate
floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of transactions in portfolio securities denominated in that foreign currency,
and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts (futures contracts). The Portfolio may also purchase ex-
change-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency fluctua-
tions, the International Bond Portfolio may enter into currency swaps. Currency
swaps involve the exchange of the rights of the Portfolio and another party to
make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write (i.e., sell) covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative, or, with
respect to the International Bond Portfolio, cross-hedging. For the payment of
a premium, the purchaser of an option obtains the right to buy (in the case of
a call option) or to sell (in the case of a put option) a security at a stated
exercise price for a specific period of time. These options may relate to par-
ticular securities, securities indices, or the yield differential between two
securities or, in the case of the International Bond Portfolio,
31.
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foreign currencies, and may or may not be listed on a securities exchange and
may or may not be issued by the Options Clearing Corporation. A Portfolio will
not purchase put and call options when the aggregate premiums on outstanding
options exceed 5% of its net assets at the time of purchase, and will not
write options on more than 25% of the value of its net assets (measured at the
time an option is written). Options trading is a highly specialized activity
that entails greater than ordinary investment risks. In addition, unlisted op-
tions are not subject to the protections afforded purchasers of listed options
issued by the Options Clearing Corporation, which performs the obligations of
its members if they default.
To the extent consistent with its investment objective, each Portfolio may
also invest in futures contracts and options on futures contracts for hedging
purposes or to maintain liquidity. The value of a Portfolio's contracts may
equal or exceed 100% of its total assets, although a Portfolio will not pur-
chase or sell a futures contract unless immediately afterwards the aggregate
amount of margin deposits on its existing futures positions plus the amount of
premiums paid for related futures options entered into for other than bona
fide hedging purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order
to offset an expected decrease in the value of its portfolio positions that
might otherwise result from a market decline or currency exchange fluctuation.
A Portfolio may do so either to hedge the value of its securities portfolio as
a whole, or to protect against declines occurring prior to sales of securities
in the value of the securities to be sold. In addition, a Portfolio may uti-
lize futures contracts in anticipation of changes in the composition of its
holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in-
struments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; (d)
the sub-adviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors;
and (e) the possibility that the counterparty will default in the performance
of its obligations. For further discussion of risks involved with domestic and
foreign futures and options, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments
in guaranteed investment contracts ("GICs") issued by highly rated U.S. insur-
ance companies. Under these contracts, a Portfolio makes cash contributions to
a deposit fund of the insurance company's general account. The insurance com-
pany then credits to the Portfolio, on a monthly basis, interest which is
based on an index (such as the Salomon Brothers CD Index), but is guaranteed
not to be less than a certain minimum rate. Each Portfolio does not expect to
invest more than 5% of its net assets in GICs at any time during the current
fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require
that the loans be secured by collateral in cash, U.S. Government securities or
irrevocable bank letters of credit maintained on a current basis equal in
value to at least
32.
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the market value of the loaned securities. A Portfolio may not make such loans
in excess of 33 1/3% of the value of its total assets. Securities loans involve
risks of delay in receiving additional collateral or in recovering the loaned
securities, or possibly loss of rights in the collateral if the borrower of the
securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolios may invest up to 10% of their total assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate of an
inverse floater resets in the opposite direction from the market rate of inter-
est to which it is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility in their market values. Issuers of unrated variable and floating rate
instruments must satisfy the same criteria as set forth above for a Portfolio.
The absence of an active secondary market with respect to particular variable
and floating rate instruments, however, could make it difficult for a Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
through reverse repurchase agreements under which a Portfolio sells portfolio
securities to financial institutions such as banks and broker-dealers and
agrees to repurchase them at a particular date and price. The Portfolios may
use the proceeds of reverse repurchase agreements to purchase other securities
either maturing, or under an agreement to resell, on a date simultaneous with
or prior to the expiration of the reverse repurchase agreement. The Portfolios
(except the Tax-Free Portfolios) may use reverse repurchase agreements when it
is anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the trans-
action. This use of reverse repurchase agreements may be regarded as leveraging
and, therefore, speculative. Reverse repurchase agreements involve the risks
that the interest income earned in the investment of the proceeds will be less
than the interest expense, that the market value of the securities sold by a
Portfolio may decline below the price of the securities the Portfolio is obli-
gated to repurchase and that the securities may not be returned to the Portfo-
lio. During the time a reverse repurchase agreement is outstanding, a Portfolio
will maintain a segregated account with the Fund's custodian containing cash,
U.S. Government or other appropriate liquid debt securities having a value at
least equal to the repurchase price. A Portfolio's reverse repurchase agree-
ments, together with any other borrowings, will not exceed, in the aggregate,
33 1/3% of the value of its total assets. In addition, a Portfolio (except the
Tax-Free Portfolios) may borrow up to an additional 5% of its total assets for
temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that each Portfolio bears directly in connection with its
own operations.
33.
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ILLIQUID SECURITIES. No Portfolio will invest more than 15% of the value of its
net assets in securities that are illiquid. GICs, variable and floating rate
instruments that cannot be disposed of within seven days, and repurchase agree-
ments and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to this 15% limit. Each
Portfolio may purchase securities which are not registered under the Securities
Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the Portfolios' sub-
adviser that an adequate trading market exists for the securities. This invest-
ment practice could have the effect of increasing the level of illiquidity in a
Portfolio during any period that qualified institutional buyers become uninter-
ested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates or market action.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time a Portfo-
lio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the sub-adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully em-
ployed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
34.
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PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not be a factor preventing a
sale or purchase when the sub-adviser believes investment considerations war-
rant such sale or purchase. Portfolio turnover may vary greatly from year to
year as well as within a particular year. High portfolio turnover rates (i.e.,
100% or more) will generally result in higher transaction costs to a Portfolio
and may result in the realization of short-term capital gains that are taxable
to shareholders as ordinary income.
INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing inter-
est rates. Fixed income securities with longer maturities, which tend to pro-
duce higher yields, are subject to potentially greater capital appreciation and
depreciation than securities with shorter maturities. The Portfolios are not
restricted to any maximum or minimum time to maturity in purchasing individual
portfolio securities, and the average maturity of a Portfolio's assets will
vary within the limits stated above under "What Are the Differences Among the
Portfolios?" based upon its sub-adviser's assessment of economic and market
conditions. Although the Portfolios' sub-adviser will normally attempt to
structure each Portfolio to have a comparable duration to its benchmark as
stated for that section, there can be no assurance that it will be able to do
so at all times.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in State-Spe-
cific Obligations raises special investment considerations. In particular,
changes in the economic condition and governmental policies of a state and its
political subdivisions could adversely affect the value of a Portfolio's
shares. Certain matters relating to the states in which the State-Specific Tax-
Free Portfolios invest are described below. For further information, see "Spe-
cial Considerations Regarding State-Specific Obligations" in the Statement of
Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following four
years. As of June 30, 1995, the General Fund had a surplus of $688.3 million.
For the fiscal year ended June 30, 1996, the General Fund's expenditures ex-
ceeded available revenues by approximately $253 million; this shortfall was
funded by the General Fund's unappropriated surplus. Rising unemployment, a
relatively high proportion of persons 65 and older in the Commonwealth and
court ordered increases in healthcare reimbursement rates place increased pres-
sures on the tax resources of the Commonwealth and its municipalities. The Com-
monwealth has sold a substantial amount of bonds over the past several years,
but the debt burden remains moderate. Employment growth has shifted to the
trade and service sectors, with losses in more high-paid manufacturing posi-
tions. A new governor took office in January 1995, but the Commonwealth has
continued to show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county. This
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in
35.
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many other industrially developed states, tends to be more cyclical than in
some other states and in the nation as a whole. Agriculture is an important
segment of the Ohio economy with over half the State's area devoted to farming
and approximately 16% of total employment in agribusiness. In past years, the
State's overall unemployment rate has been somewhat higher than the national
figure. For example, the reported 1990 average monthly State rate was 5.7%,
compared to the 5.5% national figure. However, for the last five years the
State rates were below the national rates (4.8% versus 5.6% in 1995). The unem-
ployment rate and its effects vary among particular geographic areas of the
State. There can be no assurance that future national, regional or state-wide
economic difficulties and the resulting impact on State or local government fi-
nances generally will not adversely affect the market value of Ohio State-Spe-
cific Obligations held in the Portfolio or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those obligations.
36.
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the di-
TRUSTEES rection of its Board of Trustees. The following persons cur-
rently serve on the Board:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Professor of Finance and Director of the
Financial Institutions Center, The Wharton School, University
of Pennsylvania.
David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
ates, Inc.
ADVISER AND
SUB-ADVISER The Adviser to the Compass Capital Funds is PNC Asset Manage-
ment Group, Inc. ("PAMG"). Each of the Portfolios within the
Compass Capital Fund family is managed by a specialized portfo-
lio manager who is a member of PAMG's fixed income portfolio
management subsidiary, BlackRock Financial Management, Inc.
("BlackRock"). BlackRock has its primary offices at 345 Park
Avenue, New York, New York 10154.
The Portfolios and their portfolio managers are as follows:
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<C> <S>
Low Duration Bond Robert S. Kapito; Vice Chairman of BlackRock
since 1988; Portfolio co-manager since its
inception.
Scott Amero; Managing Director of BlackRock since
1990; Portfolio co-manager since its inception.
Jody Kochansky; Vice President of BlackRock since
1992; Portfolio co-manager since 1995.
Intermediate Government Bond Robert S. Kapito and Scott Amero (see above) and
Michael P. Lustig; Mr. Lustig has been Vice
President of BlackRock since 1989; Messrs.
Kapito, Lustig and Amero have been Portfolio co-
managers since 1995.
Intermediate Bond Robert S. Kapito, Michael P. Lustig and Scott
Amero (see above); Messrs. Kapito, Lustig and
Amero have been Portfolio co-managers since 1995.
Core Bond Keith Anderson; Managing Director of BlackRock
since 1988; Portfolio co-manager since June 1997.
Robert Michele, CFA; Managing Director of
BlackRock since 1996; Prior to joining BlackRock
in 1995, Mr. Michele was a Director and head of
US Fixed Income Investments with CS First Boston
Investment Management Corporation; From 1985-
1993, he served as Deputy Manager and Senior
Portfolio Manager at Brown Brothers Harriman &
Co.; Portfolio co-manager since June 1997.
Government Income Robert S. Kapito, Michael P. Lustig and Scott
Amero (see above); Messrs. Kapito, Lustig and
Amero have been Portfolio co-managers since 1995.
</TABLE>
37.
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<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<C> <S>
Managed Income Keith Anderson; Managing Director of BlackRock
since 1988; Portfolio co-manager since June 1997.
Robert Michele (see above): Portfolio Manager at
Brown Brothers Harriman & Co.; Portfolio co-
manager since June 1997.
High Yield , and Robert S. Kapito (see
above): Portfolio co-managers since inception.
International Bond Andrew Gordon; Portfolio manager at BlackRock
since 1996; responsible for non-dollar research
at Barclay Investments from 1994 to 1996 and at
CS First Boston from 1986 to 1994; Portfolio
manager since January 1997.
Tax-Free Income Kevin Klingert; portfolio manager at BlackRock
since 1991; prior to joining BlackRock, Assistant
Vice President, Merrill Lynch, Pierce, Fenner &
Smith; Portfolio manager since 1995.
Pennsylvania Tax-Free Income Kevin Klingert (see above); Portfolio manager
since 1995.
New Jersey Tax-Free Income Kevin Klingert (see above); Portfolio manager
since 1995.
Ohio Tax-Free Income Kevin Klingert (see above); Portfolio manager
since 1995.
</TABLE>
PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1600
Market Street, 29th Floor, Philadelphia, Pennsylvania 19103.
PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-adviser are entitled to fees, com-
puted daily on a Portfolio-by-Portfolio basis and payable
monthly, at the maximum annual rates set forth below. As
stated under "What Are The Expenses Of The Portfolios?" PAMG
and the sub-adviser intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by PAMG, and do not represent an extra charge to the
Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND AND HIGH HIGH YIELD AND
YIELD PORTFOLIOS INTERNATIONAL BOND PORTFOLIOS
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
----------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1997, the Portfo-
lios paid investment advisory fees at the following annual
rates (expressed as a percentage of average daily net assets)
after voluntary fee waivers: Intermediate Government Bond
Portfo- lio, .28%; Intermediate Bond Portfolio, .30%; Govern-
ment Income Portfolio, .30%; Man-
38.
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aged Income Portfolio, .35%; Tax-Free Income Portfolio, .28%;
Pennsylvania Tax-Free Income Portfolio, .29%; Ohio Tax-Free In-
come Portfolio, .06%; Low Duration Bond Portfolio, .30%; Core
Bond Portfolio, .30%, New Jersey Tax-Free Income Portfolio,
.30%; and the International Bond Portfolio, .55%.
The Portfolios' sub-adviser strives to achieve best execution
on all transactions. Infrequently, brokerage transactions for
the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor, subject to the requirements of
best execution.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve
as the 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 ma-
jority of the outstanding stock of PDI is owned by its offi-
cers.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets. PFPC and CDI
are entitled to receive a combined administration fee, computed
daily and payable monthly, at the aggregate annual rate of (i)
.085% of the first $500 million of each Portfolio's average
daily net assets, .075% of the next $500 million of each Port-
folio's average daily net assets and .065% of the average daily
net assets of each Portfolio in excess of $1 billion and (ii)
.115% of the first $500 million of the average daily net assets
allocated to each class of Investor Shares of each Portfolio,
.105% of the next $500 million of such average daily net assets
and .095% of the average daily net assets allocated to each
class of Investor Shares of each Portfolio in excess of $1 bil-
lion. From time to time the Administrators may waive some or
all of their administration fees from a Portfolio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal period, see "What Are the Ex-
penses of the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
DISTRIBUTION Under the Fund's Distribution and Service Plan (the "Plan"),
AND SERVICE Investor Shares of the Portfolios bear the expense of payments
PLAN ("distribution fees") made to CDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank, for distribu-
tion and sales support services. The distribution fees may be
used to compensate the Distributor for distribution services
and to compensate the Distributor and PNC Bank affiliates for
sales support services provided in connection with the offering
and sale of Investor Shares. The distribution fees may also be
used to reimburse the Distributor and PNC Bank affiliates for
related expenses, including payments to brokers, dealers, fi-
nancial institutions and industry professionals ("Service Orga-
nizations") for sales support services and related expenses.
Distribution fees payable under the Plan will not exceed .10%
(annualized) of the average daily net asset value of each Port-
folio's outstanding Investor A Shares and .75% (annualized) of
the average daily net
39.
<PAGE>
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asset value of each Portfolio's outstanding Investor B and
Investor C Shares. Payments under the Plan are not tied di-
rectly to out-of-pocket expenses and therefore may be used by
the recipients as they choose (for example, to defray their
overhead expenses). The Plan also permits the Distributor,
PAMG, the Administrators and other companies that receive
fees from the Fund to make payments relating to distribution
and sales support activities out of their past profits or
other sources available to them.
Under the Plan, the Fund intends to enter into service ar-
rangements with Service Organizations (including PNC Bank and
its affiliates) with respect to each class of Investor Shares
pursuant to which Service Organizations will render certain
support services to their customers who are the beneficial
owners of Investor Shares. In consideration for a shareholder
servicing fee of up to .25% (annualized) of the average daily
net asset value of Investor Shares owned by their customers,
Service Organizations may provide one or more of the follow-
ing services: responding to customer inquiries relating to
the services performed by the Service Organization and to
customer inquiries concerning their investments in Investor
Shares; assisting customers in designating and changing divi-
dend options, account designations and addresses; and provid-
ing other similar shareholder liaison services. In considera-
tion for a separate shareholder processing fee of up to .15%
(annualized) of the average daily net asset value of Investor
Shares owned by their customers, Service Organizations may
provide one or more of these additional services to such cus-
tomers: processing purchase and redemption requests from
customers and placing orders with the Fund's transfer agent
or the Distributor; processing dividend payments from the
Fund on behalf of customers; providing sub-accounting with
respect to Investor Shares beneficially owned by customers or
the information necessary for sub-accounting; and providing
other similar services.
Service Organizations may charge their clients additional
fees for account services. Customers who are beneficial own-
ers of Investor Shares should read this Prospectus in light
of the terms and fees governing their accounts with Service
Organizations.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of un-
derwriting securities. It is intended that the services pro-
vided by Service Organizations under their service agreements
will not be prohibited under these laws. Under state securi-
ties laws, banks and financial institutions that receive pay-
ments from the Fund may be required to register as dealers.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses in-
clude, but are not limited to, fees paid to PAMG and the Ad-
ministrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, shareholder servic-
ing and processing fees, distribution fees, fees and expenses
in registering and qualifying the Portfolios and their shares
for distribution under Federal and state securities laws, ex-
penses of preparing prospectuses and statements of additional
information and of printing and distributing prospectuses and
statements of additional information to existing sharehold-
ers, expenses relating to shareholder reports, shareholder
meetings and proxy solicitations, insurance premiums, the ex-
pense of independent pricing services, and other expenses
which are not expressly assumed by PAMG or the Fund's service
providers under their agreements with the Fund. Any general
expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment
portfolios by or under the direction of the Board of Trustees
in a manner the Board determines to be fair and equitable.
40.
<PAGE>
- --------------------------------------------------------------------------------
WHAT PRICING OPTIONS ARE AVAILABLE TO INVESTORS?
- --------------------------------------------------------------------------------
The Bond Portfolios of Compass Capital Funds offer different
pricing options to investors in the form of different share
classes. These options are described below:
A SHARES (FRONT-END LOAD)
One time, front-end sales charge at time of purchase
No charges or fees at any time for redeeming shares
Lower ongoing expenses
Free exchanges with other A Shares in the Compass Capital
Funds family
A Shares may make sense for investors with a long-term invest-
ment horizon who prefer to pay a one-time front-end sales
charge and have reduced ongoing fees.
B SHARES (BACK-END LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) if shares are re-
deemed, declining over 6 years from a high of 4.50%
Free exchanges with other B Shares in the Compass Capital
Funds family
Automatically convert to A Shares seven years from purchase
B Shares may make sense for investors who prefer to pay for
professional investment advice on an ongoing basis (asset-based
sales charge) rather than with a traditional, one-time front-
end sales charge.
C SHARES (LEVEL LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) of 1.00% if shares are
redeemed within 12 months of purchase
Free exchanges with other C Shares in the Compass Capital
Funds family
C Shares may make sense for shorter term (relative to both A
and B Shares) investors who prefer to pay for professional in-
vestment advice on an ongoing basis (asset-based sales charge)
rather than with a traditional, one-time front-end sales
charge. Such investors may plan to make substantial redemptions
within 6 years of purchase.
41.
<PAGE>
- --------------------------------------------------------------------------------
THE PRICING OPTIONS FOR EACH PORTFOLIO ARE DESCRIBED IN THE TABLES BELOW:
INTERMEDIATE GOVERNMENT BOND, INTERMEDIATE BOND, CORE BOND, TAX-FREE INCOME,
PENNSYLVANIA TAX-FREE INCOME, NEW JERSEY TAX-FREE INCOME AND OHIO TAX-FREE
INCOME PORTFOLIOS:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 4.00% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
GOVERNMENT INCOME AND MANAGED INCOME PORTFOLIOS:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 4.50% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
LOW DURATION BOND PORTFOLIO:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge................. 3.00% 0.00% 0.00%
12b-1 Fee............... 0.00%* 0.75% 0.75%
CDSC (Redemption
Charge)................ 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
HIGH YIELD AND INTERNATIONAL BOND PORTFOLIOS:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge................. 5.00% 0.00% 0.00%
12b-1 Fee............... 0.00%* 0.75% 0.75%
CDSC (Redemption
Charge)................ 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
*The Portfolios do not expect to incur 12b-1 fees in excess of .005% with re-
spect to Investor A Shares during the current fiscal year.
Investors wishing to purchase shares of the Portfolios may do so either by
mailing the investment application attached to this Prospectus along with a
check or by wiring money as specified below under "How Are Shares Purchased?"
42.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE KEY CONSIDERATIONS IN SELECTING A PRICING OPTION?
- --------------------------------------------------------------------------------
In deciding which class of Investor Shares to purchase, investors should con-
sider the following:
Intended Holding Period. Over time, the cumulative distribution fees on a Port-
folio's Investor B Shares and Investor C Shares will exceed the expense of the
maximum initial sales charge on Investor A Shares. For example, if net asset
value remains constant, the Investor B Shares' and Investor C Shares' aggregate
distribution fees would be equal to the Investor A Shares' initial maximum
sales charge from four to seven years after purchase (depending on the Portfo-
lio). Thereafter, Investor B Shares and Investor C Shares would bear higher ag-
gregate expenses. Investor B and Investor C shareholders, however, enjoy the
benefit of permitting all their dollars to work from the time the investments
are made. Any positive investment return on the additional invested amount
would partially or wholly offset the higher annual expenses borne by Investor B
Shares and Investor C Shares.
Because the Portfolios' future returns cannot be predicted, however, there can
be no assurance that such a positive return will be achieved.
At the end of seven years after the date of purchase, Investor B Shares will
convert automatically to Investor A Shares, based on the relative net asset
values of shares of each class. Investor B Shares acquired through reinvestment
of dividends or distributions are also converted at the earlier of these
dates--seven years after the reinvestment date or the date of conversion of the
most recently purchased Investor B Shares that were not acquired through rein-
vestment. Investor C Shares have no conversion feature.
Unless a sales charge waiver applies, Investor B shareholders pay a contingent
deferred sales charge if they redeem during the first six years after purchase,
and Investor C shareholders pay a contingent deferred sales charge if they re-
deem during the first twelve months after purchase. Investors expecting to re-
deem during these periods should consider the cost of the applicable contingent
deferred sales charge in addition to the aggregate annual Investor B or In-
vestor C distribution fees, as compared with the cost of the applicable initial
sales charges applicable to the Investor A Shares.
Investor B Shares of the Portfolios purchased on or before January 12, 1996 are
subject to a CDSC of 4.50% of the lesser of the original purchase price or the
net asset value of Investor B Shares at the time of redemption. This deferred
sales charge is reduced for shares held more than one year. Investor B Shares
of a Portfolio purchased on or before January 12, 1996 convert to Investor A
Shares of the Portfolio at the end of six years after purchase. For more infor-
mation about Investor B Shares purchased before January 12, 1996 and the de-
ferred sales charge payable on their redemption, call PFPC at (800) 441-7762.
Reduced Sales Charges. Because of reductions in the front-end sales charge for
purchases of Investor A Shares aggregating $25,000 or more, it may be advanta-
geous for investors purchasing large quantities of Investor Shares to purchase
Investor A Shares. In any event, the Fund will not accept any purchase order
for $1,000,000 or more of Investor B Shares or Investor C Shares.
Waiver of Sales Charges. The entire initial sales charge on Investor A Shares
of a Portfolio may be waived for certain eligible purchasers allowing their en-
tire purchase price to be immediately invested in a Portfolio. The contingent
deferred sales charge may be waived upon redemption of certain Investor B
Shares and Investor C Shares.
43.
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE SHARES PURCHASED?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor Shares through a
broker who will then transmit the purchase order directly to the transfer
agent.
The minimum investment for the initial purchase of shares is $500; there is a
$50 minimum for subsequent investments. Purchases through the Automatic Invest-
ment Plan described below are subject to a lower initial purchase minimum. In
addition, the minimum initial investment for employees of the Fund, the Fund's
investment adviser, sub-adviser, Distributor or transfer agent or employees of
their affiliates is $100, unless payment is made through a payroll deduction
program in which case the minimum investment is $25.
When placing purchase orders, investors should specify whether the order is for
Investor A, Investor B or Investor C Shares of a Portfolio. All share purchase
orders that fail to specify a class will automatically be invested in Investor
A Shares.
PURCHASES THROUGH BROKERS. Shares of the Portfolios may be purchased through
brokers which have entered into dealer agreements with the Distributor. Pur-
chase orders received by a broker and transmitted to the transfer agent before
the close of regular trading on the New York Stock Exchange (currently 4:00
p.m. Eastern time) on a Business Day will be effected at the net asset value
determined that day, plus any applicable sales charge. Payment for an order may
be made by the broker in Federal funds or other funds immediately available to
the Portfolios' custodian no later than 4:00 p.m. (Eastern time) on the third
Business Day following receipt of the purchase order.
It is the responsibility of brokers to transmit purchase orders and payment on
a timely basis. If payment is not received within the period described above,
the order will be canceled, notice thereof will be given, and the broker and
its customers will be responsible for any loss to the Fund or its shareholders.
Orders of less than $500 may be mailed by a broker to the transfer agent.
PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor
Shares by completing and signing the Account Application Form and mailing it to
the transfer agent, together with a check in at least the minimum initial pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio with respect
to which shares are purchased must also appear on the check or Federal Reserve
Draft. Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, specify
the class of Investor Shares, and include the name of the account registration
and the shareholder account number. Before wiring any funds, an investor must
call PFPC at (800) 441-7762 in order to confirm the wire instructions. Purchase
orders which are received by PFPC, together with payment, before the close of
regular trading hours on the New York Stock Exchange (currently 4:00 p.m. East-
ern time) on any Business Day (as defined below) are priced at the applicable
net asset value next determined on that day, plus any applicable sales charge.
OTHER PURCHASE INFORMATION. Shares of each Portfolio are sold on a continuous
basis by CDI as the Distributor. CDI maintains its principal offices at Four
Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961. Purchases
may be effected on weekdays on which both the New York Stock Exchange and the
Federal Reserve Bank of Philadelphia are open for business (a "Business Day").
Payment for orders which are not received or accepted will be returned after
prompt inquiry. The issuance of shares is recorded on the books of the Fund. No
certificates will be issued for shares. Payments for shares of a Portfolio may,
in the discretion of the Fund's investment adviser, be made in the form of se-
curities that are permissible investments for that Portfolio. The Fund reserves
the right to reject any purchase order or to modify or waive the minimum ini-
tial or subsequent investment requirement.
44.
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE SHARES REDEEMED?
- --------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge, if applicable, there is no charge for a re-
demption. Shareholders may also place redemption requests through a broker or
other institution, which may charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE
WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR INVESTOR C
SHARES. If a redeeming shareholder owns both Investor A Shares and Investor B
or Investor C Shares in the same Portfolio, the Investor A Shares will be re-
deemed first unless the shareholder indicates otherwise. If a redeeming share-
holder owns both Investor B Shares and Investor C Shares in the same Portfolio,
the redemption order will be processed to minimize the amount of the contingent
deferred sales charge that will be charged unless the shareholder indicates
otherwise.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding Investor A Share certificates
must send their certificates with the redemption request. Additional documen-
tary evidence of authority is required by PFPC in the event redemption is re-
quested by a corporation, partnership, trust, fiduciary, executor or adminis-
trator.
EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited
redemption, shares can be redeemed by telephone and the proceeds sent by check
to the shareholder or by Federal wire transfer to a single previously desig-
nated bank account. Once authorization is on file, PFPC will honor requests by
any person by telephone at (800) 441-7762 or other means. The minimum amount
that may be sent by check is $500, while the minimum amount that may be wired
is $10,000. The Fund reserves the right to change these minimums or to termi-
nate these redemption privileges. If the proceeds of a redemption would exceed
$25,000, the redemption request must be in writing and will be subject to the
signature guarantee requirement described above. This privilege may not be used
to redeem Investor A Shares in certificated form. During periods of substantial
economic or market change, telephone redemptions may be difficult to complete.
Redemption requests may also be mailed to PFPC at P.O. Box 8907, Wilmington,
Delaware 19899-8907.
The Fund is not responsible for the efficiency of the Federal wire system or
the shareholder's firm or bank. The Fund does not currently charge for wire
transfers. The shareholder is responsible for any charges imposed by the share-
holder's bank. To change the name of the single designated bank account to re-
ceive wire redemption proceeds, it is necessary to send a written request (with
a guaranteed signature as described above) to Compass Capital Funds c/o PFPC,
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so. The Fund, the Administrators and the Distributor will em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not be
liable for any loss, liability, cost or expense for acting upon telephone in-
structions reasonably believed to be genuine in accordance with such proce-
dures.
45.
<PAGE>
- --------------------------------------------------------------------------------
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account in
such Portfolio falls below the required minimum initial investment as the re-
sult of a redemption or an exchange request. A shareholder will be notified in
writing that the value of the shareholder's account in a Portfolio is less than
the required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of shares will be
reduced by the amount of any applicable contingent deferred sales charge. Un-
less another payment option is used as described above, payment for redeemed
shares is normally made by check mailed within seven days after acceptance by
PFPC of the request and any other necessary documents in proper order. Payment
may, however, be postponed or the right of redemption suspended as provided by
the rules of the SEC. If the shares to be redeemed have been recently purchased
by check, the Fund's transfer agent may delay the payment of redemption pro-
ceeds, which may be a period of up to 15 days after the purchase date, pending
a determination that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
46.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
- --------------------------------------------------------------------------------
Compass Capital Funds offers shareholders many special features which enable an
investor to have greater investment flexibility as well as greater access to
information about the Fund throughout the investment period.
Additional information on each of these features is available from PFPC by
calling (800) 441-7762.
EXCHANGE PRIVILEGE. Investor A, Investor B and Investor C Shares of each Port-
folio may be exchanged for shares of the same class of other portfolios of the
Fund which offer that class of shares, based on their respective net asset val-
ues. Exchanges of Investor A Shares may be subject to the difference between
the sales charge previously paid on the exchanged shares and the higher sales
charge (if any) payable with respect to the shares acquired in the exchange.
Investor A Shares of money market portfolios of the Fund that were (1) acquired
through the use of the exchange privilege and (2) can be traced back to a pur-
chase of shares in one or more investment portfolios of the Fund for which a
sales charge was paid, can be exchanged for Investor A Shares of a portfolio
subject to differential sales charges as applicable.
The exchange of Investor B and Investor C Shares will not be subject to a CDSC,
which will continue to be measured from the date of the original purchase and
will not be affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a written re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. Share-
holders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange re-
quests. To add this feature to an existing account that previously did not pro-
vide for this option, a Telephone Exchange Authorization Form must be filed
with PFPC. This form is available from PFPC. Once this election has been made,
the shareholder may simply contact PFPC by telephone at (800) 441-7762 to re-
quest the exchange. During periods of substantial economic or market change,
telephone exchanges may be difficult to complete and shareholders may have to
submit exchange requests to PFPC in writing.
If the exchanging shareholder does not currently own shares of the investment
portfolio whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and broker of
record as the account from which shares are exchanged, unless otherwise speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.
Any share exchange must satisfy the requirements relating to the minimum ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. Before making an exchange request, shareholders should consult a tax or
other financial adviser and should consider the investment objective, policies
and restrictions of the investment portfolio into which the shareholder is mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling exchanges.
The Fund reserves the right to modify or terminate the exchange privilege at
any time. Notice will be given to shareholders of any material modification or
termination except where notice is not required.
47.
<PAGE>
- -------------------------------------------------------------------------------
The Fund reserves the right to reject any telephone exchange request. Tele-
phone exchanges may be subject to limitations as to amount or frequency, and
to other restrictions that may be established from time to time to ensure that
exchanges do not operate to the disadvantage of any portfolio or its share-
holders. The Fund, the Administrators and the Distributor will employ reason-
able procedures to confirm that instructions communicated by telephone are
genuine. The Fund, the Administrators and the Distributor will not be liable
for any loss, liability, cost or expense for acting upon telephone instruc-
tions reasonably believed to be genuine in accordance with such procedures.
Exchange orders may also be sent by mail to the shareholder's broker or to
PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.
AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of any Portfolio may
arrange for periodic investments in that Portfolio through automatic deduc-
tions from a checking or savings account by completing the AIP Application
Form which may be obtained from PFPC. The minimum pre-authorized investment
amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of
its affiliates acts as custodian. For further information as to applications
and annual fees, contact the Distributor. To determine whether the benefits of
an IRA are available and/or appropriate, a shareholder should consult with a
tax adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by investors who wish to receive regular distributions
from their accounts. Upon commencement of the SWP, the account must have a
current value of $10,000 or more in a Portfolio. Shareholders may elect to re-
ceive automatic cash payments of $50 or more either monthly, every other
month, quarterly, three times a year, semi-annually, or annually. Automatic
withdrawals are normally processed on the 25th day of the applicable month or,
if such day is not a Business Day, on the next Business Day and are paid
promptly thereafter. An investor may utilize the SWP by completing the SWP Ap-
plication Form which may be obtained from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested and may not
hold share certificates. Shareholders may change or cancel the SWP at any
time, upon written notice to PFPC. Purchases of additional Investor A Shares
of the Fund concurrently with withdrawals may be disadvantageous to investors
because of the sales charges involved and, therefore, are discouraged. No con-
tingent deferred sales charge will be assessed on redemptions of Investor B or
Investor C Shares made through the SWP that do not exceed 12% of an account's
net asset value on an annualized basis. For example, monthly, quarterly and
semi-annual SWP redemptions of Investor B or Investor C Shares will not be
subject to the CDSC if they do not exceed 1%, 3% and 6%, respectively, of an
account's net asset value on the redemption date. SWP redemptions of Investor
B or Investor C Shares in excess of this limit are still subject to the appli-
cable CDSC.
48.
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE SCHEDULE OF SALES CHARGES AND EXEMPTIONS?
- --------------------------------------------------------------------------------
INVESTOR A Investor A Shares are subject to a front-end sales charge de-
SHARES termined in accordance with the following schedules:
LOW DURATION BOND PORTFOLIO:
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES CHARGE SALES CHARGE AS PLACEMENT FEES
AMOUNT OF TRANSACTION AS % OF % OF TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE)
<S> <C> <C> <C>
Less than $25,000 3.00% 3.09% 2.50%
$25,000 but less than
$50,000 2.75 2.83 2.25
$50,000 but less than
$100,000 2.50 2.56 2.00
$100,000 but less than
$250,000 2.00 2.04 1.75
$250,000 but less than
$500,000 1.50 1.52 1.25
$500,000 but less than
$1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
$1-2 million 0.00 0.00 0.75
$2-3 million 0.00 0.00 0.72
$3-5 million 0.00 0.00 0.63
$5-10 million 0.00 0.00 0.44
$10-15 million 0.00 0.00 0.38
$15-20 million 0.00 0.00 0.35
$20-40 million 0.00 0.00 0.30
</TABLE>
INTERMEDIATE GOVERNMENT BOND, INTERMEDIATE BOND, CORE BOND, TAX-FREE INCOME,
PENNSYLVANIA TAX-FREE INCOME, NEW JERSEY TAX-FREE INCOME AND OHIO TAX-FREE
INCOME PORTFOLIOS:
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES CHARGE SALES CHARGE AS PLACEMENT FEES
AMOUNT OF TRANSACTION AS % OF % OF TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE)
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.50%
$25,000 but less than
$50,000 3.75 3.90 3.25
$50,000 but less than
$100,000 3.50 3.63 3.00
$100,000 but less than
$250,000 3.00 3.09 2.50
$250,000 but less than
$500,000 2.00 2.04 1.50
$500,000 but less than
$1,000,000 1.00 1.01 0.75
$1,000,000 and over 0.00* 0.00* 0.75**
$1-2 million 0.00 0.00 0.75
$2-3 million 0.00 0.00 0.72
$3-5 million 0.00 0.00 0.63
$5-10 million 0.00 0.00 0.44
$10-15 million 0.00 0.00 0.38
$15-20 million 0.00 0.00 0.35
$20-40 million 0.00 0.00 0.30
</TABLE>
*There is no initial sales charge on purchase of $1,000,000 or more of Investor
A Shares; however, a contingent deferred sales charge of 1.00% will be imposed
on the lesser of the offering price or the net asset value of the shares on the
redemption date for shares redeemed within 18 months after purchase.
**The Distributor may pay placement fees to dealers of up to 0.75% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
49.
<PAGE>
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GOVERNMENT INCOME AND MANAGED INCOME PORTFOLIOS:
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES CHARGE SALES CHARGE AS PLACEMENT FEES
AMOUNT OF TRANSACTION AS % OF % OF TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE)
<S> <C> <C> <C>
Less than $25,000 4.50% 4.71% 4.00%
$25,000 but less than
$50,000 4.25 4.70 3.75
$50,000 but less than
$100,000 4.00 4.17 3.50
$100,000 but less than
$250,000 3.50 3.63 3.00
$250,000 but less than
$500,000 2.50 2.56 2.00
$500,000 but less than
$1,000,000 1.50 1.52 1.25
$1-2 million 0.00* 0.00* 1.00**
$2-3 million 0.00 0.00 0.95
$3-5 million 0.00 0.00 0.87
$5-10 million 0.00 0.00 0.69
$10-15 million 0.00 0.00 0.62
$15-20 million 0.00 0.00 0.53
$20-40 million 0.00 0.00 0.39
</TABLE>
HIGH YIELD AND INTERNATIONAL BOND PORTFOLIOS:
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES CHARGE SALES CHARGE AS PLACEMENT FEES
AMOUNT OF TRANSACTION AS % OF % OF TO DEALERS (AS % OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE)
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$25,000 but less than
$50,000 4.75 4.99 4.25
$50,000 but less than
$100,000 4.50 4.71 4.00
$100,000 but less than
$250,000 4.00 4.17 3.50
$250,000 but less than
$500,000 3.00 3.09 2.50
$500,000 but less than
$1,000,000 2.00 2.04 1.50
$1-2 million 0.00* 0.00* 1.00**
$2-3 million 0.00 0.00 0.95
$3-5 million 0.00 0.00 0.87
$5-10 million 0.00 0.00 0.69
$10-15 million 0.00 0.00 0.62
$15-20 million 0.00 0.00 0.53
$20-40 million 0.00 0.00 0.39
</TABLE>
* There is no initial sales charge on purchase of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after pur-
chase.
** The Distributor may pay placement fees to dealers of up to 1.00% of the of-
fering price on purchases of Investor A Shares of $1,000,000 or more.
During special promotions, the entire sales charge may be reallowed to dealers.
Dealers who receive 90% or more of the sales charge may be deemed to be "under-
writers" under the 1933 Act. The amount of the sales charge not reallowed to
dealers may be paid to broker-dealer affiliates of PNC Bank Corp. who provide
sales support services. The Distributor, CCG and/or their affiliates may also
pay additional compensation, out of their assets and not as an additional
charge to the Portfolios, to dealers in connection with the sale and distribu-
tion of shares (such as additional payments based on new sales), and may, sub-
ject to applicable NASD regulations, contribute to various non-cash and cash
incentive arrangements to promote the sale of shares, as well as sponsor vari-
ous educational programs, sales contests and promotions in which participants
may receive reimbursement of expenses, entertainment and prizes such as travel
awards, merchandise and cash. For further information, see "Investment Adviso-
ry, Administration, Distribution and Servicing Arrangements" in the Statement
of Additional Information.
50.
<PAGE>
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SALES CHARGE WAIVERS--INVESTOR A SHARES. The following persons associated with
the Fund, the Distributor, the Fund's investment adviser, sub-adviser or trans-
fer agent and their affiliates may buy Investor A Shares without paying a sales
charge to the extent permitted by these firms: (a) officers, directors and
partners (and their spouses and minor children); (b) employees and retirees
(and their spouses and minor children); (c) registered representatives of bro-
kers who have entered into selling agreements with the Distributor; (d) spouses
or children of such persons; and (e) any trust, pension, profit-sharing or
other benefit plan for any of the persons set forth in (a) through (c). The
following persons may also buy Investor A Shares without paying a sales charge:
(a) persons investing through an authorized payroll deduction plan; (b) persons
investing through an authorized investment plan for organizations which operate
under Section 501(c)(3) of the Internal Revenue Code; (c) registered investment
advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Portfolio may
purchase Investor A Shares without a Sales Load, provided that the aggregate
amount invested pursuant to this exemption in Investor A Shares of Fund Portfo-
lios that would otherwise be subject to front- end sales charges equals at
least $250,000; and (d) persons participating in a "wrap account" or similar
program under which they pay advisory fees to a broker-dealer or other finan-
cial institution. INVESTORS WHO QUALIFY FOR ANY OF THESE EXEMPTIONS FROM THE
SALES CHARGE MUST PURCHASE INVESTOR A SHARES.
QUALIFIED PLANS. In general, the sales charge (as a percentage of offering
price) payable by qualified employee benefit plans ("Qualified Plans") having
at least 20 employees eligible to participate in purchases of Investor A Shares
of the Portfolios aggregating less than $500,000 will be 1.00%. No sales charge
will apply to purchases by Qualified Plans of Investor A Shares aggregating
$500,000 and above. The sales charge payable by Qualified Plans having less
than 20 employees eligible to participate in purchases of Investor A Shares of
the Portfolios aggregating less than $500,000 will be 2.50% (1.50% with respect
to shares of the Low Duration Bond Portfolio). The above schedule will apply to
purchases by such Qualified Plans of Investor A Shares aggregating $500,000 and
above.
The Fund has established different waiver arrangements with respect to the
sales charge on Investor A Shares of the Portfolios for purchases through cer-
tain Qualified Plans participating in programs whose sponsors or administrators
have entered into arrangements with the Fund. For further information, see
"Purchase and Redemption Information" in the Statement of Additional
Information.
QUANTITY DISCOUNTS. As shown above, larger purchases may reduce the sales
charge price. Upon notice to the investor's broker or the transfer agent, pur-
chases of Investor A Shares made at any one time by the following persons may
be considered when calculating the sales charge: (a) an individual, his or her
spouse, and their children under the age of 21; (b) a trustee or fiduciary of a
single trust estate or single fiduciary account; or (c) any organized group
which has been in existence for more than six months, if it is not organized
for the purpose of buying redeemable securities of a registered investment com-
pany, and if the purchase is made through a central administrator, or through a
single dealer, or by other means which result in economy of sales effort or ex-
pense. An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker/dealer or clients of an investment adviser. Purchases made by an orga-
nized group may include, for example, a trustee or other fiduciary purchasing
for a single fiduciary account or other employee benefit plan purchases made
through a payroll deduction plan.
REDUCED SALES CHARGES--INVESTOR A SHARES
RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current value of an
investor's existing Investor A Shares in any of the Portfolios that are subject
to a front-end sales charge or the total amount of an investor's initial in-
vestment in such shares, less redemptions (whichever is greater) may be com-
bined with the amount of the investor's current purchase in determining the ap-
plicable sales charge. IN ORDER TO RECEIVE THE CUMULATIVE QUANTITY REDUCTION,
PREVIOUS PURCHASES OF INVESTOR A SHARES MUST BE CALLED TO THE ATTENTION OF PFPC
BY THE INVESTOR AT THE TIME OF THE CURRENT PURCHASE.
51.
<PAGE>
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REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of a Portfolio
(or Investor A Shares of another non-money market portfolio of the Fund), a
shareholder has a one-time right, to be exercised within 60 days, to reinvest
the redemption proceeds without any sales charges. PFPC must be notified of
the reinvestment in writing by the purchaser, or by his or her broker, at the
time the purchase is made in order to eliminate a sales charge. An investor
should consult a tax adviser concerning the tax consequences of use of the re-
investment privilege.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Investor A Shares at net asset value, without a sales charge,
with the proceeds from the redemption of shares of any other investment com-
pany which were sold with a sales charge or commission. This does not include
shares of an affiliated mutual fund which were or would be subject to a con-
tingent deferred sales charge upon redemption. Such purchases must be made
within 60 days of the redemption, and the Fund must be notified by the in-
vestor in writing, or by his or her financial institution, at the time the
purchase of Investor A Shares is made.
LETTER OF INTENT. An investor may qualify for a reduced sales charge immedi-
ately by signing a Letter of Intent stating the investor's intention to invest
during the next 13 months a specified amount in Investor A Shares which, if
made at one time, would qualify for a reduced sales charge. The Letter of In-
tent may be signed at any time within 90 days after the first investment to be
included in the Letter of Intent. The initial investment must meet the minimum
initial investment requirement and represent at least 5% of the total intended
investment. THE INVESTOR MUST INSTRUCT PFPC UPON MAKING SUBSEQUENT PURCHASES
THAT SUCH PURCHASES ARE SUBJECT TO A LETTER OF INTENT. All dividends and capi-
tal gains of a Portfolio that are invested in additional Investor A Shares of
the same Portfolio are applied to the Letter of Intent.
During the term of a Letter of Intent, the Fund's transfer agent will hold In-
vestor A Shares representing 5% of the indicated amount in escrow for payment
of a higher sales load if the full amount indicated in the Letter of Intent is
not purchased. The escrowed Investor A Shares will be released when the full
amount indicated has been purchased. Any redemptions made during the 13-month
period will be subtracted from the amount of purchases in determining whether
the Letter of Intent has been completed.
If the full amount indicated is not purchased within the 13-month period, the
investor will be required to pay an amount equal to the difference between the
sales charge actually paid and the sales charge the investor would have had to
pay on his or her aggregate purchases if the total of such purchases had been
made at a single time. If remittance is not received within 20 days of the ex-
piration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the
terms of the Letter of Intent, will redeem an appropriate number of Investor A
Shares held in escrow to realize the difference.
PURCHASES OF INVESTOR B SHARES. Investor B Shares are subject to a deferred
sales charge at the rates set forth in the chart below if they are redeemed
within six years of purchase. The deferred sales charge on Investor B Shares
is based on the lesser of the offering price or the net asset value of the In-
vestor B Shares on the redemption date. Dealers will generally receive commis-
sions equal to 4.00% of the Investor B Shares sold by them plus ongoing fees
under the Fund's Distribution and Service Plan and described under "Who Man-
ages The Fund?" Dealers may not receive a commission in connection with sales
of Investor B Shares to certain retirement plans sponsored by the Fund, CCG or
its affiliates, but may receive fees under the Distribution and Service Plan.
These commissions and payments may be different than the reallowances, place-
ment fees and commissions paid to dealers in connection with sales of Investor
A Shares and Investor C Shares. See "What Is The Schedule Of Sales Charges And
Exemptions--Investor A Shares" for information on additional sales incentives
which the Distributor, CCG and/or their affiliates may provide to dealers in
connection with the sale of shares.
52.
<PAGE>
- --------------------------------------------------------------------------------
The amount of any contingent deferred sales charge an investor must pay on In-
vestor B Shares depends on the number of years that elapse between the purchase
date and the date the Investor B Shares are redeemed as set forth in the fol-
lowing chart:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
<S> <C>
Less than one 4.50%
More than one, but less than two 4.00
More than two, but less than three 3.50
More than three, but less than four 3.00
More than four, but less than five 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
</TABLE>
PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the offering price or the net as-
set value of the Investor C Shares on the redemption date if redeemed within
twelve months after purchase. Dealers will generally receive commissions equal
to 1.00% of the Investor C Shares sold by them plus ongoing fees under the
Fund's Distribution and Service Plan as described above under "Who Manages the
Fund?" Dealers may not receive a commission in connection with sales of In-
vestor C Shares to certain retirement plans sponsored by the Fund, CCG or its
affiliates, but may receive fees under the Distribution and Service Plan. These
commissions and payments may be different than the reallowances, placement fees
and commissions paid to dealers in connection with sales of Investor A Shares
and Investor B Shares. See "What Is The Schedule Of Sales Charges And Exemp-
tions--Investor A Shares" for information on additional sales incentives which
the Distributor, CCG and/or their affiliates may provide to dealers in connec-
tion with the sale of shares.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE. The contingent deferred
sales charge on Investor B Shares and Investor C Shares is not charged in con-
nection with: (1) exchanges described in "What Are the Shareholder Features of
the Fund?--Exchange Privilege"; (2) redemptions made in connection with minimum
required distributions from IRA, 403(b)(7) and Qualified Plan accounts due to
the shareholder reaching age 70 1/2; (3) redemptions made with respect to cer-
tain retirement plans sponsored by the Fund, CCG or its affiliates; (4) redemp-
tions in connection with a shareholder's death or disability (as defined in the
Internal Revenue Code) subsequent to the purchase of Investor B or Investor C
Shares; (5) involuntary redemptions of Investor B or Investor C Shares in ac-
counts with low balances as described in "How Are Shares Redeemed?"; and (6)
redemptions made pursuant to the Systematic Withdrawal Plan, subject to the
limitations set forth above under "What Are the Shareholder Features of the
Fund?--Systematic Withdrawal Plan." In addition, no contingent deferred sales
charge is charged on Investor B or Investor C Shares acquired through the rein-
vestment of dividends or distributions.
The Fund also waives the contingent deferred sales charge on redemptions of In-
vestor B Shares of the Portfolios purchased through certain Qualified Plans
participating in programs whose sponsors or administrators have entered into
arrangements with the Fund. For further information, see "Purchase and Redemp-
tion Information" in the Statement of Additional Information.
When an investor redeems Investor B or Investor C Shares, the redemption order
is processed to minimize the amount of the contingent deferred sales charge
that will be charged. Investor B and Investor C Shares are redeemed first from
those shares that are not subject to the deferred sales load (i.e., shares that
were acquired through reinvestment of dividends or distributions) and after
that from the shares that have been held the longest.
53.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of Investor Shares of
each Portfolio as of the close of regular trading hours on the NYSE (currently
4:00 p.m. Eastern Time) on each Business Day by dividing the value of all secu-
rities and other assets owned by a Portfolio that are allocated to a particular
class of shares, less the liabilities charged to that class, by the number of
shares of the class that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless a Portfolio's sub-adviser under the supervision of the Board of
Trustees determines such method does not represent fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
shares of the same class of shares of the relevant Portfolio unless a share-
holder elects otherwise. Such election, or any revocation thereof, must be made
in writing to PFPC, and will become effective with respect to dividends paid
after its receipt by PFPC. Each Portfolio declares a dividend each day on "set-
tled" shares (i.e., shares for which the particular Portfolio has received pay-
ment in Federal funds) on the first Business Day after a purchase order is
placed with the Fund. Payments by check are normally converted to Federal funds
within two Business Days of receipt. Over the course of a year, substantially
all of the Portfolio's net investment income will be declared as dividends. The
amount of the daily dividend for each Portfolio will be based on periodic pro-
jections of its net investment income. All dividends are paid within ten days
after the end of each month. Net realized capital gains (including net short-
term capital gains), if any, will be distributed by each Portfolio at least an-
nually.
54.
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), whether the
distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum tax. First, "exempt
interest dividends" derived from certain private activity bonds issued after
August 7, 1986 generally will constitute an item of tax preference for corpo-
rate and non-corporate taxpayers in determining alternative minimum and envi-
ronmental tax liability. Second, "exempt interest dividends" must be taken into
account by corporate taxpayers in determining certain adjustments for alterna-
tive minimum tax purposes. In addition, investors should be aware of the possi-
bility of state and local alternative minimum or minimum income tax liability
on interest from private activity bonds. Shareholders who are recipients of So-
cial Security Act or Railroad Retirement Act benefits should note that "exempt
interest dividends" will be taken into account in determining the taxability of
their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions declared from net investment income during that year and may
differ significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange. Generally, shareholders may
include sales charges paid on the purchase of shares in their tax basis for the
purposes of determining gain or loss on a redemption, transfer or exchange of
such shares. However, if a shareholder exchanges the shares for shares of an-
other Portfolio within 90 days of purchase and is able to reduce the sales
charges applicable to the new shares (by virtue of the Fund's exchange privi-
lege), the amount equal to such reduction may not be included in the tax basis
of the shareholder's exchanged shares for the purpose of determining gain or
loss but may be included (subject to the same limitation) in the tax basis of
the new shares.
Any loss upon the sale or exchange of shares held for six months or less will
be disallowed for Federal income tax purposes to the extent of any exempt in-
terest dividends received by the shareholder. For the
55.
<PAGE>
- --------------------------------------------------------------------------------
Ohio Tax-Free Income Portfolio, the loss will be disallowed for Ohio income tax
purposes to the same extent, even though, for Ohio income tax purposes, some
portion of such dividends actually may have been subject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of a taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. Federal
income tax purposes, to treat certain foreign taxes paid by it, including gen-
erally any withholding taxes and other foreign income taxes, as paid by its
shareholders. The Portfolio intends to make this election. As a result, the
amount of such foreign taxes paid by the Portfolio will be included in its
shareholders' income pro rata (in addition to taxable distributions actually
received by them), and each shareholder generally will be entitled either (a)
to credit a proportionate amount of such taxes against U.S. Federal income tax
liabilities, or (b) if a shareholder itemizes deductions, to deduct such pro-
portionate amounts from U.S. income, should the shareholder so choose.
A Portfolio may make investments that produce income that is not matched by a
corresponding cash distribution to the Portfolio, such as investments in pay-
in-kind bonds or in obligations such as zero coupon securities having original
issue discount (i.e., an amount equal to the excess of the stated redemption
price of the security at maturity over its issue price), or market discount
(i.e., an amount equal to the excess of the stated redemption price of the se-
curity over the basis of such bond immediately after it was acquired) if the
Portfolio elects to accrue market discount on a current basis. In addition, in-
come may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
a Portfolio and therefore would be subject to the distribution requirements of
the Code. Because such income may not be matched by a corresponding cash dis-
tribution to a Portfolio, such Portfolio may be required to borrow money or
dispose of other securities to be able to make distributions to its investors.
In addition, if an election is not made to currently accrue market discount
with respect to a market discount bond, all or a portion of any deduction or
any interest expenses incurred to purchase or hold such bond may be deferred
until such bond is sold or otherwise disposed.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of the dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
tion, shareholders who are non-resident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to differ-
ent Federal income tax treatment. Future legislative or administrative changes
or court decisions may materially affect the tax consequences of investing in a
Portfolio. For additional information concerning the tax treatment of dividends
and distributions by the states listed below, including certain restrictions
applicable to such treatment, see "Taxes" in the Statement of Additional Infor-
mation.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania State-Specific Obligations or attributable to insurance proceeds on
account of such interest, is not taxable to individuals, estates or trusts un-
der the Personal income tax (in the case of insurance proceeds, to the extent
they are exempt for Federal Income Tax purposes); to corporations under the
Corporate Net Income Tax (in the case of insurance proceeds, to the extent they
are exempt for Federal income tax purposes); nor to individuals under the Phil-
adelphia School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania State-
Specific Obligations is taxable under the Personal Income Tax, the Corporate
Net Income Tax, and, unless these assets were held by the Pennsylvania Tax-Free
Income Portfolio for more than six months, the School District Tax.
56.
<PAGE>
- --------------------------------------------------------------------------------
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania State-Specific Obligations held by the Pennsylvania Tax-Free
Income Portfolio, such gain may be subject to the Personal Income Tax and Cor-
porate Net Income Tax. Such gain may also be subject to the School District
Tax, except that gain realized with respect to a share held for more than six
months is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares, or inter-
est and gain thereon, is subject to, or included in the measure of, the special
taxes imposed by the Commonwealth of Pennsylvania on banks and other financial
institutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed above (including the Corporate Capi-
tal Stock/Foreign Franchise Tax).
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax to the extent that the Portfolio
is comprised of Pennsylvania State-Specific Obligations and Federal obligations
(if the interest on such obligations is exempt from state and local taxation
under the laws of the United States).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends paid by the New Jersey Tax-Free Income Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New Jersey
law as currently in effect, distributions paid by a "qualified investment fund"
will not be subject to the New Jersey personal income tax to the extent that
the distributions are attributable to income received as interest or gain from
New Jersey State-Specific Obligations, or as interest or gain from direct U.S.
Government obligations. Distributions by a "qualified investment fund" that are
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to interest
on Ohio State-Specific Obligations or obligations issued by the U.S. Govern-
ment, its agencies, instrumentalities or territories (if the interest on such
obligations is exempt from state income taxation under the laws of the United
States). Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Tax-Free Income Portfolio
in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions either constitute
exempt-interest dividends for Federal income tax purposes or are properly at-
tributable to interest on Ohio State-Specific Obligations or the U.S. obliga-
tions described above. However, Shares of the Ohio Tax-Free Income Portfolio
will be included in a corporation's net worth base for purposes of calculating
the Ohio corporation franchise tax. Distributions properly attributable to gain
on the sale, exchange or other disposition of Ohio State-Specific Obligations
will not be subject to the Ohio personal income tax, or municipal or school
district income taxes in Ohio and will not be included in the net income base
of the Ohio corporation franchise tax. Distributions attributable to other
sources will be subject to the Ohio personal income tax and the Ohio corpora-
tion franchise tax.
57.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS THE FUND ORGANIZED?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty-six investment portfolios.
Each Portfolio, other than the Government Income Portfolio, offers five sepa-
rate classes of shares--Institutional Shares, Service Shares, Investor A
Shares, Investor B Shares and Investor C Shares. The Government Income Portfo-
lio offers only Investor A Shares, Investor B Shares and Investor C Shares. In
addition, the Low Duration Bond, Core Bond and Intermediate Bond Portfolios of-
fer a sixth share class-Black Rock Shares. This prospectus relates only to In-
vestor A Shares, Investor B Shares and Investor C Shares of the Portfolios de-
scribed herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, certain administrative/servicing
fees and amounts payable under the Fund's Distribution and Service Plan. In ad-
dition, each class of Investor Shares is sold with different sales charges. Be-
cause of these "class expenses" and sales charges, the performance of the
BlackRock Shares of a Portfolio is expected to be no less than the performance
of the Portfolio's Institutional Shares, the performance of both the BlackRock
Shares and Institutional Shares of a Portfolio is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of the
BlackRock Shares, Institutional Shares and Service Shares of a Portfolio is ex-
pected to be higher than the performance of the Portfolio's three classes of
Investor Shares. The performance of each class of Investor Shares may be dif-
ferent. The Fund offers various services and privileges in connection with its
Investor Shares that are not generally offered in connection with its Black
Rock, Institutional and Service Shares, including an automatic investment plan
and an automatic withdrawal plan. For further information regarding the Fund's
Institutional and Service Share classes, contact PFPC at (800) 441-7764.
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 31, 1997, PNC Bank held of record approximately [70%] of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
58.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
Performance information for each class of Investor Shares of the Portfolios may
be quoted in advertisements and communications to shareholders. Total return
will be calculated on an average annual total return basis for various periods.
Average annual total return reflects the average annual percentage change in
value of an investment in Investor Shares of a Portfolio over the measuring pe-
riod. Total return may also be calculated on an aggregate total return basis.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by a Portfolio with respect to a class of
shares are reinvested in shares of the same class, and also reflect the maximum
sales load charged by the Portfolio with respect to a class of shares. When,
however, a Portfolio compares the total return of a share class to that of
other funds or relevant indices, total return may also be computed without re-
flecting the sales load.
The yield of a class of shares is computed by dividing the Portfolio's net in-
come per share allocated to that class during a 30-day (or one month) period by
the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis. Each Tax-Free Portfolio's "tax-
equivalent yield" may also be quoted, which shows the level of taxable yield
needed to produce an after-tax equivalent to a Portfolio's tax-free yield. This
is done by increasing the Portfolio's yield (calculated above) by the amount
necessary to reflect the payment of Federal and/or state income tax at a stated
tax rate.
The performance of a class of a Portfolio's Investor Shares may be compared to
the performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a class of a Portfolio's
Investor Shares may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and with the performance of the Lehman GMNA Index, the T-Bill Index,
the "stocks, bonds and inflation index" published annually by Ibbotson Associ-
ates and the Lehman Government Corporate Bond Index, as well as the benchmarks
attached to this Prospectus. Performance information may also include evalua-
tions of the Portfolios and their share classes published by nationally recog-
nized ranking services, and information as reported in financial publications
such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of a class of shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Investor Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for In-
vestor Shares of a Portfolio cannot necessarily be used to compare an invest-
ment in such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other institu-
tions directly to their customer accounts in connection with investments in In-
vestor Shares will not be included in the Portfolio performance calculations.
59.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER INFORMATION ON THE COMPASS CAPITAL HIGH YIELD PORTFOLIO MANAGEMENT TEAM
- --------------------------------------------------------------------------------
and , co-managers of the Compass Capital High Yield Portfolio, have
had more years of experience as Portfolio Managers. and
were the Portfolio Managers of the Fund (account) from until De-
cember 31, 1997 at Co. The cumulative total return for the Fund
(account) from until December 31, 1997 was . At December 31, 1997,
that Fund (account) had million in net assets. As Portfolio Managers at
, had full discretionary authority over the selection of in-
vestments for that fund.
The performance data for the Fund and portfolio management team is in-
cluded to provide investors with a longer performance record for in manag-
ing a(n) Fund (account) with substantially similar investment objectives and
policies to the Compass Capital High Yield Portfolio. The Fund perfor-
mance data does not represent the past, present or future performance of the
Compass Capital High Yield Portfolio. Past performance is no guarantee of fu-
ture results. Investors should not consider this performance data as an indica-
tion of the future performance of the Compass Capital High Yield Portfolio.
Share prices and investment returns will fluctuate reflecting market conditions
and cash flows, as well as changes in company-specific fundamentals of portfo-
lio securities. Consequently, investments in the High Yield Portfolio may be
worth more or less than their original cost at the time of redemption.
Average annual returns for the one-year, three-year and five-year periods ended
December 31, 1997 for the Fund and for the entire period during which
managed that fund compared with the performance of the Lehman High
Yield Index were:
<TABLE>
<CAPTION>
FUND LEHMAN HIGH YIELD
--------- -----------------
<S> <C> <C>
One Year.......................................
Three Year Ann.................................
Five Year Ann..................................
During Management Tenure.......................
</TABLE>
(1) All returns presented above were calculated on a total return basis and
include all reinvested dividends and interest, accrued income and realized
and unrealized gains and losses.
(2) The expense ratio of the Fund was .
(3) The Lehman High Yield Index is an unmanaged index of bonds that is consid-
ered generally representative of the high yield bond market.
60.
<PAGE>
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of the Compass Capital Funds:
We have audited the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, of the Short Government Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, Government Income, Managed In-
come, International Bond, Tax-Free Income and New Jersey Tax-Free Income Port-
folios of the Compass Capital Fund, and the statements of net assets of the
Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios of the Compass
Capital Funds as of September 30, 1996, and the related statements of opera-
tions for the periods then ended, the statements of changes in net assets for
each of the two years (or periods) in the period then ended, and the financial
highlights for each of the periods presented (except for those statements which
have been audited by other auditors as discussed below). These financial state-
ments and financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net as-
sets for the year ended June 30, 1995, and the financial highlights for the
year ended June 30, 1995 and each of the prior periods presented of the Short
Government Bond and Core Bond Portfolios, formerly the BFM Institutional Trust
Short Duration and Core Fixed Income Portfolios (the "BFM Funds"), respectively
were audited by other auditors, whose report dated August 7, 1995 expressed an
unqualified opinion thereon.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of materials misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian and brokers as of September 30, 1996. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Compass Capital Funds (Short Government Bond, Intermediate Government Bond, In-
termediate Bond, Core Bond, Government Income, Managed Income, International
Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free and
Ohio Tax-Free Income Portfolios), as of September 30, 1996, and the results of
their operations for the periods then ended, the changes in their net assets
for each of the two years (or periods) in the period then ended (except for the
year ended June 30, 1995 for the BFM Funds which have been audited by other au-
ditors), and the financial highlights for each of the periods presented (except
for the year ended June 30, 1995 and prior periods for the BFM Funds which have
been audited by other auditors), in conformity with generally accepted account-
ing principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 22, 1996
61.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the Compass Capital Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
MUTUAL FUND SPECIALISTS 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
Available to provide Monday through Friday toll-free 888-426-6727
performance and market toll-free 800-388-8734
trends.
PORTFOLIO MANAGERS 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
COMMENTARY Monday through Friday toll-free 888-426-6727
(Audio recording updated toll-free 800-388-8734
periodically)
SHAREHOLDER SERVICES
TELEPHONE ACCESS: 24 Hours, 7 days a week toll-free 800-441-7762
ACCOUNT SERVICE 8:30 to 5 PM, E.S.T. toll-free 800-441-7762
REPRESENTATIVES: Monday through Friday
Available to discuss
account balance
information, mutual fund
prospectus, literature
and discuss programs and
services available.
PURCHASES AND 8:30 to 5 PM, E.S.T. toll-free 800-441-7762
REDEMPTIONS: Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.compassfunds.com
information and specific
fund performance.
Request mutual fund
prospectuses and
literature. Forward
mutual fund inquiries.
E-MAIL:
Request prospectuses and 24 Hours, 7 days a week [email protected]
literature. Forward
mutual fund inquiries.
WRITTEN CORRESPONDENCE: POST OFFICE BOX ADDRESS STREET ADDRESS
Compass Capital Funds Compass Capital Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
62.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman
Bond Intermediate Government Aggregate, excluding maturities above 9.99
Index years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate Gov't/Corp the Lehman Aggregate, excluding maturities
Index above 9.99 years
Core Bond Lehman Aggregate Index The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of November 1996, the composition of
the Lehman Brothers Aggregate Index is:
52% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
19% allocation to corporate and asset-
backed securities
Government Income Lehman Mortgage Index/10 50% allocation to the mortgage component of
Year Treasury the Lehman Aggregate Index and a 50%
allocation to the Merrill Lynch 10 Year
Index
Managed Income Lehman Aggregate Index The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year to maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of November 1996, the composition of
the Lehman Brothers Aggregate Index is:
52% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
19% allocation to corporate and asset-
backed securities
High Yield Lehman High Yield Index The Lehman High Yield Index contains issues
that meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
.Maximum quality rating of Ba1 (including
defaulted issues)
.At least one year to maturity
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. Outstanding par value of at least $3
million
. Must be issued as part of a deal of at
least $50 million
. Individual bonds must have been issued
within the last 5 years
. Remaining maturity of not less than one
year
Excludes bonds subject to the alternative
minimum tax (AMT), taxable municipal bonds,
and floating-rate or zero coupon municipal
bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
63.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
DESCRIPTIONS OF RATING CATEGORIES
The following are descriptions of ratings assigned by Standard & Poor's Corpo-
ration ("S&P") and Moody's Investors Service, Inc. ("Moody's") to certain debt
securities in which the Compass Capital Bond Portfolios may invest. See the
Statement of Additional Information for descriptions of other Moody's and S&P
rating categories and those of other rating agencies.
STANDARD & POOR'S:
"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 re-
pay principal and differs from AAA issues only in small degree.
"A"--Debt is considered to have a strong capacity to pay interest and repay
principal although such issues are somewhat more susceptible to the adverse ef-
fects 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 re-
pay principal. Whereas such issues normally exhibit adequate protection parame-
ters, 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 ac-
cordance 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 ca-
pacity 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 inter-
est and repay principal. The "B" rating category is also used for debt subordi-
nated to senior debt that is assigned an actual or implied "BB" or "BB-" rat-
ing.
"CCC"--Debt has a currently identifiable vulnerability to default, and is de-
pendent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the capac-
ity to pay interest and repay principal. The "CCC" rating category is also used
for debt subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
"CC"--This rating is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC" rating.
"C"--This rating is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt serv-
ice payments are continued.
"CI"--This rating is reserved for income bonds on which no interest is being
paid.
64.
<PAGE>
- --------------------------------------------------------------------------------
"D"--Debt is in payment default. This rating is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S & P believes that such payments will be made
during such grace period. "D" rating is also used upon the filing of a bank-
ruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-)--The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"r"--This rating is attached to highlight derivative, hybrid, and certain other
obligations that S & P believes may experience high volatility or high vari-
ability in expected returns due to non-credit risks. Examples of such obliga-
tions are: securities whose principal or interest return is indexed to equi-
ties, commodities, or currencies; certain swaps and options; and interest only
and principal only mortgage securities. The absence of an "r" symbol should not
be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
MOODY'S:
"Aaa"--Bonds are judged to be of the best quality. They carry the smallest de-
gree 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 fun-
damentally strong position of such issues.
"Aa"--Bonds are judged to be of high quality by all standards. Together with
the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A"--Bonds possess many favorable investment attributes and are to be consid-
ered 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 character-
istics as well.
"Ba," "B," "Caa," "Ca," and "C"--Bonds that possess one of these ratings pro-
vide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of desir-
able 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 pro-
jects unseasoned in operation experience, (c) rentals which begin when facili-
ties are completed, or (d) payments to which some other limiting condition at-
taches. 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 qual-
ity of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Baa1, Ba1 and B1.
65.
<PAGE>
COMPASS CAPITAL FUNDS
THE COMPASS CAPITAL FUNDS
Compass Capital Funds is a leading mutual fund company currently managing in
excess of $13 billion in 33 portfolios designed to fit a broad range of
investment goals. Each portfolio is managed by recognized experts in equity,
fixed income, international, and tax-free investing who adhere to a pure
investment styleSM.
STOCK PORTFOLIOS
- --------------------------------------------------------------------------------
Large Cap Growth Equity Small Cap Growth Equity
Large Cap Value Equity Small Cap Value Equity
Mid-Cap Growth Equity
Mid-Cap Value Equity Micro-Cap Equity
International Equity
International Small Cap Equity
International Emerging Markets
Index Equity
Select Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
Intermediate Bond
Core Bond High Yield
International Bond
TAX-FREE BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Tax-Free Income New Jersey Tax-Free Income
Pennsylvania Tax-Free Income Ohio Tax-Free Income
MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------
Money Market North Carolina Municipal Money Market
U.S. Treasury Money Market Ohio Municipal Money Market
Municipal Money Market Pennsylvania Municipal Money Market
New Jersey Municipal Money Market Virginia Municipal Money Market
<PAGE>
January , 1998
- --------------------------------------------------------------------------------
THE BOND PORTFOLIOS INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASKING THE KEY
QUESTIONS
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 5
What Are The Portfolios' Financial Highlights?............... 7
What Are The Portfolios?..................................... 15
What Are The Differences Among The Portfolios?............... 16
What Types Of Securities Are In The Portfolios?.............. 17
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 18
What Additional Investment Policies And Risks Apply?......... 19
Who Manages The Fund?........................................ 32
How Are Shares Purchased And Redeemed?....................... 36
How Is Net Asset Value Calculated?........................... 38
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 38
How Are Fund Distributions Taxed?............................ 39
How Is The Fund Organized?................................... 42
How Is Performance Calculated?............................... 43
Other Information On The High Yield Portfolio Management
Team........................................................ 44
How Can I Get More Information?.............................. 45
</TABLE>
This Prospectus contains information about the Compass Capital
bond Portfolios that a prospective investor needs to know before
investing. Please keep it for future reference. A Statement of
Additional Information dated January , 1998 has been filed with
the Securities and Exchange Commission (the "SEC"). The Statement
of Additional Information may be obtained free of charge from the
Fund by calling (800) 441-7764. The Statement of Additional In-
formation, as supplemented from time to time, is incorporated by
reference into this Prospectus.
THE COMPASS CAPITAL HIGH YIELD PORTFOLIO MAY INVEST UP TO 100% OF
ITS NET ASSETS IN NON-INVESTMENT GRADE DEBT SECURITIES COMMONLY
REFERRED TO AS "JUNK BONDS." JUNK BONDS ARE CONSIDERED TO BE
SPECULATIVE, AND ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS,
THAN THOSE FOUND IN HIGHER RATED SECURITIES. PURCHASERS SHOULD
CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO PRIOR TO INVESTING. SEE "WHAT ARE THE
PORTFOLIOS?", "WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS
APPLY--HIGH YIELD SECURITIES" AND "APPENDIX B--DESCRIPTIONS OF
RATING CATEGORIES."
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY
OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT IN-
VESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS ARE INTENDED
ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE BOND PORTFOLIOS OF COMPASS CAPITAL FUNDS
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 33 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to
seek their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of 12 in-
vestment portfolios (the "Portfolios") that provide investors
with a broad spectrum of investment alternatives within the
fixed income sector. Eight of these Portfolios invest in tax-
able bonds, and four of these Portfolios invest in tax-exempt
bonds. All Portfolios except the Government Income Portfolio
offer Institutional Shares. A detailed description of each
Portfolio begins on page 14.
COMPASS CAPITAL PORTFOLIO
PERFORMANCE LIPPER PEER GROUP
BENCHMARK
LOW DURATION
BOND Merrill 1-3 Short-Intermediate
(PREVIOUSLY Year Treasury Investment Grade Debt
CALLED THE Index
SHORT
GOVERNMENT
BOND
PORTFOLIO)
Intermediate U.S.
Lehman Brothers Government
Intermediate
Government
INTERMEDIATE Index
GOVERNMENT
BOND
Lehman Brothers
Intermediate
Government/Corporate
Index
INTERMEDIATE
BOND Intermediate Investment
Grade Debt Funds
CORE BOND Lehman Intermediate Investment
Aggregate Grade Debt
Index
MANAGED INCOME
Corporate Debt A-Rated
Lehman
Aggregate
Index
HIGH YIELD
High Yield
INTERNATIONAL International Income
BOND Lehman High
Yield Index
General Municipal Debt
TAX-FREE
INCOME Salomon Non-
U.S. Hedged
World
Government
Bond Index
PA Municipal Debt
PA TAX-FREE NJ Municipal Debt
INCOME
OH Municipal Debt
NJ TAX-FREE
INCOME Lehman
Municipal Bond
Index
OH TAX FREE
INCOME
Lehman Local GO
Index
UNDERSTANDING Lehman Local GO
THE COMPASS Index
CAPITAL BOND This Prospectus has been crafted to provide detailed, accurate
PORTFOLIOS and comprehensive information on the Compass Capital Portfo-
lios. We intend this document to be an effective tool as you
explore different directions in fixed income investing.
Lehman Local GO
Index
CONSIDERING
THE RISKS IN There can be no assurance that any mutual fund will achieve its
BOND investment objective. Some or all of the Portfolios may pur-
INVESTING chase mortgage-related, asset-backed, foreign, high yield and
illiquid securities; enter into repurchase and reverse repur-
chase agreements and engage in leveraging techniques; lend
portfolio securities to third parties; and enter into futures
contracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers located
in a particular state, and is non-diversified, which means that
its performance may be dependent upon the performance of a
smaller number of securities than the other Portfolios, which
are considered diversified. See "What Additional Invest-
ment Policies And Risks Apply?"
3.
<PAGE>
- --------------------------------------------------------------------------------
The High Yield and the Low Duration Bond Portfolios invest in
high yield securities which are considered high risk securi-
ties. See "What Additional Investment Policies And Risks Ap-
ply?--High Yield Securities."
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?"
CAPITAL FUNDS
4.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Institutional
Shares of the Portfolios for the fiscal period ended September 30, 1997 as a
percentage of average daily net assets. The figures shown for the Intermediate
Government Bond, Intermediate Bond, International Bond, Tax-Free Income, Penn-
sylvania Tax-Free Income and Ohio Tax-Free Income Portfolios have been restated
to reflect current expenses and fee waivers. Because no Institutional Shares of
the New Jersey Tax-Free Income Portfolio and the High Yield Portfolio were out-
standing during the fiscal year ended September 30, 1997, the figures shown for
those Portfolios under "Other expenses" are estimated for the current fiscal
year. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE
DURATION GOVERNMENT INTERMEDIATE
BOND BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .30% .30%
Other operating expenses .25 .25 .25
--- --- ---
Administration fees
(after fee waivers)(/1/) .15 .15 .13
Other expenses .10 .10 .12
--- --- ---
Total Portfolio operating expenses (after
fee waivers)(/1/) .55% .55% .55%
=== === ===
</TABLE>
<TABLE>
<CAPTION>
CORE BOND MANAGED INCOME HIGH
PORTFOLIO PORTFOLIO YIELD
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .35% xx
Other operating expenses .25 .23 xx
--- --- ---
Administration fees (after fee waivers)(/1/) .14 .15 xx
Other expenses .11 .08 xx
--- --- ---
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .58% xx
=== === ===
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .33%, .33%, .35%, .34%,
.31% and %, respectively, and "Total Portfolio operating expenses" would
be .83%, .83%, .85%, .84%, .81% and %, respectively. See "What are the
Portfolios' Financial Highlights?" for information about interest paid by
the Portfolios in connection with their investment activity.
5.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL BOND TAX-FREE INCOME TAX-FREE INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .50% .30% .30%
Other operating expenses .48 .25 .25
--------- ------- --------
Administration fees
(after fee
waivers)(/1/) .15 .11 .14
Other expenses (after
expense reimbursement) .33 .14 .11
--------- ------- --------
Total Portfolio
operating expenses
(after fee waivers and
expense reimbursements)
(/1/) .98% .55% .55%
========= ======= ========
</TABLE>
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX- TAX-
FREE INCOME FREE INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fees (after fee waivers)(/1/) .30% .30%
Other operating expenses .25 .25
----- -----
Administration fees (after fee waivers)(/1/) .11 .10
Other expenses .14 .15
----- -----
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .55%
===== =====
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50%, .50%, .50% and .50%,
respectively, and administration fees would be .23% for each Portfolio. In
addition, the Expense Summary reflects reimbursements made to the Tax-Free
Income Portfolio by the adviser. PAMG and the Portfolios' administrators
are under no obligation to waive fees or reimburse expenses, but have in-
formed the Fund that they expect to waive fees and reimburse expenses dur-
ing the remainder of the current fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels set forth in the table.
Without waivers, "Other operating expenses" would be .56%, .37%, .34%, .37%
and .38% respectively, and "Total Portfolio operating expenses" would be
1.11%, .87%, .84%, .87% and .88%, respectively.
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return, and (2) redemption at the end
of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio $ 6 $18 $31 $ 69
Intermediate Government Bond
Portfolio 6 18 31 69
Intermediate Bond Portfolio 6 18 31 69
Core Bond Portfolio 6 18 31 69
Managed Income Portfolio 6 19 32 73
High Yield Portfolio
International Bond Portfolio 10 31 51 120
Tax-Free Income Portfolio 6 18 31 69
Pennsylvania Tax-Free Income
Portfolio 6 18 31 69
New Jersey Tax-Free Income Portfolio 6 18 31 69
Ohio Tax-Free Income Portfolio 6 18 31 69
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
6.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountants. The financial highlights
of the Core Bond Portfolio and the Low Duration Bond Portfolio
(formerly, the Short Government Bond Portfolio) for the periods
ended June 30, 1995, 1994 and 1993 were audited by other audi-
tors. Please refer to a revised auditor's report under "Other
Information" which makes reference to the audits performed by
those other auditors. This financial information should be read
together with those financial statements. Further information
about the performance of the Portfolios is available in the
Fund's annual shareholder reports. Both the Statement of Addi-
tional Information and the annual shareholder reports may be
obtained from the Fund free of charge by calling (800) 441-
7764. During the periods shown, no Institutional Shares of the
New Jersey Tax-Free Income Portfolio and the High Yield Portfo-
lio were outstanding.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
YEAR APRIL 1, 1996 JULY 1, 1995 YEAR YEAR
ENDED THROUGH THROUGH ENDED ENDED JULY 17, 1992(/1/)
SEPTEMBER 30, SEPTEMBER 30, MARCH 31, JUNE 30, JUNE 30, THROUGH
1997 1996 1996 1995 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.79 $ 9.83 $ 9.71 $ 9.96 $ 10.00
--- -------- ------- ------- ------- -------
Net investment income 0.28 0.42 0.58 0.48 0.51
Net realized and
unrealized loss on
investments (0.01) - - 0.13 (0.25) (0.06)
--- -------- ------- ------- ------- -------
Net increase from
investment operations 0.27 0.42 0.71 0.23 0.45
--- -------- ------- ------- ------- -------
Dividends from net
investment income (0.27) (0.41) (0.58) (0.48) (0.49)
Distributions from net
realized capital gains - - (0.01) (0.01) - - - -
TOTAL DIVIDENDS AND
DISTRIBUTIONS (0.27) (0.46) (0.59) (0.48) (0.49)
--- -------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD $ 9.79 $ 9.79 $ 9.83 $ 9.71 $ 9.96
=== ======== ======= ======= ======= =======
Total investment return 2.70% 4.25% 6.99% 2.33% 4.63%
RATIOS TO AVERAGE NET
ASSETS:
Expenses 0.55%/2/,/3/ 0.63%/2/,/3/ 0.57% 0.57% 0.56%/2/
Excluding Waivers 0.83%/2/ 0.83%/2/ 1.05% 1.02% 0.66%/2/
Net investment income 5.72%/2/ 5.25%/2/ 6.08% 4.70% 5.32%/2/
Excluding Waivers 5.45%/2/ 5.05%/2/ 5.60% 4.25% 5.22%/2/
SUPPLEMENTAL DATA:
Portfolio turnover 228% 185% 586% 455% 513%
Net assets, end of
period (in thousands) $135,686 $52,843 $44,486 $31,265 $51,611
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Low Duration
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and
liabilities of the Predecessor Low Duration Bond Portfolio were transferred
to this Portfolio, and were combined with the assets of a pre-existing
portfolio investment maintained by the Fund.
/1/ Commencement of investment operations of share class.
/2/ Annualized.
/3/ Including interest expense, ratios would have been % for the period ended
September 30, 1997, 0.64% for the period ended September 30, 1996 and 0.96%
for the period ended March 31, 1996. For the periods prior to March 31,
1996, interest income was presented net of interest expense.
7.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 4/20/92/1/
ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.02 $ 9.64 $ 10.60 $ 10.46 $ 10.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.58 0.58 0.55 0.54 0.24
Net gain (loss) on
investments
(both realized and
unrealized) (0.11) 0.38 (0.86) 0.16 0.46
-------- -------- -------- -------- --------
Total from investment
operations 0.47 0.96 (0.31) 0.70 0.70
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.57) (0.58) (0.55) (0.54) (0.24)
Distributions from net
realized capital gains - - - - (0.10) (0.02) - -
-------- -------- -------- -------- --------
Total distributions (0.57) (0.58) (0.65) (0.56) (0.24)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 9.92 $ 10.02 $ 9.64 $ 10.60 $ 10.46
======== ======== ======== ======== ========
Total return 4.82% 10.28% (3.08)% 6.88% 7.14%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $126,312 $134,835 $128,974 $137,065 $105,620
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.53%/3/ 0.42%/3/ 0.40% 0.73% 0.80%/2/
Before
advisory/administration
fee waivers 0.83% 0.79% 0.80% 0.81% 0.80%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.03% 5.94% 5.48% 5.23% 5.28%/2/
Before
advisory/administration
fee waivers 5.73% 5.57% 5.08% 5.15% 5.28%/2/
PORTFOLIO TURNOVER RATE 580% 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been % for the period ended
September 30, 1997, 0.83% for the period ended September 30, 1996, and 0.55%
for the period ended September 30, 1995.
8.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 9/17/93/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.43 $ 9.05 $ 10.01 $ 10.00
--- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.56 0.56 0.54 0.02
Net gain (loss) on
investments
(both realized and
unrealized) (0.09) 0.38 (0.88) (0.01)
--- -------- -------- ------- -------
Total from investment
operations 0.47 0.94 (0.34) 0.01
--- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.55) (0.56) (0.56) - -
Distributions from net
realized capital gains (0.03) - - (0.06) - -
--- -------- -------- ------- -------
Total distributions (0.58) (0.56) (0.62) - -
--- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 9.32 $ 9.43 $ 9.05 $ 10.01
=== ======== ======== ======= =======
Total return 5.10% 10.76% (3.52)% 0.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $207,909 $124,979 $71,896 $56,713
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.53%/3/ 0.47%/3/ 0.45% 0.45%/2/
Before
advisory/administration
fee waivers 0.83% 0.89% 0.88% 0.84%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.27% 6.18% 5.54% 4.72%/2/
Before
advisory/administration
fee waivers 5.97% 5.84% 5.11% 4.33%/2/
PORTFOLIO TURNOVER RATE 670% 262% 92% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been % for the period ended
September 30, 1997, 0.83% for the period ended September 30, 1996, and 0.55%
for the period ended September 30, 1995.
9.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR PERIOD PERIOD
ENDED APRIL 1, 1996 JULY 1, 1995 YEAR YEAR DECEMBER 9, 1992/1/
SEPTEMBER THROUGH THROUGH ENDED ENDED THROUGH
30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
NET ASSET VALUE,
BEGINNING OF PERIOD $ 9.61 $ 9.85 $ 9.36 $ 10.37 $10.00
--- -------- ------- ------- ------- ------
Net investment income
(net of $.004, $.003
and $.001,
respectively, of
interest expense)(**) 0.30 0.47 0.62 0.55 0.32
Net realized and
unrealized gains on
investments (0.06) (0.07) 0.50 (0.60) 0.37
--- -------- ------- ------- ------- ------
Net (decrease) increase
from investment
operations 0.24 0.40 1.12 (0.05) 0.69
--- -------- ------- ------- ------- ------
Dividends from net
investment income (0.30) (0.47) (0.62) (0.55) (0.32)
Distributions from net
realized capital gains - - (0.17) (0.01) (0.41) - -
--- -------- ------- ------- ------- ------
Total dividends and
distributions (0.30) (0.64) (0.63) (0.96) (0.32)
--- -------- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD $ 9.55 $ 9.61 $ 9.85 $ 9.36 $10.37
=== ======== ======= ======= ======= ======
Total investment
return(***) 2.55% 3.93% 11.79% (0.69)% 6.88%
RATIOS TO AVERAGE NET
ASSETS:
Expenses(*) 0.55%/2/,/3/ 0.66%/2/,/3/ 0.55% 0.55% 0.55%/2/
Excluding Waivers 0.84%/2/ 0.91%/2/ 1.75% 2.65% 2.44%/2/
Net investment
income(**) 6.75%/2/ 5.89%/2/ 6.62% 5.61% 5.57%/2/
Excluding Waivers 6.45%/2/ 5.64%/2/ 5.43% 3.51% 3.68%/2/
SUPPLEMENTAL DATA:
PORTFOLIO TURNOVER 308% 723% 435% 722% 354%
Net assets, end of
period (in thousands) $162,626 $64,707 $32,191 $12,507 $7,803
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed
Income Portfolio, a separate investment portfolio (the "Predecessor Core
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and
liabilities of the Predecessor Core Bond Portfolio were transferred to this
Portfolio, which had no prior operating history.
/1/Commencement of investment operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been % for the period ended
September 30, 1997, 0.80% for the period ended September 30, 1996, and 0.75%
for the period ended March 31, 1996. For the periods prior to March 31, 1996
interest income was presented net of interest expense.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR YEAR 11/1/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91 9/30/90
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.38 $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70 $ 10.00
--- -------- -------- -------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.64 0.65 0.64 0.67 0.69 0.74 0.66
Net gain (loss) on
investments (both
realized and
unrealized) (0.21) 0.60 (1.21) 0.56 0.48 0.63 (0.29)
--- -------- -------- -------- -------- -------- ------- -------
Total from investment
operations 0.43 1.25 (0.57) 1.23 1.17 1.37 0.37
--- -------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.62) (0.65) (0.64) (0.67) (0.69) (0.73) (0.66)
Distribution in excess
of net investment
income - - (0.01) (0.02) - - - - (0.08) (0.01)
Distributions from net
realized capital gains (0.10) - - (0.14) (0.13) - - - - - -
Distributions in excess
of net realized gains - - - - (0.01) - - - - - - - -
--- -------- -------- -------- -------- -------- ------- -------
Total distributions (0.72) (0.66) (0.81) (0.80) (0.69) (0.81) (0.67)
--- -------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.09 $ 10.38 $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70
=== ======== ======== ======== ======== ======== ======= =======
Total return 4.33% 13.27% (5.27)% 12.13% 11.80% 14.74% 3.80%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $564,744 $443,148 $395,060 $341,791 $314,075 $52,802 $38,328
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.58% 0.57% 0.55% 0.74% 0.80% 0.80% 0.80%/2/
Before
advisory/administration
fee waivers 0.81% 0.77% 0.77% 0.78% 0.80% 0.84% 0.82%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.17% 6.44% 6.11% 6.25% 6.28% 7.36% 7.31%/2/
Before
advisory/administration
fee waivers 5.95% 6.24% 5.89% 6.21% 6.28% 7.32% 7.29%/2/
PORTFOLIO TURNOVER RATE 638% 203% 61% 72% 56% 38% 18%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE
PERIOD
6/10/96/1/
YEAR ENDED THROUGH
9/30/97 9/30/96
<S> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 11.37
--- -------
Income from investment operations
Net investment income 0.21
Net (loss) gain on investments (both realized and
unrealized) 0.30
--- -------
Total from investment operations 0.51
--- -------
LESS DISTRIBUTIONS
Distributions from net investment income (0.17)
Distributions from net realized capital gains - -
--- -------
In Excess of Net Realized Gains
Total distributions (0.17)
--- -------
NET ASSET VALUE AT END OF PERIOD $ 11.71
=== =======
Total return 4.48%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $30,882
Ratios of expenses to average net assets 0.92%/2/
Excluding waivers 1.32%/2/
Ratios of net investment income to average net assets 6.28%/2/
Excluding waivers 5.88%/2/
PORTFOLIO TURNOVER RATE 108%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass Interna-
tional Fixed Income Fund, a separate investment portfolio (the "Predecessor
International Bond Portfolio") of Compass Capital Group, which was organized
as a Massachusetts business trust. The assets and liabilities of the Prede-
cessor International Bond Portfolio were transferred to this Portfolio,
which had no prior operating history, on February 13, 1996. For the periods
presented, this Portfolio received Sub-advisory services from another com-
pany that was unaffiliated with PAMG and BlackRock.
1Commencement of operations of share class.
2Annualized.
12.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 1/21/93/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $10.61 $10.04 $11.31 $10.61
--- ------ ------ ------ ------
Income from investment
operations
Net investment income 0.49 0.53 0.53 0.42
Net gain (loss) on
investments (both realized
and unrealized) 0.28 0.59 (0.93) 0.70
--- ------ ------ ------ ------
Total from investment
operations 0.77 1.12 (0.40) 1.12
--- ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.53) (0.53) (0.42)
Distributions from net
realized capital gains - - (0.02) (0.34) - -
--- ------ ------ ------ ------
Total distributions (0.54) (0.55) (0.87) (0.42)
--- ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.84 $10.61 $10.04 $11.31
=== ====== ====== ====== ======
Total return 7.45% 11.54% (3.77)% 10.72%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $8,350 $ 271 $ 132 $ 675
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.55% 0.52% 0.50% 0.50%/2/
Before
advisory/administration fee
waivers 0.89% 1.30% 1.73% 1.28%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 5.10% 5.19% 4.97% 5.14%/2/
Before
advisory/administration fee
waivers 4.78% 4.41% 3.74% 4.36%/2/
PORTFOLIO TURNOVER RATE 268% 92% 40% 71%
</TABLE>
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 12/1/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $10.33 $ 9.82 $10.70 $10.00
--- ------ ------ ------ ------
Income from investment
operations
Net investment income 0.52 0.52 0.53 0.39
Net gain (loss) on
investments (both realized
and unrealized) 0.12 0.51 (0.85) 0.73
--- ------ ------ ------ ------
Total from investment
operations 0.64 1.03 (0.32) 1.12
--- ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.53) (0.52) (0.53) (0.39)
Distributions from net
realized capital gains - - - - (0.03) (0.03)
--- ------ ------ ------ ------
Total distributions (0.53) (0.52) (0.56) (0.42)
--- ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.44 $10.33 $ 9.82 $10.70
=== ====== ====== ====== ======
Total return 6.29% 10.81% (2.96)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $3,609 $2,092 $ 639 $ 256
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.55% 0.52% 0.39% 0.09%/2/
Before
advisory/administration fee
waivers 0.85% 0.84% 0.99% 0.97%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 5.01% 5.23% 5.27% 5.19%/2/
Before
advisory/administration fee
waivers 4.72% 4.91% 4.67% 4.31%/2/
PORTFOLIO TURNOVER RATE 119% 66% 30% 40%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 12/1/92/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $10.05 $ 9.60 $10.53 $10.00
--- ------ ------ ------ ------
Income from investment
operations
Net investment income 0.50 0.55 0.53 0.36
Net gain (loss) on
investments (both realized
and unrealized) 0.10 0.45 (0.91) 0.53
--- ------ ------ ------ ------
Total from investment
operations 0.60 1.00 (0.38) 0.89
--- ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.50) (0.55) (0.53) (0.36)
Distributions from net
realized capital gains - - - - (0.02) - -
--- ------ ------ ------ ------
Total distributions (0.50) (0.55) (0.55) (0.36)
--- ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.15 $10.05 $ 9.60 $10.53
=== ====== ====== ====== ======
Total return 6.12% 10.75% (3.75)% 9.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $ 409 $ 200 $ 127 $1,676
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.51% 0.12% 0.10% 0.08%/2/
Before
advisory/administration fee
waivers 1.10% 1.19% 1.49% 2.59%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 4.96% 5.61% 5.16% 4.99%/2/
Before
advisory/administration fee
waivers 4.37% 4.54% 3.77% 2.48%/2/
PORTFOLIO TURNOVER RATE 136% 63% 61% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
14.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of 12 in-
vestment portfolios that provide investors with a broad spec-
trum of investment alternatives within the fixed income sector.
Eight of these Portfolios invest solely in taxable bonds and
four of these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding periods,
a fund that invests in any one of these styles may perform
above or below the market. An investment program that combines
these multiple disciplines allows investors to select from
among these various product options in the way that most
closely fits the investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 Year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Managed Income and
International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
High Yield To seek current income by investing
primarily in non-investment grade debt
securities. Debt securities of less
than investment grade are considered
"high risk" securities (commonly
referred to as "junk bonds").
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio State-Specific Tax-Free Portfolio,
Tax-Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
15.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-
WEIGHTED
AVERAGE MIN
PERFORMANCE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year 3-5 Years Investment Grade B
Bond Treasury Index Spectrum
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't
Index
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Gov't/Corp Index
Core Bond Lehman Aggregate 5-10 Years Investment Grade BBB
Index Spectrum
Managed Lehman Aggregate 5-10 Years Investment Grade BBB
Income Index Spectrum
High Yield Lehman High Yield 8-12 Years Non-Investment Grade C
Index Spectrum
International Salomon Non-U.S. 5-15 Years AA, AAA, BBB
Bond Hedged World Gov't/Agency
Government Bond Index
Tax-Free Lehman Municipal Bond 10-15 Years Investment Grade BBB
Income Index Spectrum
PA Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Income Spectrum
NJ Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Income Spectrum
OH Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Income Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios' sub-adviser will normally attempt to structure the Portfo-
lios to have comparable durations to the benchmarks. Duration, which mea-
sures price sensitivity to interest rate changes, is not necessarily equal
to average maturity.
16.
<PAGE>
- --------------------------------------------------------------------------------
WHAT TYPES OF SECURITIES ARE IN THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio,
according to the following designations:
Yes:The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No:The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL HIGH YIELD CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ SECURITIES RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Bond Yes Yes Yes Elig. Elig. Elig. Elig. Elig. Elig.
Intermediate Gov't Bond Yes Yes Yes Elig. Yes Elig. No No Elig.
Intermediate Bond Yes Yes Yes Elig. Yes Yes No No Elig.
Core Bond Yes Yes Yes Elig. Yes Yes No No Elig.
Managed Income Yes Yes Yes Elig. Yes Yes No Elig. Elig.
High Yield Yes Yes No No Yes Yes Yes Elig. No
International Bond Elig. Elig. Elig. Elig. Elig. Elig. No Yes Elig.
Tax-Free Income Temp. No No No No No No No Yes
PA Tax-Free Income Temp. No No No No No No No Yes
NJ Tax-Free Income Temp. No No No No No No No Yes
OH Tax Free Income Temp. No No No No No No No Yes
</TABLE>
/1/MBS = mortgage-backed securities
/2/ABS = asset-backed securities
17.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any change to a Portfolio's investment
objective. No assurance can be provided that a Portfolio will achieve its in-
vestment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio (as defined below), invest less than
80% of its net assets in Municipal Obligations (as defined below), except
during defensive periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), more than 5% of its total assets to be invested in securities of
any one issuer, except that up to 50% of a Portfolio's total assets may be in-
vested without regard to this limitation so long as no more than 25% of the
Portfolio's total assets are invested in any one issuer (except U.S. Government
securities).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
18.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Intermediate Government Bond
Portfolio will be rated in the highest rating category at the time of purchase
or, if unrated, of comparable quality as determined by the Portfolios' sub-ad-
viser. Securities acquired by the other Portfolios will be rated investment
grade at the time of purchase (within the four highest rating categories by
Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services, Inc.) or, if
unrated, of comparable quality as determined by the Portfolios' sub-adviser.
Securities rated "Baa" on "BBB" are generally considered to be investment grade
although they have speculative characteristics. If a security's rating is re-
duced below the minimum rating that is permitted for a Portfolio, the Portfo-
lio's sub-adviser will consider whether the Portfolio should continue to hold
the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Intermediate Government
Bond Portfolio will invest at least 65% of its total assets in obligations is-
sued or guaranteed by the U.S. Government, its agencies or instrumentalities
and related repurchase agreements during normal market conditions. Under normal
market conditions, the International Bond Portfolio will invest at least 65% of
its total assets in the debt obligations of foreign issuers located in at least
three different foreign countries. The Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the
"State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their political sub-
divisions, agencies, instrumentalities and authorities and related tax-exempt
derivative securities the interest on which is exempt from regular Federal in-
come tax and is not an item of tax preference for purposes of the Federal al-
ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe-
cific Tax-Free Portfolio intends to invest at least 65% of its net assets in
Municipal Obligations of issuers located in the particular state indicated by
its name ("State-Specific Obligations"). The Tax-Free Income Portfolio intends
to invest no more than 25% of its net assets in Municipal Obligations of is-
suers located in the same state. During temporary defensive periods each Tax-
Free Portfolio may invest without limitation in securities that are not Munici-
pal Obligations and may hold without limitation uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. Each of the Managed Income and Core Bond
Portfolios may invest up to 10% of its total assets and the Low Duration Bond
Portfolio may invest up to 20% of its total assets in debt securities of
foreign issuers and may hold from time to time various foreign currencies
pending investment or conversion into U.S. dollars. Some of these Portfolios
may have the characteristics of futures contracts. In addition, each Portfolio
may engage in foreign currency exchange transactions to seek to protect against
changes in the level of future exchange rates which would adversely affect the
Portfolio's performance. These investments and transactions involving foreign
securities, currencies, options (including options that relate to foreign
currencies), futures, hedging and cross-hedging are described below and under
"Interest Rate and Currency Transactions" and "Options and Futures Contracts."
Investing in securities of foreign issuers involves considerations not
typically associated with investing in securities of companies organized and
operated in the United States. Because foreign securities generally are
denominated and pay dividends or interest in foreign currencies, the value of a
Portfolio that invests in foreign securities will be affected favorably or
unfavorably by changes in currency exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general,
19.
<PAGE>
- --------------------------------------------------------------------------------
less information is publicly available with respect to foreign issuers than is
available with respect to U.S. companies. Most foreign companies are also not
subject to the uniform accounting and financial reporting requirements applica-
ble to issuers in the United States. While the volume of transactions effected
on foreign stock exchanges has increased in recent years, it remains apprecia-
bly below that of the New York Stock Exchange. Accordingly, a Portfolio's for-
eign investments may be less liquid and their prices may be more volatile than
comparable investments in securities in U.S. companies. In addition, there is
generally less government supervision and regulation of securities exchanges,
brokers and issuers in foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more that 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
HIGH YIELD SECURITIES. The High Yield Portfolio will invest primarily in the
full spectrum of "high yield" or non-investment grade debt securities, commonly
known to investors as "junk bonds." The Low Duration Bond Portfolio may invest
in non-investment grade fixed income or convertible securities when the Portfo-
lio's sub-adviser believes that the investment characteristics of such securi-
ties make them desirable in light of the Portfolio's investment objective and
current portfolio mix, so long as under normal market conditions, no more than
20% of its total assets are invested in non-investment grade debt securities,
and such securities are rated "B" or higher at the time of purchase by at least
one major rating agency.
High yield securities are bonds that are issued by a company whose credit rat-
ing (based on rating agencies' evaluation of the likelihood of repayment) ne-
cessitates offering a higher coupon and yield on its issues when selling them
to investors who may otherwise be hesitant in purchasing the debt of such a
company. While generally providing greater income and opportunity for gain,
non-investment grade debt securities may be subject to greater risks than secu-
rities which have higher credit ratings, including a high risk of default, and
their yields will fluctuate over time. High yield securities will generally be
in the lower rating categories of recognized rating agencies (rated Ba or lower
by Moody's or BB or lower by Standard & Poor's) or will be non-rated. The
credit rating of a high yield security does not necessarily address its market
value risk, and ratings may from time to time change, positively or negatively,
to reflect developments regarding the issuer's financial condition. High yield
securities are considered to be speculative with respect to the capacity of the
issuer to timely repay principal and pay interest or dividends in accordance
with the terms of the obligation and may have more credit risk than higher
rated securities.
20.
<PAGE>
- --------------------------------------------------------------------------------
While the market values of high yield securities tend to react less to fluctua-
tions in interest rates than do those of higher rated securities, the values of
high yield securities often reflect individual corporate developments and have
a high sensitivity to economic changes to a greater extent than do higher rated
securities. Issuers of high yield securities are often in the growth stage of
their development and/or involved in a reorganization or takeover. The compa-
nies are often highly leveraged (have a significant amount of debt relative to
shareholders' equity) and may not have available to them more traditional fi-
nancing methods, thereby increasing the risk associated with acquiring these
types of securities. In some cases, obligations with respect to high yield se-
curities are subordinated to the prior repayment of senior indebtedness, which
will potentially limit a Portfolio's ability to fully recover principal or to
receive interest payments when senior securities are in default. Thus, invest-
ors in high yield securities have a lower degree of protection with respect to
principal and interest payments then do investors in higher rated securities.
During an economic downturn, a substantial period of rising interest rates or a
recession, highly leveraged issuers of high yield securities may experience fi-
nancial distress possibly resulting in insufficient revenues to meet their
principal and interest payment obligations, to meet projected business goals
and to obtain additional financing. An economic downturn could also disrupt the
market for lower-rated securities and adversely affect the value of outstanding
securities, the Portfolio's net asset value and the ability of the issuers to
repay principal and interest. If the issuer of a security held by a Portfolio
defaulted, the Portfolio may not receive full interest and principal payments
due to it and could incur additional expenses if it chose to seek recovery of
its investment.
The secondary markets for high yield securities are not as liquid as the sec-
ondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and partici-
pants in the markets are mostly institutional investors, including insurance
companies, banks, other financial institutions and mutual funds. In addition,
the trading volume for high yield securities is generally lower than that for
higher rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in
the condition of a particular issuer. Under certain economic and/or market con-
ditions, a Portfolio may have difficulty disposing of certain high yield secu-
rities due to the limited number of investors in that sector of the market. An
illiquid secondary market may adversely affect the market price of the high
yield security, which may result in increased difficulty selling the particular
issue and obtaining accurate market quotations on the issue when valuing a
Portfolio's assets. Market quotations on high yield securities are available
only from a limited number of dealers, and such quotations may not be the ac-
tual prices available for a purchase or sale.
The high yield markets may react strongly to adverse news about an issuer or
the economy, or to the perception or expectation of adverse news, whether or
not it is based on fundamental analysis. Additionally, prices for high yield
securities may be affected by legislative and regulatory developments. These
developments could adversely affect a Portfolio's net asset value and invest-
ment practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value and liquidity of out-
standing high yield securities, especially in a thinly traded market. For exam-
ple, federal legislation requiring the divestiture by federally insured savings
and loan associations of their investments in high yield bonds and limiting the
deductibility of interest by certain corporate issuers of high yield bonds ad-
versely affected the market in recent years.
When the secondary market for high yield securities becomes more illiquid, or
in the absence of readily available market quotations for such securities, the
relative lack of reliable objective data makes it more difficult to value a
Portfolio's securities, and judgment plays a more important role in determining
such valuations. Increased illiquidity in the junk bond market, in combination
with the relative youth and growth of the market for such securities, also may
affect the ability of a Portfolio to dispose of such securities at a desirable
price. Additionally, if the secondary markets for high yield securities con-
tract due to adverse economic conditions or for other reasons, certain of a
Portfolio's liquid securities may become illiquid and the proportion of the
Portfolio's assets invested in illiquid securities may significantly increase.
21.
<PAGE>
- --------------------------------------------------------------------------------
The Low Duration Bond Portfolio may invest in securities rated "B" and above or
determined by the sub-adviser to be of comparable quality. Such securities are
considered to have the current capacity to meet interest and principal pay-
ments, but have a greater vulnerability to default than higher rated securi-
ties. Adverse business, financial or economic conditions will likely impair ca-
pacity or willingness to pay interest and principal. The High Yield Portfolio
may invest in securities rated "C" and above or determined by the sub-adviser
to be of comparable quality. Securities rated "C" are considered highly specu-
lative and may be used to cover a situation where the issuer has filed a bank-
ruptcy petition but debt service payments are continued. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposure to adverse conditions.
The rating assigned by a rating agency evaluates the safety of a non-investment
grade security's principal and interest payments, but does not address market
value risk. Because such ratings of the ratings agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, the sub-adviser performs its own analysis of the issuers
whose non-investment grade securities the Portfolio holds. Because of this, the
Portfolio's performance may depend more on the sub-adviser's own credit analy-
sis than in the case of mutual funds investing in higher-rated securities. For
a description of these ratings, see Appendix B.
In selecting non-investment grade securities, the sub-adviser considers factors
such as those relating to the creditworthiness of issuers, the ratings and per-
formance of the securities, the protections afforded the securities and the di-
versity of the Portfolio. The sub-adviser continuously monitors the issuers of
non-investment grade securities held by the Portfolio for their ability to make
required principal and interest payments, as well as in an effort to control
the liquidity of the Portfolio so that it can meet redemption requests. If a
security's rating is reduced below the minimum credit rating that is permitted
for a Portfolio, the Portfolio's sub-adviser will consider whether the Portfo-
lio should continue to hold the security.
In the event that a Portfolio investing in high yield securities experiences an
unexpected level of net redemptions, the Portfolio could be forced to sell its
holdings without regard to the investment merits, thereby decreasing the assets
upon which the Portfolio's rate of return is based.
The expense ratio of the High Yield Portfolio can be expected to be higher than
those of Portfolios investing primarily in investment grade securities. The
costs attributable to investing in the high yield markets are usually higher
for several reasons, such as higher investment research costs and higher com-
mission costs.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental
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body has no obligation to make these payments in future years unless money is
appropriated on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. These securities represent a relatively new
type of financing that is not yet as marketable as more conventional
securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest on which is paid solely from revenues of similar projects. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. The Tax-Free Portfolios may also invest in tax-exempt derivative
securities relating to Municipal Obligations, including tender option bonds,
participations, beneficial interests in trusts and partnership interests.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Tax-Free Portfolio and affect its
share price.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its service providers will rely on such opinions and will
not review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative securities, or
the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in residential and commercial
mortgage-related and other asset-backed securities (i.e., securities backed by
home equity loans, installment sale contracts, credit card receivables or other
assets) issued by governmental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed
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or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways. In
most cases, however, payments of principal are applied to the CMO classes in
the order of their respective stated maturities, so that no principal payments
will be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. The classes may include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
other specified classes have been retired and are converted thereafter to in-
terest-paying securities. They may also include planned amortization classes
("PACs") which generally require, within certain limits, that specified amounts
of principal be applied on each payment date, and generally exhibit less yield
and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws many of which give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile receivables permit the
servicers to retain possession of the underlying obligations. If the servicer
were to sell these obligations to another party, there is a risk that the pur-
chaser would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have an effective
security interest in all of the obligations backing such receivables. There-
fore, there is a possibility that recoveries on repossessed collateral may not,
in some cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may normally be prepaid at any
time because the underlying assets (i.e., loans) generally may be prepaid at
any time. In calculating the average weighted maturity of a Portfolio, the ma-
turity of mortgage-related and other asset-backed securities held by the Port-
folio will be based on estimates of average life which take prepayments into
account. The average life of a mortgage-related instrument, in particular, is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities as the result of scheduled principal payments
and mortgage prepayments. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a Portfolio will generally be at
lower rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears Mortgage) or mortgage-related securities contain-
ing loans or mortgages originated by PNC Bank, National Association ("PNC
Bank") or its affiliates. It is possible that under some circumstances, PNC
Mortgage Securities Corp. or its affiliates could have interests that are in
conflict with the holders of these mortgage-backed securities, and such holders
could have rights against PNC Mortgage Securities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions.
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These participations, which may be issued by the U.S. Government (or a U.S.
Government agency or instrumentality) or by private issuers such as banks and
other institutions, are issued at a discount to their "face value," and may in-
clude stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives all or most of the interest are generally higher than prevailing market
yields on other mortgage-related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments. Additionally, current federal tax law requires the holder of certain
zero coupon bonds to accrue income with respect to these securities prior to
the receipt of cash payments. To maintain its qualification as a regulated in-
vestment company and avoid liability for federal income and excise taxes, a
Portfolio may be required to distribute income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvanta-
geous circumstances in order to generate cash to satisfy these distribution re-
quirements. See "How Are Fund Distributions Taxed?"
PAY-IN-KIND BONDS. Pay-in-kind, or PIK, bonds are bonds which pay interest
through the issuance of additional debt or equity securities. Similar to zero
coupon obligations, pay-in-kind bonds also carry additional risk as holders of
these types of securities realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, a Portfolio may
obtain no return at all on its investment. The market price of pay-in-kind
bonds is affected by interest rate changes to a greater extent, and therefore
tends to be more volatile, than that of securities which pay interest in cash.
Additionally, current federal tax law requires the holder of certain pay-in-
kind bonds to accrue income with respect to these securities prior to the re-
ceipt of cash payments. To maintain its qualification as a regulated investment
company and avoid liability for federal income and excise taxes, a Portfolio
may be required to distribute income accrued with respect to these securities
and may have to dispose of portfolio securities under disadvantageous circum-
stances in order to generate cash to satisfy these distribution requirements.
See "How Are Fund Distributions Taxed?"
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. Bank obligations may include certificates
of deposit, notes, bankers' acceptances and fixed time deposits. These obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
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U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the Government National Mort-
gage Association are supported by the United States' full faith and credit;
others such as those of the Federal National Mortgage Association and the Stu-
dent Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit Banks
or the Federal Home Loan Mortgage Corporation are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government-sponsored agencies or instrumen-
talities if it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios may enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of their holdings, as a duration manage-
ment technique or to protect against an increase in the price of securities a
Portfolio anticipates purchasing at a later date. The Portfolios intend to use
these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of inter-
est on a notional principal amount from the party selling such interest rate
floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of
transactions in portfolio securities denominated in that foreign currency, and
may also enter into contracts to purchase or sell foreign currencies at a fu-
ture date ("forward contracts") and purchase and sell foreign currency futures
contracts (futures contracts). The Portfolio may also purchase exchange-listed
and over-the-counter call and put options on futures contracts and on foreign
currencies, and may write covered call options on up to 100% of the currencies
in its portfolio. In order to protect against currency fluctuations, the Inter-
national Bond Portfolio may enter into currency swaps. Currency swaps involve
the exchange of the rights of the Portfolio and another party to make or re-
ceive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write (i.e., sell) covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative, or, with
respect to the International Bond Portfolio, cross-hedging. For the payment of
a premium, the purchaser of an option obtains the right to buy (in the case of
a call option) or to sell (in the case of a put option) a security at a stated
exercise price for a specific period of time. These options may relate to par-
ticular securities, securities indices or the yield differential between two
securities, or, in the case of the International Bond Portfolio, foreign cur-
rencies, and may or may not be listed on a securities exchange and may or may
not be issued by the Options Clearing Corporation. A Portfolio will not pur-
chase put and call options when the aggregate premiums on outstanding options
exceed 5% of its net assets at the time of purchase, and will not write options
on more than 25% of the value of its net assets (measured at the time an option
is written). Options trading is a highly specialized activity that entails
greater than ordinary investment risks. In addition, unlisted options are not
subject to the protections afforded purchasers of listed options issued by the
Options Clearing Corporation, which performs the obligations of its members if
they default.
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To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its total assets, although a Portfolio will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered in to for other than bona fide hedging
purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. A
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities in
the value of the securities to be sold. In addition, a Portfolio may utilize
futures contracts in anticipation of changes in the composition of its holdings
or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; (d) the
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors; and (e)
the possibility that the counterparty will default to the performance of its
obligations. For further discussion of risks involved with domestic and foreign
futures and options, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit
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the indebtedness thereunder to vary in addition to providing for periodic ad-
justments in the interest rate. The Portfolios may invest up to 10% of their
total assets in leveraged inverse floating rate debt instruments ("inverse
floaters"). The interest rate of an inverse floater resets in the opposite di-
rection from the market rate of interest to which it is indexed. An inverse
floater may be considered to be leveraged to the extent that its interest rate
varies by a magnitude that exceeds the magnitude of the change in the index
rate of interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Issuers of unrated
variable and floating rate instruments must satisfy the same criteria as set
forth above for a Portfolio. The absence of an active secondary market with re-
spect to particular variable and floating rate instruments, however, could make
it difficult for a Portfolio to dispose of a variable or floating rate instru-
ment if the issuer defaulted on its payment obligation or during periods when
the Portfolio is not entitled to exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
through reverse repurchase agreements under which a Portfolio sells portfolio
securities to financial institutions such as banks and broker-dealers and
agrees to repurchase them at a particular date and price. The Portfolios may
use the proceeds of reverse repurchase agreements to purchase other securities
either maturing, or under an agreement to resell, on a date simultaneous with
or prior to the expiration of the reverse repurchase agreement. The Portfolios
(except the Tax-Free Portfolios) may use reverse repurchase agreements when it
is anticipated that the interest income to be earned from the investment of the
proceeds of the transaction is greater than the interest expense of the trans-
action. This use of reverse repurchase agreements may be regarded as leveraging
and, therefore, speculative. Reverse repurchase agreements involve the risks
that the interest income earned in the investment of the proceeds will be less
than the interest expense, that the market value of the securities sold by a
Portfolio may decline below the price of the securities the Portfolio is obli-
gated to repurchase and that the securities may not be returned to the Portfo-
lio. During the time a reverse repurchase agreement is outstanding, a Portfolio
will maintain a segregated account with the Fund's custodian containing cash,
U.S. Government or other appropriate liquid securities having a value at least
equal to the repurchase price. A Portfolio's reverse repurchase agreements, to-
gether with any other borrowings, will not exceed, in the aggregate, 33 1/3% of
the value of its total assets. In addition, a Portfolio (except the Tax-Free
Portfolios) may borrow up to an additional 5% of its total assets for temporary
purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that each Portfolio bears directly in connection with its
own operations.
ILLIQUID SECURITIES. No Portfolio will invest more than 15% of the value of its
net assets in securities that are illiquid. GICs, variable and floating rate
instruments that cannot be disposed of within seven days, and repurchase agree-
ments and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to this 15% limit. Each
Portfolio may purchase securities which are not registered under the Securities
Act of 1933 (the "1933 Act") but which can be sold to "qualified institu -
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tional buyers" in accordance with Rule 144A under the 1933 Act. These securi-
ties will not be considered illiquid so long as it is determined by the Portfo-
lios' sub-adviser that an adequate trading market exists for the securities.
This investment practice could have the effect of increasing the level of illi-
quidity in a Portfolio during any period that qualified institutional buyers
become uninterested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates or market action.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time a Portfo-
lio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the sub-adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully em-
ployed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not be a factor
29.
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preventing a sale or purchase when the sub-adviser believes investment consid-
erations warrant such sale or purchase. Portfolio turnover may vary greatly
from year to year as well as within a particular year. High portfolio turnover
rates (i.e., 100% or more) will generally result in higher transaction costs to
a Portfolio and may result in the realization of short-term capital gains that
are taxable to shareholders as ordinary income.
INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing inter-
est rates. Fixed income securities with longer maturities, which tend to pro-
duce higher yields, are subject to potentially greater capital appreciation and
depreciation than securities with shorter maturities. The Portfolios are not
restricted to any maximum or minimum time to maturity in purchasing individual
portfolio securities, and the average maturity of a Portfolio's assets will
vary within the limits stated above under "What Are the Differences Among the
Portfolios?" based upon its sub-adviser's assessment of economic and market
conditions. Although the Portfolios' sub-adviser will normally attempt to
structure each Portfolio to have a comparable duration to its benchmark as
stated in that section, there can be no assurance that it will be able to do so
at all times.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Tax-Free Portfolios in State-Spe-
cific Obligations raises special investment considerations. In particular,
changes in the economic condition and governmental policies of a state and its
political subdivisions could adversely affect the value of a Portfolio's
shares. Certain matters relating to the states in which the State-Specific Tax-
Free Portfolios invest are described below. For further information, see "Spe-
cial Considerations Regarding State-Specific Obligations" in the Statement of
Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following four
years. As of June 30, 1995, the General Fund had a surplus of $688.3 million.
For the fiscal year ended June 30, 1996, the General Fund's expenditures ex-
ceeded available revenues by approximately $253 million; this shortfall was
funded by the General Fund's unappropriated surplus. Rising unemployment, a
relatively high proportion of persons 65 and older in the Commonwealth and
court ordered increases in healthcare reimbursement rates place increased pres-
sures on the tax resources of the Commonwealth and its municipalities. The Com-
monwealth has sold a substantial amount of bonds over the past several years,
but the debt burden remains moderate. Employment growth has shifted to the
trade and service sectors, with losses in more high-paid manufacturing posi-
tions. A new governor took office in January 1995, but the Commonwealth has
continued to show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county. This
balanced budget plan may actually adversely affect a particular municipality's
or county's ability to repay its obligations.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cyclical
than in some other states and in the
30.
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nation as a whole. Agriculture is an important segment of the Ohio economy with
over half the State's area devoted to farming and approximately 16% of total
employment in agribusiness. In past years, the State's overall unemployment
rate has been somewhat higher than the national figure. For example, the re-
ported 1990 average monthly State rate was 5.7%, compared to the 5.5% national
figure. However, for the last five years the State rates were below the na-
tional rates (4.8% versus 5.6% in 1995). The unemployment rate and its effects
vary among particular geographic areas of the State. There can be no assurance
that future national, regional or state-wide economic difficulties and the re-
sulting impact on State or local government finances generally will not ad-
versely affect the market value of Ohio State-Specific Obligations held in the
Portfolio or the ability of particular obligors to make timely payments of debt
service on (or lease payments relating to) those obligations.
31.
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of its Board of Trustees. The following persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial
Officer of USX Corporation.
Anthony M. Santomero--Professor of Finance and Director of
the Financial Institutional Center, The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
ates, Inc.
ADVISER AND
SUB-ADVISER The Adviser to the Compass Capital Funds is PNC Asset Manage-
ment Group, Inc. ("PAMG"). Each of the Portfolios within the
Compass Capital Fund family is managed by a specialized port-
folio manager who is a member of PAMG's fixed income portfo-
lio management subsidiary, BlackRock Financial Management,
Inc. ("BlackRock"). BlackRock has its primary offices at 345
Park Avenue, New York, New York 10154.
The Portfolios and their portfolio managers are as follows:
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<S> <C>
Low Duration Bond Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-manager
since its inception.
Scott Amero; Managing Director of BlackRock
since 1990; Portfolio co-manager since its
inception.
Jody Kochansky; Vice President of BlackRock
since 1992; Portfolio co-manager since
1995.
Intermediate Government Bond Robert S. Kapito and Scott Amero (see
above) and Michael P. Lustig; Mr. Lustig
has been Vice President of BlackRock since
1989; Messrs. Kapito, Lustig and Amero have
been Portfolio co-managers since 1995.
Intermediate Bond Robert S. Kapito, Michael P. Lustig and
Scott Amero (see above); Messrs. Kapito,
Lustig and Amero have been Portfolio co-
managers since 1995.
Core Bond Keith Anderson; Managing Director of
BlackRock since 1988; Portfolio co-manager
since June 1997.
Robert Michele, CFA; Managing Director of
BlackRock since 1996; Prior to joining
BlackRock in 1995, Mr. Michele was a
Director and head of US Fixed Income
Investments with CS First Boston Investment
Management Corporation; From 1985-1993, he
served as Deputy Manager and Senior
Portfolio Manager at Brown Brothers
Harriman & Co.; Portfolio co-manager since
June 1997.
</TABLE>
32.
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<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<S> <C>
Managed Income Keith Anderson; Managing Director of
BlackRock since 1988; Portfolio co-manager
since June 1997.
Robert Michele (see above); Portfolio co-
manager since June 1997.
High Yield , and Robert S.
Kapito (see above); Portfolio co-managers
since inception.
International Bond Andrew Gordon; portfolio manager at
BlackRock since 1996; responsible for non-
dollar research at Barclay Investments from
1994 to 1996 and at CS First Boston from
1986 to 1994; Portfolio manager since
January 1997.
Tax-Free Income Kevin Klingert; portfolio manager at
BlackRock since 1991; prior to joining
BlackRock, Assistant Vice President,
Merrill, Lynch, Pierce, Fenner & Smith;
Portfolio manager since 1995.
Pennsylvania Tax-Free Income Kevin Klingert (see above); Portfolio
manager since 1995.
New Jersey Tax-Free Income Kevin Klingert (see above); Portfolio
manager since 1995.
Ohio Tax-Free Income Kevin Klingert (see above); Portfolio
manager since 1995.
</TABLE>
33.
<PAGE>
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PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1600
Market Street, 29th Floor, Philadelphia, Pennsylvania 19103.
PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company.
For their investment advisory and sub-advisory services,
PAMG and the Portfolios' sub-adviser are entitled to fees,
computed daily on a Portfolio-by-Portfolio basis and payable
monthly, at the maximum annual rates set forth below. As
stated under "What Are The Expenses Of The Portfolios?" PAMG
and the sub-adviser intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by PAMG, and do not represent an extra charge to the
Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND AND HIGH YIELD HIGH YIELD AND
PORTFOLIOS INTERNATIONAL BOND PORTFOLIOS
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 1997, the Portfo-
lios paid investment advisory fees at the following annual
rates (expressed as a percentage of average daily net as-
sets) after voluntary fee waivers: Intermediate Government
Bond Portfolio, .28%; Intermediate Bond Portfolio, .30%;
Managed Income Portfolio, .35%; Tax-Free Income Portfolio,
.28%; Pennsylvania Tax-Free Income Portfolio, .29%; Ohio
Tax-Free Income Portfolio, .06%; Low Duration Bond Portfo-
lio, .30%; Core Bond Portfolio, .30%; New Jersey Tax-Free
Income Portfolio, .30%; and the International Bond Portfo-
lio, .55%.
The Portfolios' sub-adviser strives to achieve best execu-
tion on all transactions. Infrequently, brokerage transac-
tions for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor, subject to the requirements
of best execution.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are in-
direct 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.
The Administrators generally assist the Fund in all aspects
of its administration and operation, including matters re-
lating to the maintenance of financial records and fund ac-
counting. As compensation for these services, CCG is enti-
tled to receive a fee, computed daily and payable monthly,
at an annual rate of .03% of each Portfolio's average daily
net assets. PFPC and CDI are entitled to receive a combined
administration fee, computed daily and payable monthly, at
the aggregate annual rate of (i) .085% of the first $500
million of each Portfolio's average daily net assets, .075%
of the next $500 million of each Portfolio's average daily
net assets and .065% of the average daily net assets of each
Portfolio in excess of $1 billion and (ii) .115% of the
first $500
34.
<PAGE>
- --------------------------------------------------------------------------------
million of the average daily net assets allocated to Institu-
tional Shares of each Portfolio, .105% of the next $500 million
of such average daily net assets and .095% of the average daily
net assets allocated to Institutional Shares of each Portfolio
in excess of $1 billion. From time to time the Administrators
may waive some or all of their administration fees from a Port-
folio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal period, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, fees and expenses in registering
and qualifying the Portfolios and their shares for distribution
under Federal and state securities laws, expenses of preparing
prospectuses and statements of additional information and of
printing and distributing prospectuses and statements of addi-
tional information to existing shareholders, expenses relating
to shareholder reports, shareholder meetings and proxy solici-
tations, insurance premiums, the expense of independent pricing
services, and other expenses which are not expressly assumed by
PAMG or the Fund's service providers under their agreements
with the Fund. Any general expenses of the Fund that do not be-
long 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.
35.
<PAGE>
- -------------------------------------------------------------------------------
HOW ARE SHARES PURCHASED AND REDEEMED?
- -------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at
Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Fund is not required or permitted under the Plan to
make distribution payments with respect to Institutional Shares. However, 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 which,
subject to applicable NASD regulations, may include contributions to various
non-cash and cash incentive arrangements to promote the sale of shares, as
well as sponsorship of various educational programs, sales contests and promo-
tions in which participants may receive reimbursement of expenses, entertain-
ment and prizes such as travel awards, merchandise and cash. For further in-
formation, see "Investment Advisory, Administration, Distribution and Servic-
ing Arrangements" in the Statement of Additional Information.
PURCHASE OF SHARES. Institutional Shares are offered to institutional invest-
ors, including registered investment advisers with a minimum investment of
$500,000 and individuals with a minimum investment of $2,000,000.
Institutional Shares are sold at their net asset value per share next computed
after an order is received by PFPC. Orders received by PFPC by 4:00 p.m.
(Eastern Time) on a Business Day are priced the same day. A "Business Day" is
any weekday that the New York Stock Exchange (the "NYSE") and the Federal Re-
serve Bank of Philadelphia (the "FRB") are open for business.
Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders
received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following
Business Day.
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also,
in the discretion of the Fund, be made in the form of securities that are per-
missible investments for the respective Portfolios. For further information,
see the Statement of Additional Information. The minimum initial investment
for institutions is $5,000. There is no minimum subsequent investment require-
ment.
Compass Capital may in its discretion waive the minimum investment amount and
may reject any order for Institutional Shares.
REDEMPTION OF SHARES. Redemption orders for Institutional Shares may be placed
by telephoning PFPC at (800) 441-7450. Institutional Shares are redeemed at
their net asset value per share next determined after PFPC's receipt of the
redemption order. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. The Fund and its service providers will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions that
are reasonably believed to be genuine in accordance with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption
orders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's
custodian is closed is normally wired in Federal funds on the next Business
Day following redemption on which the Fund's custodian is open for business.
The Fund reserves the right to wire redemption proceeds within seven days af-
ter receiving a redemp-
36.
<PAGE>
- --------------------------------------------------------------------------------
tion order if, in the judgment of PAMG, an earlier payment could adversely af-
fect a Portfolio. No charge for wiring redemption payments is imposed by the
Fund.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may redeem Institutional Shares in any Portfolio account if the ac-
count balance drops below $5,000 as the result of redemption requests and the
shareholder does not increase the balance to at least $5,000 on thirty days'
written notice.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
Shares of the Portfolios may be purchased by customers of broker-dealers and
agents which have established a servicing relationship with the Fund on behalf
of their customers. These broker-dealers and agents may impose additional or
different conditions on the purchase or redemption of Portfolio shares by their
customers and may charge their customers transaction, account or other fees on
the purchase and redemption of Portfolio shares. Each broker-dealer or agent is
responsible for transmitting to its customers a schedule of any such fees and
information regarding any additional or different conditions regarding pur-
chases and redemptions. Shareholders who are customers of such broker-dealers
or agents should consult them for information regarding these fees and condi-
tions.
37.
<PAGE>
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HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Institutional Shares of each Port-
folio as of the close of regular trading hours on the NYSE (currently 4:00 p.m.
Eastern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio that are allocated to its Institutional
Shares, less the liabilities charged to its Institutional Shares, by the number
of its Institutional Shares that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless a Portfolio's sub-adviser under the supervision of the Board of
Trustees determines such method does not represent fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
shares of Institutional Shares of the relevant Portfolio unless a shareholder
elects otherwise. Such election, or any revocation thereof, must be made in
writing to PFPC, and will become effective with respect to dividends paid after
its receipt by PFPC. Each Portfolio declares a dividend each day on "settled"
shares (i.e. shares for which the particular Portfolio has received payment in
Federal funds) on the first Business day after a purchase order is placed with
the Fund. Payments by check are normally converted to Federal funds within two
Business Days of receipt. Over the course of a year, substantially all of the
Portfolios' net investment income will be declared as dividends. the amount of
the daily dividend for each Portfolio will be based on periodic projections of
its net investment income. All dividends are paid within ten days after the end
of each month. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by each Portfolio at least annually.
38.
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HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), whether the
distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum tax. First, "exempt
interest dividends" derived from certain private activity bonds issued after
August 7, 1986 generally will constitute an item of tax preference for corpo-
rate and non-corporate taxpayers in determining alternative minimum and envi-
ronmental tax liability. Second, "exempt interest dividends" must be taken into
account by corporate taxpayers in determining certain adjustments for alterna-
tive minimum tax purposes. In addition, investors should be aware of the possi-
bility of state and local alternative minimum or minimum income tax liability
on interest from private activity bonds. Shareholders who are recipients of So-
cial Security Act or Railroad Retirement Act benefits should note that "exempt
interest dividends" will be taken into account in determining the taxability of
their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions declared from net investment income during that year and may
differ significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange. Any loss upon the sale or ex-
change of shares held for six months or less will be disallowed for Federal in-
come tax purposes to the extent of any exempt interest dividends received by
the shareholder. For the Ohio Tax-Free Income Portfolio, the loss will be dis-
allowed for Ohio income tax purposes to the same extent, even though, for Ohio
income tax purposes, some portion of such dividends actually may have been sub-
ject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of a taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. Federal
income tax purposes, to treat certain foreign taxes paid by it, including gen-
erally any withholding taxes and other foreign income taxes, as paid by its
shareholders.
39.
<PAGE>
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The Portfolio intends to make this election. As a result, the amount of such
foreign taxes paid by the Portfolio will be included in its shareholders' in-
come pro rata (in addition to taxable distributions actually received by
them), and each shareholder generally will be entitled either (a) to credit a
proportionate amount of such taxes against U.S. Federal income tax liabili-
ties, or (b) if a shareholder itemizes deductions, to deduct such proportion-
ate amounts from U.S. income, should the shareholder so choose.
TAX TREATMENT OF CERTAIN SECURITIES. A Portfolio may make investments that
produce income that is not matched by a corresponding cash distribution to the
Portfolio, such as investments in pay-in-kind bonds or in obligations such as
zero coupon securities having original issue discount (i.e., an amount equal
to the excess of the stated redemption price of the security at maturity over
its issue price), or market discount (i.e., an amount equal to the excess of
the stated redemption price of the security over the basis of such bond imme-
diately after it was acquired) if the Portfolio elects to accrue market dis-
count on a current basis. In addition, income may continue to accrue for fed-
eral income tax purposes with respect to a non-performing investment. Any such
income would be treated as income earned by a Portfolio and therefore would be
subject to the distribution requirements of the Code. Because such income may
not be matched by a corresponding cash distribution to a Portfolio, such Port-
folio may be required to borrow money or dispose of other securities to be
able to make distributions to its investors. In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction or any interest expenses incurred to
purchase or hold such bond may be deferred until such bond is sold or other-
wise disposed.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of the dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In
addition,shareholders who are non-resident alien individuals, foreign trusts
or estates, foreign corporations or foreign partnerships may be subject to
different Federal income tax treatment. Future legislative or administrative
changes or court decisions may materially affect the tax consequences of in-
vesting in a Portfolio. For additional information concerning the tax treat-
ment of dividends and distributions by the states listed below, including cer-
tain restrictions applicable to such treatment, see "Taxes" in the Statement
of Additional Information.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania State-Specific Obligations or attributable to insurance proceeds on
account of such interest, is not taxable to individuals, estates or trusts un-
der the Personal Income Tax (in the case of insurance proceeds, to the extent
they are exempt for Federal income tax purposes); to corporations under the
Corporate Net Income Tax (in the case of insurance proceeds, to the extent
they are exempt for Federal income tax purposes); nor to individuals under the
Philadelphia School District Net Investment Income Tax ("School District
Tax").
Income received by a shareholder attributable to gain on the sale or other
disposition by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania
State-Specific Obligations is taxable under the Personal Income Tax, the Cor-
porate Net Income Tax, and, unless these assets were held by the Pennsylvania
Tax-Free Income Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania State-Specific Obligations held by the Pennsylvania Tax-Free
Income Portfolio, such gain may be subject to the Personal Income Tax and Cor-
porate Net Income Tax. Such gain may also be subject to the School District
Tax, except that gain realized with respect to a share held for more than six
months is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares, or in-
terest and gain thereon, is subject to, or included in the measure of, the
special taxes imposed by the Commonwealth of Pennsylvania on banks
40.
<PAGE>
- --------------------------------------------------------------------------------
and other financial institutions or with respect to any privilege, excise,
franchise or other tax imposed on business entities not discussed above (in-
cluding the Corporate Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax to the extent that the Portfolio
is comprised of Pennsylvania State-Specific Obligations and Federal obligations
(if the interest on such obligations is exempt from state and local taxation
under the laws of the United States).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends paid by the New Jersey Tax-Free Income Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New Jersey
law as currently in effect, distributions paid by a "qualified investment fund"
will not be subject to the New Jersey personal income tax to the extent that
the distributions are attributable to income received as interest or gain from
New Jersey State-Specific Obligations, or as interest or gain from direct U.S.
Government obligations. Distributions by a "qualified investment fund" that are
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to interest
on Ohio State-Specific Obligations or obligations issued by the U.S. Govern-
ment, its agencies, instrumentalities or territories (if the interest on such
obligations is exempt from state income taxation under the laws of the United
States) Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Tax-Free Income Portfolio
in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions either constitute
exempt-interest dividends for Federal income tax purposes or are properly at-
tributable to interest on Ohio State-Specific Obligations or the U.S. obliga-
tions described above. However, Shares of the Ohio Tax-Free Income Portfolio
will be included in a corporation's net worth base for purposes of calculating
the Ohio corporation franchise tax. Distributions properly attributable to gain
on the sale, exchange or other disposition of Ohio State-Specific Obligations
will not be subject to the Ohio personal income tax, or municipal or school
district income taxes in Ohio and will not be included in the net income base
of the Ohio corporation franchise tax. Distributions attributable to other
sources will be subject to the Ohio personal income tax and the Ohio corpora-
tion franchise tax.
41.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS THE FUND ORGANIZED?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty-six investment portfolios.
Each Portfolio offers five separate classes of shares--Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares. In
addition, the Low Duration Bond, Core Bond and Intermediate Bond Portfolios of-
fer a sixth share class-BlackRock Shares. This prospectus relates only to In-
stitutional Shares of the Portfolios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, certain administrative/servicing
fees and amounts payable under the Fund's Distribution and Service Plan. Be-
cause of these "class expenses" and sales charges, the performance of the
BlackRock Shares of a Portfolio is expected to be less than the performance of
the Portfolio's Institutional Shares, the performance of both the BlackRock
Shares and Institutional Shares of a Portfolio is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of the
BlackRock Shares, Institutional Shares and Service Shares of a Portfolio is ex-
pected to be higher than the performance of the Portfolio's classes of Investor
Shares. The performance of each class of Investor Shares may be different. The
Fund offers various services and privileges in connection with its Investor
Shares that are not generally offered in connection with its BlackRock, Insti-
tutional and Service Shares, including an automatic investment plan and an au-
tomatic withdrawal plan. For further information regarding the Fund's Service
and Investor Share classes, contact PFPC at (800) 441-7764 (Service Shares) or
(800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 31, 1997, PNC Bank held of record approximately [70%] of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
42.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
Performance information for Institutional Shares of the Portfolios may be
quoted in advertisements and communications to shareholders. Total return will
be calculated on an average annual total return basis for various periods. Av-
erage annual total return reflects the average annual percentage change in
value of an investment in Institutional Shares of a Portfolio over the measur-
ing period. Total return may also be calculated on an aggregate total return
basis. Aggregate total return reflects the total percentage change in value
over the measuring period. Both methods of calculating total return assume that
dividend and capital gain distributions made by a Portfolio with respect to its
Institutional Shares are reinvested in Institutional Shares.
The yield of Institutional Shares is computed by dividing the Portfolio's net
income per share allocated to its Institutional Shares during a 30-day (or one
month) period by the net asset value per share on the last day of the period
and annualizing the result on a semi-annual basis. Each Tax-Free Portfolio's
"tax-equivalent yield" may also be quoted, which shows the level of taxable
yield needed to produce an after-tax equivalent to a Portfolio's tax-free
yield. This is done by increasing the Portfolio's yield (calculated above) by
the amount necessary to reflect the payment of Federal and/or state income tax
at a stated tax rate.
The performance of a Portfolio's Institutional Shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a Portfolio's Institu-
tional Shares may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and with the performance of the Lehman GMNA Index, the T-Bill Index,
the "stocks, bonds and inflation index" published annually by Ibbotson Associ-
ates and the Lehman Government Corporate Bond Index, as well as the benchmarks
attached to this Prospectus. Performance information may also include evalua-
tions of the Portfolios and their Institutional Shares published by nationally
recognized ranking services, and information as reported in financial publica-
tions such as Business Week, Fortune, Institutional Investor, Money Magazine,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in publi-
cations of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Institutional Shares of a particular Portfolio, a Portfolio
may provide other information demonstrating hypothetical investment returns.
This information may include, but is not limited to, illustrating the com-
pounding effects of dividends in a dividend reinvestment plan or the impact of
tax-deferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Institutional Shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data
for Institutional Shares of a Portfolio cannot necessarily be used to compare
an investment in such shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Performance is generally a function of the kind
and quality of the instruments held in a portfolio, portfolio maturity, operat-
ing expenses and market conditions. Any fees charged by brokers or other insti-
tutions directly to their customer accounts in connection with investments in
Institutional Shares will not be included in the Portfolio performance calcula-
tions.
43.
<PAGE>
- --------------------------------------------------------------------------------
OTHER INFORMATION ON THE COMPASS CAPITAL HIGH YIELD PORTFOLIO MANAGEMENT TEAM
- --------------------------------------------------------------------------------
and , co-managers of the Compass Capital High Yield Portfolio,
have had more than years of experience as Portfolio Managers. and
were the Portfolio Managers of the Fund (account) from until
December 31, 1997 at Co. The cumulative total return for the Fund
(account) from until December 31, 1997 was . At December 31, 1997,
that Fund (account) had million in net assets. As Portfolio Managers at
, had full discretionary authority over the selection of investments
for that fund.
The performance data for the Fund and portfolio management team is in-
cluded to provide investors with a longer performance record for in manag-
ing a(n) Fund (account) with substantially similar investment objectives and
policies to the Compass Capital High Yield Portfolio. The Fund performance
data does not represent the past, present or future performance of the Compass
Capital High Yield Portfolio. Past performance is no guarantee of future re-
sults. Investors should not consider this performance data as an indication of
the future performance of the Compass Capital High Yield Portfolio. Share
prices and investment returns will fluctuate reflecting market conditions and
cash flows, as well as changes in company-specific fundamentals of portfolio
securities. Consequently, investments in the High Yield Portfolio may be worth
more or less than their original cost at the time of redemption.
Average annual returns for the one-year, three-year and five-year periods ended
December 31, 1997 for the Fund and for the entire period during which
managed that fund compared with the performance of the Lehman High Yield
Index were:
<TABLE>
<CAPTION>
FUND LEHMAN HIGH YIELD
---- -----------------
<S> <C> <C>
One Year..........................................
Three Year Ann. ..................................
Five Year Ann. ...................................
During Management Tenure..........................
</TABLE>
(1) All returns presented above were calculated on a total return basis and in-
clude all reinvested dividends and interest, accrued income and realized and
unrealized gains and losses.
(2) The expense ratio of the Fund was .
(3) The Lehman High Yield Index is an unmanaged index of bonds that is consid-
ered generally representative of the high yield bond market.
44.
<PAGE>
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of the Compass Capital Funds:
We have audited the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, of the Short Government Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, Government Income, Managed In-
come, International Bond, Tax-Free Income and New Jersey Tax-Free Income Port-
folios of the Compass Capital Fund, and the statements of net assets of the
Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios of the Compass
Capital Funds as of September 30, 1996, and the related statements of opera-
tions for the periods then ended, the statements of changes in net assets for
each of the two years (or periods) in the period then ended, and the financial
highlights for each of the periods presented (except for those statements which
have been audited by other auditors as discussed below). These financial state-
ments and financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net as-
sets for the year ended June 30, 1995, and the financial highlights for the
year ended June 30, 1995 and each of the prior periods presented of the Short
Government Bond and Core Bond Portfolios, formerly the BFM Institutional Trust
Short Duration and Core Fixed Income Portfolios (the "BFM Funds"), respectively
were audited by other auditors, whose report dated August 7, 1995 expressed an
unqualified opinion thereon.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of materials misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian and brokers as of September 30, 1996. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Compass Capital Funds (Short Government Bond, Intermediate Government Bond, In-
termediate Bond, Core Bond, Government Income, Managed Income, International
Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free and
Ohio Tax-Free Income Portfolios), as of September 30, 1996, and the results of
their operations for the periods then ended, the changes in their net assets
for each of the two years (or periods) in the period then ended (except for the
year ended June 30, 1995 for the BFM Funds which have been audited by other au-
ditors), and the financial highlights for each of the periods presented (except
for the year ended June 30, 1995 and prior periods for the BFM Funds which have
been audited by other auditors), in conformity with generally accepted account-
ing principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 22, 1996
45.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
CONVENIENT WAYS TO ACCESS FUND INFORMATION
Below is a brief description of how investors can easily access information
about the Compass Capital Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
MUTUAL FUND SPECIALISTS 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
Available to provide Monday through Friday toll-free 888-426-6727
performance and market toll-free 800-388-8734
trends.
PORTFOLIO MANAGERS 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
COMMENTARY Monday through Friday toll-free 888-426-6727
(Audio recording updated toll-free 800-388-8734
periodically)
SHAREHOLDER SERVICES
TELEPHONE ACCESS: 24 Hours, 7 days a week toll-free 800-441-7764
ACCOUNT SERVICE 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
REPRESENTATIVES: Monday through Friday
Available to discuss
account balance
information, mutual fund
prospectus, literature
and discuss programs and
services available.
PURCHASES AND 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
REDEMPTIONS Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.compassfunds.com
information and specific
fund performance.
Request mutual fund
prospectuses and
literature. Forward
mutual fund inquiries.
E-MAIL:
Request prospectuses and 24 Hours, 7 days a week [email protected]
literature. Forward
mutual fund inquiries.
WRITTEN CORRESPONDENCE: POST OFFICE BOX ADDRESS STREET ADDRESS
Compass Capital Funds Compass Capital Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
46.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1 to 2.99 years
Treasury Index
Intermediate Government Lehman Brothers Treasury and agency issues in the Lehman Aggregate,
Bond Intermediate Government Index excluding maturities above 9.99 years
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in the Lehman
Intermediate Gov't/Corp Index Aggregate, excluding maturities above 9.99 years
Core Bond Lehman Aggregate Index The Lehman Aggregate contains issues that meet the
following criteria:
. At least $100 million par amount outstanding for
entry and exit
. Rated investment grade (at least Baa-3) by Moody's or
S&P (if not rated by Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes, non-agency
bonds, buydowns, graduated equity mortgages, project
loans and non-conforming ("jumbo") mortgages
. As of November 1996, the composition of the Lehman
Brothers Aggregate Index is:
52% allocation to Treasury and government securities
29% allocation to mortgage-backed securities
19% allocation to corporate and asset-backed securities
Managed Income Lehman Aggregate Index The Lehman Aggregate contains issues that meet the
following criteria:
. At least $100 million par amount outstanding for
entry and exit
. Rated investment grade (at least Baa-3) by Moody's or
S&P (if not rated by Moody's)
. At least one year to maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes, non-agency
bonds, buydowns, graduated equity mortgages, project
loans and non-conforming ("jumbo") mortgages
. As of November 1996, the composition of the Lehman
Brothers Aggregate Index is:
52% allocation to Treasury and government securities
29% allocation to mortgage-backed securities
19% allocation to corporate and asset-backed securities
High Yield Lehman High Yield Index The Lehman High Yield Index contains issues that meet
the following criteria:
. At least $100 million par amount outstanding for
entry and exit
. Maximum quality rating of Ba1 (including defaulted
issues)
. At least one year to maturity
International Bond Salomon Non-U.S. A market-capitalization weighted benchmark that tracks
Hedged World the performance of the 13 Government bond markets of
Government Bond Index Australia, Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands, Spain, Sweden
and the United Kingdom. The currency-hedged return is
computed by using a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal All of the bonds in the following Municipal Indices
Bond Index possess the following characteristics:
. A minimum credit rating of Baa-3
. Outstanding par value of at least $3 million
.Must be issued as part of a deal of at least $50
million
. Individual bonds must have been issued within the
last 5 years
. Remaining maturity of not less than one year
Excludes bonds subject to the alternative minimum tax
(AMT), taxable municipal bonds, and floating-rate or
zero coupon municipal bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
47.
<PAGE>
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APPENDIX B
Descriptions of Rating Categories
The following are descriptions of ratings assigned by Standard & Poor's Corpo-
ration ("S&P") and Moody's Investors Service, Inc. ("Moody's") to certain debt
securities in which the Compass Capital Bond Portfolios may invest. See the
Statement of Additional Information for descriptions of other Moody's and S&P
rating categories and those of other rating agencies.
STANDARD & POOR'S:
"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 re-
pay principal and differs from AAA issues only in small degree.
"A"--Debt is considered to have a strong capacity to pay interest and repay
principal although such issues are somewhat more susceptible to the adverse ef-
fects 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 re-
pay principal. Whereas such issues normally exhibit adequate protection parame-
ters, 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 ac-
cordance 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 ca-
pacity 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 inter-
est and repay principal. The "B" rating category is also used for debt subordi-
nated to senior debt that is assigned an actual or implied "BB" or "BB-" rat-
ing.
"CCC"--Debt has a currently identifiable vulnerability to default, and is de-
pendent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the capac-
ity to pay interest and repay principal. The "CCC" rating category is also used
for debt subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
"CC"--This rating is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC" rating.
"C"--This rating is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt serv-
ice payments are continued.
"CI"--This rating is reserved for income bonds on which no interest is being
paid.
48.
<PAGE>
- --------------------------------------------------------------------------------
"D"--Debt is in payment default. This rating is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S & P believes that such payments will be made
during such grace period. "D" rating is also used upon the filing of a bank-
ruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-)--The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"r"--This rating is attached to highlight derivative, hybrid, and certain other
obligations that S & P believes may experience high volatility or high vari-
ability in expected returns due to non-credit risks. Examples of such obliga-
tions are: securities whose principal or interest return is indexed to equi-
ties, commodities, or currencies; certain swaps and options; and interest only
and principal only mortgage securities. The absence of an "r" symbol should not
be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
MOODY'S:
"Aaa"--Bonds are judged to be of the best quality. They carry the smallest de-
gree 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 fun-
damentally strong position of such issues.
"Aa"--Bonds are judged to be of high quality by all standards. Together with
the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A"--Bonds possess many favorable investment attributes and are to be consid-
ered 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 character-
istics as well.
"Ba," "B," "Caa," "Ca," and "C"--Bonds that possess one of these ratings pro-
vide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of desir-
able 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 pro-
jects unseasoned in operation experience, (c) rentals which begin when facili-
ties are completed, or (d) payments to which some other limiting condition at-
taches. 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 qual-
ity of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Baa1, Ba1 and B1.
49.
<PAGE>
COMPASS CAPITAL FUNDS
THE COMPASS CAPITAL FUNDS
Compass Capital Funds is a leading mutual fund company currently managing in
excess of $13 billion in 33 portfolios designed to fit a broad range of
investment goals. Each portfolio is managed by recognized experts in equity,
fixed income, international, and tax-free investing who adhere to a pure
investment style.SM
STOCK PORTFOLIOS
- --------------------------------------------------------------------------------
Large Cap Growth Equity Small Cap Growth Equity
Large Cap Value Equity Small Cap Value Equity
Mid-Cap Growth Equity
Mid-Cap Value Equity Micro-Cap Equity
International Equity
International Small Cap Equity
International Emerging Markets
Index Equity
Select Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
Intermediate Bond
Core Bond High Yield
International Bond
TAX-FREE BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Tax-Free Income New Jersey Tax-Free Income
Pennsylvania Tax-Free Income Ohio Tax-Free Income
MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------
Money Market North Carolina Municipal Money Market
U.S. Treasury Money Market Ohio Municipal Money Market
Municipal Money Market Pennsylvania Municipal Money Market
New Jersey Municipal Money Market Virginia Municipal Money Market
<PAGE>
January , 1998
- --------------------------------------------------------------------------------
THE BOND PORTFOLIOS SERVICE SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASKING THE KEY
QUESTIONS
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 4
What Are The Portfolios' Financial Highlights?............... 7
What Are The Portfolios?..................................... 16
What Are The Differences Among The Portfolios?............... 17
What Types of Securities Are In The Portfolios?.............. 17
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 18
What Additional Investment Policies And Risks Apply?......... 19
Who Manages The Fund?........................................ 32
How Are Shares Purchased And Redeemed?....................... 36
What Special Purchase And Redemption Procedures May Apply?... 38
How Is Net Asset Value Calculated?........................... 40
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 40
How Are Fund Distributions Taxed?............................ 41
How Is the Fund Organized?................................... 44
How Is Performance Calculated?............................... 45
Other Information On The High Yield Portfolio Management
Team........................................................ 46
Other Information............................................ 47
How Can I Get More Information?.............................. 48
</TABLE>
This Prospectus contains information about the Compass Capital
bond Portfolios that a prospective investor needs to know before
investing. Please keep it for future reference. A Statement of
Additional Information dated January , 1998 has been filed with
the Securities and Exchange Commission (the "SEC"). The Statement
of Additional Information may be obtained free of charge from the
Fund by calling (800) 441-7764. The Statement of Additional In-
formation, as supplemented from time to time, is incorporated by
reference into this Prospectus.
THE COMPASS CAPITAL HIGH YIELD PORTFOLIO MAY INVEST UP TO 100% OF
ITS NET ASSETS IN NON-INVESTMENT GRADE DEBT SECURITIES COMMONLY
REFERRED TO AS "JUNK BONDS." JUNK BONDS ARE CONSIDERED TO BE
SPECULATIVE, AND ENTAIL GREATER RISKS, INCLUDING DEFAULT RISKS,
THAN THOSE FOUND IN HIGHER RATED SECURITIES. PURCHASERS SHOULD
CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH AN INVESTMENT IN
THIS PORTFOLIO PRIOR TO INVESTING. SEE "WHAT ARE THE PORTFO-
LIOS?", "WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY--
HIGH YIELD SECURITIES" AND "APPENDIX B--DESCRIPTIONS OF RATING
CATEGORIES."
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY
OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT IN-
VESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS ARE INTENDED
ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE BOND PORTFOLIOS OF COMPASS CAPITAL FUNDS
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND family consists of 33 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to
seek their long-term financial goals.
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of 12 in-
vestment portfolios (the "Portfolios") that provide investors
with a broad spectrum of investment alternatives within the
fixed income sector. Eight of these Portfolios invest in tax-
able bonds, and four of these Portfolios invest in tax-exempt
bonds. All Portfolios except the Government Income Portfolio
offer Service Shares. A detailed description of each Portfolio
begins on page 16.
COMPASS CAPITAL PERFORMANCE LIPPER PEER GROUP
PORTFOLIO BENCHMARK
LOW DURATION
BOND Merrill 1-3 Short-Intermediate
(PREVIOUSLY Year Treasury Investment Grade Debt
CALLED THE Index
SHORT
GOVERNMENT
BOND
PORTFOLIO)
Intermediate U.S.
INTERMEDIATE Lehman Brothers Government
GOVERNMENT Intermediate
BOND Government
Index
INTERMEDIATE Lehman Brothers Intermediate Investment
BOND Intermediate Grade Debt
Government/Corporate
Index
Intermediate Investment
CORE BOND Lehman Grade Debt
Aggregate
MANAGED INCOME Index
Corporate Debt A-Rated
Lehman
Aggregate
Index
Lehman High High Yield
HIGH YIELD Yield Index
Salomon Non- International Income
U.S. Hedged
INTERNATIONAL World
BOND Government
Bond Index
Lehman General Municipal Debt
TAX-FREE Municipal Bond
INCOME Index
Lehman Local GO PA Municipal Debt
Index
PA TAX-FREE
INCOME Lehman Local GO NJ Municipal Debt
Index
NJ TAX-FREE
INCOME Lehman Local GO OH Municipal Debt
Index
OH TAX FREE
INCOME
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Portfo-
CAPITAL BOND lios. We intend this document to be an effective tool as you
PORTFOLIOS explore different directions in fixed income investing.
CONSIDERING
THE RISKS IN There can be no assurance that any mutual fund will achieve its
BOND investment objective. Some or all of the Portfolios may pur-
INVESTING chase mortgage-related, asset-backed, foreign, high yield and
illiquid securities; enter into repurchase and reverse repur-
chase agreements and engage in leveraging techniques; lend
portfolio securities to third parties; and enter into futures
contracts and options. Each of the Pennsylvania, New Jersey and
Ohio Tax-Free Income Portfolios (the "State-Specific Tax-Free
Portfolios") concentrates in the securities of issuers located
in a particular state, and is non-diversified, which means that
its performance may be dependent upon the performance of a
smaller number of securities than the other Portfolios, which
are considered diversified. See "What Additional Investment
Policies And Risks Apply?"
The High Yield and the Low Duration Bond Portfolios invest in
high yield securities which are considered high risk securi-
ties. See "What Additional Investment Policies And Risks Ap-
ply?--High Yield Securities."
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolios, see "How Are Shares Purchased And Redeemed?" and
CAPITAL "What Special Purchase And Redemption Procedures May Apply?"
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Service Shares
of the Portfolios after fee waivers for the fiscal period ended September 30,
1997 as a percentage of average daily net assets. The figures shown for the In-
termediate Government Bond, Intermediate Bond, International, Tax-Free Income,
Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios have been re-
stated to reflect current expenses and fee waivers. Because no Service Shares
of the High Yield Portfolio were outstanding during the fiscal year ended Sep-
tember 30, 1997, the figure shown for that Portfolio under "Other expenses" is
estimated for the current fiscal year. An example based on the summary is also
shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE
DURATION GOVERNMENT INTERMEDIATE
BOND BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .30% .30%
Other operating expenses .55 .55 .55
----- ------ ------
Administration fees (after fee
waivers)(/1/) .15 .15 .13
Shareholder servicing fees .15 .15 .15
Other expenses .25 .25 .27
---- ----- -----
Total Portfolio operating expenses
(after fee waivers)(/1/) .85% .85% .85%
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CORE MANAGED HIGH
BOND INCOME YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .30% .35% xx
Other operating expenses .55 .53 xx
----- ----- ----
Administration fees (after fee waivers)(/1/) .14 .15 xx
Shareholder servicing fees .15 .15 xx
Other expenses .26 .23 xx
---- ---- ----
Total Portfolio operating expenses
(after fee waivers)(/1/) .85% .88% xx
===== ===== ==== ====
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the Portfolios' administrators are un-
der no obligation to waive fees or reimburse expenses, but have informed
the Fund that they expect to waive fees and reimburse expenses during the
remainder of the current fiscal year as necessary to maintain the Portfo-
lios' total operating expenses at the levels set forth in the table. With-
out waivers, "Other operating expenses" would be .63%, .63%, .65%, .64%,
.61% and %, respectively, and "Total Portfolio operating expenses" would
be 1.13%, 1.13%, 1.15%, 1.14%, 1.11% and %, respectively. See "What are
the Portfolios' Financial Highlights?" for information about interest paid
by the Portfolios in connection with their investment activity.
4.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS? (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PENNSYLVANIA
INTERNATIONAL TAX-FREE TAX-FREE
BOND INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Advisory fees (after fee
waivers)(/1/) .50% .30% .30%
Other operating expenses .78 .55 .55
--- --- ---
Administration fees (after fee
waivers)(/1/) .15 .11 .14
Shareholder servicing fees .15 .15 .15
Other expenses (after expense
reimbursements) .48 .29 .26
--- --- ---
Total Portfolio operating expenses
(after fee waivers and expense
reimbursements)(/1/) 1.28% .85% .85%
==== === ===
</TABLE>
<TABLE>
<CAPTION>
NEW JERSEY OHIO
TAX-FREE TAX-FREE
INCOME INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory Fees (after fee
waivers)(/1/) .30% .30%
Other operating expenses .55 .55
--- ---
Administration fees (after
fee waivers)(/1/) .11 .10
Shareholder servicing fees .15 .15
Other expenses .29 .30
---- ----
Total Portfolio operating
expenses
(after fee waivers)(/1/) .85% .85%
=== ===
</TABLE>
(1) Without waivers, advisory fees would be .55%, .50%, .50%, .50% and .50%,
respectively, and administration fees would be .23% for each Portfolio. In
addition, the Expense Summary reflects reimbursements made to the Tax-Free
Income Portfolio by the adviser. PAMG and the Portfolio's administrators
are under no obligation to waive fees or reimburse expenses, but have in-
formed the Fund that they expect to waive fees and reimburse expenses dur-
ing the remainder of the current fiscal year as necessary to maintain the
Portfolios' total operating expenses at the levels set forth in the table.
Without waivers, "Other operating expenses" would be .86%, .67%, .64%, .67%
and .68% respectively, and "Total Portfolio operating expenses" would be
1.41%, 1.17%, 1.14%,1.17% and 1.18%, respectively.
5.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio $ 9 $27 $47 $105
Intermediate Government Bond
Portfolio 9 27 47 105
Intermediate Bond Portfolio 9 27 47 105
Core Bond Portfolio 9 27 47 105
Managed Income Portfolio 9 28 49 108
High Yield Portfolio
International Bond Portfolio 11 33 57 127
Tax-Free Income Portfolio 9 27 47 105
Pennsylvania Tax-Free Income
Portfolio 9 27 47 105
New Jersey Tax-Free Income Portfolio 9 27 47 105
Ohio Tax-Free Income Portfolio 9 27 47 105
</TABLE>
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses that an investor in the Portfolios will bear
either directly or indirectly. They do not reflect any charges that may be im-
posed by brokers or other institutions directly on their customer accounts in
connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
6.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountants. The financial statements
of the Core Bond Portfolio and the Low Duration Portfolio (for-
merly, the Short Government Bond Portfolio) for the year ended
June 30, 1995 were audited by other auditors. Please refer to a
revised auditor's report under "Other Information" which makes
reference to the audits performed by those other auditors. This
financial information should be read together with those finan-
cial statements. Further information about the performance of
the Portfolios is available in the Fund's annual shareholder
reports. Both the Statement of Additional Information and the
annual shareholder reports may be obtained from the Fund free
of charge by calling (800) 441-7764. During the periods shown,
no Service Shares of the High Yield Portfolio were outstanding.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO+
(FORMERLY, THE SHORT GOVERNMENT BOND PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
APRIL 1, 1996 JANUARY 13, 1996/1/
YEAR ENDED THROUGH THROUGH
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 MARCH 31, 1996
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period $ 9.79 $ 9.91
--- ------- --------
Net investment income
(net of $.014, $.011
and $.005
respectively, of
interest expense) 0.26 0.11
Net realized and
unrealized loss on
investments (0.01) (0.12)
--- ------- --------
Net increase from
investment operations 0.25 (0.01)
--- ------- --------
Dividends from net
investment income (0.25) (0.11)
Distributions from net
realized capital gains - - - -
--- ------- --------
Total dividends and
distributions (0.25) (0.11)
--- ------- --------
NET ASSET VALUE, END OF
PERIOD $ 9.79 $ 9.79
=== ======= ========
Total investment return 2.54% (0.11)%
RATIOS TO AVERAGE NET
ASSETS:
Expenses/2/ 0.85%/3/ 0.85%/3/
Excluding waivers/2/ 1.13% 1.05%
Net investment
income/2/ 5.40% 5.25%
Excluding waivers/2/ 5.13% 5.05%
SUPPLEMENTAL DATA:
Portfolio turnover 228% 185%
Net assets, end of
period (in thousands) $91,870 $181,670
</TABLE>
+ This Portfolio commenced operations on July 17, 1992 as the Short Duration
Portfolio, a separate investment portfolio (the "Predecessor Low Duration
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and
liabilities of the Predecessor Low Duration Bond Portfolio were transferred
to this Portfolio, and were combined with the assets of a pre-existing
portfolio of investments maintained by the Fund.
/1Commencement/of investment operations of share class.
/2Annualized./
/3Including/interest expense, ratios would have been % for the year ended
September 30, 1997, 0.97% for the period ended September 30, 1996 and 1.18%
for the period ended March 31, 1996. For the periods prior to March 31, 1996,
interest income was presented net of interest expense.
7.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 7/29//93/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.02 $ 9.64 $ 10.60 $ 10.45
--- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.56 0.56 0.53 0.09
Net gain (loss) on
investments
(both realized and
unrealized) (0.12) 0.37 (0.86) 0.15
--- ------- ------- ------- -------
Total from investment
operations 0.44 0.93 (0.33) 0.24
--- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.55) (0.53) (0.09)
Distributions from net
realized capital gains - - - - (0.10) - -
--- ------- ------- ------- -------
Total distributions (0.54) (0.55) (0.63) (0.09)
--- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 9.92 $ 10.02 $ 9.64 $ 10.60
=== ======= ======= ======= =======
Total return 4.51% 9.99% (3.31)% 2.30%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $47,494 $49,762 $60,812 $15,035
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.83%/3/ 0.69%/3/ 0.65% 0.67%/2/
Before
advisory/administration
fee waivers 1.13% 1.06% 1.05% 0.75%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.73% 5.67% 5.30% 5.14%/2/
Before
advisory/administration
fee waivers 5.43% 5.30% 4.90% 5.06%/2/
PORTFOLIO TURNOVER RATE 580% 247% 9% 80%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3Including/interest expense, ratios would have been % for the period ended
September 30, 1997, 1.00% for the period ended September 30, 1996, and 0.69%
for the period ended September 30, 1995.
8.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 9/29//93/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.43 $ 9.05 $ 10.01 $ 9.99
--- ------- ------- ------- ------
Income from investment
operations
Net investment income 0.53 0.54 0.54 - -
Net gain (loss) on
investments (both
realized and
unrealized) (0.09) 0.38 (0.91) 0.02
--- ------- ------- ------- ------
Total from investment
operations 0.44 0.92 (0.37) 0.02
--- ------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.52) (0.54) (0.53) - -
Distributions from net
realized capital gains (0.03) - - (0.06) - -
--- ------- ------- ------- ------
Total distributions (0.55) (0.54) (0.59) - -
--- ------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 9.32 $ 9.43 $ 9.05 $10.01
=== ======= ======= ======= ======
Total return 4.79% 10.46% (3.80)% 0.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $45,362 $36,718 $35,764 $ 91
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.83%/3/ 0.74%/3/ 0.70% 0.70%/2/
Before
advisory/administration
fee waivers 1.13% 1.09% 1.13% 1.09%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.98% 5.90% 5.33% 4.35%/2/
Before
advisory/administration
fee waivers 5.67% 5.55% 4.90% 3.96%/2/
PORTFOLIO TURNOVER RATE 670% 262% 92% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3Including/interest expense, ratios would have been % for the period ended
September 30, 1997, 1.14% for the period ended September 30, 1996, and 0.82%
for the period ended September 30, 1995.
9.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
YEAR 4/1/96 1/13/96/1/
ENDED THROUGH THROUGH
9/30/97 9/30/96 3/31/96
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 9.61 $ 9.91
--- -------- --------
Net investment income (net of
$.004, $.003 and $.001,
respectively, of interest
expense)/2/ 0.30 0.11
Net realized and unrealized
gains on investments (0.07) (0.30)
--- -------- --------
Net (decrease) increase from
investment operations 0.23 (0.19)
--- -------- --------
Dividends from net investment
income (0.29) (0.11)
Distributions from net realized
capital gains - - - -
Total dividends and
distributions (0.29) (0.11)
--- -------- --------
NET ASSET VALUE, END OF PERIOD $ 9.55 $ 9.61
=== ======== ========
Total investment return 2.40% (1.90)%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.85%/2/,/3/ 0.85%/2/,/3/
Excluding waivers 1.14%/2/ 1.10%/2/
Net investment income/2/ 6.33%/2/ 5.46%/2/
Excluding waivers 6.04%/2/ 5.21%/2/
SUPPLEMENTAL DATA:
Portfolio turnover 308% 723%
Net assets, end of period (in
thousands) $117,207 $232,040
</TABLE>
+ This Portfolio commenced operations on December 9, 1992 as the Core Fixed
Income Portfolio, a separate investment portfolio (the "Predecessor Core
Bond Portfolio") of The BFM Institutional Trust Inc., which was organized as
a Maryland business corporation. On January 13, 1996, the assets and
liabilities of the Predecessor Core Bond Portfolio were transferred to this
Portfolio, which had no prior operating history.
/1Commencement/of investment operations of share class.
/2Annualized./
/3Including/interest expense, ratios would have been % for the period ended
September 30, 1997, 1.08% for the period ended September 30, 1996, and 0.94%
for the period ended March 31, 1996. For the periods prior to March 31,
1996, interest income was presented net of interest expense.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 10.38 $ 9.79 $ 11.17 $ 10.96
--- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.61 0.63 0.59 0.11
Net gain (loss) on
investments (both
realized and unrealized) (0.20) 0.60 (1.18) 0.21
--- -------- -------- ------- -------
Total from investment
operations 0.41 1.23 (0.59) 0.32
--- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.60) (0.63) (0.62) (0.11)
Distribution in excess of
net investment income - - (0.01) (0.02) - -
Distributions from net
realized capital gains (0.10) - - (0.14) - -
Distributions in excess of
net realized gains - - (0.01) - -
--- -------- -------- ------- -------
Total distributions (0.70) (0.64) (0.79) (0.11)
--- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.09 $ 10.38 $ 9.79 $ 11.17
=== ======== ======== ======= =======
Total return 4.05% 12.97% (5.49)% 2.93%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $165,073 $116,846 $67,655 $15,322
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.88% 0.85% 0.80% 0.80%/2/
Before
advisory/administration
fee waivers 1.11% 1.05% 1.02% 0.84%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.87% 6.14% 5.95% 5.83%/2/
Before
advisory/administration
fee waivers 5.65% 5.94% 5.73% 5.79%/2/
PORTFOLIO TURNOVER RATE 638% 203% 61% 72%
</TABLE>
/1Commencement/of operations of share class.
/2Annualized./
11.
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- -------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL BOND PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 2/1/96 3/1/95 YEAR YEAR YEAR 7/1/91
ENDED THROUGH THROUGH ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 1/31/96 2/28/95 2/28/94 2/28/93 2/29/92/1/
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.39 $ 10.52 $ 10.75 $ 10.76 $ 10.21 $ 10.00
--- ------ ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.89 0.62 0.62 0.65 0.52 0.31
Net (loss) gain on
investments (both
realized and
unrealized) (0.29) 1.13 (0.48) 0.46 0.47 0.26
--- ------ ------- ------- ------- ------- -------
Total from investment
operations 0.60 1.75 (0.14) 1.11 0.99 0.57
--- ------ ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.28) (0.88) (0.13) (0.90) (0.30) - -
Distributions from net
realized capital gains - - - - (0.24) (0.22) (0.14) (0.36)
--- ------ ------- ------- ------- ------- -------
In Excess of Net
Realized Gains - - - - - - - - - - - -
Total distributions (0.28) (0.88) (0.37) 1.12 (0.44) (0.36)
--- ------ ------- ------- ------- ------- -------
NET ASSET VALUE AT END
OF PERIOD $11.71 $ 11.39 $ 10.52 $ 10.75 $ 10.76 $ 10.21
=== ====== ======= ======= ======= ======= =======
Total return 5.39% 16.79% 1.50% 10.24% 9.55% 5.84%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $7,836 $37,627 $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets 1.09%/2/ 1.23%/2/ 1.24% 1.38% 1.30% 1.33%/2/
Excluding waivers 1.20%/2/ 1.23%/2/ 1.24% 1.38% 1.30% 1.37%/2/
Ratios of net
investment income to
average net assets 3.82%/2/ 5.62%/2/ 5.96% 6.00% 6.31% 6.79%/2/
Excluding waivers 3.72%/2/ 5.62%/2/ 5.96% 6.00% 6.31% 6.75%/2/
PORTFOLIO TURNOVER RATE 108% 159% 131% 128% 115% 110%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the Compass
International Fixed Income Fund, a separate investment portfolio (the
"Predecessor International Bond Portfolio") of Compass Capital Group, which
was organized as a Massachusetts business trust. The assets and liabilities
of the Predecessor International Bond Portfolio were transferred to this
Portfolio, which had no prior operating history, on February 13, 1996. For
the periods presented, this Portfolio received Sub-advisory services from
another company that was unaffiliated with PAMG and BlackRock.
/1Share/class commenced operations on July 1, 1991.
/2Annualized./
12.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.61 $10.04 $11.31 $10.97
--- ------- ------ ------ ------
Income from investment
operations
Net investment income 0.51 0.50 0.51 0.09
Net gain (loss) on
investments (both realized
and unrealized) 0.23 0.59 (0.93) 0.34
--- ------- ------ ------ ------
Total from investment
operations 0.74 1.09 (0.42) 0.43
--- ------- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.51) (0.50) (0.51) (0.09)
Distributions from net
realized capital gains - - (0.02) (0.34) - -
--- ------- ------ ------ ------
Total distributions (0.51) (0.52) (0.85) (0.09)
--- ------- ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 10.84 $10.61 $10.04 $11.31
=== ======= ====== ====== ======
Total return 7.14% 11.24% (4.02)% 3.92%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $36,161 $4,713 $2,109 $ 634
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.85% 0.80% 0.75% 0.71%/2/
Before
advisory/administration fee
waivers 1.18% 1.57% 1.98% 1.49%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 4.88% 4.92% 4.75% 4.99%/2/
Before
advisory/administration fee
waivers 4.56% 4.15% 3.52% 4.21%/2/
PORTFOLIO TURNOVER RATE 268% 92% 40% 71%
</TABLE>
PENNSYLVANIA TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/94
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.33 $ 9.82 $ 10.70 $ 10.43
--- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.50 0.50 0.51 0.09
Net gain (loss) on
investments (both realized
and unrealized) 0.11 0.51 (0.85) 0.28
--- ------- ------- ------- -------
Total from investment
operations 0.61 1.01 (0.34) 0.37
--- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.50) (0.50) (0.51) (0.09)
Distributions from net
realized capital gains - - - - (0.03) (0.01)
--- ------- ------- ------- -------
Total distributions (0.50) (0.50) (0.54) (0.10)
--- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.44 $ 10.33 $ 9.82 $ 10.70
=== ======= ======= ======= =======
Total return 5.97% 10.51% (3.20)% 3.54%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $34,297 $13,815 $11,518 $ 3,894
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.85% 0.79% 0.55% 0.34%/2/
Before
advisory/administration fee
waivers 1.15% 1.11% 1.15% 1.22%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 4.74% 5.04% 4.97% 4.90%/2/
Before
advisory/administration fee
waivers 4.44% 4.72% 4.37% 4.02%/2/
PORTFOLIO TURNOVER RATE 119% 66% 30% 40%
</TABLE>
/1Commencement/of operations of share class.
/2Annualized./
13.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY TAX-FREE INCOME PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
YEAR 2/1/96 3/1/95 YEAR YEAR YEAR PERIOD
ENDED THROUGH THROUGH ENDED ENDED ENDED ENDED
9/30/97 9/30/96 1/31/96 2/28/95 2/28/94 2/28/93 2/28/92/1/
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.61 $ 10.94 $ 11.31 $ 11.30 $ 10.46 $ 10.00
--- ------- ------- ------- -------- ------- -------
Income from investment
operations
Net investment income 0.73 0.46 0.51 0.54 0.52 0.34
Net (loss) gain on
investments (both
realized and
unrealized) (0.32) 0.65 (0.36) 0.04 0.85 0.45
--- ------- ------- ------- -------- ------- -------
Total from investment
operations 0.41 1.11 0.15 0.58 1.37 0.79
--- ------- ------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.75) (0.44) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains - - - - (0.01) (0.03) - - - -
--- ------- ------- ------- -------- ------- -------
Total distributions (0.75) (0.44) (0.52) (0.57) (0.53) (0.33)
--- ------- ------- ------- -------- ------- -------
NET ASSET VALUE AT END
OF PERIOD $ 11.27 $ 11.61 $ 10.94 $ 11.31 $ 11.30 $ 10.46
=== ======= ======= ======= ======== ======= =======
Total return 0.15% 10.35% 1.49% 5.18% 13.48% 12.33%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $88,077 $97,976 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets 0.85%/2/ 0.88%/2/ 0.79% 0.38% 0.48% 0.52%/2/
Excluding waivers 1.17%/2/ 0.90%/2/ 0.87% 0.86% 1.04% 1.29%/2/
Ratios of net
investment income to
average net assets 4.44%/2/ 4.43%/2/ 4.71% 4.75% 5.04% 5.35%/2/
Excluding waivers 4.13%/2/ 4.41%/2/ 4.63% 4.27% 4.48% 4.58%/2/
PORTFOLIO TURNOVER RATE 109% 26% 28% 12% 16% 0%
</TABLE>
+ This Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Bond Fund, a separate investment portfolio (the "Predecessor New
Jersey Tax-Free Income Portfolio") of Compass Capital Group, which was
organized as a Massachusetts business trust. On January 13, 1996, the assets
and liabilities of the Predecessor New Jersey Tax-Free Income Portfolio were
transferred to this Portfolio, which had no prior operating history.
/1/Share class commenced operations on July 1, 1991.
/2/Annualized.
14.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 7/29/93/1/
ENDED ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/94
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $10.05 $ 9.60 $10.53 $10.24
--- ------ ------ ------ ------
Income from investment
operations
Net investment income 0.48 0.52 0.49 0.09
Net gain (loss) on
investments (both realized
and unrealized) 0.10 0.45 (0.91) 0.29
--- ------ ------ ------ ------
Total from investment
operations 0.58 0.97 (0.42) 0.38
--- ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.48) (0.52) (0.49) (0.09)
Distributions from net
realized capital gains - - - - (0.02) - -
--- ------ ------ ------ ------
Total distributions (0.48) (0.52) (0.51) (0.09)
--- ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.15 $10.05 $ 9.60 $10.53
=== ====== ====== ====== ======
Total return 5.80% 10.45% (4.00)% 3.68%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $6,377 $5,150 $4,428 $ 907
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.79% 0.39% 0.35% 0.32%/2/
Before
advisory/administration fee
waivers 1.38% 1.46% 1.74% 2.83%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 4.69% 5.39% 5.06% 4.71%/2/
Before
advisory/administration fee
waivers 4.10% 4.31% 3.67% 2.20%/2/
PORTFOLIO TURNOVER RATE 136% 63% 61% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
15.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The Bond Portfolios of COMPASS CAPITAL FUNDS consist of 12
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the fixed income
sector. Eight of these Portfolios invest solely in taxable
bonds and four of these Portfolios invest in tax-exempt
bonds.
In certain investment cycles and over certain holding peri-
ods, a fund that invests in any one of these styles may per-
form above or below the market. An investment program that
combines these multiple disciplines allows investors to se-
lect from among these various product options in the way that
most closely fits the investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 Year Treasury
Index.
Intermediate Government Bond, To seek current income consistent
Intermediate Bond, Managed with the preservation of capital.
Income and International
Bond
Core Bond To realize a total rate of return
that exceeds the total return of
the Lehman Brothers Aggregate
Index.
High Yield To seek current income by
investing primarily in non-
investment grade debt securities.
Debt securities of less than
investment grade are considered
"high risk" securities (commonly
referred to as "junk bonds").
Tax-Free Income, Pennsylvania To seek as high a level of
Tax-Free Income, New Jersey current income exempt from
Tax-Free Income and Ohio Federal income tax and, to the
Tax-Free Income extent possible for each State-
Specific Tax-Free Portfolio,
income tax of the specific state
in which the Portfolio
concentrates, as is consistent
with preservation of capital.
</TABLE>
16.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-WEIGHTED MIN
PERFORMANCE AVERAGE MATURITY CREDIT QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year 3-5 Years Investment Grade B
Bond Treasury Index Spectrum
Intermediate Lehman Brothers 5-10 Years Gov't/Agency AAA
Gov't Bond Intermediate Gov't Index
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Gov't/Corp Spectrum
Index
Core Bond Lehman Aggregate Index 5-10 Years Investment Grade BBB
Spectrum
Managed Lehman Aggregate Index 5-10 Years Investment Grade BBB
Income Spectrum
High Yield Lehman High Yield Index 8-12 Years Non-Investment Grade C
Spectrum
International Salomon Non-U.S. Hedged 5-15 Years AA, AAA, BBB
Bond World Government Gov't/Agency
Bond Index
Tax-Free Lehman Municipal 10-15 Years Investment Grade BBB
Income Bond Index Spectrum
PA Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Income Spectrum
NJ Tax-Free Lehman Local GO Index 10-15 Years Investment Grade BBB
Income Spectrum
OH Tax-Free jLehman Local GO Index 10-15 Years Investment Grade BBB
Income Spectrum
</TABLE>
* For more information on a Portfolio's benchmark, see the Appendix at the
back of this Prospectus.
** The Portfolios' sub-adviser will normally attempt to structure the Portfo-
lios to have comparable durations to the benchmarks. Duration, which mea-
sures price sensitivity to interest rate changes, is not necessarily equal
to average maturity.
WHAT TYPES OF SECURITIES ARE IN THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio
according to the following designations:
Yes:The Portfolio will hold a significant concentration of these securities
at all times.
Elig.: Eligible; the Portfolio may purchase these securities, but they may or
may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under nor-
mal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON FOREIGN
AGENCY/ SECURITIES/
AGENCY COMMERCIAL HIGH YIELD CURRENCY
TREASURIES AGENCIES MBS/1/ MBS/1/ CORP. ABS/2/ SECURITIES RISK MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Bond Yes Yes Yes Elig. Elig. Elig. Elig. Elig. Elig.
Intermediate Gov't Bond Yes Yes Yes Elig. Yes Elig. No No Elig.
Intermediate Bond Yes Yes Yes Elig. Yes Yes No No Elig.
Core Bond Yes Yes Yes Elig. Yes Yes No Elig. Elig.
Gov't Income
Managed Income Yes Yes Yes Elig. Yes Yes No Elig. Elig.
High Yield Yes Yes No No Yes Yes Yes Elig. No.
International Bond Elig. Elig. Elig. Elig. Elig. Elig. No Yes Elig.
Tax-Free Income Temp. No No No No No No No Yes
PA Tax-Free Income Temp. No No No No No No No Yes
NJ Tax-Free Income Temp. No No No No No No No Yes
OH Tax Free Income Temp. No No No No No No No Yes
</TABLE>
/1MBS/= mortgage-backed securities
/2ABS/= asset-backed securities
17.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any change to a Portfolio's investment
objective. No assurance can be provided that a Portfolio will achieve its in-
vestment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(3) in the case of each Tax-Free Portfolio (as defined below), invest less than
80% of its net assets in Municipal Obligations (as defined below), except
during defensive periods or during periods of unusual market conditions.
Restriction 1 does not apply to the State-Specific Tax-Free Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Tax-
Free Portfolio will not invest in securities (except U.S. Government securi-
ties) that would cause, at the end of any tax quarter (plus any additional
grace period), more than 5% of its total assets to be invested in securities of
any one issuer, except that up to 50% of a Portfolio's total assets may be in-
vested without regard to this limitation so long as no more than 25% of the
Portfolio's total assets are invested in any one issuer (except U.S. Government
securities).
The investment limitations stated above are applied at the time investment se-
curities are purchased.
18.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Low Duration Bond Portfolio and
Intermediate Government Bond Portfolio will be rated in the highest rating cat-
egory at the time of purchase or, if unrated, of comparable quality as deter-
mined by the Portfolios' sub-adviser. Securities acquired by the other Portfo-
lios will be rated investment grade at the time of purchase (within the four
highest rating categories by Standard & Poor's Ratings Group ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor
Services, Inc.) or, if unrated, of comparable quality as determined by the
Portfolios' sub-adviser. Securities rated "Baa" or "BBB" are generally consid-
ered to be investment grade although they have speculative characteristics. If
a security's rating is reduced below the minimum rating that is permitted for a
Portfolio, the Portfolio's sub-adviser will consider whether the Portfolio
should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities. The Intermediate Government
Bond Portfolio will invest at least 65% of its total assets in obligations is-
sued or guaranteed by the U.S. Government, its agencies or instrumentalities
and related repurchase agreements during normal market conditions. Under normal
market conditions, the International Bond Portfolio will invest at least 65% of
its total assets in the debt obligations of foreign issuers located in at least
three different foreign countries. The Pennsylvania Tax-Free Income Portfolio,
New Jersey Tax-Free Income Portfolio and Ohio Tax-Free Income Portfolio (the
"State-Specific Tax-Free Portfolios") and the Tax-Free Income Portfolio (to-
gether with the "State-Specific Tax-Free Portfolios," the "Tax-Free Portfo-
lios") will invest, during normal market conditions, at least 80% of their net
assets in obligations issued by or on behalf of states, territories and posses-
sions of the United States, the District of Columbia and their political sub-
divisions, agencies, instrumentalities and authorities and related tax-exempt
derivative securities the interest on which is exempt from regular Federal in-
come tax and is not an item of tax preference for purposes of the Federal al-
ternative minimum tax ("Municipal Obligations"). In addition, each State-Spe-
cific Tax-Free Portfolio intends to invest at least 65% of its net assets in
Municipal Obligations of issuers located in the particular state indicated by
its name ("State-Specific Obligations"). The Tax-Free Income Portfolio intends
to invest no more than 25% of its net assets in Municipal Obligations of is-
suers located in the same state. During temporary defensive periods each Tax-
Free Portfolio may invest without limitation in securities that are not Munici-
pal Obligations and may hold without limitation uninvested cash reserves.
FOREIGN INVESTMENTS. The International Bond Portfolio will invest primarily in
foreign securities and currencies. Each of the Managed Income and Core Bond
Portfolios may invest up to 10% of its total assets and the Low Duration Bond
Portfolio may invest up to 20% of its total assets in debt securities of for-
eign issuers and may hold from time to time various foreign currencies pending
investment or conversion into U.S. dollars. Some of these Portfolios may have
the characteristics of futures contracts. In addition, each Portfolio may en-
gage in foreign currency exchange transactions to seek to protect against
changes in the level of future exchange rates which would adversely affect the
Portfolio's performance. These investments and transactions involving foreign
securities, currencies, options (including options that relate to foreign cur-
rencies), futures, hedging and cross-hedging are described below and under "In-
terest Rate and Currency Transactions" and "Options and Futures Contracts." In-
vesting in securities of foreign issuers involves considerations not typically
associated with investing in securities of companies organized and operated in
the United States. Because foreign securities generally are denominated and pay
dividends or interest in foreign currencies, the value of a Portfolio that in-
vests in foreign securities will be affected favorably or unfavorably by
changes in currency exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or
19.
<PAGE>
- --------------------------------------------------------------------------------
depreciation of portfolio securities and could favorably or adversely affect a
Portfolio's operations. In general, less information is publicly available with
respect to foreign issuers than is available with respect to U.S. companies.
Most foreign companies are also not subject to the uniform accounting and fi-
nancial reporting requirements applicable to issuers in the United States.
While the volume of transactions effected on foreign stock exchanges has in-
creased in recent years, it remains appreciably below that of the New York
Stock Exchange. Accordingly, a Portfolio's foreign investments may be less liq-
uid and their prices may be more volatile than comparable investments in secu-
rities in U.S. companies. In addition, there is generally less government su-
pervision and regulation of securities exchanges, brokers and issuers in for-
eign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, the International Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
The expense ratio of the International Bond Portfolio can be expected to be
higher than those of Portfolios investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as higher investment research costs, higher foreign custody costs, higher
commission costs and additional costs arising from delays in settlements of
transactions involving foreign securities.
HIGH YIELD SECURITIES. The High Yield Portfolio will invest primarily in the
full spectrum of "high yield" or non-investment grade debt securities, commonly
known to investors as "junk bonds." The Low Duration Bond Portfolio may invest
in non-investment grade fixed income or convertible securities when the Portfo-
lio's sub-adviser believes that the investment characteristics of such securi-
ties make them desirable in light of the Portfolio's investment objective and
current portfolio mix, so long as under normal market conditions, no more than
20% of its total assets are invested in non-investment grade debt securities,
and such securities are rated "B" or higher at the time of purchase by at least
one major rating agency.
High yield securities are bonds that are issued by a company whose credit rat-
ing (based on rating agencies' evaluation of the likelihood of repayment) ne-
cessitates offering a higher coupon and yield on its issues when selling them
to investors who may otherwise be hesitant in purchasing the debt of such a
company. While generally providing greater income and opportunity for gain,
non-investment grade debt securities may be subject to greater risks than secu-
rities which have higher credit ratings, including a high risk of default, and
their yields will fluctuate over time. High yield securities will generally be
in the lower rating categories of recognized rating agencies (rated Ba or lower
by Moody's or BB or lower by Standard & Poor's) or will be non-rated. The
credit rating of a high yield security does not necessarily address its market
value risk, and
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ratings may from time to time change, positively or negatively, to reflect de-
velopments regarding the issuer's financial condition. High yield securities
are considered to be speculative with respect to the capacity of the issuer to
timely repay principal and pay interest or dividends in accordance with the
terms of the obligation and may have more credit risk than higher rated securi-
ties.
While the market values of high yield securities tend to react less to fluctua-
tions in interest rates than do those of higher rated securities, the values of
high yield securities often reflect individual corporate develop-ments and have
a high sensitivity to economic changes to a greater extent than do higher rated
securities. Issuers of high yield securities are often in the growth stage of
their development and/or involved in a reorganization or takeover. The compa-
nies are often highly leveraged (have a significant amount of debt relative to
shareholders' equity) and may not have available to them more traditional fi-
nancing methods, thereby increasing the risk associated with acquiring these
types of securities. In some cases, obligations with respect to high yield se-
curities are subordinated to the prior repayment of senior indebtedness, which
will potentially limit a Portfolio's ability to fully recover principal or to
receive interest payments when senior securities are in default. Thus, invest-
ors in high yield securities have a lower degree of protection with respect to
principal and interest payments then do investors in higher rated securities.
During an economic downturn, a substantial period of rising interest rates or a
recession, highly leveraged issuers of high yield securities may experience fi-
nancial distress possibly resulting in insufficient revenues to meet their
principal and interest payment obligations, to meet projected business goals
and to obtain additional financing. An economic downturn could also disrupt the
market for lower-rated securities and adversely affect the value of outstanding
securities, the Portfolio's net asset value and the ability of the issuers to
repay principal and interest. If the issuer of a security held by a Portfolio
defaulted, the Portfolio may not receive full interest and principal payments
due to it and could incur additional expenses if it chose to seek recovery of
its investment.
The secondary markets for high yield securities are not as liquid as the sec-
ondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and partici-
pants in the markets are mostly institutional investors, including insurance
companies, banks, other financial institutions and mutual funds. In addition,
the trading volume for high yield securities is generally lower than that for
higher rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in
the condition of a particular issuer. Under certain economic and/or market con-
ditions, a Portfolio may have difficulty disposing of certain high yield secu-
rities due to the limited number of investors in that sector of the market. An
illiquid secondary market may adversely affect the market price of the high
yield security, which may result in increased difficulty selling the particular
issue and obtaining accurate market quotations on the issue when valuing a
Portfolio's assets. Market quotations on high yield securities are available
only from a limited number of dealers, and such quotations may not be the ac-
tual prices available for a purchase or sale.
The high yield markets may react strongly to adverse news about an issuer or
the economy, or to the perception or expectation of adverse news, whether or
not it is based on fundamental analysis. Additionally, prices for high yield
securities may be affected by legislative and regulatory developments. These
developments could adversely affect a Portfolio's net asset value and invest-
ment practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value and liquidity of out-
standing high yield securities, especially in a thinly traded market. For exam-
ple, federal legislation requiring the divestiture by federally insured savings
and loan associations of their investments in high yield bonds and limiting the
deductibility of interest by certain corporate issuers of high yield bonds ad-
versely affected the market in recent years.
When the secondary market for high yield securities becomes more illiquid, or
in the absence of readily available market quotations for such securities, the
relative lack of reliable objective data makes it more difficult to value a
Portfolio's securities, and judgment plays a more important role in determining
such valua-
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tions. Increased illiquidity in the junk bond market, in combination with the
relative youth and growth of the market for such securities, also may affect
the ability of a Portfolio to dispose of such securities at a desirable price.
Additionally, if the secondary markets for high yield securities contract due
to adverse economic conditions or for other reasons, certain of a Portfolio's
liquid securities may become illiquid and the proportion of the Portfolio's as-
sets invested in illiquid securities may significantly increase.
The Low Duration Bond Portfolio may invest in securities rated "B" and above or
determined by BlackRock to be of comparable quality. Such securities are con-
sidered to have the current capacity to meet interest and principal payments,
but have a greater vulnerability to default than higher rated securities. Ad-
verse business, financial or economic conditions will likely impair capacity or
willingness to pay interest and principal. The High Yield Portfolio may invest
in securities rated "C" and above or determined by the sub-adviser to be of
comparable quality. Securities rated "C" are considered highly speculative and
may be used to cover a situation where the issuer has filed a bankruptcy peti-
tion but debt service payments are continued. While such debt will likely have
some quality and protective characteristics, these are outweighed by large un-
certainties or major risk exposure to adverse conditions.
The rating assigned by a rating agency evaluates the safety of a non-investment
grade security's principal and interest payments, but does not address market
value risk. Because such ratings of the ratings agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, the sub-adviser performs its own analysis of the issuers
whose non-investment grade securities the Portfolio holds. Because of this, the
Portfolio's performance may depend more on the sub-adviser's own credit analy-
sis than in the case of mutual funds investing in higher-rated securities. For
a description of these ratings, see Appendix B.
In selecting non-investment grade securities, the sub-adviser considers factors
such as those relating to the creditworthiness of issuers, the ratings and per-
formance of the securities, the protections afforded the securities and the di-
versity of the Portfolio. The sub-adviser continuously monitors the issuers of
non-investment grade securities held by the Portfolio for their ability to make
required principal and interest payments, as well as in an effort to control
the liquidity of the Portfolio so that it can meet redemption requests. If a
security's rating is reduced below the minimum credit rating that is permitted
for a Portfolio, the Portfolio's sub-adviser will consider whether the Portfo-
lio should continue to hold the security.
In the event that a Portfolio investing in high yield securities experiences an
unexpected level of net redemptions, the Portfolio could be forced to sell its
holdings without regard to the investment merits, thereby decreasing the assets
upon which the Portfolio's rate of return is based.
The expense ratio of the High Yield Portfolio can be expected to be higher than
those of Portfolios investing primarily in investment grade securities. The
costs attributable to investing in the high yield markets are usually higher
for several reasons, such as higher investment research costs and higher com-
mission costs.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
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Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest on which is paid solely from revenues of similar projects. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
Each Tax-Free Portfolio may acquire "stand-by commitments" with respect to Mu-
nicipal Obligations held by it. Under a stand-by commitment, a dealer agrees to
purchase, at the Portfolio's option, specified Municipal Obligations at a spec-
ified price. The acquisition of a stand-by commitment may increase the cost,
and thereby reduce the yield, of the Municipal Obligations to which the commit-
ment relates. The Tax-Free Portfolios may invest in tax-exempt derivative secu-
rities relating to Municipal Obligations, including tender option bonds, par-
ticipations, beneficial interests in trusts and partnership interests.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Tax-Free Portfolio and affect its
share price.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its service providers will rely on such opinions and will
not review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative securities, or
the bases for such opinions.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in residential and commercial
mortgage-related and other asset-backed securities (i.e., securities backed by
home equity loans, installment sale contracts, credit card receivables or other
assets) issued by governmental entities and private issuers.
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The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, adjustable rate
mortgage-related securities ("ARMs") and collateralized mortgage obligations
("CMOs"), which provide the holder with a specified interest in the cash flow
of a pool of underlying mortgages or other mortgage-backed securities. Issuers
of CMOs ordinarily elect to be taxed as pass-through entities known as real
estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in a variety of ways. In most cases, however, payments of prin-
cipal are applied to the CMO classes in the order of their respective stated
maturities, so that no principal payments will be made on a CMO class until
all other classes having an earlier stated maturity date are paid in full. The
classes may include accrual certificates (also known as "Z-Bonds"), which only
accrue interest at a specified rate until other specified classes have been
retired and are converted thereafter to interest-paying securities. They may
also include planned amortization classes ("PACs") which generally require,
within certain limits, that specified amounts of principal be applied on each
payment date, and generally exhibit less yield and market volatility than
other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the pro-
tection of a number of state and Federal consumer credit laws many of which
give debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables per-
mit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have
an effective security interest in all of the obligations backing such receiv-
ables. Therefore, there is a possibility that recoveries on repossessed col-
lateral may not, in some cases, be able to support payments on these securi-
ties.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may normally be prepaid at any
time because the underlying assets (i.e., loans) generally may be prepaid at
any time. In calculating the average weighted maturity of a Portfolio, the ma-
turity of mortgage-related and other asset-backed securities held by the Port-
folio will be based on estimates of average life which take prepayments into
account. The average life of a mortgage-related instrument, in particular, is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities as the result of scheduled principal payments
and mortgage prepayments. In general, the collateral supporting non-mortgage
asset-backed securities is of shorter maturity than mortgage loans and is less
likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such peri-
ods, the reinvestment of prepayment proceeds by a Portfolio will generally be
at lower rates than the rates that were carried by the obligations that have
been prepaid. Because of these and other reasons, an asset-backed security's
total return and maturity may be difficult to predict precisely. To the extent
that a Portfolio purchases asset-backed securities at a premium, prepayments
(which may be made without penalty) may result in loss of the Portfolio's
principal investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears Mortgage) or mortgage-related securities con-
taining loans or mortgages originated by PNC Bank, National Association ("PNC
Bank") or its affiliates. It is possible
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that under some circumstances, PNC Mortgage Securities Corp. or its affiliates
could have interests that are in conflict with the holders of these mortgage-
backed securities, and such holders could have rights against PNC Mortgage Se-
curities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors. The International Bond Portfolio also may purchase "stripped" se-
curities that evidence ownership in the future interest payments or principal
payments on obligations of foreign governments.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives all or most of the interest are generally higher than prevailing market
yields on other mortgage- related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments. Additionally, current federal tax law requires the holder of certain
zero coupon bonds to accrue income with respect to these securities prior to
the receipt of cash payments. To maintain its qualification as a regulated in-
vestment company and avoid liability for federal income and excise taxes, a
Portfolio may be required to distribute income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvanta-
geous circumstances in order to generate cash to satisfy these distribution re-
quirements. See "How Are Fund Distributions Taxed?"
PAY-IN-KIND BONDS Pay-in-kind, or PIK, bonds are bonds which pay interest
through the issuance of additional debt or equity securities. Similar to zero
coupon obligations, pay-in-kind bonds also carry additional risk as holders of
these types of securities realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, a Portfolio may
obtain no return at all on its investment. The market price of pay-in-kind
bonds is affected by interest rate changes to a greater extent, and therefore
tends to be more volatile, than that of securities which pay interest in cash.
Additionally, current federal tax law requires the holder of certain pay-in-
kind bonds to accrue income with respect to these securities prior to the re-
ceipt of cash payments. To maintain its qualification as a regulated investment
company and avoid liability for federal income and excise taxes, a Portfolio
may be required to distribute income accrued with respect to these securities
and may have to dispose of portfolio securities under disadvantageous circum-
stances in order to generate cash to satisfy these distribution requirements.
See "How Are Fund Distributions Taxed?"
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial obligations issued by Canadian corporations and Canadian counterparts
of U.S.
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corporations, as well as Europaper, which is U.S. dollar-denominated commercial
paper of a foreign issuer. Bank obligations may include certificates of depos-
it, notes, bankers' acceptances and fixed time deposits. These obligations may
be general obligations of the parent bank or may be limited to the issuing
branch or subsidiary by the terms of a specific obligation or by government
regulation. The Portfolios may also make interest-bearing savings deposits in
commercial and savings banks in amounts not in excess of 5% of their respective
total assets.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the Government National Mort-
gage Association are supported by the United States' full faith and credit;
others such as those of the Federal National Mortgage Association and the Stu-
dent Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit Banks
or the Federal Home Loan Mortgage Corporation are supported only by the credit
of the instrumentality. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government-sponsored agencies or instrumen-
talities if it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios may to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their holdings, as a duration
management technique or to protect against an increase in the price of securi-
ties a Portfolio anticipates purchasing at a later date. The Portfolios intend
to use these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of inter-
est on a notional principal amount from the party selling such interest rate
floor.
In addition, the International Bond Portfolio may engage in foreign currency
exchange transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of transactions in portfolio securities denominated in that foreign currency,
and may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency
futures contracts (futures contracts). The Portfolio may also purchase ex-
change-listed and over-the-counter call and put options on futures contracts
and on foreign currencies, and may write covered call options on up to 100% of
the currencies in its portfolio. In order to protect against currency fluctua-
tions, the International Bond Portfolio may enter into currency swaps. Currency
swaps involve the exchange of the rights of the Portfolio and another party to
make or receive payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio may write (i.e., sell) covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative, or, with
respect to the International Bond Portfolio, cross-hedging. For the payment of
a premium, the purchaser of an option obtains the right to buy (in the case of
a call option) or to sell (in the case of a put option) a security at a stated
exercise price for a specific period of time. These options may relate to par-
ticular securities, securities indices, or the yield differential between two
securities or, in the case of the International Bond Portfolio, foreign curren-
cies, and may or may not be listed on a securities exchange and may or may not
be issued by
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the Options Clearing Corporation. A Portfolio will not purchase put and call
options when the aggregate premiums on outstanding options exceed 5% of its net
assets at the time of purchase, and will not write options on more than 25% of
the value of its net assets (measured at the time an option is written). Op-
tions trading is a highly specialized activity that entails greater than ordi-
nary investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clear-
ing Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its total assets, although a Portfolio will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered into for other than bona fide hedging
purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. A
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities in
the value of the securities to be sold. In addition, a Portfolio may utilize
futures contracts in anticipation of changes in the composition of its holdings
or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by a Portfolio and the price of the futures contract or option; (b)
possible lack of a liquid secondary market for a futures contract and the re-
sulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; (d) the
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors; and (e)
the possibility that the counterparty will default in the performance of its
obligations. For further discussion of risks involved with domestic and foreign
futures and options, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Govern-
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ment securities or irrevocable bank letters of credit maintained on a current
basis equal in value to at least the market value of the loaned securities. A
Portfolio may not make such loans in excess of 33 1/3% of the value of its to-
tal assets. Securities loans involve risks of delay in receiving additional
collateral or in recovering the loaned securities, or possibly loss of rights
in the collateral if the borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolios may invest up to 10% of their total assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate of an
inverse floater resets in the opposite direction from the market rate of inter-
est to which it is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility in their market values. Issuers of unrated variable and floating rate
instruments must satisfy the same criteria as set forth above for a Portfolio.
The absence of an active secondary market with respect to particular variable
and floating rate instruments, however, could make it difficult for a Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities.
Borrowings may be made through reverse repurchase agreements under which a
Portfolio sells portfolio securities to financial institutions such as banks
and broker-dealers and agrees to repurchase them at a particular date and
price. The Portfolios may use the proceeds of reverse repurchase agreements to
purchase other securities either maturing, or under an agreement to resell, on
a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Portfolios (except the Tax-Free Portfolios) may use reverse re-
purchase agreements when it is anticipated that the interest income to be
earned from the investment of the proceeds of the transaction is greater than
the interest expense of the transaction. This use of reverse repurchase agree-
ments may be regarded as leveraging and, therefore, speculative. Reverse repur-
chase agreements involve the risks that the interest income earned in the in-
vestment of the proceeds will be less than the interest expense, that the mar-
ket value of the securities sold by a Portfolio may decline below the price of
the securities the Portfolio is obligated to repurchase and that the securities
may not be returned to the Portfolio. During the time a reverse repurchase
agreement is outstanding, a Portfolio will maintain a segregated account with
the Fund's custodian containing cash, U.S. Government or other appropriate liq-
uid debt securities having a value at least equal to the repurchase price. A
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets. In
addition, a Portfolio (except the Tax-Free Portfolios) may borrow up to an ad-
ditional 5% of its total assets for temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio
28.
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would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that each Portfolio bears di-
rectly in connection with its own operations.
ILLIQUID SECURITIES. No Portfolio will invest more than 15% of the value of its
net assets in securities that are illiquid. GICs, variable and floating rate
instruments that cannot be disposed of within seven days, and repurchase agree-
ments and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to this 15% limit. Each
Portfolio may purchase securities which are not registered under the Securities
Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the Portfolios' sub-
adviser that an adequate trading market exists for the securities. This invest-
ment practice could have the effect of increasing the level of illiquidity in a
Portfolio during any period that qualified institutional buyers become uninter-
ested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates or market action.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time a Port-
folio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the sub-adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully em-
ployed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential
29.
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declines in long positions in similar securities and in order to maintain
portfolio flexibility. In a short sale "against-the-box," at the time of sale,
the Portfolio owns or has the immediate and unconditional right to acquire the
identical security at no additional cost. When selling short "against-the-
box," a Portfolio forgoes an opportunity for capital appreciation in the secu-
rity.
PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not be a factor preventing a
sale or purchase when the sub-adviser believes investment considerations war-
rant such sale or purchase. Portfolio turnover may vary greatly from year to
year as well as within a particular year. High portfolio turnover rates (i.e.,
100% or more) will generally result in higher transaction costs to a Portfolio
and may result in the realization of short-term capital gains that are taxable
to shareholders as ordinary income.
INTEREST RATE AND EXTENSION RISKS. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing inter-
est rates. Fixed income securities with longer maturities, which tend to pro-
duce higher yields, are subject to potentially greater capital appreciation
and depreciation than securities with shorter maturities. The Portfolios are
not restricted to any maximum or minimum time to maturity in purchasing indi-
vidual portfolio securities, and the average maturity of a Portfolio's assets
will vary within the limits stated above under "What Are the Differences Among
the Portfolios?" based upon its sub-adviser's assessment of economic and mar-
ket conditions. Although the Portfolios' sub-adviser will normally attempt to
structure each Portfolio to have a comparable duration to its benchmark as
stated in that section, there can be no assurance that it will be able to do
so at all times.
STATE-SPECIFIC TAX-FREE PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration of investments by the State-Specific Tax-Free Portfolios in State-
Specific Obligations raises special investment considerations. In particular,
changes in the economic condition and governmental policies of a state and its
political subdivisions could adversely affect the value of a Portfolio's
shares. Certain matters relating to the states in which the State-Specific
Tax-Free Portfolios invest are described below. For further information, see
"Special Considerations Regarding State-Specific Obligations" in the Statement
of Additional Information.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending decreases resulted in surpluses the following
four years. As of June 30, 1995, the General Fund had a surplus of $688.3 mil-
lion. For the fiscal year ended June 30, 1996, the General Fund's expenditures
exceeded available revenues by approximately $253 million; this shortfall was
funded by the General Fund's unappropriated surplus. Rising unemployment, a
relatively high proportion of persons 65 and older in the Commonwealth and
court ordered increases in healthcare reimbursement rates place increased
pressures on the tax resources of the Commonwealth and its municipalities. The
Commonwealth has sold a substantial amount of bonds over the past several
years, but the debt burden remains moderate. Employment growth has shifted to
the trade and service sectors, with losses in more high-paid manufacturing po-
sitions. A new governor took office in January 1995, but the Commonwealth has
continued to show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective com-
mercial agriculture, insurance, tourism, petroleum refining and manufacturing,
although New Jersey's manufacturing industry has experienced a downward trend
in the last few years. New Jersey is a major recipient of Federal assistance
and, of all the states, is among the highest in the amount of Federal aid re-
ceived. Therefore, a decrease in Federal financial assistance may adversely
affect the financial condition of New Jersey and its political subdivisions
and instrumentalities. While New Jersey's economic base has become more diver-
sified over time and thus its economy appears to be less vulnerable during re-
cessionary periods, a recurrence of high levels of unemployment could ad-
versely affect New Jersey's overall economy and the ability of New Jersey and
its political subdivisions and instrumentalities to meet their financial obli-
gations. In addition, New Jersey maintains a balanced budget which restricts
total appropriation increases to only 5% annually with respect to any munici-
pality or county. This balanced budget plan may actually adversely affect a
particular municipality's or county's ability to repay its obligations.
30.
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Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cyclical
than in some other states and in the nation as a whole. Agriculture is an im-
portant segment of the Ohio economy with over half the State's area devoted to
farming and approximately 16% of total employment in agribusiness. In past
years, the State's overall unemployment rate has been somewhat higher than the
national figure. For example, the reported 1990 average monthly State rate was
5.7%, compared to the 5.5% national figure. However, for the last five years
the State rates were below the national rates (4.8% versus 5.6% in 1995). The
unemployment rate and its effects vary among particular geographic areas of the
State. There can be no assurance that future national, regional or state-wide
economic difficulties and the resulting impact on State or local government fi-
nances generally will not adversely affect the market value of Ohio State-Spe-
cific Obligations held in the Portfolio or the ability of particular obligors
to make timely payments of debt service on (or lease payments relating to)
those obligations.
31.
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of its Board of Trustees. The following persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
cer of USX Corporation.
Anthony M. Santomero--Professor of Finance and Director of
the Financial Institutions Center, The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
ates, Inc.
ADVISER AND
SUB-ADVISER The Adviser to the Compass Capital Funds is PNC Asset Manage-
ment Group, Inc. ("PAMG"). Each of the Portfolios within the
Compass Capital Fund family is managed by a specialized port-
folio manager who is a member of PAMG's fixed income portfo-
lio management subsidiary, BlackRock Financial Management,
Inc. ("BlackRock"). BlackRock has its primary offices at 345
Park Avenue, New York, New York 10154.
The Portfolios and their portfolio managers are as follows:
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<S> <C>
Low Duration Bond Robert S. Kapito; Vice Chairman of BlackRock since
1988; Portfolio co-manager since its inception.
Scott Amero; Managing Director of BlackRock since
1990; Portfolio co-manager since its inception.
Jody Kochansky; Vice President of BlackRock since
1992; Portfolio co-manager since 1995.
Intermediate Government Robert S. Kapito and Scott Amero (see above) and
Bond Michael P. Lustig; Mr. Lustig has been Vice
President of BlackRock since 1989; Messrs. Kapito,
Lustig and Amero have been Portfolio co-managers
since 1995.
Intermediate Bond Robert S. Kapito, Michael P. Lustig and Scott Amero
(see above); Messrs. Kapito, Lustig and Amero have
been Portfolio co-managers since 1995.
Core Bond Keith Anderson; Managing Director of BlackRock since
1988; Portfolio co-manager since June 1997.
Robert Michele, CFA; Managing Director of BlackRock
since 1996; Prior to joining BlackRock in 1995, Mr.
Michele was a Director and head of US Fixed Income
Investments with CS First Boston Investment
Management Corporation; From 1985-1993, he served as
Deputy Manager and Senior Portfolio Manager at Brown
Brothers Harriman & Co.; Portfolio co-manager since
June 1997.
</TABLE>
32.
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<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<S> <C>
Managed Income Keith Anderson; Managing Director of BlackRock since
1988; Portfolio co-manager since June 1997.
Robert Michele (See above); Portfolio co-manager
since June 1997.
High Yield , and Robert S. Kapito (see
above); Portfolio co-managers since inception.
International Bond Andrew Gordon; portfolio manager at BlackRock since
1996; responsible for non-dollar research at Barclay
Investments from 1994 to 1996 and at CS First Boston
from 1986 to 1994; Portfolio manager since January
1997.
Tax-Free Income Kevin Klingert; portfolio manager at BlackRock since
1991; prior to joining BlackRock, Assistant Vice
President, Merrill, Lynch, Pierce, Fenner & Smith;
Portfolio manager since 1995.
Pennsylvania Tax-Free Kevin Klingert (see above); Portfolio manager since
Income 1995.
New Jersey Tax-Free In- Kevin Klingert (see above); Portfolio manager since
come 1995.
Ohio Tax-Free Income Kevin Klingert (see above); Portfolio manager since
1995.
</TABLE>
PAMG was organized in 1994 to perform advisory services for in-
vestment companies, and has its principal offices at 1600 Mar-
ket Street, 29th Floor, Philadelphia, Pennsylvania 19103. PAMG
is an indirect wholly-owned subsidiary of PNC Bank Corp., a
multi-bank holding company.
For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-adviser are entitled to fees, computed
daily on a Portfolio-by-Portfolio basis and payable monthly, at
the maximum annual rates set forth below. As stated under "What
Are The Expenses Of The Portfolios?" PAMG and the sub-adviser
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL BOND HIGH YIELD AND
AND HIGH YIELD PORTFOLIOS INTERNATIONAL BOND PORTFOLIOS
---------------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
33.
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For the twelve months ended September 30, 1997, the Portfo-
lios paid investment advisory fees at the following annual
rates (expressed as a percentage of average daily net as-
sets) after voluntary fee waivers: Intermediate Government
Bond Portfolio, .28%; Intermediate Bond Portfolio, .30%;
Managed Income Portfolio, .35%; Tax-Free Income Portfolio,
.28%; Pennsylvania Tax-Free Income Portfolio, .29%; Ohio
Tax-Free Income Portfolio, .06%; Low Duration Bond Portfo-
lio, .30%; Core Bond Portfolio, .30%; New Jersey Tax-Free
Income Portfolio, .30%; and International Bond Portfolio,
.55%.
The Portfolios' sub-adviser strives to achieve best execu-
tion on all transactions. Infrequently, brokerage transac-
tions for the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor, subject to the requirements
of best execution.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are in-
direct 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.
The Administrators generally assist the Fund in all aspects
of its administration and operation, including matters re-
lating to the maintenance of financial records and fund ac-
counting. As compensation for these services, CCG is enti-
tled to receive a fee, computed daily and payable monthly,
at an annual rate of .03% of each Portfolio's average daily
net assets. PFPC and CDI are entitled to receive a combined
administration fee, computed daily and payable monthly, at
the aggregate annual rate of (i) .085% of the first $500
million of each Portfolio's average daily net assets, .075%
of the next $500 million of each Portfolio's average daily
net assets and .065% of the average daily net assets of each
Portfolio in excess of $1 billion and (ii) .115% of the
first $500 million of the average daily net assets allocated
to Service Shares of each Portfolio, .105% of the next $500
million of such average daily net assets and .095% of the
average daily net assets allocated to Service Shares of each
Portfolio in excess of $1 billion. From time to time the Ad-
ministrators may waive some or all of their administration
fees from a Portfolio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal period, see "What Are the
Expenses of the Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves
AGENT, as their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
SHAREHOLDER The Fund intends to enter into service arrangements with in-
SERVICING stitutional investors ("Institutions") (including PNC Bank
and its affiliates) which provide that the Institutions will
render support services to their customers who are the bene-
ficial owners of Service Shares. These services are intended
to supplement the services provided by the Fund's Adminis-
trators and transfer agent to the Fund's shareholders of
record. In consideration for payment of a shareholder
processing fee of up to .15% (on
34.
<PAGE>
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an annualized basis) of the average daily net asset value of
Service Shares owned beneficially by their customers, Institu-
tions may provide one or more of the following services:
processing purchase and redemption requests from customers and
placing orders with the Fund's transfer agent or the distribu-
tor; processing dividend payments from the Fund on behalf of
customers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information nec-
essary for sub-accounting; and providing other similar servic-
es. In consideration for payment of a separate shareholder ser-
vicing fee of up to .15% (on an annualized basis) of the aver-
age daily net asset value of Service Shares owned beneficially
by their customers, Institutions may provide one or more of
these additional services to such customers: responding to cus-
tomer inquiries relating to the services performed by the In-
stitution and to customer inquiries concerning their invest-
ments in Service Shares; assisting customers in designating and
changing dividend options, account designations and addresses;
and providing other similar shareholder liaison services. Cus-
tomers who are beneficial owners of Service Shares should read
this Prospectus in light of the terms and fees governing their
accounts with Institutions.
Conflict-of-interest restrictions may apply to the receipt of
compensation paid by the Fund in connection with the investment
of fiduciary funds in Portfolio shares. Institutions, including
banks regulated by the Comptroller of the Currency, Federal Re-
serve Board and state banking commissions, and investment ad-
visers and other money managers subject to the jurisdiction of
the SEC, the Department of Labor or state securities commis-
sions, are urged to consult their legal counsel before entering
into agreements with the Fund.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided
by Institutions under their service agreements will not be pro-
hibited under these laws. Under state securities laws, banks
and financial institutions that receive payments from the Fund
may be required to register as dealers.
EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to PAMG and the Administra-
tors, transfer agency and custodian fees, trustee fees, taxes,
interest, professional fees, shareholder servicing and process-
ing fees, fees and expenses in registering and qualifying the
Portfolios and their shares for distribution under Federal and
state securities laws, expenses of preparing prospectuses and
statements of additional information and of printing and dis-
tributing prospectuses and statements of additional information
to existing shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insurance
premiums, the expense of independent pricing services, and
other expenses which are not expressly assumed by PAMG or the
Fund's service providers under their agreements with the Fund.
Any general expenses of the Fund that do not belong to a par-
ticular investment portfolio will be allocated among all in-
vestment portfolios by or under the direction of the Board of
Trustees in a manner the Board determines to be fair and equi-
table.
35.
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HOW ARE SHARES PURCHASED AND REDEEMED?
- -------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at
Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Fund is not required or permitted under the Plan to
make distribution payments with respect to Service Shares. However, 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 ac-
tivities out of their past profits or other sources available to them, which,
subject to applicable NASD regulations, may include contributions to various
non-cash and cash incentive arrangements to promote the sale of shares, as
well as sponsorship of various educational programs, sales contests and promo-
tions in which participants may receive reimbursement of expenses, entertain-
ment and prizes such as travel awards, merchandise and cash. For further in-
formation, see "Investment Advisory, Administration, Distribution and Servic-
ing Arrangements" in the Statement of Additional Information.
PURCHASE OF SHARES. Service Shares are offered without a sales load to Insti-
tutions acting on behalf of their customers, as well as certain persons who
were shareholders of Compass Capital Group of Funds at the time of its combi-
nation with the PNC(R) Fund during the first quarter of 1996. Service Shares
will normally be held of record by Institutions or in the names of nominees of
Institutions. Share purchases are normally effected through a customer's ac-
count at an Institution through procedures established in connection with the
requirements of the account. In these cases, confirmations of share purchases
and redemptions will be sent to the Institutions. Beneficial ownership of
shares will be recorded by the Institutions and reflected in the account
statements provided by such Institutions to their customers. Investors wishing
to purchase shares should contact their Institutions.
Service Shares are sold at their net asset value per share next computed after
an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern
Time) on a Business Day are priced the same day. A "Business Day" is any week-
day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank
of Philadelphia (the "FRB") are open for business. Purchase orders may be
placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after
4:00 p.m. (Eastern Time) are priced on the following Business Day.
Payment for Service Shares must normally be made in Federal funds or other
funds immediately available to the Fund's custodian. Payment may also, in the
discretion of the Fund, be made in the form of securities that are permissible
investments for the respective Portfolios. For further information, see the
Statement of Additional Information. The minimum initial investment is $5,000;
however, Institutions may set a higher minimum for their customers. There is
no minimum subsequent investment requirement.
Compass Capital may in its discretion waive the minimum investment amount and
may in its discretion reject any order for Service Shares.
REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in
accordance with the procedures applicable to their accounts with the Institu-
tions. These procedures will vary according to the type of account and the In-
stitution involved, and customers should consult their account managers in
this regard. It is the responsibility of Institutions to transmit redemption
orders to PFPC and credit their customers' accounts with redemption proceeds
on a timely basis. In the case of shareholders holding share certificates, the
certificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-
7450. Shares are redeemed at their net asset value per share next determined
after PFPC's receipt of the redemption order. The Fund, the
36.
<PAGE>
- --------------------------------------------------------------------------------
Administrators and the Distributor will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. The Fund and its serv-
ice providers will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions that are reasonably believed to be genuine
in accordance with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of PAMG, an earlier payment could
adversely affect a Portfolio. No charge for wiring redemption payments is im-
posed by the Fund, although Institutions may charge their customer accounts for
redemption services. Information relating to such redemption services and
charges, if any, should be obtained by customers from their Institutions.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
400 Bellevue Parkway, Wilmington, DE 19809.
The Fund may redeem Service Shares in any Portfolio account if the account bal-
ance drops below $5,000 as the result of redemption requests and the share-
holder does not increase the balance to at least $5,000 upon thirty days' writ-
ten notice. If a customer has agreed with an Institution to maintain a minimum
balance in his or her account with the Institution, and the balance in the ac-
count falls below that minimum, the customer may be obligated to redeem all or
part of his or her shares in the Portfolios to the extent necessary to maintain
the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
37.
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WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?
- --------------------------------------------------------------------------------
Persons who were shareholders of an investment portfolio of the Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC(R) Fund
may also purchase and redeem Service Shares of the same Portfolio and for the
same account in which they held shares on that date through the procedures de-
scribed in this section.
PURCHASES. Purchase orders may be placed through PFPC. The minimum investment
is $100. Purchases through the Automatic Investment Plan described below are
subject to a lower purchase minimum. The name of the Portfolio with respect to
which shares are purchased must appear on the check or Federal Reserve Draft.
Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders which
are received by PFPC, together with payment, before the close of regular trad-
ing hours on the NYSE (currently 4:00 p.m. Eastern Time) on any Business Day
(as defined above) are priced according to the net asset value next determined
on that day.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an investor
in shares of a Portfolio may arrange for periodic investments in that Portfolio
through automatic deductions from a checking or savings account by completing
the AIP Application Form which may be obtained from PFPC. The minimum pre- au-
thorized investment amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their shares of
the Portfolios at any time by sending a written redemption request in proper
form to Compass Capital Funds c/o PFPC Inc., P.O. Box 8907, Wilmington, Dela-
ware 19899-8907.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding share certificates must send
their certificates with the redemption request. Additional documentary evidence
of authority is required by PFPC in the event redemption is requested by a cor-
poration, partnership, trust, fiduciary, executor or administrator.
If a shareholder has given authorization for expedited redemption, shares can
be redeemed by telephone and the proceeds sent by check to the shareholder or
by Federal wire transfer to a single previously designated bank account. Once
authorization is on file, PFPC will honor requests by any person by telephone
at (800) 441-7762 or other means. The minimum amount that may be sent by check
is $500, while the minimum amount that may be wired is $10,000. Compass Capital
reserves the right to change these minimums or to terminate these redemption
privileges. If the proceeds of a redemption would exceed $25,000, the redemp-
tion request must be in writing and will be subject to the signature guarantee
requirement described above. This privilege may not be used to redeem shares in
certificated form.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
38.
<PAGE>
- --------------------------------------------------------------------------------
Compass Capital is not responsible for the efficiency of the Federal wire sys-
tem or the shareholder's firm or bank. Compass Capital does not currently
charge for wire transfers. The shareholder is responsible for any charges im-
posed by the shareholder's bank. To change the name of the single designated
bank account to receive wire redemption proceeds, it is necessary to send a
written request (with a guaranteed signature as described above, to Compass
Capital Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
Compass Capital reserves the right to refuse a telephone redemption if it be-
lieves it advisable to do so. The Fund, the Administrators and the Distributor
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Compass Capital, the Administrators and the Distributor
will not be liable for any loss, liability, cost or expense for acting upon
telephone instructions reasonably believed to be genuine in accordance with
such procedures.
The Fund offers a Systematic Withdrawal Plan ("SWP") which may be used by in-
vestors who wish to receive regular distributions from their accounts. Upon
commencement of the SWP, the account must have a current value of $10,000 or
more in a Portfolio. Shareholders may elect to receive automatic cash payments
of $50 or more either monthly, every other month, quarterly, three times a
year, semi-annually, or annually. Automatic withdrawals are normally processed
on the 25th day of the applicable month or, if such day is not a Business Day,
on the next Business Day and are paid promptly thereafter. An investor may uti-
lize the SWP by completing the SWP Application Form which may be obtained from
PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
39.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Service Shares of each Portfolio
as of the close of regular trading hours on the NYSE (currently 4:00 p.m. East-
ern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio that are allocated to its Service Shares,
less the liabilities charged to its Service Shares, by the number of its Serv-
ice Shares that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless a Portfolio's sub-adviser under the supervision of the Board of
Trustees determines such method does not represent fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
Service Shares of the relevant Portfolio unless a shareholder elects otherwise.
Such election, or any revocation thereof, must be made in writing to PFPC, and
will become effective with respect to dividends paid after its receipt by PFPC.
Each Portfolio declares a dividend each day on "settled" shares (i.e. shares
for which the particular Portfolio has received payment in Federal funds) on
the first Business Day after a purchase order is placed with the Fund. Payments
by check are normally converted to Federal funds within two Business Days of
receipt. Over the course of a year, substantially all of the Portfolios' net
investment income will be declared as dividends. The amount of the daily divi-
dend for each Portfolio will be based on periodic projections of its net in-
vestment income. All dividends are paid within ten days after the end of each
month. Net realized capital gains (including net short-term capital gains), if
any, will be distributed by each Portfolio at least annually.
40.
<PAGE>
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HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), whether the
distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Each Tax-Free Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns, and
in two circumstances such amounts, while exempt from regular Federal income
tax, are taxable to persons subject to alternative minimum tax. First, "exempt
interest dividends" derived from certain private activity bonds issued after
August 7, 1986 generally will constitute an item of tax preference for corpo-
rate and non-corporate taxpayers in determining alternative minimum and envi-
ronmental tax liability. Second, "exempt interest dividends" must be taken into
account by corporate taxpayers in determining certain adjustments for alterna-
tive minimum tax purposes. In addition, investors should be aware of the possi-
bility of state and local alternative minimum or minimum income tax liability
on interest from private activity bonds. Shareholders who are recipients of So-
cial Security Act or Railroad Retirement Act benefits should note that "exempt
interest dividends" will be taken into account in determining the taxability of
their benefit payments.
Each Tax-Free Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions declared from net investment income during that year and may
differ significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange. Any loss upon the sale or ex-
change of shares held for six months or less will be disallowed for Federal in-
come tax purposes to the extent of any exempt interest dividends received by
the shareholder. For the Ohio Tax-Free Income Portfolio, the loss will be dis-
allowed for Ohio income tax purposes to the same extent, even though, for Ohio
income tax purposes, some portion of such dividends actually may have been sub-
ject to Ohio income tax.
It is expected that dividends and certain interest income earned by the Inter-
national Bond Portfolio from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
Portfolio's total assets at the close of a taxable year consists of stock or
securities of foreign corporations, the Portfolio may elect, for U.S. Federal
income tax purposes, to treat certain foreign taxes paid by it, including gen-
erally any withholding taxes and other foreign income taxes, as paid by its
shareholders.
41.
<PAGE>
- --------------------------------------------------------------------------------
The Portfolio intends to make this election. As a result, the amount of such
foreign taxes paid by the Portfolio will be included in its shareholders' in-
come pro rata (in addition to taxable distributions actually received by them),
and each shareholder generally will be entitled either (a) to credit a propor-
tionate amount of such taxes against U.S. Federal income tax liabilities, or
(b) if a shareholder itemizes deductions, to deduct such proportionate amounts
from U.S. income, should the shareholder so choose.
A Portfolio may make investments that produce income that is not matched by a
corresponding cash distribution to the Portfolio, such as investments in pay-
in-kind bonds or in obligations such as zero coupon securities having original
issue discount (i.e., an amount equal to the excess of the stated redemption
price of the security at maturity over its issue price), or market discount
(i.e., an amount equal to the excess of the stated redemption price of the se-
curity over the basis of such bond immediately after it was acquired) if the
Portfolio elects to accrue market discount on a current basis. In addition, in-
come may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
a Portfolio and therefore would be subject to the distribution requirements of
the Code. Because such income may not be matched by a corresponding cash dis-
tribution to a Portfolio, such Portfolio may be required to borrow money or
dispose of other securities to be able to make distributions to its investors.
In addition, if an election is not made to currently accrue market discount
with respect to a market discount bond, all or a portion of any deduction or
any interest expenses incurred to purchase or hold such bond may be deferred
until such bond is sold or otherwise disposed.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of the dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
tion, shareholders who are non-resident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to differ-
ent Federal income tax treatment. Future legislative or administrative changes
or court decisions may materially affect the tax consequences of investing in a
Portfolio. For additional information concerning the tax treatment of dividends
and distributions by the states listed below including certain restrictions ap-
plicable to such treatment, see "Taxes" in the Statement of Additional Informa-
tion.
PENNSYLVANIA TAX CONSIDERATIONS. Income received by a shareholder attributable
to interest realized by the Pennsylvania Tax-Free Income Portfolio from Penn-
sylvania State-Specific Obligations or attributable to insurance proceeds on
account of such interest, is not taxable to individuals, estates or trusts un-
der the Personal Income Tax (in the case of insurance proceeds, to the extent
they are exempt for Federal income tax purposes); to corporations under the
Corporate Net Income Tax (in the case of insurance proceeds, to the extent they
are exempt for Federal income tax purposes); nor to individuals under the Phil-
adelphia School District Net Investment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Pennsylvania Tax-Free Income Portfolio of Pennsylvania State-
Specific Obligations is taxable under the Personal Income Tax, the Corporate
Net Income Tax, and, unless these assets were held by the Pennsylvania Tax-Free
Income Portfolio for more than six months, the School District Tax.
To the extent that gain on the disposition of a share represents gain realized
on Pennsylvania State-Specific Obligations held by the Pennsylvania Tax-Free
Income Portfolio, such gain may be subject to the Personal Income Tax and Cor-
porate Net Income Tax. Such gain may also be subject to the School District
Tax, except that gain realized with respect to a share held for more than six
months is not subject to the School District Tax.
This discussion does not address the extent, if any, to which shares, or inter-
est and gain thereon, are subject to, or included in the measure of, the spe-
cial taxes imposed by the Commonwealth of Pennsylvania on banks and other fi-
nancial institutions or with respect to any privilege, excise, franchise or
other tax imposed on business entities not discussed above (including the Cor-
porate Capital Stock/Foreign Franchise Tax).
42.
<PAGE>
- --------------------------------------------------------------------------------
Shareholders of the Pennsylvania Tax-Free Income Portfolio are not subject to
the Pennsylvania County Personal Property Tax to the extent that the Portfolio
is comprised of Pennsylvania State-Specific Obligations and Federal obligations
(if the interest on such obligations is exempt from state and local taxation
under the laws of the United States).
NEW JERSEY TAX CONSIDERATIONS. It is anticipated that substantially all divi-
dends paid by the New Jersey Tax-Free Income Portfolio will not be subject to
New Jersey personal income tax. In accordance with the provisions of New Jersey
law as currently in effect, distributions paid by a "qualified investment fund"
will not be subject to the New Jersey personal income tax to the extent that
the distributions are attributable to income received as interest or gain from
New Jersey State-Specific Obligations, or as interest or gain from direct U.S.
Government obligations. Distributions by a "qualified investment fund" that are
attributable to most other sources will be subject to the New Jersey personal
income tax. Shares of the Portfolio are not subject to property taxation by New
Jersey or its political subdivisions.
The New Jersey personal income tax is not applicable to corporations. For all
corporations subject to the New Jersey Corporation Business Tax, dividends and
distributions from a "qualified investment fund" are included in the net income
tax base for purposes of computing the Corporation Business Tax. Furthermore,
any gain upon the redemption or sale of shares by a corporate shareholder is
also included in the net income tax base for purposes of computing the Corpora-
tion Business Tax.
OHIO TAX CONSIDERATIONS. Individuals and estates that are subject to Ohio per-
sonal income tax or municipal or school district income taxes in Ohio will not
be subject to such taxes on distributions from the Ohio Tax-Free Income Portfo-
lio to the extent that such distributions are properly attributable to interest
on Ohio State-Specific Obligations or obligations issued by the U.S. Govern-
ment, its agencies, instrumentalities or territories (if the interest on such
obligations is exempt from state income taxation under the laws of the United
States). Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Tax-Free Income Portfolio
in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions either constitute
exempt-interest dividends for Federal income tax purposes or are properly at-
tributable to interest on Ohio State-Specific Obligations or the U.S. obliga-
tions described above. However, Shares of the Ohio Tax-Free Income Portfolio
will be included in a corporation's net worth base for purposes of calculating
the Ohio corporation franchise tax. Distributions properly attributable to gain
on the sale, exchange or other disposition of Ohio State Specific Obligations
will not be subject to the Ohio personal income tax, or municipal or school
district income taxes in Ohio and will not be included in the net income base
of the Ohio corporation franchise tax. Distributions attributable to other
sources will be subject to the Ohio personal income tax and the Ohio corpora-
tion franchise tax.
43.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS THE FUND ORGANIZED?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital FundsSM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty-six investment portfolios.
Each Portfolio offers five separate classes of shares--Institutional Shares,
Service Shares, Investor A Shares, Investor B Shares and Investor C Shares. In
addition, the Low Duration Bond, Core Bond and Intermediate Bond Portfolios of-
fer a sixth share class--BlackRock Shares. This prospectus relates only to
Service Shares of the Portfolios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, certain administrative/servicing
fees and amounts payable under the Fund's Distribution and Service Plan. In ad-
dition, each class of Investor Shares is sold with different sales charges. Be-
cause of these "class expenses" and sales charges, the performance of the
BlackRock Shares of a Portfolio is expected to be no less than the performance
of the Portfolio's Institutional Shares, the performance of both the BlackRock
Shares and Institutional Shares of a Portfolio is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of the
BlackRock Shares, Institutional Shares and Service Shares of a Portfolio is ex-
pected to be higher than the performance of the Portfolio's classes of Investor
Shares. The performance of each class of Investor Shares may be different. The
Fund offers various services and privileges in connection with its Investor
Shares that are not generally offered in connection with its BlackRock, Insti-
tutional and Service Shares, including an automatic investment plan and an au-
tomatic withdrawal plan. For further information regarding the Fund's Institu-
tional or Investor Share classes, contact PFPC at (800) 441-7764 (Institutional
Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 31, 1997, PNC Bank held of record approximately [70%] of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
44.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
Performance information for Service Shares of the Portfolios may be quoted in
advertisements and communications to shareholders. Total return will be calcu-
lated on an average annual total return basis for various periods. Average an-
nual total return reflects the average annual percentage change in value of an
investment in Service Shares of a Portfolio over the measuring period. Total
return may also be calculated on an aggregate total return basis. Aggregate to-
tal return reflects the total percentage change in value over the measuring pe-
riod. Both methods of calculating total return assume that dividend and capital
gain distributions made by a Portfolio with respect to its Service Shares are
reinvested in Service Shares.
The yield of Service Shares is computed by dividing the Portfolio's net income
per share allocated to its Service Shares during a 30-day (or one month) period
by the net asset value per share on the last day of the period and annualizing
the result on a semi-annual basis. Each Tax-Free Portfolio's "tax-equivalent
yield" may also be quoted, which shows the level of taxable yield needed to
produce an after-tax equivalent to a Portfolio's tax-free yield. This is done
by increasing the Portfolio's yield (calculated above) by the amount necessary
to reflect the payment of Federal and/or state income tax at a stated tax rate.
The performance of a Portfolio's Service Shares may be compared to the perfor-
mance of other mutual funds with similar investment objectives and to relevant
indices, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a Portfolio's Service Shares may be com-
pared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service, and with the
performance of the Lehman GMNA Index, the T-Bill Index, the "stocks, bonds and
inflation index" published annually by Ibbotson Associates and the Lehman Gov-
ernment Corporate Bond Index, as well as the benchmarks attached to this Pro-
spectus. Performance information may also include evaluations of the Portfolios
and their Service Shares published by nationally recognized ranking services,
and information as reported in financial publications such as Business Week,
Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The Wall
Street Journal and The New York Times, or in publications of a local or re-
gional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Service Shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Service Shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, performance data for
Service Shares of a Portfolio cannot necessarily be used to compare an invest-
ment in such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in a portfolio, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other institu-
tions directly to their customer accounts in connection with investments in
Service Shares will not be included in the Portfolio performance calculations.
45.
<PAGE>
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OTHER INFORMATION ON THE COMPASS CAPITAL HIGH YIELD PORTFOLIO MANAGEMENT TEAM
- --------------------------------------------------------------------------------
and , co-managers of the Compass Capital High Yield Portfolio,
have had more than years of experience as Portfolio Managers. and
were the Portfolio Managers of the Fund (account) from
until December 31, 1997 at Co. The cumulative total return for the
Fund (account) from until December 31, 1997 was . At December
31, 1997, that Fund (account) had million in net assets. As Portfolio
Managers at , had full discretionary authority over the se-
lection of investments for that fund.
The performance data for the Fund and portfolio management team is in-
cluded to provide investors with a longer performance record for in manag-
ing a(n) Fund (account) with substantially similar investment objectives and
policies to the Compass Capital High Yield Portfolio. The Fund perfor-
mance data does not represent the past, present or future performance of the
Compass Capital High Yield Portfolio. Past performance is no guarantee of fu-
ture results. Investors should not consider this performance data as an indica-
tion of the future performance of the Compass Capital High Yield Portfolio.
Share prices and investment returns will fluctuate reflecting market conditions
and cash flows, as well as changes in company-specific fundamentals of portfo-
lio securities. Consequently, investments in the High Yield Portfolio may be
worth more or less than their original cost at the time of redemption.
Average annual returns for the one-year, three-year and five-year periods ended
December 31, 1997 for the Fund and for the entire period during which
managed that fund compared with the performance of the Lehman High
Yield Index were:
<TABLE>
<CAPTION>
FUND LEHMAN HIGH YIELD
---- -----------------
<S> <C> <C>
One Year............................................
Three Year Ann. ....................................
Five Year Ann. .....................................
During Management Tenure............................
</TABLE>
- --------
(1) All returns presented above were calculated on a total return basis and in-
clude all reinvested dividends and interest, accrued income and realized
and unrealized gains and losses.
(2) The expense ratio of the Fund was .
(3) The Lehman High Yield Index is an unmanaged index of bonds that is consid-
ered generally representative of the high yield bond market.
46.
<PAGE>
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of the Compass Capital Funds:
We have audited the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, of the Short Government Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, Government Income, Managed In-
come, International Bond, Tax-Free Income and New Jersey Tax-Free Income Port-
folios of the Compass Capital Fund, and the statements of net assets of the
Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios of the Compass
Capital Funds as of September 30, 1996, and the related statements of opera-
tions for the periods then ended, the statements of changes in net assets for
each of the two years (or periods) in the period then ended, and the financial
highlights for each of the periods presented (except for those statements which
have been audited by other auditors as discussed below). These financial state-
ments and financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statements of changes in net as-
sets for the year ended June 30, 1995, and the financial highlights for the
year ended June 30, 1995 and each of the prior periods presented of the Short
Government Bond and Core Bond Portfolios, formerly the BFM Institutional Trust
Short Duration and Core Fixed Income Portfolios (the "BFM Funds"), respectively
were audited by other auditors, whose report dated August 7, 1995 expressed an
unqualified opinion thereon.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of materials misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments held by the
custodian and brokers as of September 30, 1996. An audit also includes assess-
ing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Compass Capital Funds (Short Government Bond, Intermediate Government Bond, In-
termediate Bond, Core Bond, Government Income, Managed Income, International
Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free and
Ohio Tax-Free Income Portfolios), as of September 30, 1996, and the results of
their operations for the periods then ended, the changes in their net assets
for each of the two years (or periods) in the period then ended (except for the
year ended June 30, 1995 for the BFM Funds which have been audited by other au-
ditors), and the financial highlights for each of the periods presented (except
for the year ended June 30, 1995 and prior periods for the BFM Funds which have
been audited by other auditors), in conformity with generally accepted account-
ing principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 22, 1996
47.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the Compass Capital Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
MUTUAL FUND SPECIALISTS 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
Available to provide Monday through Friday toll-free 888-426-6727
performance and market toll-free 800-388-8734
trends.
PORTFOLIO MANAGERS 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
COMMENTARY Monday through Friday toll-free 888-426-6727
(Audio recording updated toll-free 800-388-8734
periodically)
SHAREHOLDER SERVICES
TELEPHONE ACCESS: 24 Hours, 7 days a week toll-free 800-441-7764
ACCOUNT SERVICE 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
REPRESENTATIVES: Monday through Friday
Available to discuss
account balance
information, mutual fund
prospectus, literature
and discuss programs and
services available.
PURCHASES AND 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
REDEMPTIONS Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.compassfunds.com
information and specific
fund performance.
Request mutual fund
prospectuses and
literature. Forward
mutual fund inquiries.
E-MAIL:
Request prospectuses and 24 Hours, 7 days a week [email protected]
literature. Forward
mutual fund inquiries.
WRITTEN CORRESPONDENCE: POST OFFICE BOX ADDRESS STREET ADDRESS
Compass Capital Funds Compass Capital Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
48.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasury Index Treasuries with maturities ranging from 1 to 2.99
years
Intermediate Government Lehman Brothers Intermediate Treasury and agency issues in the Lehman Aggregate,
Bond Government Index excluding maturities above 9.99 years
Intermediate Bond Lehman Brothers Intermediate Treasury, agency and corporate issues in the Lehman
Gov't/Corp Index Aggregate, excluding maturities above 9.99 years
Core Bond Lehman Aggregate Index The Lehman Aggregate contains issues that meet the
following criteria:
.At least $100 million par amount outstanding for
entry and exit
.Rated investment grade (at least Baa-3) by Moody's
or S&P (if not rated by Moody's)
.At least one year at maturity
.Coupon must have a fixed rate
.Excludes CMOs, ARMs, manufactured homes, non-agency
bonds, buydowns, graduated equity mortgages, project
loans and non-conforming ("jumbo") mortgages
.As of November 1996, the composition of the Lehman
Brothers Aggregate Index is:
52% allocation to Treasury and government securities
29% allocation to mortgage-backed securities
19% allocation to corporate and asset-backed
securities
Managed Income Lehman Aggregate Index The Lehman Aggregate contains issues that meet the
following criteria:
.At least $100 million par amount outstanding for
entry and exit
.Rated investment grade (at least Baa-3) by Moody's
or S&P (if not rated by Moody's)
.At least one year to maturity
.Coupon must have a fixed rate
.Excludes CMOs, ARMs, manufactured homes, non-agency
bonds, buydowns, graduated equity mortgages, project
loans and non-conforming ("jumbo") mortgages
.As of November 1996, the composition of the Lehman
Brothers Aggregate Index is:
52% allocation to Treasury and government securities
29% allocation to mortgage-backed securities
19% allocation to corporate and asset-backed
securities
High Yield Lehman High Yield Index The Lehman High Yield Index contains issues that
meet the following criteria:
.At least $100 million par amount outstanding for
entry and exit
.Maximum quality rating of Ba1 (including defaulted
issues)
.At least one year to maturity
International Bond Salomon Non-U.S. Hedged World A market-capitalization weighted benchmark that
Government Bond Index tracks the performance of the 13 Government bond
markets of Australia, Austria, Belgium, Canada,
Denmark, France, Germany, Italy, Japan, the
Netherlands, Spain, Sweden and the United Kingdom.
The currency-hedged return is computed by using a
rolling one-month forward exchange contract as a
hedging instrument.
Tax-Free Income Lehman Municipal Bond Index All of the bonds in the following Municipal Indices
possess the following characteristics:
.A minimum credit rating of Baa-3
.Outstanding par value of at least $3 million
.Must be issued as part of a deal of at least $50
million
.Individual bonds must have been issued within the
last 5 years
.Remaining maturity of not less than one year
Excludes bonds subject to the alternative minimum
tax (AMT), taxable municipal bonds, and floating-
rate or zero coupon municipal bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
49.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
DESCRIPTIONS OF RATING CATEGORIES
The following are descriptions of ratings assigned by Standard & Poor's Corpo-
ration ("S&P") and Moody's Investors Service, Inc. ("Moody's") to certain debt
securities in which the Compass Capital Bond Portfolios may invest. See the
Statement of Additional Information for descriptions of other Moody's and S&P
rating categories and those of other rating agencies.
STANDARD & POOR'S:
"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 re-
pay principal and differs from AAA issues only in small degree.
"A"--Debt is considered to have a strong capacity to pay interest and repay
principal although such issues are somewhat more susceptible to the adverse ef-
fects 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 re-
pay principal. Whereas such issues normally exhibit adequate protection parame-
ters, 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 ac-
cordance 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 ca-
pacity 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 inter-
est and repay principal. The "B" rating category is also used for debt subordi-
nated to senior debt that is assigned an actual or implied "BB" or "BB-" rat-
ing.
"CCC"--Debt has a currently identifiable vulnerability to default, and is de-
pendent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the capac-
ity to pay interest and repay principal. The "CCC" rating category is also used
for debt subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
"CC"--This rating is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC" rating.
"C"--This rating is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt serv-
ice payments are continued.
"CI"--This rating is reserved for income bonds on which no interest is being
paid.
50.
<PAGE>
- --------------------------------------------------------------------------------
"D"--Debt is in payment default. This rating is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S & P believes that such payments will be made
during such grace period. "D" rating is also used upon the filing of a bank-
ruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-)--The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"r"--This rating is attached to highlight derivative, hybrid, and certain other
obligations that S & P believes may experience high volatility or high vari-
ability in expected returns due to non-credit risks. Examples of such obliga-
tions are: securities whose principal or interest return is indexed to equi-
ties, commodities, or currencies; certain swaps and options; and interest only
and principal only mortgage securities. The absence of an "r" symbol should not
be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
MOODY'S:
"Aaa"--Bonds are judged to be of the best quality. They carry the smallest de-
gree 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 fun-
damentally strong position of such issues.
"Aa"--Bonds are judged to be of high quality by all standards. Together with
the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A"--Bonds possess many favorable investment attributes and are to be consid-
ered 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 character-
istics as well.
"Ba," "B," "Caa," "Ca," and "C"--Bonds that possess one of these ratings pro-
vide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of desir-
able 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 fa-
cilities 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 qual-
ity of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Baa1, Ba1 and B1.
51.
<PAGE>
COMPASS CAPITAL FUNDS
THE COMPASS CAPITAL FUNDS
Compass Capital Funds is a leading mutual fund company currently managing in
excess of $13 billion in 33 portfolios designed to fit a broad range of
investment goals. Each portfolio is managed by recognized experts in equity,
fixed income, international, and tax-free investing who adhere to a pure
investment style SM.
STOCK PORTFOLIOS
- --------------------------------------------------------------------------------
Large Cap Growth Equity Small Cap Growth Equity
Large Cap Value Equity Small Cap Value Equity
Mid-Cap Growth Equity
Mid-Cap Value Equity Micro-Cap Equity
International Equity
International Small Cap Equity
International Emerging Markets
Index Equity
Select Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
Intermediate Bond
Core Bond High Yield
International Bond
TAX-FREE BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Tax-Free Income New Jersey Tax-Free Income
Pennsylvania Tax-Free Income Ohio Tax-Free Income
MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------
Money Market North Carolina Municipal Money Market
U.S. Treasury Money Market Ohio Municipal Money Market
Municipal Money Market Pennsylvania Municipal Money Market
New Jersey Municipal Money Market Virginia Municipal Money Market
<PAGE>
January , 1998
- --------------------------------------------------------------------------------
MICRO-CAP EQUITY PORTFOLIO INVESTOR SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASKING THE KEY
QUESTIONS
PAGE
<S> <C>
What Are The Expenses Of The Portfolio?...................... 4
What Is The Portfolio?....................................... 6
What Additional Investment Policies And Risks Apply?......... 7
What Are The Portfolio's Fundamental Investment
Limitations?................................................ 12
Who Manages The Fund?........................................ 13
What Pricing Options Are Available To Investors?............. 17
What Are The Key Considerations In Selecting A Pricing
Option?..................................................... 18
How Are Shares Purchased?.................................... 19
How Are Shares Redeemed?..................................... 20
What Are The Shareholder Features Of The Fund?............... 22
What Is The Schedule Of Sales Charges And Exemptions?........ 24
How Is Net Asset Value Calculated?........................... 28
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 28
How Are Fund Distributions Taxed?............................ 29
How Is the Fund Organized?................................... 30
How Is Performance Calculated?............................... 31
How Can I Get More Information?.............................. 32
</TABLE>
This Prospectus contains information about the Compass Capital
Micro-Cap Equity Portfolio (the "Portfolio") that a prospective
investor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated Janu-
ary , 1998 has been filed with the Securities and Exchange Com-
mission (the "SEC"). The Statement of Additional Information may
be obtained free of charge from Compass Capital Funds (the
"Fund") by calling (800) 441-7762. The Statement of Additional
Information, as supplemented from time to time, is incorporated
by reference into this Prospectus. The SEC maintains an Internet
Web site at http://www.sec.gov that contains the Statement of Ad-
ditional Information, material incorporated by reference and
other information regarding the Portfolio that has been filed
with the SEC.
SHARES OF THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY
OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE PORTFOLIO INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT IN-
VESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2.
<PAGE>
- --------------------------------------------------------------------------------
MICRO-CAP EQUITY PORTFOLIO OF COMPASS CAPITAL FUNDS
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 33 portfolios and
has been structured to include many different investment styles
so that investors may participate across multiple disciplines
in order to seek their long-term financial goals.
The Micro-Cap Equity Portfolio of COMPASS CAPITAL FUNDS is one
of thirteen diversified investment portfolios that provide in-
vestors with a broad spectrum of investment alternatives within
the equity sector. Nine of these portfolios invest in U.S.
stocks, three portfolios invest in non-U.S. international
stocks and one portfolio invests in a combination of U.S.
stocks and bonds. A detailed description of the Micro-Cap Eq-
uity Portfolio begins on page 6. To obtain a prospectus de-
scribing the Fund's other equity portfolios, call (800) 441-
7762.
The Portfolio's performance benchmark is the Wilshire MicroCap
Index and its Lipper peer group is the Micro Cap Funds catego-
ry. The Wilshire MicroCap Index is comprised of all issues in
the Wilshire 5000 Index that rank below the 2,501st company
based on market capitalization. The Wilshire 5000 Index con-
tains all publicly traded U.S. stocks, excluding REITS and lim-
ited partnerships.
PNC Asset Management Group, Inc. ("PAMG") serves as the Portfo-
lio's investment adviser. PNC Equity Advisors Company, a whol-
ly-owned subsidiary of PAMG ("PEAC"), serves as sub-adviser to
the Portfolio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Micro-Cap
CAPITAL Equity Portfolio. We intend this document to be an effective
MICRO-CAP tool as you explore one approach to international equity in-
EQUITY vesting.
PORTFOLIO
CONSIDERING There can be no assurance that the Portfolio will achieve its
THE RISKS IN investment objective. The Portfolio will hold equity securities
EQUITY of micro cap issuers and may acquire warrants and illiquid se-
INVESTING curities; enter into repurchase and reverse repurchase agree-
ments; lend portfolio securities to third parties; and enter
into futures contracts and options and forward currency ex-
change contracts. Certain risks associated with international
investments are heightened because of currency fluctuations and
investments in emerging markets. These and the other investment
practices set forth below, and their associated risks, deserve
careful consideration. See "What Additional Investment Policies
And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolio, see "How Are Shares Purchased?" and "How Are Shares
CAPITAL Redeemed?"
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Investor Shares of the Portfolio for the current fiscal year as a percentage of
average daily net assets. An example based on the summary is also shown.
<TABLE>
<CAPTION>
MICRO-CAP EQUITY PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Front-End Sales Charge(/1/)
(as a percentage of offering price) 5.0% None None
Maximum Deferred Sales Charge(/1/)(/2/)
(as a percentage of offering price) None 4.5% 1.0%
Sales Charge on Reinvested Dividends None None None
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/3/) --% --% --%
12b-1 fees(/3/)(/4/) .00 .75 .75
Other operating expenses -- -- --
-- -- --
Shareholder servicing fee -- -- --
Shareholder processing fee -- -- --
Other expenses -- -- --
-- -- --
Total Portfolio operating expenses (after fee
waivers)(/3/) --% --% --%
== == ==
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfolio.
Without waivers, advisory fees would be --% for each class of the Portfo-
lio. PAMG and the Portfolio's administrators are under no obligation to
waive or continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain the Portfolio's total operat-
ing expenses through the fiscal year ending September 30, 1998 at the lev-
els set forth in the table. Without waivers, "Total Portfolio operating ex-
penses" would be: (i) --% for Investor A Shares; and (ii) --% for Investor
B Shares and Investor C Shares. The Portfolio does not expect to incur 12b-
1 fees in excess of .005% with respect to Investor A Shares (otherwise pay-
able at the maximum rate of .10%) through the fiscal year ending September
30, 1998.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" Long-term investors in Investor Shares may pay more than the eco-
nomic equivalent of the maximum front-end sales charges permitted by the
rules of the NASD.
4.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Investor Shares of the Portfolio would pay the following ex-
penses on a $1,000 investment assuming (1) 5% annual return, (2) redemption at
the end of each time period and (3) with respect to Investor B shares only, no
redemption at the end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
<S> <C> <C>
A Shares* $-- $--
B Shares (Redemption)** -- --
B Shares (No Redemption) -- --
C Shares -- --
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the begin-
ning of the period.
** Reflects the deduction of the deferred sales charge.
The foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses an investor will bear either directly or indirectly.
They do not reflect any charges that may be imposed by brokers or other insti-
tutions directly on their customer accounts in connection with investments in
the Portfolio. For a detailed description of the expenses, see "Who Manages The
Fund?"
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.
5.
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO?
- --------------------------------------------------------------------------------
The Micro-Cap Equity Portfolio of COMPASS CAPITAL FUNDS is
one of thirteen Compass Capital investment portfolios that
provide investors with a broad spectrum of investment alter-
natives within the equity sector. Nine of these portfolios
invest primarily in U.S. stocks, three portfolios invest in
non-U.S. international stocks and one portfolio invests in a
combination of U.S. stocks and bonds.
In certain investment cycles and over certain holding peri-
ods, an equity fund that invests according to a "value" style
or a "growth" style may perform above or below the market. An
investment program that combines these multiple disciplines
allows investors to select from among these various product
options in the way that most closely fits the investor's in-
vestment goals and sentiments.
INVESTMENT The Micro-Cap Equity Portfolio seeks to provide long-term
OBJECTIVE capital appreciation.
INVESTMENT Pursues micro cap stocks with earnings growth potential. Em-
STYLE phasizes micro cap stocks which the sub-adviser considers to
have favorable and above-average earnings growth prospects.
PORTFOLIO Stocks with growth rate estimates in excess of average for
EMPHASIS benchmark and capitalizations of $25 million to $300 million.
The Portfolio will invest in micro cap companies that have
revenue and earnings growth visibility of 20% or higher; gen-
erally, only companies in the top 35th percentile of the mi-
cro cap sector will be considered appropriate investments.
Such companies will generally have debt which does not exceed
35% of its capitalization.
6.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
During normal market conditions, the Micro-Cap Equity Portfolio will invest at
least 90% (and in any event at least 65%) of its total assets in equity securi-
ties of micro cap issuers. The Portfolio defines micro cap issuers as those
with $25 million to $300 million in market capitalization (the total market
value of a company's outstanding equity securities) at the time of purchase.
Equity securities include common stock and preferred stock (including convert-
ible preferred stock); bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity interests in trusts
and partnerships; and depository receipts.
MICRO CAP ISSUERS. Micro cap issuers will normally have more limited product
lines, markets and financial resources and will be dependent upon a more lim-
ited management group than larger capitalized companies. In addition, many mi-
cro cap companies are not well known to the investing public, do not have sig-
nificant institutional ownership and are followed by relatively few securities
analysts, with the result that there may be less publicly available information
concerning such companies in comparison with the information relating to compa-
nies with larger market capitalizations. Also, the securities of micro cap com-
panies are often traded in the over-the-counter markets and may have fewer mar-
ket makers and wider spreads between their quoted bid and asked prices, and
concomitantly lower trading volumes. This may result in comparatively greater
price volatility and less liquidity than the securities of larger, more estab-
lished companies, particularly those traded on the New York or American Stock
Exchanges.
There have been instances of fraud in the micro cap market, including the ma-
nipulation of micro cap stocks by brokers, issuers and promoters to benefit
themselves at the expense of investors. No assurance can be given that the Mi-
cro-Cap Equity Portfolio will not suffer losses due to fraudulent activity in
the market in which it invests.
ADRS, EDRS AND GDRS. The Portfolio may invest in both sponsored and unsponsored
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"),
Global Depository Receipts ("GDRs") and other similar global instruments. ADRs
typically are issued by an American bank or trust company and evidence owner-
ship of underlying securities issued by a foreign corporation. EDRs, which are
sometimes referred to as Continental Depository Receipts, are receipts issued
in Europe, typically by foreign banks and trust companies, that evidence owner-
ship of either foreign or domestic underlying securities. GDRs are depository
receipts structured like global debt issues to facilitate trading on an inter-
national basis. Unsponsored ADR, EDR and GDR programs are organized indepen-
dently and without the cooperation of the issuer of the underlying securities.
As a result, available information concerning the issuer may not be as current
as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs
and GDRs may be more volatile than if such instruments were sponsored by the
issuer. Investments in ADRs, EDRs and GDRs present additional investment con-
siderations as described below under "International Investing."
INTERNATIONAL INVESTING. Investing in foreign securities involves considera-
tions not typically associated with investing in securities of companies orga-
nized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a portfolio that invests in foreign securities as measured in U.S. dollars
will be affected favorably or unfavorably by changes in exchange rates.
The Portfolio's investments in foreign securities may also be adversely af-
fected by changes in foreign political or social conditions, diplomatic rela-
tions, confiscatory taxation, expropriation, limitation on the removal of
7.
<PAGE>
- --------------------------------------------------------------------------------
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary pol-
icies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect the Portfolio's
operations.
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, the
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
Political and economic structures in countries with emerging economies or secu-
rities markets may be undergoing significant evolution and rapid development,
and these countries may lack the social, political and economic stability char-
acteristic of more developed countries. Some of these countries may have in the
past failed to recognize private property rights and have at times nationalized
or expropriated the assets of private companies. As a result, the risks de-
scribed above, including the risks of nationalization or expropriation of as-
sets, may be heightened. In addition, unanticipated political or social devel-
opments may affect the value of investments in these countries and the avail-
ability to the Portfolio of additional investments in emerging market coun-
tries. The small size and inexperience of the securities markets in certain of
these countries and the limited volume of trading in securities in these coun-
tries may make investments in the countries illiquid and more volatile than in-
vestments in Japan or most Western European countries. There may be little fi-
nancial or accounting information available with respect to issuers located in
certain emerging market countries, and it may be difficult to assess the value
or prospects of an investment in such issuers.
The Portfolio may (but is not required to) use forward foreign currency ex-
change contracts to hedge against movements in the value of foreign currencies
(including the European Currency Unit) relative to the U.S. dollar in connec-
tion with specific portfolio transactions or with respect to portfolio posi-
tions. A forward foreign currency exchange contract involves an obligation to
purchase or sell a specified currency at a future date at a price set at the
time of the contract. Foreign currency exchange contracts do not eliminate
fluctuations in the values of portfolio securities but rather allow the Portfo-
lio to establish a rate of exchange for a future point in time.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, the Portfolio may write (i.e. sell) covered call options, buy put op-
tions, buy call options and write secured put options for the purpose of hedg-
ing or earning additional income, which may be deemed speculative or cross-
hedging. For the payment of a premium, the purchaser of an option obtains the
right to buy (in the case of a call option) or to sell (in the case of a put
option) a security at a stated exercise price for a specific period of time.
These options may relate to particular securities, securities indices, or the
yield differential between two securities or foreign currencies, and may or may
not be listed on a securities exchange and may or may not be issued by the Op-
tions Clearing Corporation. The Portfolio will not purchase put and call op-
tions when the aggregate premiums on outstanding options exceed 5% of its net
assets at the time of purchase, and will not write options on more than 25% of
the value of its net assets (measured at the time an option is written). Op-
tions trading is a highly specialized activity that entails greater than ordi-
nary investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clear-
ing Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, the Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or for
8.
<PAGE>
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other hedging purposes. The value of the Portfolio's contracts may equal or ex-
ceed 100% of its total assets, although the Portfolio will not purchase or sell
a futures contract unless immediately afterwards the aggregate amount of margin
deposits on its existing futures positions plus the amount of premiums paid for
related futures options entered into for other than bona fide hedging purposes
is 5% or less of its net assets.
Futures contracts obligate the Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. The Portfolio may sell a futures contract in order to offset
an expected decrease in the value of its portfolio positions that might other-
wise result from a market decline or currency exchange fluctuation. The Portfo-
lio may do so either to hedge the value of its securities portfolio as a whole,
or to protect against declines occurring prior to sales of securities in the
value of the securities to be sold. In addition, the Portfolio may utilize
futures contracts in anticipation of changes in the composition of its holdings
or in currency exchange rates.
The Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When the Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When the Portfolio sells an option on a futures contract, it becomes
obligated to sell or buy a futures contract if the option is exercised. In con-
nection with the Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the instru-
ments held by the Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses caused
by unanticipated market movements, which are potentially unlimited; and (d) the
sub-adviser's inability to predict correctly the direction of securities pric-
es, interest rates, currency exchange rates and other economic factors. For
further discussion of risks involved with domestic and foreign futures and op-
tions, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolio from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de-
termines that market conditions warrant, the Portfolio may invest without limi-
tation in high quality money market instruments. The Portfolio may also invest
in high quality money market instruments pending investment or to meet antici-
pated redemption requests.
High quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar denominated obligations of foreign is-
suers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and obli-
gations of supranational organizations. Generally, such obligations will mature
within one year from the date of settlement, but may mature within two years
from the date of settlement. Under a repurchase agreement, the Portfolio agrees
to purchase securities from financial institutions subject to the seller's
agreement to repurchase them at an agreed upon time and price. Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose the Portfolio to possible loss because of adverse market action, ex-
penses and/or delays in connection with the disposition of the underlying secu-
rities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may purchase secu-
rities on a "when-issued" basis and may purchase or sell securities on a "for-
ward commitment" basis. These transactions involve a commitment by the Portfo-
lio to purchase or sell particular securities with payment and delivery
9.
<PAGE>
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taking place at a future date (perhaps one or two months later), and permit the
Portfolio to lock in a price or yield on a security it owns or intends to pur-
chase, regardless of future changes in interest rates or market action. When-
issued and forward commitment transactions involve the risk, however, that the
price or yield obtained in a transaction may be less favorable than the price
or yield available in the market when the securities delivery takes place. The
Portfolio's when-issued purchases and forward commitments are not expected to
exceed 25% of the value of its total assets absent unusual market conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Portfolio is authorized
to borrow money. If the securities held by the Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by the Portfolio through reverse repurchase agreements under which the Portfo-
lio sells portfolio securities to financial institutions such as banks and bro-
ker-dealers and agrees to repurchase them at a particular date and price. The
Portfolio may use the proceeds of reverse repurchase agreements to purchase
other securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase agree-
ment. Reverse repurchase agreements involve the risks that the interest income
earned in the investment of the proceeds will be less than the interest ex-
pense, that the market value of the securities sold by the Portfolio may de-
cline below the price of the securities the Portfolio is obligated to repur-
chase and that the securities may not be returned to the Portfolio. During the
time a reverse repurchase agreement is outstanding, the Portfolio will maintain
a segregated account with the Fund's custodian containing cash, U.S. Government
or other appropriate liquid securities having a value at least equal to the re-
purchase price. The Portfolio's reverse repurchase agreements, together with
any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value
of its total assets. Whenever borrowings exceed 5% of the Portfolio's total as-
sets, the Portfolio will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolio may invest in securities issued by other investment com-
panies which invest in short-term debt securities and which seek to maintain a
$1.00 net asset value per share. The Portfolio may also invest in securities
issued by other investment companies with similar investment objectives. Secu-
rities of other investment companies will be acquired within limits prescribed
by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of an-
other investment company, the Portfolio would bear, along with other sharehold-
ers, its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the expenses each bears
directly in connection with its own operations.
SECURITIES LENDING. The Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. The Portfolio may not
make such loans in excess of 33 1/3% of the value of its total assets. Securi-
ties loans involve risks of delay in receiving additional collateral or in re-
covering the loaned securities, or possibly loss of rights in the collateral if
the borrower of the securities becomes insolvent.
ILLIQUID SECURITIES. The Portfolio will not invest more than 15% of the value
of its net assets in securities that are illiquid. Variable and floating rate
instruments that cannot be disposed of within seven days, and repurchase agree-
ments and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to these limits. The Port-
folio may purchase securities which are not registered under the Securities Act
of 1933 (the "1933 Act") but which can be sold to "qualified institutional buy-
ers" in accordance with Rule 144A under the 1933 Act. These securities will not
be considered illiquid so long as it is determined by the adviser or sub-ad-
viser that an adequate trading market exists for the securities. This invest-
ment practice could have the effect of increasing the level of illiquidity in
the Portfolio during any period that qualified institutional buyers become un-
interested in purchasing these restricted securities.
10.
<PAGE>
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PORTFOLIO TURNOVER RATE. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the Portfolio will not exceed 100%. The
Portfolio's annual portfolio turnover rate will not be a factor preventing a
sale or purchase when the adviser or sub-adviser believes investment considera-
tions warrant such sale or purchase. Portfolio turnover may vary greatly from
year to year as well as within a particular year. High portfolio turnover rates
(i.e. 100% or more) will generally result in higher transaction costs to the
Portfolio and may result in the realization of short-term capital gains that
are taxable to shareholders as ordinary income.
11.
<PAGE>
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WHAT ARE THE PORTFOLIO'S FUNDAMENTAL INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
The Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any change to the Portfolio's investment
objective. No assurance can be provided that the Portfolio will achieve its in-
vestment objective.
The Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of the Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolio's fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
The Portfolio may not:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of the Portfolio's total assets may be invested without re-
gard to this 5% limitation;
(2) subject to the foregoing 25% exception, purchase more than 10% of the out-
standing voting securities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets at
the time of such borrowing.
These investment limitations are applied at the time investment securities are
purchased.
12.
<PAGE>
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of Compass Capital Funds are managed
TRUSTEES under the direction of the Board of Trustees. The following
persons currently serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Professor of Finance and Director of the
Financial Institutions Center, The Wharton School, University
of Pennsylvania.
David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
ates, Inc.
The Statement of Additional Information furnishes additional
information about the trustees and officers of the Fund.
ADVISER AND The Adviser to Compass Capital Funds is PNC Asset Management
SUB-ADVISER Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform ad-
visory services for investment companies, and has its principal
offices at 1600 Market Street, 29th Floor, Philadelphia, Penn-
sylvania 19103. PAMG is an indirect wholly-owned subsidiary of
PNC Bank Corp., a multi-bank holding company.
The subadviser to the Portfolio is PNC Equity Advisors Company
("PEAC"), a wholly-owned subsidiary of PAMG, with primary
offices at 1600 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103. PEAC is a registered investment adviser,
formed by PNC Bank in 1994. William J. Wykle, Thomas Callan and
William McVail serve as portfolio managers of the Portfolio.
Mr. Wykle has been an investment manager at PEAC since 1995.
From 1986 to 1995, Mr. Wykle was an investment adviser with PNC
Bank. Mr. Callan has been an investment manager at PEAC since
1996, prior to which he was an equity analyst with PNC Bank
since 1993. Prior to 1993, Mr. Callan was a Trust Department
Trainee at PNC Bank. Mr. McVail has been an investment manager
at PEAC since 1994, prior to which he was an equity and fixed
income analyst with PNC Bank since 1988.
For their investment advisory and sub-advisory services, PAMG
and PEAC are entitled to fees, computed daily on a portfolio-
by-portfolio basis and payable monthly, at the maximum annual
rates set forth below. As stated under "What Are the Expenses
of the Portfolio?" PAMG and PEAC intend to waive a portion of
their fees during the current fiscal year. All sub-advisory
fees are paid by PAMG and do not represent an extra charge to
the Portfolio.
13.
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MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion --% --%
$1 billion -- $2 billion -- --
$2 billion -- $3 billion -- --
greater than $3 billion -- --
</TABLE>
PEAC strives to achieve best execution on all transactions.
Infrequently, brokerage transactions for the Portfolio may
be directed to registered broker/dealers who have entered
into dealer agreements with Compass Capital's distributor.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are in-
direct 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.
The Administrators generally assist the Fund in all aspects
of its administration and operation, including matters re-
lating to the maintenance of financial records and fund ac-
counting. As compensation for these services, CCG is enti-
tled to receive a fee, computed daily and payable monthly,
at an annual rate of .03% of each Portfolio's average daily
net assets. PFPC and CDI are entitled to receive a combined
administration fee, computed daily and payable monthly, at
the aggregate annual rate of (i) .085% of the first $500
million of each Portfolio's average daily net assets, .075%
of the next $500 million of each Portfolio's average daily
net assets and .065% of the average daily net assets of each
Portfolio in excess of $1 billion and (ii) .115% of the
first $500 million of the average daily net assets allocated
to each class of Investor Shares of each Portfolio, .105% of
the next $500 million of such average daily net assets and
.095% of the average daily net assets allocated to each
class of Investor Shares of each Portfolio in excess of $1
billion. From time to time the Administrators may waive some
or all of their administration fees from a Portfolio.
For information about the operating expenses the Portfolio
expects to incur in the current fiscal year, see "What Are
The Expenses Of The Portfolio?"
TRANSFER PNC Bank serves as the Portfolio's custodian and PFPC serves
AGENT, as its transfer agent and dividend disbursing agent. PFPC
DIVIDEND has its principal offices at Bellevue Corporate Center, 400
DISBURSING Bellevue Parkway, Wilmington, Delaware 19809.
AGENT AND
CUSTODIAN
DISTRIBUTION Under the Fund's Distribution and Service Plan (the "Plan"),
AND SERVICE Investor Shares of the Portfolio bear the expense of pay-
PLAN ments ("distribution fees") made to CDI, as the Fund's dis-
tributor (the "Distributor"), or affiliates of PNC Bank, for
distribution and sales support services. The distribution
fees may be used to compensate the Distributor for distribu-
tion services and to compensate the Distributor and PNC Bank
affiliates for sales support services provided in connection
with the offering and sale of Investor Shares. The distribu-
tion fees may also be used to reimburse the Distributor and
PNC Bank affiliates for related expenses, including payments
to brokers, dealers, financial institutions and industry
professionals ("Service Organizations") for
14.
<PAGE>
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sales support services and related expenses. Distribution fees
payable under the Plan will not exceed .10% (annualized) of the
average daily net asset value of the Portfolio's outstanding
Investor A Shares and .75% (annualized) of the average daily
net asset value of the Portfolio's outstanding Investor B and
Investor C Shares. Payments under the Plan are not tied di-
rectly to out-of-pocket expenses and therefore may be used by
the recipients as they choose (for example, to defray their
overhead expenses). The Plan also permits the Distributor,
PAMG, the Administrators and other companies that receive fees
from the Fund to make payments relating to distribution and
sales support activities out of their past profits or other
sources available to them.
Under the Plan, the Fund intends to enter into service arrange-
ments with Service Organizations (including PNC Bank and its
affiliates) with respect to each class of Investor Shares pur-
suant to which Service Organizations will render certain sup-
port services to their customers who are the beneficial owners
of Investor Shares. In consideration for a shareholder servic-
ing fee of up to .25% (annualized) of the average daily net as-
set value of Investor Shares owned by their customers, Service
Organizations may provide one or more of the following servic-
es: responding to customer inquiries relating to the services
performed by the Service Organization and to customer inquiries
concerning their investments in Investor Shares; assisting cus-
tomers in designating and changing dividend options, account
designations and addresses; and providing other similar share-
holder liaison services. In consideration for a separate share-
holder processing fee of up to .15% (annualized) of the average
daily net asset value of Investor Shares owned by their custom-
ers, Service Organizations may provide one or more of these ad-
ditional services to such customers: processing purchase and
redemption requests from customers and placing orders with the
Fund's transfer agent or the Distributor; processing dividend
payments from the Fund on behalf of customers; providing sub-
accounting with respect to Investor Shares beneficially owned
by customers or the information necessary for sub-accounting;
and providing other similar services.
Service Organizations may charge their clients additional fees
for account services. Customers who are beneficial owners of
Investor Shares should read this Prospectus in light of the
terms and fees governing their accounts with Service Organiza-
tions.
The Glass-Steagall Act and other applicable laws, among other
things, prohibit banks from engaging in the business of under-
writing securities. It is intended that the services provided
by Service Organizations under their service agreements will
not be prohibited under these laws. Under state securities
laws, banks and financial institutions that receive payments
from the Fund may be required to register as dealers.
EXPENSES Expenses are deducted from the total income of the Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to the investment adviser and
the Administrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, shareholder servicing
and processing fees, distribution fees, fees and expenses in
registering and qualifying the Portfolio and its shares for
distribution under Federal and state securities laws, expenses
of preparing prospectuses and statements of additional informa-
tion and of printing and distributing prospectuses and state-
ments of additional information to existing shareholders,
15.
<PAGE>
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expenses relating to shareholder reports, shareholder meet-
ings and proxy solicitations, insurance premiums, the expense
of independent pricing services, and other expenses which are
not expressly assumed by PAMG or the Fund's service providers
under their agreements with the Fund. Any general expenses of
the Fund that do not belong to a particular investment port-
folio 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.
16.
<PAGE>
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WHAT PRICING OPTIONS ARE AVAILABLE TO INVESTORS?
- --------------------------------------------------------------------------------
The Portfolio offers different pricing options to investors in
the form of different share classes. These options are de-
scribed below:
A SHARES (FRONT-END LOAD)
One time, front-end sales charge at time of purchase
No charges or fees at any time for redeeming shares
Lower ongoing expenses
Free exchanges with other A Shares in the Compass Capital
Funds family
A Shares may make sense for investors with a long-term invest-
ment horizon who prefer to pay a one-time front-end sales
charge and have reduced ongoing fees.
B SHARES (BACK-END LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) if shares are re-
deemed, declining over 6 years from a high of 4.50%
Free exchanges with other B Shares in the Compass Capital
Funds family
Automatically convert to A Shares eight years from purchase
B Shares may make sense for investors who prefer to pay for
professional investment advice on an ongoing basis (asset-based
sales charge) rather than with a traditional, one-time front-
end sales charge.
C SHARES (LEVEL LOAD)
No front-end sales charge at time of purchase
Contingent deferred sales charge (CDSC) of 1.00% if shares are
redeemed within 12 months of purchase
Free exchanges with other C Shares in the Compass Capital Funds
family
C Shares may make sense for shorter term (relative to both A
and B Shares) investors who prefer to pay for professional in-
vestment advice on an ongoing basis (asset-based sales charge)
rather than with a traditional, one-time front-end sales
charge. Such investors may plan to make substantial redemptions
within 6 years of purchase.
THE PRICING OPTIONS FOR THE PORTFOLIO ARE DESCRIBED IN THE TABLE BELOW:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 5.00% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
</TABLE>
* The Portfolio does not expect to incur 12b-1 fees in excess of .005% with
respect to Investor A Shares through the fiscal year ending September 30, 1998.
Investors wishing to purchase shares of the Portfolio may do so either by mail-
ing the investment application attached to this Prospectus along with a check
or by wiring money as specified below under "How Are Shares Purchased?"
17.
<PAGE>
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WHAT ARE THE KEY CONSIDERATIONS IN SELECTING A PRICING OPTION?
- -------------------------------------------------------------------------------
In deciding which class of Investor Shares to purchase, investors should con-
sider the following:
INTENDED HOLDING PERIOD. Over time, the cumulative distribution fees on the
Portfolio's Investor B Shares and Investor C Shares will exceed the expense of
the maximum initial sales charge on Investor A Shares. For example, if net as-
set value remains constant, the Investor B Shares' and Investor C Shares' ag-
gregate distribution fees would be equal to the Investor A Shares' initial
maximum sales charge approximately 6 years after purchase. Thereafter, In-
vestor B Shares and Investor C Shares would bear higher aggregate expenses.
Investor B and Investor C shareholders, however, enjoy the benefit of permit-
ting all their dollars to work from the time the investments are made. Any
positive investment return on the additional invested amount would partially
or wholly offset the higher annual expenses borne by Investor B Shares and In-
vestor C Shares.
Because the Portfolio's future returns cannot be predicted, however, there can
be no assurance that such a positive return will be achieved.
At the end of eight years after the date of purchase, Investor B Shares will
convert automatically to Investor A Shares, based on the relative net asset
values of shares of each class. Investor B Shares acquired through reinvest-
ment of dividends or distributions are also converted at the earlier of these
dates--eight years after the reinvestment date or the date of conversion of
the most recently purchased Investor B Shares that were not acquired through
reinvestment. Investor C Shares have no conversion feature.
Unless a sales charge waiver applies, Investor B shareholders pay a contingent
deferred sales charge if they redeem during the first six years after pur-
chase, and Investor C shareholders pay a contingent deferred sales charge if
they redeem during the first twelve months after purchase. Investors expecting
to redeem during these periods should consider the cost of the applicable con-
tingent deferred sales charge in addition to the aggregate annual Investor B
or Investor C distribution fees, as compared with the cost of the initial
sales charges applicable to the Investor A Shares.
REDUCED SALES CHARGES. Because of reductions in the front-end sales charge for
purchases of Investor A Shares aggregating $25,000 or more, it may be advanta-
geous for investors purchasing large quantities of Investor Shares to purchase
Investor A Shares. In any event, the Fund will not accept any purchase order
for $1,000,000 or more of Investor B Shares or Investor C Shares.
WAIVER OF SALES CHARGES. The entire initial sales charge on Investor A Shares
of the Portfolio may be waived for certain eligible purchasers allowing their
entire purchase price to be immediately invested in the Portfolio. The contin-
gent deferred sales charge may be waived upon redemption of certain Investor B
Shares and Investor C Shares.
18.
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HOW ARE SHARES PURCHASED?
- --------------------------------------------------------------------------------
GENERAL. Initial and subsequent purchase orders may be placed through securi-
ties brokers, dealers or financial institutions ("brokers"), or the transfer
agent. Generally, individual investors will purchase Investor Shares through a
broker who will then transmit the purchase order directly to the transfer
agent.
The minimum investment for the initial purchase of shares is $500; there is a
$50 minimum for subsequent investments. Purchases through the Automatic Invest-
ment Plan described below are subject to a lower initial purchase minimum. In
addition, the minimum initial investment for employees of the Fund, the Fund's
investment adviser, sub-adviser, Distributor or transfer agent or employees of
their affiliates is $100, unless payment is made through a payroll deduction
program in which case the minimum investment is $25.
When placing purchase orders, investors should specify whether the order is for
Investor A, Investor B or Investor C Shares of the Portfolio. All share pur-
chase orders that fail to specify a class will automatically be invested in In-
vestor A Shares.
PURCHASES THROUGH BROKERS. Shares may be purchased through brokers which have
entered into dealer agreements with the Distributor. Purchase orders received
by a broker and transmitted to the transfer agent before the close of regular
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on a
Business Day will be effected at the net asset value determined that day, plus
any applicable sales charge. Payment for an order may be made by the broker in
Federal funds or other funds immediately available to the Portfolio's custodian
no later than 4:00 p.m. (Eastern time) on the third Business Day following re-
ceipt of the purchase order.
It is the responsibility of brokers to transmit purchase orders and payment on
a timely basis. If payment is not received within the period described above,
the order will be canceled, notice thereof will be given, and the broker and
its customers will be responsible for any loss to the Fund or its shareholders.
Orders of less than $500 may be mailed by a broker to the transfer agent.
PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor
Shares by completing and signing the Account Application Form and mailing it to
the transfer agent, together with a check in at least the minimum initial pur-
chase amount payable to Compass Capital Funds. An Account Application Form may
be obtained by calling (800) 441-7762. The name of the Portfolio must also ap-
pear on the check or Federal Reserve Draft. Investors may also wire Federal
funds in connection with the purchase of shares. The wire instructions must in-
clude the name of the Portfolio, specify the class of Investor Shares and in-
clude the name of the account registration and the shareholder account number.
Before wiring any funds, an investor must call PFPC at (800) 441-7762 in order
to confirm the wire instructions. Purchase orders which are received by PFPC,
together with payment, before the close of regular trading hours on the New
York Stock Exchange (currently 4:00 p.m. Eastern time) on any Business Day (as
defined below) are priced at the applicable net asset value next determined on
that day, plus any applicable sales charge.
OTHER PURCHASE INFORMATION. Shares of the Portfolio are sold on a continuous
basis by CDI as the Distributor. CDI maintains its principal offices at Four
Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961. Purchases
may be effected on weekdays on which both the New York Stock Exchange and the
Federal Reserve Bank of Philadelphia are open for business (a "Business Day").
Payment for orders which are not received or accepted will be returned after
prompt inquiry. The issuance of shares is recorded on the books of the Fund. No
certificates will be issued for shares. Payments for shares of the Portfolio
may, in the discretion of the Fund's investment adviser, be made in the form of
securities that are permissible investments for the Portfolio. The Fund re-
serves the right to reject any purchase order, to modify or waive the minimum
initial or subsequent investment requirement and to suspend and resume the sale
of any share class of the Portfolio at any time.
19.
<PAGE>
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HOW ARE SHARES REDEEMED?
- -------------------------------------------------------------------------------
REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to Compass Capital
Funds c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the
contingent deferred sales charge, if applicable, there is no charge for a re-
demption. Shareholders may also place redemption requests through a broker or
other institution, which may charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIO, SHAREHOLDERS SHOULD INDICATE
WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR INVESTOR C
SHARES. If a redeeming shareholder owns both Investor A Shares and Investor B
Shares or Investor C Shares in the Portfolio, the Investor A Shares will be
redeemed first unless the shareholder indicates otherwise. If a redeeming
shareholder owns both Investor B Shares and Investor C Shares in the Portfo-
lio, the redemption order will be processed to minimize the amount of the con-
tingent deferred sales charge that will be charged unless the shareholder in-
dicates otherwise.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institu-
tion. Eligible guarantor institutions generally include banks, broker/dealers,
credit unions, national securities exchanges, registered securities associa-
tions, clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Additional documentary evidence of authority is
required by PFPC in the event redemption is requested by a corporation, part-
nership, trust, fiduciary, executor or administrator.
EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited
redemption, shares can be redeemed by telephone and the proceeds sent by check
to the shareholder or by Federal wire transfer to a single previously desig-
nated bank account. Once authorization is on file, PFPC will honor requests by
any person by telephone at (800) 441-7762 or other means. The minimum amount
that may be sent by check is $500, while the minimum amount that may be wired
is $10,000. The Fund reserves the right to change these minimums or to termi-
nate these redemption privileges. If the proceeds of a redemption would exceed
$25,000, the redemption request must be in writing and will be subject to the
signature guarantee requirement described above. During periods of substantial
economic or market change, telephone redemptions may be difficult to complete.
Redemption requests may also be mailed to PFPC at P.O. Box 8907, Wilmington,
Delaware 19899-8907.
The Fund is not responsible for the efficiency of the Federal wire system or
the shareholder's firm or bank. The Fund does not currently charge for wire
transfers. The shareholder is responsible for any charges imposed by the
shareholder's bank. To change the name of the single designated bank account
to receive wire redemption proceeds, it is necessary to send a written request
(with a guaranteed signature as described above) to Compass Capital Funds c/o
PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so. The Fund, the Administrators and the Distributor will em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not
be liable for any
20.
<PAGE>
- --------------------------------------------------------------------------------
loss, liability, cost or expense for acting upon telephone instructions reason-
ably believed to be genuine in accordance with such procedures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in the Portfolio at any time the net asset value of the account in
the Portfolio falls below the required minimum initial investment as the result
of a redemption or an exchange request. A shareholder will be notified in writ-
ing that the value of the shareholder's account in the Portfolio is less than
the required amount and will be allowed 30 days to make additional investments
before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by Compass Capital Funds c/o PFPC, P.O. Box 8907, Wil-
mington, Delaware 19899-8907. Proceeds from the redemption of shares will be
reduced by the amount of any applicable contingent deferred sales charge. Un-
less another payment option is used as described above, payment for redeemed
shares is normally made by check mailed within seven days after acceptance by
PFPC of the request and any other necessary documents in proper order. Payment
may, however, be postponed or the right of redemption suspended as provided by
the rules of the SEC. If the shares to be redeemed have been recently purchased
by check, the Fund's transfer agent may delay the payment of redemption pro-
ceeds, which may be a period of up to 15 days after the purchase date, pending
a determination that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
21.
<PAGE>
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WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
- --------------------------------------------------------------------------------
COMPASS CAPITAL FUNDS offers shareholders many special features which enable an
investor to have greater investment flexibility as well as greater access to
information about the Fund throughout the investment period.
Additional information on each of these features is available from PFPC by
calling (800) 441-7762.
EXCHANGE PRIVILEGE. Investor A, Investor B and Investor C Shares of the Portfo-
lio may be exchanged for shares of the same class of other portfolios of the
Fund which offer that class of shares, based on their respective net asset val-
ues. Exchanges of Investor A Shares may be subject to the difference between
the sales charge previously paid on the exchanged shares and the higher sales
charge (if any) payable with respect to the shares acquired in the exchange.
Investor A Shares of money market portfolios of the Fund that were (1) acquired
through the use of the exchange privilege and (2) can be traced back to a pur-
chase of shares in one or more investment portfolios of the Fund for which a
sales charge was paid, can be exchanged for Investor A Shares of a portfolio
subject to differential sales charges as applicable.
The exchange of Investor B and Investor C Shares will not be subject to a CDSC,
which will continue to be measured from the date of the original purchase and
will not be affected by exchanges.
A shareholder wishing to make an exchange may do so by sending a written re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. To add
this feature to an existing account that previously did not provide this op-
tion, a Telephone Exchange Authorization Form must be filed with PFPC. This
form is available from PFPC. Once this election has been made, the shareholder
may simply contact PFPC by telephone at (800) 441-7762 to request the exchange.
During periods of substantial economic or market change, telephone exchanges
may be difficult to complete and shareholders may have to submit exchange re-
quests to PFPC in writing.
If the exchanging shareholder does not currently own shares of the investment
portfolio whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain options and broker of
record as the account from which shares are exchanged, unless otherwise speci-
fied in writing by the shareholder with all signatures guaranteed by an eligi-
ble guarantor institution as defined above. In order to participate in the Au-
tomatic Investment Program or establish a Systematic Withdrawal Plan for the
new account, however, an exchanging shareholder must file a specific written
request.
Any share exchange must satisfy the requirements relating to the minimum ini-
tial investment requirement, and must be legally available for sale in the
state of the investor's residence. For Federal income tax purposes, a share ex-
change is a taxable event and, accordingly, a capital gain or loss may be real-
ized. Before making an exchange request, shareholders should consult a tax or
other financial adviser and should consider the investment objective, policies
and restrictions of the investment portfolio into which the shareholder is mak-
ing an exchange, as set forth in the applicable Prospectus. Brokers may charge
a fee for handling exchanges.
The Fund reserves the right to modify or terminate the exchange privilege at
any time. Notice will be given to shareholders of any material modification or
termination except where notice is not required.
22.
<PAGE>
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The Fund reserves the right to reject any telephone exchange request. Telephone
exchanges may be subject to limitations as to amount or frequency, and to other
restrictions that may be established from time to time to ensure that exchanges
do not operate to the disadvantage of any portfolio or its shareholders. The
Fund, the Administrators and the Distributor will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Fund,
the Administrators and the Distributor will not be liable for any loss, liabil-
ity, cost or expense for acting upon telephone instructions reasonably believed
to be genuine in accordance with such procedures. Exchange orders may also be
sent by mail to the shareholder's broker or to PFPC at P.O. Box 8907, Wilming-
ton, Delaware 19899-8907.
AUTOMATIC INVESTMENT PLAN ("AIP"). An investor in shares of the Portfolio may
arrange for periodic investments in the Portfolio through automatic deductions
from a checking or savings account by completing the AIP Application Form which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of
its affiliates acts as custodian. For further information as to applications
and annual fees, contact the Distributor. To determine whether the benefits of
an IRA are available and/or appropriate, a shareholder should consult with a
tax adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by investors who wish to receive regular distributions
from their accounts. Upon commencement of the SWP, the account must have a cur-
rent value of $10,000 or more in the Portfolio. Shareholders may elect to re-
ceive automatic cash payments of $50 or more either monthly, every other month,
quarterly, three times a year, semi-annually, or annually. Automatic withdraw-
als are normally processed on the 25th day of the applicable month or, if such
day is not a Business Day, on the next Business Day and are paid promptly
thereafter. An investor may utilize the SWP by completing the SWP Application
Form which may be obtained from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC. Pur-
chases of additional Investor A Shares of the Fund concurrently with withdraw-
als may be disadvantageous to investors because of the sales charges involved
and, therefore, are discouraged. No contingent deferred sales charge will be
assessed on redemptions of Investor B or Investor C Shares made through the SWP
that do not exceed 12% of an account's net asset value on an annualized basis.
For example, monthly, quarterly and semi-annual SWP redemptions of Investor B
or Investor C Shares will not be subject to the CDSC if they do not exceed 1%,
3% and 6%, respectively, of an account's net asset value on the redemption
date. SWP redemptions of Investor B or Investor C Shares in excess of this
limit are still subject to the applicable CDSC.
23.
<PAGE>
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WHAT IS THE SCHEDULE OF SALES CHARGES AND EXEMPTIONS?
- -------------------------------------------------------------------------------
INVESTOR A Investor A Shares of the Portfolio are subject to a front-
SHARES end sales charge determined in accordance with the following
schedules:
<TABLE>
<CAPTION>
REALLOWANCE OR
PLACEMENT FEES
SALES CHARGE SALES CHARGE TO DEALERS
AMOUNT OF TRANSACTION AS % OF AS % OF NET (AS % OF
AT OFFERING PRICE OFFERING PRICE ASSET VALUE OFFERING PRICE)
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$25,000 but less than $50,000 4.75 4.99 4.25
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 4.00 4.17 3.50
$250,000 but less than $500,000 3.00 3.09 2.50
$500,000 but less than
$1,000,000 2.00 2.04 1.50
$1,000,000 but less than
$2,000,000 0.00* 0.00* 1.00**
$2,000,000 but less than
$3,000,000 0.00* 0.00* 0.95**
$3,000,000 but less than
$5,000,000 0.00* 0.00* 0.87**
$5,000,000 but less than
$10,000,000 0.00* 0.00* 0.69**
$10,000,000 but less than
$15,000,000 0.00* 0.00* 0.62**
$15,000,000 but less than
$20,000,000 0.00* 0.00* 0.53**
$20,000,000 but less than
$40,000,000 0.00* 0.00* 0.39**
</TABLE>
* There is no initial sales charge on purchases of $1,000,000 or more of In-
vestor A Shares; however, a contingent deferred sales charge of 1.00% will
be imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after
purchase.
** The Distributor may pay placement fees to dealers on purchases of Investor
A Shares of $1,000,000 or more.
During special promotions, the entire sales charge may be reallowed to deal-
ers. Dealers who receive 90% or more of the sales charge may be deemed to be
"underwriters" under the 1933 Act. The amount of the sales charge not
reallowed to dealers may be paid to broker-dealer affiliates of PNC Bank Corp.
who provide sales support services. The Distributor, CCG and/or their affili-
ates may also pay additional compensation, out of their assets and not as an
additional charge to the Portfolio, to dealers in connection with the sale and
distribution of shares (such as additional payments based on new sales), and
may, subject to applicable NASD regulations, contribute to various non-cash
and cash incentive arrangements to promote the sale of shares, as well as
sponsor various educational programs, sales contests and promotions in which
participants may receive reimbursement of expenses, entertainment and prizes
such as travel awards, merchandise and cash. For further information, see "In-
vestment Advisory, Administration, Distribution and Servicing Arrangements" in
the Statement of Additional Information.
SALES CHARGE WAIVERS--INVESTOR A SHARES. The following persons associated with
the Fund, the Distributor, the Fund's investment adviser, sub-advisers or
transfer agent and their affiliates may buy Investor A Shares without paying a
sales charge to the extent permitted by these firms: (a) officers, directors
and partners (and their spouses and minor children); (b) employees and retir-
ees (and their spouses and minor children); (c) registered representatives of
brokers who have entered into selling agreements with the Distributor; (d)
spouses or children of such persons; and (e) any trust, pension, profit-shar-
ing or other benefit plan for any of the persons set forth in (a) through (c).
The following persons may also buy Investor A Shares without paying a sales
charge: (a) persons investing through an authorized payroll deduction plan;
(b) persons investing through an authorized investment plan for organizations
which operate under Section
24.
<PAGE>
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501(c)(3) of the Internal Revenue Code; (c) registered investment advisers,
trust companies and bank trust departments exercising discretionary investment
authority with respect to amounts to be invested in the Portfolio, provided
that the aggregate amount invested pursuant to this exemption in Investor A
Shares that would otherwise be subject to front-end sales charges equals at
least $250,000; and (d) persons participating in a "wrap account" or similar
program under which they pay advisory fees to a broker-dealer or other finan-
cial institution. Investors who qualify for any of these exemptions from the
sales charge must purchase Investor A Shares.
QUALIFIED PLANS. In general, the sales charge (as a percentage of the offering
price) payable by qualified employee benefit plans ("Qualified Plans") having
at least 20 employees eligible to participate in purchases of Investor A Shares
of the Portfolio aggregating less than $500,000 will be 1.00%. No sales charge
will apply to purchases by Qualified Plans of Investor A Shares aggregating
$500,000 and above. The sales charge payable by Qualified Plans having less
than 20 employees eligible to participate in purchases of Investor A Shares of
the Portfolio aggregating less than $500,000 will be 2.50%. The above schedule
will apply to purchases by such Qualified Plans of Investor A Shares aggregat-
ing $500,000 and above.
The Fund has established different waiver arrangements with respect to the
sales charge on Investor A Shares of the Portfolio for purchases through cer-
tain Qualified Plans participating in programs whose sponsors or administrators
have entered into arrangements with the Fund. For further information, see
"Purchase and Redemption Information" in the Statement of Additional Informa-
tion.
QUANTITY DISCOUNTS. As shown above, larger purchases may reduce the sales
charge price. Upon notice to the investor's broker or the transfer agent, pur-
chases of Investor A Shares made at any one time by the following persons may
be considered when calculating the sales charge: (a) an individual, his or her
spouse, and their children under the age of 21; (b) a trustee or fiduciary of a
single trust estate or single fiduciary account; or (c) any organized group
which has been in existence for more than six months, if it is not organized
for the purpose of buying redeemable securities of a registered investment com-
pany, and if the purchase is made through a central administrator, or through a
single dealer, or by other means which result in economy of sales effort or ex-
pense. An organized group does not include a group of individuals whose sole
organizational connection is participation as credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker/dealer or clients of an investment adviser. Purchases made by an orga-
nized group may include, for example, a trustee or other fiduciary purchasing
for a single fiduciary account or other employee benefit plan purchases made
through a payroll deduction plan.
REDUCED SALES CHARGES--INVESTOR A SHARES
RIGHT OF ACCUMULATION. Under the Right of Accumulation, the current value of an
investor's existing Investor A Shares in the Portfolio or the total amount of
an investor's initial investment in such shares, less redemptions (whichever is
greater) may be combined with the amount of the investor's current purchase in
determining the applicable sales charge. In order to receive the cumulative
quantity reduction, previous purchases of Investor A Shares must be called to
the attention of PFPC by the investor at the time of the current purchase.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of the Portfolio
(or Investor A Shares of another non-money market portfolio of the Fund), a
shareholder has a one-time right, to be exercised within 60 days, to reinvest
the redemption proceeds without any sales charges. PFPC must be notified of the
reinvestment in writing by the purchaser, or by his or her broker, at the time
purchase is made in order to eliminate a sales charge. An investor should con-
sult a tax adviser concerning the tax consequences of use of the reinvestment
privilege.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Investor A Shares at net asset value, without a sales charge, with
the proceeds from the redemption of shares of any other investment company
which were sold with a sales charge or commission. This does not include shares
of an affiliated mutual fund which were or would be subject to a contingent de-
ferred sales charge upon redemption. Such purchases must be made within 60 days
of the redemption, and the Fund must be notified by the investor in writing, or
by his or her financial institution, at the time the purchase of Investor A
Shares is made.
25.
<PAGE>
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LETTER OF INTENT. An investor may qualify for a reduced sales charge immedi-
ately by signing a Letter of Intent stating the investor's intention to invest
during the next 13 months a specified amount in Investor A Shares which, if
made at one time, would qualify for a reduced sales charge. The Letter of In-
tent may be signed at any time within 90 days after the first investment to be
included in the Letter of Intent. The initial investment must meet the minimum
initial investment requirement and represent at least 5% of the total intended
investment. The investor must instruct PFPC upon making subsequent purchases
that such purchases are subject to a Letter of Intent. All dividends and capi-
tal gains of the Portfolio that are invested in additional Investor A Shares
of the Portfolio are applied to the Letter of Intent.
During the term of a Letter of Intent, the Fund's transfer agent will hold In-
vestor A Shares representing 5% of the indicated amount in escrow for payment
of a higher sales load if the full amount indicated in the Letter of Intent is
not purchased. The escrowed Investor A Shares will be released when the full
amount indicated has been purchased. Any redemptions made during the 13-month
period will be subtracted from the amount of purchases in determining whether
the Letter of Intent has been completed.
If the full amount indicated is not purchased within the 13-month period, the
investor will be required to pay an amount equal to the difference between the
sales charge actually paid and the sales charge the investor would have had to
pay on his or her aggregate purchases if the total of such purchases had been
made at a single time. If remittance is not received within 20 days of the ex-
piration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the
terms of the Letter of Intent, will redeem an appropriate number of Investor A
Shares held in escrow to realize the difference.
PURCHASES OF INVESTOR B SHARES. Investor B Shares are subject to a deferred
sales charge at the rates set forth in the chart below if they are redeemed
within six years of purchase. The deferred sales charge on Investor B Shares
is based on the lesser of the offering price or the net asset value of the In-
vestor B Shares on the redemption date. Dealers will generally receive commis-
sions equal to 4.00% of Investor B Shares sold by them plus ongoing fees under
the Fund's Distribution and Service Plan and described under "Who Manages the
Fund?" Dealers may not receive a commission in connection with sales of In-
vestor B Shares to certain retirement plans sponsored by the Fund, CCG or its
affiliates, but may receive fees under the Distribution and Service Plan.
These commissions and payments may be different than the reallowances, place-
ment fees and commissions paid to dealers in connection with sales of Investor
A Shares and Investor C Shares. See "What Is The Schedule Of Sales Charges And
Exemptions--Investor A Shares" for information on additional sales incentives
which the Distributor, CCG and/or their affiliates may provide to dealers in
connection with the sale of shares.
The amount of any contingent deferred sales charge an investor must pay on In-
vestor B Shares depends on the number of years that elapse between the pur-
chase date and the date the Investor B Shares are redeemed as set forth in the
following chart:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
<S> <C>
Less than one 4.50%
More than one, but less than two 4.00
More than two, but less than three 3.50
More than three, but less than four 3.00
More than four, but less than five 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
More than seven, but less than eight 0.00
</TABLE>
26.
<PAGE>
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PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the offering price or the net as-
set value of the Investor C Shares on the redemption date if redeemed within
twelve months after purchase. Dealers will generally receive commissions equal
to 1.00% of the Investor C Shares sold by them plus ongoing fees under the
Fund's Distribution and Service Plan and described under "Who Manages the
Fund?" Dealers may not receive a commission in connection with sales of In-
vestor C Shares to certain retirement plans sponsored by the Fund, CCG or its
affiliates, but may receive fees under the Distribution and Service Plan. These
commissions and payments, may be different than the reallowances, placement
fees and commissions paid to dealers in connection with sales of Investor A
Shares and Investor B Shares. See "What Is The Schedule Of Sales Charges And
Exemptions--Investor A Shares" for information on additional sales incentives
which the Distributor, CCG and/or their affiliates may provide to dealers in
connection with the sale of shares.
EXEMPTIONS FROM THE CONTINGENT DEFERRED SALES CHARGE--INVESTOR B AND INVESTOR C
SHARES. The contingent deferred sales charge on Investor B Shares and Investor
C Shares is not charged in connection with: (1) exchanges described in "What
Are The Shareholder Features Of The Fund?--Exchange Privilege"; (2) redemptions
made in connection with minimum required distributions from IRA, 403(b)(7) and
Qualified Plan accounts due to the shareholder reaching age 70 1/2; (3) redemp-
tions made with respect to certain retirement plans sponsored by the Fund, CCG
or its affiliates; (4) redemptions in connection with a shareholder's death or
disability (as defined in the Internal Revenue Code) subsequent to the purchase
of Investor B Shares or Investor C Shares; (5) involuntary redemptions of In-
vestor B Shares or Investor C Shares in accounts with low balances as described
in "How Are Shares Redeemed?"; and (6) redemptions made pursuant to the System-
atic Withdrawal Plan, subject to the limitations set forth above under "What
Are The Shareholder Features Of The Fund?--Systematic Withdrawal Plan." In ad-
dition, no contingent deferred sales charge is charged on Investor B Shares or
Investor C Shares acquired through the reinvestment of dividends or
distributions. The Fund also waives the contingent deferred sales charge on re-
demptions of Investor B Shares of the Portfolio purchased through certain Qual-
ified Plans participating in programs whose sponsors or administrators have en-
tered into arrangements with the Fund. For further information, see "Purchase
and Redemption Information" in the Statement of Additional Information.
When an investor redeems Investor B Shares or Investor C Shares, the redemption
order is processed to minimize the amount of the contingent deferred sales
charge that will be charged. Investor B Shares and Investor C Shares are re-
deemed first from those shares that are not subject to the deferred sales load
(i.e., shares that were acquired through reinvestment of dividends or distribu-
tions) and after that from the shares that have been held the longest.
27.
<PAGE>
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HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Share price is based on net asset value. Net asset value is calculated sepa-
rately for each class of Investor Shares of the Portfolio as of the close of
regular trading hours on the NYSE (currently 4:00 p.m. Eastern Time) on each
Business Day by dividing the value of all securities and other assets owned by
the Portfolio that are allocated to a particular class of shares, less the lia-
bilities charged to that class, by the number of shares of the class that are
outstanding.
Most securities held by the Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless the Portfolio's sub-adviser under the supervision of the Board
of Trustees determines such method does not represent fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. The net investment in-
come of the Portfolio is declared quarterly as a dividend to investors who are
shareholders of the Portfolio at the close of business on the day of declara-
tion. All dividends are paid not later than ten days after the end of each
quarter. Any net realized capital gains (including net short-term capital
gains) will be distributed by the Portfolio at least annually. The period for
which dividends are payable and the time for payment are subject to change by
the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional shares of the same class on which the distributions are paid, unless a
shareholder elects to receive distributions in cash. This election, or any rev-
ocation thereof, must be made in writing to PFPC, and will become effective
with respect to distributions paid after its receipt by PFPC.
28.
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If the Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), whether the distributions are paid in cash or
reinvested in additional shares.
Distributions paid out of the Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolio will be eligible for the dividends received de-
duction allowed to certain corporations only to the extent of the total quali-
fying dividends received by the Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by the Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange. Generally, shareholders may
include sales charges paid on the purchase of shares in their tax basis for the
purposes of determining gain or loss on a redemption, transfer or exchange of
such shares. However, if a shareholder exchanges the shares for shares of an-
other portfolio within 90 days of purchase and is able to reduce the sales
charges applicable to the new shares (by virtue of the Fund's exchange privi-
lege), the amount equal to such reduction may not be included in the tax basis
of the shareholder's exchanged shares for the purpose of determining gain or
loss but may be included (subject to the same limitation) in the tax basis of
the new shares.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolio. The application of state and local income taxes to investments in
the Portfolio may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolio.
29.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS THE FUND ORGANIZED?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty-six investment portfolios.
The Portfolio currently offers five separate classes of shares--Institutional
Shares, Service Shares, Investor A Shares, Investor B Shares and Investor C
Shares. This Prospectus relates to Investor A Shares, Investor B Shares and In-
vestor C Shares.
Shares of each class bear their pro rata portion of all operating expenses paid
by the Portfolio, except transfer agency fees, certain administration fees and
amounts payable under the Fund's Distribution and Service Plan. In addition,
each class of Investor Shares is sold with different sales charges. Because of
these "class expenses" and sales charges, the performance of the Portfolio's
Institutional Shares is expected to be higher than the performance of the Port-
folio's Service Shares, and the performance of each of the Institutional Shares
and Service Shares of the Portfolio is expected to be higher than the perfor-
mance of the Portfolio's three classes of Investor Shares. The performance of
each class of Investor Shares may be different. The Portfolio offers various
services and privileges in connection with its Investor Shares that are not
generally offered in connection with its Institutional and Service Shares, in-
cluding an automatic investment plan and an automatic withdrawal plan. For fur-
ther information regarding the Portfolio's Institutional and Service Share
Classes, contact PFPC at (800) 441-7764.
Each share of the Portfolio has a par value of $.001, represents an interest in
the Portfolio and is entitled to the dividends and distributions earned on the
Portfolio's assets that are declared in the discretion of the Board of Trust-
ees. The Fund's shareholders are entitled to one vote for each full share held
and proportionate fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except where otherwise required by law or as
determined by the Board of Trustees. The Fund does not currently intend to hold
annual meetings of shareholders for the election of trustees (except as re-
quired under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 31, 1997, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of institutional and individual in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
30.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
Performance information for each class of Investor Shares of the Portfolio may
be quoted in advertisements and communications to shareholders. Total return
will be calculated on an average annual total return basis for various periods.
Average annual total return reflects the average annual percentage change in
value of an investment in Investor Shares of 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 dividend
and capital gain distributions made by the Portfolio with respect to a class of
shares are reinvested in shares of the same class, and also reflect the maximum
sales load charged by the Portfolio with respect to a class of shares. When,
however, the Portfolio compares the total return of a share class to that of
other funds or relevant indices, total return may also be computed without re-
flecting the sales load. Excluding the sales load may have the effect of en-
hancing total return.
The performance of a share class may be compared to the performance of other
mutual funds with similar investment objectives and to relevant indices, as
well as to ratings or rankings prepared by independent services or other finan-
cial or industry publications that monitor the performance of mutual funds. For
example, the performance of a class of shares may be compared to data prepared
by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. and Wei-
senberger Investment Company Service, and to the performance of the Dow Jones
Industrial Average, the "stocks, bonds and inflation Index" published annually
by Ibbotson Associates, the Lipper Micro Cap Fund Index and the Financial Times
World Stock Index, as well as the Wilshire MicroCap Index. Performance informa-
tion may also include evaluations of the Portfolio and its share classes pub-
lished by nationally recognized ranking services, and information as reported
in financial publications such as Business Week, Fortune, Institutional Invest-
or, Money Magazine, Forbes, Barron's, The Wall Street Journal and The New York
Times, or in publications of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of a class of shares of the Portfolio, the Portfolio may pro-
vide other information demonstrating hypothetical investment returns. This in-
formation may include, but is not limited to, illustrating the compounding ef-
fects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of the Portfolio represent past performance
and should not be considered representative of future results. The investment
return and principal value of an investment in the Portfolio will fluctuate so
that an investor's Investor Shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data
for Investor Shares of the Portfolio cannot necessarily be used to compare an
investment in such shares with bank deposits, savings accounts and similar in-
vestment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Performance is generally a function of the kind
and quality of the instruments held in a portfolio, portfolio maturity, operat-
ing expenses and market conditions. Any fees charged by brokers or other insti-
tutions directly to their customer accounts in connection with investments in
Investor Shares will not be included in the Portfolio performance calculations.
31.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the Compass Capital Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
MUTUAL FUND SPECIALISTS: 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
Available to provide Monday through Friday toll-free 888-426-6727
performance and market toll-free 800-388-8734
trends.
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 888-4COMPASS
COMMENTARY: toll-free 888-426-6727
(Audio recording updated toll-free 800-388-8734
periodically)
SHAREHOLDER SERVICES
TELEPHONE ACCESS: 24 Hours, 7 days a week toll-free 800-441-7762
ACCOUNT SERVICE 8:30 to 5 PM, E.S.T. toll-free 800-441-7762
REPRESENTATIVES: Monday through Friday
Available to discuss
account balance
information, mutual fund
prospectus, literature
and discuss programs and
services available.
PURCHASES AND 8:30 to 5 PM, E.S.T. toll-free 800-441-7762
REDEMPTIONS: Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.compassfunds.com
information and specific
fund performance.
Request mutual fund
prospectuses and
literature. Forward
mutual fund inquiries.
E-MAIL:
Request prospectuses and 24 Hours, 7 days a week [email protected]
literature. Forward
mutual fund inquiries.
WRITTEN CORRESPONDENCE: POST OFFICE BOX ADDRESS STREET ADDRESS
Compass Capital Funds Compass Capital Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
32.
<PAGE>
COMPASS CAPITAL FUNDS
THE COMPASS CAPITAL FUNDS
Compass Capital Funds is a leading mutual fund company currently managing in
excess of $13 billion in 33 portfolios designed to fit a broad range of
investment goals. Each portfolio is managed by recognized experts in equity,
fixed income, international, and tax-free investing who adhere to a pure
investment styleSM.
STOCK PORTFOLIOS
- --------------------------------------------------------------------------------
Large Cap Growth Equity Micro-Cap Equity
Large Cap Value Equity Index Equity
Mid-Cap Growth Equity Select Equity
Mid-Cap Value Equity International Equity
Small Cap Growth Equity International Small Cap Equity
Small Cap Value Equity International Emerging Markets
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
Intermediate Bond High Yield
Core Bond International Bond
TAX-FREE BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Tax-Free Income New Jersey Tax-Free Income
Pennsylvania Tax-Free Income Ohio Tax-Free Income
MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------
Money Market North Carolina Municipal Money Market
U.S. Treasury Money Market Ohio Municipal Money Market
Municipal Money Market Pennsylvania Municipal Money Market
New Jersey Municipal Money Market Virginia Municipal Money Market
<PAGE>
January , 1998
- --------------------------------------------------------------------------------
MICRO-CAP EQUITY PORTFOLIO INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASKING THE KEY
QUESTIONS
<S> <C>
What Are The Expenses Of The Portfolio?...................... 4
What Is The Portfolio?....................................... 5
What Additional Investment Policies And Risks Apply?......... 6
What Are The Portfolio's Fundamental Investment
Limitations?................................................ 10
Who Manages The Fund?........................................ 11
How Are Shares Purchased And Redeemed?....................... 13
How Is Net Asset Value Calculated?........................... 15
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 15
How Are Fund Distributions Taxed?............................ 16
How Is The Fund Organized?................................... 17
How Is Performance Calculated?............................... 18
How Can I Get More Information?.............................. 19
</TABLE>
This Prospectus contains information about the Compass Capital
Micro-Cap Equity Portfolio (the "Portfolio") that a prospective
investor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated Janu-
ary , 1998 has been filed with the Securities and Exchange Com-
mission (the "SEC"). The Statement of Additional Information may
be obtained free of charge from Compass Capital Funds (the
"Fund") by calling (800) 441-7764. The Statement of Additional
Information, as supplemented from time to time, is incorporated
by reference into this Prospectus. The SEC maintains an Internet
Web site at http://www.sec.gov that contains the Statement of Ad-
ditional Information, material incorporated by reference and
other information regarding the Portfolio that has been filed
with the SEC.
SHARES OF THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY
OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIO INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT IN-
VESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2.
<PAGE>
- --------------------------------------------------------------------------------
MICRO-CAP EQUITY PORTFOLIO OF COMPASS CAPITAL FUNDS
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 33 portfolios and
has been structured to include many different investment styles
so that investors may participate across multiple disciplines
in order to seek their long-term financial goals.
The Micro-Cap Equity Portfolio of COMPASS CAPITAL FUNDS is one
of thirteen diversified investment portfolios that provide in-
vestors with a broad spectrum of investment alternatives within
the equity sector. Nine of these portfolios invest in U.S.
stocks, three portfolios invest in non-U.S. international
stocks and one portfolio invests in a combination of U.S.
stocks and bonds. A detailed description of the Micro-Cap Eq-
uity Portfolio begins on page 5. To obtain a prospectus de-
scribing the Fund's other equity portfolios, call (800) 441-
7762.
The Portfolio's performance benchmark is the Wilshire MicroCap
Index and its Lipper peer group is the Micro Cap Funds catego-
ry. The Wilshire MicroCap Index is comprised of all issues in
the Wilshire 5000 Index that rank below the 2,501st company
based on market capitalization. The Wilshire 5000 Index con-
tains all publicly traded U.S. stocks, excluding REITS and lim-
ited partnerships.
PNC Asset Management Group, Inc. ("PAMG") serves as the Portfo-
lio's investment adviser. PNC Equity Advisors Company, a whol-
ly-owned subsidiary of PAMG ("PEAC"), serves as sub-adviser to
the Portfolio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Micro-Cap
CAPITAL Equity Portfolio. We intend this document to be an effective
MICRO-CAP tool as you explore one approach to international equity in-
EQUITY vesting.
PORTFOLIO
CONSIDERING There can be no assurance that the Portfolio will achieve its
THE RISKS IN investment objective. The Portfolio will hold equity securities
EQUITY of micro cap issuers and may acquire warrants and illiquid se-
INVESTING curities; enter into repurchase and reverse repurchase
agreements; lend portfolio securities to third parties; and en-
ter into futures contracts and options and forward currency ex-
change contracts. Certain risks associated with international
investments are heightened because of currency fluctuations and
investments in emerging markets. These and the other investment
practices set forth below, and their associated risks, deserve
careful consideration. See "What Additional Investment Policies
And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolio, see "How Are Shares Purchased And Redeemed?"
CAPITAL
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Institutional Shares of the Portfolio for the current fiscal year as a percent-
age of average daily net assets. An example based on the summary is also shown.
<TABLE>
<CAPTION>
MICRO-CAP
EQUITY
PORTFOLIO
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) --%
Other operating expenses --
--
Administration fees --
Other expenses --
--
Total Portfolio operating expenses (after fee waivers)(/1/) --%
==
</TABLE>
(1) Without waivers, advisory fees would be --%. PAMG and the Portfolio's ad-
ministrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolio's total operating expenses through the fis-
cal year ending September 30, 1998 at the levels set forth in the table.
Without waivers, "Total Portfolio operating expenses" would be --%.
EXAMPLE
An investor in Institutional Shares of the Portfolio would pay the following
expenses on a $1,000 investment assuming (1) 5% annual return, and (2) redemp-
tion at the end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
<S> <C> <C>
$-- $--
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses an investor will bear either directly or indirectly.
They do not reflect any charges that may be imposed by affiliates of the Port-
folio's investment adviser or other institutions directly on their customer ac-
counts in connection with investments in the Portfolio. For a detailed descrip-
tion of the expenses, see "Who Manages The Fund?"
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
4.
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO?
- --------------------------------------------------------------------------------
The Micro-Cap Equity Portfolio of COMPASS CAPITAL FUNDS is one
of thirteen Compass Capital investment portfolios that provide
investors with a broad spectrum of investment alternatives
within the equity sector. Nine of these portfolios invest pri-
marily in U.S. stocks, three portfolios invest in non-U.S. in-
ternational stocks and one portfolio invests in a combination
of U.S. stocks and bonds.
In certain investment cycles and over certain holding periods,
an equity fund that invests according to a "value" style or a
"growth" style may perform above or below the market. An in-
vestment program that combines these multiple disciplines al-
lows investors to select from among these various product op-
tions in the way that most closely fits the investor's invest-
ment goals and sentiments.
INVESTMENT The Micro-Cap Equity Portfolio seeks to provide long-term capi-
OBJECTIVE tal appreciation.
INVESTMENT Pursues micro cap stocks with earnings growth potential. Empha-
STYLE sizes micro cap stocks which the sub-adviser considers to have
favorable and above-average earnings growth prospects.
PORTFOLIO Stocks with growth rate estimates in excess of average for
EMPHASIS benchmark and capitalizations of $25 million to $300 million.
The Portfolio will invest in micro cap companies that have rev-
enue and earnings growth visibility of 20% or higher; general-
ly, only companies in the top 35th percentile of the micro cap
sector will be considered appropriate investments. Such compa-
nies will generally have debt which does not exceed 35% of its
capitalization.
5.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
During normal market conditions, the Micro-Cap Equity Portfolio will invest at
least 90% (and in any event at least 65%) of its total assets in equity securi-
ties of micro cap issuers. The Portfolio defines micro cap issuers as those
with $25 million to $300 million in market capitalization (the total market
value of a company's outstanding equity securities) at the time of purchase.
Equity securities include common stock and preferred stock (including convert-
ible preferred stock); bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity interests in trusts
and partnerships; and depository receipts.
MICRO CAP ISSUERS. Micro cap issuers will normally have more limited product
lines, markets and financial resources and will be dependent upon a more lim-
ited management group than larger capitalized companies. In addition, many mi-
cro cap companies are not well known to the investing public, do not have sig-
nificant institutional ownership and are followed by relatively few securities
analysts, with the result that there may be less publicly available information
concerning such companies in comparison with the information relating to compa-
nies with larger market capitalizations. Also, the securities of micro cap com-
panies are often traded in the over-the-counter markets and may have fewer mar-
ket makers and wider spreads between their quoted bid and asked prices, and
concomitantly lower trading volumes. This may result in comparatively greater
price volatility and less liquidity than the securities of larger, more estab-
lished companies, particularly those traded on the New York or American Stock
Exchanges.
There have been instances of fraud in the micro cap market, including the ma-
nipulation of micro cap stocks by brokers, issuers and promoters to benefit
themselves at the expense of investors. No assurance can be given that the Mi-
cro-Cap Equity Portfolio will not suffer losses due to fraudulent activity in
the market in which it invests.
ADRS, EDRS AND GDRS. The Portfolio may invest in both sponsored and unsponsored
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"),
Global Depository Receipts ("GDRs") and other similar global instruments. ADRs
typically are issued by an American bank or trust company and evidence owner-
ship of underlying securities issued by a foreign corporation. EDRs, which are
sometimes referred to as Continental Depository Receipts, are receipts issued
in Europe, typically by foreign banks and trust companies, that evidence owner-
ship of either foreign or domestic underlying securities. GDRs are depository
receipts structured like global debt issues to facilitate trading on an inter-
national basis. Unsponsored ADR, EDR and GDR programs are organized indepen-
dently and without the cooperation of the issuer of the underlying securities.
As a result, available information concerning the issuer may not be as current
as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs
and GDRs may be more volatile than if such instruments were sponsored by the
issuer. Investments in ADRs, EDRs and GDRs present additional investment con-
siderations as described below under "International Investing."
INTERNATIONAL INVESTING. Investing in foreign securities involves considera-
tions not typically associated with investing in securities of companies orga-
nized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a portfolio that invests in foreign securities as measured in U.S. dollars
will be affected favorably or unfavorably by changes in exchange rates.
The Portfolio's investments in foreign securities may also be adversely af-
fected by changes in foreign political or social conditions, diplomatic rela-
tions, confiscatory taxation, expropriation, limitation on the removal of funds
or assets, or imposition of (or change in) exchange control regulations. In ad-
dition, changes in government administrations or economic or monetary policies
in the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect the Portfolio's operations.
6.
<PAGE>
- --------------------------------------------------------------------------------
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, the
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
Political and economic structures in countries with emerging economies or secu-
rities markets may be undergoing significant evolution and rapid development,
and these countries may lack the social, political and economic stability char-
acteristic of more developed countries. Some of these countries may have in the
past failed to recognize private property rights and have at times nationalized
or expropriated the assets of private companies. As a result, the risks de-
scribed above, including the risks of nationalization or expropriation of as-
sets, may be heightened. In addition, unanticipated political or social devel-
opments may affect the value of investments in these countries and the avail-
ability to the Portfolio of additional investments in emerging market coun-
tries. The small size and inexperience of the securities markets in certain of
these countries and the limited volume of trading in securities in these coun-
tries may make investments in the countries illiquid and more volatile than in-
vestments in Japan or most Western European countries. There may be little fi-
nancial or accounting information available with respect to issuers located in
certain emerging market countries, and it may be difficult to assess the value
or prospects of an investment in such issuers.
The Portfolio may (but is not required to) use forward foreign currency ex-
change contracts to hedge against movements in the value of foreign currencies
(including the European Currency Unit) relative to the U.S. dollar in connec-
tion with specific portfolio transactions or with respect to portfolio posi-
tions. A forward foreign currency exchange contract involves an obligation to
purchase or sell a specified currency at a future date at a price set at the
time of the contract. Foreign currency exchange contracts do not eliminate
fluctuations in the values of portfolio securities but rather allow the Portfo-
lio to establish a rate of exchange for a future point in time.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, the Portfolio may write (i.e. sell) covered call options, buy put op-
tions, buy call options and write secured put options for the purpose of hedg-
ing or earning additional income, which may be deemed speculative or cross-
hedging. For the payment of a premium, the purchaser of an option obtains the
right to buy (in the case of a call option) or to sell (in the case of a put
option) a security at a stated exercise price for a specific period of time.
These options may relate to particular securities, securities indices, or the
yield differential between two securities or foreign currencies, and may or may
not be listed on a securities exchange and may or may not be issued by the Op-
tions Clearing Corporation. The Portfolio will not purchase put and call op-
tions when the aggregate premiums on outstanding options exceed 5% of its net
assets at the time of purchase, and will not write options on more than 25% of
the value of its net assets (measured at the time an option is written). Op-
tions trading is a highly specialized activity that entails greater than ordi-
nary investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clear-
ing Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, the Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or for other hedging
purposes. The value of the Portfolio's contracts may equal or exceed 100% of
its total assets, although the Portfolio will not purchase or sell a futures
contract unless immediately afterwards the aggregate amount of margin deposits
on its existing futures positions plus the amount of premiums paid for related
futures options entered into for other than bona fide hedging purposes is 5% or
less of its net assets.
Futures contracts obligate the Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. The Portfolio may sell a futures contract in order to
7.
<PAGE>
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offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. The
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities
in the value of the securities to be sold. In addition, the Portfolio may uti-
lize futures contracts in anticipation of changes in the composition of its
holdings or in currency exchange rates.
The Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When the Portfolio purchases an op-
tion on a futures contract, it has the right to assume a position as a pur-
chaser or a seller of a futures contract at a specified exercise price during
the option period. When the Portfolio sells an option on a futures contract,
it becomes obligated to sell or buy a futures contract if the option is exer-
cised. In connection with the Portfolio's position in a futures contract or
related option, the Fund will create a segregated account of liquid assets or
will otherwise cover its position in accordance with applicable SEC require-
ments.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in-
struments held by the Portfolio and the price of the futures contract or op-
tion; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially unlim-
ited; and (d) the sub-adviser's inability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other eco-
nomic factors. For further discussion of risks involved with domestic and for-
eign futures and options, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolio from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de-
termines that market conditions warrant, the Portfolio may invest without lim-
itation in high quality money market instruments. The Portfolio may also in-
vest in high quality money market instruments pending investment or to meet
anticipated redemption requests.
High quality money market instruments include U.S. government obligations,
U.S. government agency obligations, dollar denominated obligations of foreign
issuers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and ob-
ligations of supranational organizations. Generally, such obligations will ma-
ture within one year from the date of settlement, but may mature within two
years from the date of settlement. Under a repurchase agreement, the Portfolio
agrees to purchase securities from financial institutions subject to the sell-
er's agreement to repurchase them at an agreed upon time and price. Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller
would expose the Portfolio to possible loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by the
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), and permit
the Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates or market action.
When-issued and forward commitment transactions involve the risk, however,
that the price or yield obtained in a transaction may be less favorable than
the price or yield available in the market when the securities delivery takes
place. The Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Portfolio is autho-
rized to borrow money. If the securities held by the Portfolio should decline
in value while borrowings are outstanding, the net asset value of the Portfo-
lio's outstanding shares will decline in value by proportionately more than
the decline in
8.
<PAGE>
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value suffered by the Portfolio's securities. Borrowings may be made by the
Portfolio through reverse repurchase agreements under which the Portfolio sells
portfolio securities to financial institutions such as banks and broker-dealers
and agrees to repurchase them at a particular date and price. The Portfolio may
use the proceeds of reverse repurchase agreements to purchase other securities
either maturing, or under an agreement to resell, on a date simultaneous with
or prior to the expiration of the reverse repurchase agreement. Reverse repur-
chase agreements involve the risks that the interest income earned in the in-
vestment of the proceeds will be less than the interest expense, that the mar-
ket value of the securities sold by the Portfolio may decline below the price
of the securities the Portfolio is obligated to repurchase and that the securi-
ties may not be returned to the Portfolio. During the time a reverse repurchase
agreement is outstanding, the Portfolio will maintain a segregated account with
the Fund's custodian containing cash, U.S. Government or other appropriate liq-
uid securities having a value at least equal to the repurchase price. The Port-
folio's reverse repurchase agreements, together with any other borrowings, will
not exceed, in the aggregate, 33 1/3% of the value of its total assets. When-
ever borrowings exceed 5% of the Portfolio's total assets, the Portfolio will
not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolio may invest in securities issued by other investment com-
panies which invest in short-term debt securities and which seek to maintain a
$1.00 net asset value per share. The Portfolio may also invest in securities
issued by other investment companies with similar investment objectives. Secu-
rities of other investment companies will be acquired within limits prescribed
by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of an-
other investment company, the Portfolio would bear, along with other sharehold-
ers, its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the expenses each bears
directly in connection with its own operations.
SECURITIES LENDING. The Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. The Portfolio may not
make such loans in excess of 33 1/3% of the value of its total assets. Securi-
ties loans involve risks of delay in receiving additional collateral or in re-
covering the loaned securities, or possibly loss of rights in the collateral if
the borrower of the securities becomes insolvent.
ILLIQUID SECURITIES. The Portfolio will not invest more than 15% of the value
of its net assets in securities that are illiquid. Variable and floating rate
instruments that cannot be disposed of within seven days, and repurchase agree-
ments and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to these limits. The Port-
folio may purchase securities which are not registered under the Securities Act
of 1933 (the "1933 Act") but which can be sold to "qualified institutional buy-
ers" in accordance with Rule 144A under the 1933 Act. These securities will not
be considered illiquid so long as it is determined by the adviser or sub-ad-
viser that an adequate trading market exists for the securities. This invest-
ment practice could have the effect of increasing the level of illiquidity in
the Portfolio during any period that qualified institutional buyers become un-
interested in purchasing these restricted securities.
PORTFOLIO TURNOVER RATE. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the Portfolio will not exceed 100%. The
Portfolio's annual portfolio turnover rate will not be a factor preventing a
sale or purchase when the adviser or sub-adviser believes investment considera-
tions warrant such sale or purchase. Portfolio turnover may vary greatly from
year to year as well as within a particular year. High portfolio turnover rates
(i.e. 100% or more) will generally result in higher transaction costs to the
Portfolio and may result in the realization of short-term capital gains that
are taxable to shareholders as ordinary income.
9.
<PAGE>
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WHAT ARE THE PORTFOLIO'S FUNDAMENTAL INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
The Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any change to the Portfolio's investment
objective. No assurance can be provided that the Portfolio will achieve its in-
vestment objective.
The Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of the Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolio's fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
The Portfolio may not:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of the Portfolio's total assets may be invested without re-
gard to this 5% limitation;
(2) subject to the foregoing 25% exception, purchase more than 10% of the out-
standing voting securities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets at
the time of such borrowing.
These investment limitations are applied at the time investment securities are
purchased.
10.
<PAGE>
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of Compass Capital Funds are managed
TRUSTEES under the direction of the Board of Trustees. The following
persons currently serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Officer
of USX Corporation.
Anthony M. Santomero--Professor of Finance and Director of the
Financial Institutions Center, The Wharton School, University
of Pennsylvania.
David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
ates, Inc.
The Statement of Additional Information furnishes additional
information about the trustees and officers of the Fund.
ADVISER AND The Adviser to Compass Capital Funds is PNC Asset Management
SUB-ADVISER Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform ad-
visory services for investment companies, and has its principal
offices at 1600 Market Street, 29th Floor, Philadelphia, Penn-
sylvania 19103. PAMG is an indirect wholly-owned subsidiary of
PNC Bank Corp., a multi-bank holding company.
The subadviser to the Portfolio is PNC Equity Advisors Company
("PEAC"), a wholly-owned subsidiary of PAMG, with primary of-
fices at 1600 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103. PEAC is a registered investment adviser,
formed by PNC Bank in 1994. William J. Wykle, Thomas Callan and
William McVail serve as portfolio managers of the Portfolio.
Mr. Wykle has been an investment manager at PEAC since 1995.
From 1986 to 1995, Mr Wykle was an investment adviser with PNC
Bank. Mr. Callan has been an investment manager at PEAC since
1996, prior to which he was an equity analyst with PNC Bank
since 1993. Prior to 1993, Mr. Callan was a Trust Department
Trainee at PNC Bank. Mr. McVail has been an investment manager
at PEAC since 1994, prior to which he was an equity and fixed
income analyst with PNC Bank since 1988.
For their investment advisory and sub-advisory services, PAMG
and PEAC are entitled to fees, computed daily on a portfolio-
by-portfolio basis and payable monthly, at the maximum annual
rates set forth below. As stated under "What Are the Expenses
of the Portfolio?" PAMG and PEAC intend to waive a portion of
their fees during the current fiscal year. All sub-advisory
fees are paid by PAMG and do not represent an extra charge to
the Portfolio.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion --% --%
$1 billion -- $2 billion -- --
$2 billion -- $3 billion -- --
greater than $3 billion -- --
</TABLE>
11.
<PAGE>
- -------------------------------------------------------------------------------
PEAC strives to achieve best execution on all transactions.
Infrequently, brokerage transactions for the Portfolio may
be directed to registered broker/dealers who have entered
into dealer agreements with Compass Capital's distributor.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators")
serve as the Fund's co-administrators. CCG and PFPC are in-
direct 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.
The Administrators generally assist the Fund in all aspects
of its administration and operation, including matters re-
lating to the maintenance of financial records and fund ac-
counting. As compensation for these services, CCG is enti-
tled to receive a fee, computed daily and payable monthly,
at an annual rate of .03% of each Portfolio's average daily
net assets. PFPC and CDI are entitled to receive a combined
administration fee, computed daily and payable monthly, at
the aggregate annual rate of (i) .085% of the first $500
million of each Portfolio's average daily net assets, .075%
of the next $500 million of each Portfolio's average daily
net assets and .065% of the average daily net assets of each
Portfolio in excess of $1 billion and (ii) .115% of the
first $500 million of the average daily net assets allocated
to Institutional Shares of each Portfolio, .105% of the next
$500 million of such average daily net assets and .095% of
the average daily net assets allocated to Institutional
Shares of each Portfolio in excess of $1 billion. From time
to time the Administrators may waive some or all of their
administration fees from a Portfolio.
For information about the operating expenses the Portfolio
expects to incur in the current fiscal year, see "What Are
The Expenses Of The Portfolio?"
TRANSFER PNC Bank serves as the Portfolio's custodian and PFPC serves
AGENT, as its transfer agent and dividend disbursing agent. PFPC
DIVIDEND has its principal offices at Bellevue Corporate Center, 400
DISBURSING Bellevue Parkway, Wilmington, Delaware 19809.
AGENT AND
CUSTODIAN
EXPENSES Expenses are deducted from the total income of the Portfolio
before dividends and distributions are paid. Expenses in-
clude, but are not limited to, fees paid to the investment
adviser and the Administrators, transfer agency and custo-
dian fees, trustee fees, taxes, interest, professional fees,
fees and expenses in registering and qualifying the Portfo-
lio 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 in-
formation to existing shareholders, expenses relating to
shareholder reports, shareholder meetings and proxy solici-
tations, insurance premiums, the expense of independent
pricing services, and other expenses which are not expressly
assumed by PAMG or the Fund's service providers under their
agreements with the Fund. Any general expenses of the Fund
that do not belong to a particular investment portfolio will
be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board de-
termines to be fair and equitable.
12.
<PAGE>
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HOW ARE SHARES PURCHASED AND REDEEMED?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolio are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at Four
Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Fund is not required or permitted under the Plan to
make distribution payments with respect to Institutional Shares. However, 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 which,
subject to applicable NASD regulations, may include contributions to various
non-cash and cash incentive arrangements to promote the sale of shares, as well
as sponsorship of various educational programs, sales contests and promotions
in which participants may receive reimbursement of expenses, entertainment and
prizes such as travel awards, merchandise and cash. For further information,
see "Investment Advisory, Administration, Distribution, and Servicing Arrange-
ments" in the Statement of Additional Information.
PURCHASE OF SHARES. Institutional Shares are offered to institutional invest-
ors, including registered investment advisers with a minimum investment of
$500,000 and individuals with a minimum investment of $2,000,000.
Institutional Shares are sold at their net asset value per Share next computed
after an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (East-
ern Time) on a Business Day are priced the same day. A "Business Day" is any
weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve
Bank of Philadelphia (the "FRB") are open for business.
Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders re-
ceived by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Busi-
ness Day.
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also, in
the discretion of the Fund, be made in the form of securities that are permis-
sible investments for the Portfolio. For further information, see the Statement
of Additional Information. The minimum initial investment for institutions is
$5,000. There is no minimum subsequent investment requirement.
The Fund may in its discretion waive the minimum investment amount and may re-
ject any order for Institutional Shares, and may suspend and resume the sale of
any share class of the Portfolio at any time.
REDEMPTION OF SHARES. Redemption orders for Institutional Shares may be placed
by telephoning PFPC at (800) 441-7450. Institutional Shares are redeemed at
their net asset value per share next determined after PFPC's receipt of the re-
demption order. The Fund, the Administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. The Fund and its service providers will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions that
are reasonably believed to be genuine in accordance with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of PAMG, an earlier payment could
adversely affect the Portfolio. No charge for wiring redemption payments is im-
posed by the Fund.
13.
<PAGE>
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During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to redeem Institutional Shares in any shareholder's
account if the account balance drops below $5,000 as the result of redemption
requests and the shareholder does not increase the balance to at least $5,000
on thirty days' written notice.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
14.
<PAGE>
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HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Share price is based on net asset value. Net asset value is calculated sepa-
rately for Institutional Shares of the Portfolio as of the close of regular
trading hours on the NYSE (currently 4:00 p.m. Eastern Time) on each Business
Day by dividing the value of all securities and other assets owned by the Port-
folio that are allocated to its Institutional Shares, less the liabilities
charged to its Institutional Shares, by the number of its Institutional Shares
that are outstanding.
Most securities held by the Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless the Portfolio's sub-adviser under the supervision of the Board
of Trustees determines such method does not represent fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. The net investment in-
come of the Portfolio is declared quarterly as a dividend to investors who are
shareholders of the Portfolio at the close of business on the day of declara-
tion. All dividends are paid not later than ten days after the end of each
quarter. Any net realized capital gains (including net short-term capital
gains) will be distributed by the Portfolio at least annually. The period for
which dividends are payable and the time for payment are subject to change by
the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional Institutional Shares, unless a shareholder elects to receive distribu-
tions in cash. This election, or any revocation thereof, must be made in writ-
ing to PFPC, and will become effective with respect to distributions paid after
its receipt by PFPC.
15.
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If the Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), whether the distributions are paid in cash or
reinvested in additional shares.
Distributions paid out of the Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolio will be eligible for the dividends received de-
duction allowed to certain corporations only to the extent of the total quali-
fying dividends received by the Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by the Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolio. The application of state and local income taxes to investments in
the Portfolio may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolio.
16.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS THE FUND ORGANIZED?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty-six investment portfolios.
The Portfolio currently offers five separate classes of shares--Institutional
Shares, Service Shares, Investor A Shares, Investor B Shares and Investor C
Shares. This Prospectus relates only to Institutional Shares of the Portfolio.
Shares of each class bear their pro rata portion of all operating expenses paid
by the Portfolio, except transfer agency fees, certain administration fees and
amounts payable under the Fund's Distribution and Service Plan. In addition,
each class of Investor Shares is sold with different sales charges. Because of
these "class expenses" and sales charges, the performance of the Portfolio's
Institutional Shares is expected to be higher than the performance of the Port-
folio's Service Shares, and the performance of each of the Institutional Shares
and Service Shares of the Portfolio is expected to be higher than the perfor-
mance of the Portfolio's three classes of Investor Shares. The performance of
each class of Investor Shares may be different. The Portfolio offers various
services and privileges in connection with its Investor Shares that are not
generally offered in connection with its Institutional and Service Shares, in-
cluding an automatic investment plan and an automatic withdrawal plan. For fur-
ther information regarding the Portfolio's Service or Investor Share classes,
contact PFPC at (800) 441-7764 (Service Shares) or (800) 441-7762 (Investor
Shares).
Each share of the Portfolio has a par value of $.001, represents an interest in
the Portfolio and is entitled to the dividends and distributions earned on the
Portfolio's assets that are declared in the discretion of the Board of Trust-
ees. The Fund's shareholders are entitled to one vote for each full share held
and proportionate fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except where otherwise required by law or as
determined by the Board of Trustees. The Fund does not currently intend to hold
annual meetings of shareholders for the election of trustees (except as re-
quired under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 31, 1997, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
17.
<PAGE>
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HOW IS PERFORMANCE CALCULATED?
- -------------------------------------------------------------------------------
Performance information for Institutional Shares of the Portfolio may be
quoted in advertisements and communications to shareholders. Total return will
be calculated on an average annual total return basis for various periods. Av-
erage annual total return reflects the average annual percentage change in
value of an investment in Institutional Shares of the Portfolio over the mea-
suring period. Total return may also be calculated on an aggregate total re-
turn basis. Aggregate total return reflects the total percentage change in
value over the measuring period. Both methods of calculating total return as-
sume that dividend and capital gain distributions made by the Portfolio with
respect to its Institutional Shares are reinvested in Institutional Shares.
The performance of the Portfolio's Institutional Shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of the Portfolio's Insti-
tutional Shares may be compared to data prepared by Lipper Analytical Servic-
es, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Com-
pany Service, and to the performance of the Dow Jones Industrial Average, the
"stocks, bonds and inflation Index" published annually by Ibbotson Associates,
the Lipper Micro-Cap Fund Index and the Financial Times World Stock Index, as
well as the Wilshire MicroCap Index. Performance information may also include
evaluations of the Portfolio and its Institutional Shares published by nation-
ally recognized ranking services, and information as reported in financial
publications such as Business Week, Fortune, Institutional Investor, Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Institutional Shares of the Portfolio, the Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of the Portfolio represent past performance
and should not be considered representative of future results. The investment
return and principal value of an investment in the Portfolio will fluctuate so
that an investor's Institutional Shares, when redeemed, may be worth more or
less than their original cost. Since performance will fluctuate, performance
data for Institutional Shares of 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. Performance is generally a function
of the kind and quality of the instruments held in a portfolio, portfolio ma-
turity, operating expenses and market conditions. Any fees charged by brokers
or other institutions directly to their customer accounts in connection with
investments in Institutional Shares will not be included in the Portfolio per-
formance calculations.
18.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
CONVENIENT WAYS TO ACCESS FUND INFORMATION
Below is a brief description of how investors can easily access information
about the Compass Capital Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
MUTUAL FUND SPECIALISTS: 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
Available to provide Monday through Friday toll-free 888-426-6727
performance and market toll-free 800-388-8734
trends.
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 888-4COMPASS
COMMENTARY: toll-free 888-426-6727
(Audio recording updated toll-free 800-388-8734
periodically)
SHAREHOLDER SERVICES
TELEPHONE ACCESS: 24 Hours, 7 days a week toll-free 800-441-7764
ACCOUNT SERVICE 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
REPRESENTATIVES: Monday through Friday
Available to discuss
account balance
information, mutual fund
prospectus, literature
and discuss programs and
services available.
PURCHASES AND 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
REDEMPTIONS: Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.compassfunds.com
information and specific
fund performance.
Request mutual fund
prospectuses and
literature. Forward
mutual fund inquiries.
E-MAIL:
Request prospectuses and 24 Hours, 7 days a week [email protected]
literature. Forward
mutual fund inquiries.
WRITTEN CORRESPONDENCE: POST OFFICE BOX ADDRESS STREET ADDRESS
Compass Capital Funds Compass Capital Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
19.
<PAGE>
COMPASS CAPITAL FUNDS
THE COMPASS CAPITAL FUNDS
Compass Capital Funds is a leading mutual fund company currently managing in
excess of $13 billion in 33 portfolios designed to fit a broad range of invest-
ment goals. Each portfolio is managed by recognized experts in equity, fixed
income, international, and tax-free investing who adhere to a pure investment
style SM.
STOCK PORTFOLIOS
- --------------------------------------------------------------------------------
Large Cap Growth Equity Micro-Cap Equity
Large Cap Value Equity Index Equity
Mid-Cap Growth Equity Select Equity
Mid-Cap Value Equity Small Cap Growth Equity Small Cap Value Equity
International Equity
International Small Cap Equity
International Emerging Markets
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income High Yield
Intermediate Bond International Bond
Core Bond
TAX-FREE BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Tax-Free Income New Jersey Tax-Free Income
Pennsylvania Tax-Free Income Ohio Tax-Free Income
MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------
Money Market North Carolina Municipal Money Market
U.S. Treasury Money Market Ohio Municipal Money Market
Municipal Money Market Pennsylvania Municipal Money Market
New Jersey Municipal Money Market Virginia Municipal Money Market
<PAGE>
January , 1998
- -------------------------------------------------------------------------------
MICRO-CAP EQUITY PORTFOLIO SERVICE SHARES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASKING THE KEY
QUESTIONS
PAGE
<S> <C>
What Are The Expenses Of The Portfolio?...................... 4
What Is The Portfolio?....................................... 5
What Additional Investment Policies And Risks Apply?......... 6
What Are The Portfolio's Fundamental Investment
Limitations?................................................ 11
Who Manages The Fund?........................................ 12
How Are Shares Purchased And Redeemed?....................... 15
How Is Net Asset Value Calculated?........................... 17
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 17
How Are Fund Distributions Taxed?............................ 18
How Is the Fund Organized?................................... 19
How Is Performance Calculated?............................... 20
How Can I Get More Information?.............................. 21
</TABLE>
This Prospectus contains information about the Compass Capital
Micro-Cap Equity Portfolio (the "Portfolio") that a prospective
investor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated Jan-
uary , 1998 has been filed with the Securities and Exchange
Commission (the "SEC"). The Statement of Additional Information
may be obtained free of charge from Compass Capital Funds (the
"Fund") by calling (800) 441-7764. The Statement of Additional
Information, as supplemented from time to time, is incorporated
by reference into this Prospectus. The SEC maintains an Internet
Web site at http://www.sec.gov that contains the Statement of
Additional Information, material incorporated by reference and
other information regarding the Portfolio that has been filed
with the SEC.
SHARES OF THE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY
OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIO INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2.
<PAGE>
- --------------------------------------------------------------------------------
MICRO-CAP EQUITY PORTFOLIO OF COMPASS CAPITAL FUNDS
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 33 portfolios and
has been structured to include many different investment styles
so that investors may participate across multiple disciplines
in order to seek their long-term financial goals.
The Micro-Cap Equity Portfolio of COMPASS CAPITAL FUNDS is one
of thirteen diversified investment portfolios that provide in-
vestors with a broad spectrum of investment alternatives within
the equity sector. Nine of these portfolios invest in U.S.
stocks, three portfolios invest in non-U.S. international
stocks and one portfolio invests in a combination of U.S.
stocks and bonds. A detailed description of the Micro-Cap Eq-
uity Portfolio begins on page 5. To obtain a prospectus de-
scribing the Fund's other equity portfolios, call (800) 441-
7762.
The Portfolio's performance benchmark is the Wilshire MicroCap
Index and its Lipper peer group is the Micro-Cap Funds catego-
ry. The Wilshire MicroCap Index is comprised of all issues in
the Wilshire 5000 Index that rank below the 2,501st company
based on market capitalization. The Wilshire 5000 Index con-
tains all publicly traded U.S. stocks, excluding REITS and lim-
ited partnerships.
PNC Asset Management Group, Inc. ("PAMG") serves as the Portfo-
lio's investment adviser. PNC Equity Advisors Company, a whol-
ly-owned subsidiary of PAMG ("PEAC"), serves as sub-adviser to
the Portfolio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE COMPASS and comprehensive information on the Compass Capital Micro-Cap
CAPITAL Equity Portfolio. We intend this document to be an effective
MICRO-CAP tool as you explore one approach to international equity in-
EQUITY vesting.
PORTFOLIO
CONSIDERING There can be no assurance that the Portfolio will achieve its
THE RISKS IN investment objective.The Portfolio will hold equity securities
EQUITY of micro cap issuers and may acquire warrants and illiquid se-
INVESTING curities; enter into repurchase and reverse repurchase agree-
ments; lend portfolio securities to third parties; and enter
into futures contracts and options and forward currency ex-
change contracts. Certain risks associated with international
investments are heightened because of currency fluctuations and
investments in emerging markets. These and the other investment
practices set forth below, and their associated risks, deserve
careful consideration. See "What Additional Investment Policies
And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE COMPASS Portfolio, see "How Are Shares Purchased And Redeemed?"
CAPITAL
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses expected to be incurred by
Service Shares of the Portfolio for the current fiscal year as a percentage of
average daily net assets. An example based on the summary is also shown.
<TABLE>
<CAPTION>
MICRO-CAP
EQUITY PORTFOLIO
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) --%
Other operating expenses --
--------
Administration fees --
Shareholder servicing fees --
Other expenses --
--------
Total Portfolio operating expenses
(after fee waivers)(/1/) --%
========
</TABLE>
(1) Without waivers, advisory fees would be --%. PAMG and the Portfolio's ad-
ministrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolio's total operating expenses through the fis-
cal year ending September 30, 1998 at the levels set forth in the table.
Without waivers, "Total Portfolio operating expenses" would be --%.
EXAMPLE
An investor in Service Shares of the Portfolio would pay the following expenses
on a $1,000 investment assuming (1) 5% annual return, and (2) redemption at the
end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
<S> <C>
$-- $--
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses an investor will bear either directly or indirectly.
They do not reflect any charges that may be imposed by affiliates of the Port-
folio's investment adviser or other institutions directly on their customer ac-
counts in connection with investments in the Portfolio. For a detailed descrip-
tion of the expenses, see "Who Manages The Fund?"
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
4.
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE PORTFOLIO?
- --------------------------------------------------------------------------------
The Micro-Cap Equity Portfolio of COMPASS CAPITAL FUNDS is one
of thirteen Compass Capital investment portfolios that provide
investors with a broad spectrum of investment alternatives
within the equity sector. Nine of these portfolios invest pri-
marily in U.S. stocks, three portfolios invest in non-U.S. in-
ternational stocks and one portfolio invests in a combination
of U.S. stocks and bonds.
In certain investment cycles and over certain holding periods,
an equity fund that invests according to a "value" style or a
"growth" style may perform above or below the market. An in-
vestment program that combines these multiple disciplines al-
lows investors to select from among these various product op-
tions in the way that most closely fits the investor's invest-
ment goals and sentiments.
INVESTMENT The Micro-Cap Equity Portfolio seeks to provide long-term capi-
OBJECTIVE tal appreciation.
INVESTMENT Pursues micro cap stocks with earnings growth potential. Empha-
STYLE sizes micro cap stocks which the sub-adviser considers to have
favorable and above-average earnings growth prospects.
PORTFOLIO Stocks with growth rate estimates in excess of average for
EMPHASIS benchmark and capitalizations of $25 million to $300 million.
The Portfolio will invest in micro cap companies that have rev-
enue and earnings growth visibility of 20% or higher; general-
ly, only companies in the top 35th percentile of the micro cap
sector will be considered appropriate investments. Such compa-
nies will generally have debt which does not exceed 35% of its
capitalization.
5.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
During normal market conditions, the Micro-Cap Equity Portfolio will invest at
least 90% (and in any event at least 65%) of its total assets in equity securi-
ties of micro cap issuers. The Portfolio defines micro cap issuers as those
with $25 million to $300 million in market capitalization (the total market
value of a company's outstanding equity securities) at the time of purchase.
Equity securities include common stock and preferred stock (including convert-
ible preferred stock); bonds, notes and debentures convertible into common or
preferred stock; stock purchase warrants and rights; equity interests in trusts
and partnerships; and depository receipts.
MICRO CAP ISSUERS. Micro cap issuers will normally have more limited product
lines, markets and financial resources and will be dependent upon a more lim-
ited management group than larger capitalized companies. In addition, many mi-
cro cap companies are not well known to the investing public, do not have sig-
nificant institutional ownership and are followed by relatively few securities
analysts, with the result that there may be less publicly available information
concerning such companies in comparison with the information relating to compa-
nies with larger market capitalizations. Also, the securities of micro cap com-
panies are often traded in the over-the-counter markets and may have fewer mar-
ket makers and wider spreads between their quoted bid and asked prices, and
concomitantly lower trading volumes. This may result in comparatively greater
price volatility and less liquidity than the securities of larger, more estab-
lished companies, particularly those traded on the New York or American Stock
Exchanges.
There have been instances of fraud in the micro cap market, including the ma-
nipulation of micro cap stocks by brokers, issuers and promoters to benefit
themselves at the expense of investors. No assurance can be given that the Mi-
cro-Cap Equity Portfolio will not suffer losses due to fraudulent activity in
the market in which it invests.
ADRS, EDRS AND GDRS. The Portfolio may invest in both sponsored and unsponsored
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs"),
Global Depository Receipts ("GDRs") and other similar global instruments. ADRs
typically are issued by an American bank or trust company and evidence owner-
ship of underlying securities issued by a foreign corporation. EDRs, which are
sometimes referred to as Continental Depository Receipts, are receipts issued
in Europe, typically by foreign banks and trust companies, that evidence owner-
ship of either foreign or domestic underlying securities. GDRs are depository
receipts structured like global debt issues to facilitate trading on an inter-
national basis. Unsponsored ADR, EDR and GDR programs are organized indepen-
dently and without the cooperation of the issuer of the underlying securities.
As a result, available information concerning the issuer may not be as current
as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs
and GDRs may be more volatile than if such instruments were sponsored by the
issuer. Investments in ADRs, EDRs and GDRs present additional investment con-
siderations as described below under "International Investing."
INTERNATIONAL INVESTING. Investing in foreign securities involves considera-
tions not typically associated with investing in securities of companies orga-
nized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a portfolio that invests in foreign securities as measured in U.S. dollars
will be affected favorably or unfavorably by changes in exchange rates.
The Portfolio's investments in foreign securities may also be adversely af-
fected by changes in foreign political or social conditions, diplomatic rela-
tions, confiscatory taxation, expropriation, limitation on the removal of
6.
<PAGE>
- --------------------------------------------------------------------------------
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary pol-
icies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect the Portfolio's
operations.
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, the
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
Political and economic structures in countries with emerging economies or secu-
rities markets may be undergoing significant evolution and rapid development,
and these countries may lack the social, political and economic stability char-
acteristic of more developed countries. Some of these countries may have in the
past failed to recognize private property rights and have at times nationalized
or expropriated the assets of private companies. As a result, the risks de-
scribed above, including the risks of nationalization or expropriation of as-
sets, may be heightened. In addition, unanticipated political or social devel-
opments may affect the value of investments in these countries and the avail-
ability to the Portfolio of additional investments in emerging market coun-
tries. The small size and inexperience of the securities markets in certain of
these countries and the limited volume of trading in securities in these coun-
tries may make investments in the countries illiquid and more volatile than in-
vestments in Japan or most Western European countries. There may be little fi-
nancial or accounting information available with respect to issuers located in
certain emerging market countries, and it may be difficult to assess the value
or prospects of an investment in such issuers.
The Portfolio may (but is not required to) use forward foreign currency ex-
change contracts to hedge against movements in the value of foreign currencies
(including the European Currency Unit) relative to the U.S. dollar in connec-
tion with specific portfolio transactions or with respect to portfolio posi-
tions. A forward foreign currency exchange contract involves an obligation to
purchase or sell a specified currency at a future date at a price set at the
time of the contract. Foreign currency exchange contracts do not eliminate
fluctuations in the values of portfolio securities but rather allow the Portfo-
lio to establish a rate of exchange for a future point in time.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, the Portfolio may write (i.e. sell) covered call options, buy put op-
tions, buy call options and write secured put options for the purpose of hedg-
ing or earning additional income, which may be deemed speculative or cross-
hedging. For the payment of a premium, the purchaser of an option obtains the
right to buy (in the case of a call option) or to sell (in the case of a put
option) a security at a stated exercise price for a specific period of time.
These options may relate to particular securities, securities indices, or the
yield differential between two securities or foreign currencies, and may or may
not be listed on a securities exchange and may or may not be issued by the Op-
tions Clearing Corporation. The Portfolio will not purchase put and call op-
tions when the aggregate premiums on outstanding options exceed 5% of its net
assets at the time of purchase, and will not write options on more than 25% of
the value of its net assets (measured at the time an option is written). Op-
tions trading is a highly specialized activity that entails greater than ordi-
nary investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clear-
ing Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, the Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or for other hedging
purposes. The value of the Portfolio's contracts may equal or exceed 100% of
its total assets,
7.
<PAGE>
- -------------------------------------------------------------------------------
although the Portfolio will not purchase or sell a futures contract unless im-
mediately afterwards the aggregate amount of margin deposits on its existing
futures positions plus the amount of premiums paid for related futures options
entered into for other than bona fide hedging purposes is 5% or less of its
net assets.
Futures contracts obligate the Portfolio, at maturity, to take or make deliv-
ery of securities, the cash value of a securities index or a stated quantity
of a foreign currency. The Portfolio may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. The
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities
in the value of the securities to be sold. In addition, the Portfolio may uti-
lize futures contracts in anticipation of changes in the composition of its
holdings or in currency exchange rates.
The Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When the Portfolio purchases an op-
tion on a futures contract, it has the right to assume a position as a pur-
chaser or a seller of a futures contract at a specified exercise price during
the option period. When the Portfolio sells an option on a futures contract,
it becomes obligated to sell or buy a futures contract if the option is exer-
cised. In connection with the Portfolio's position in a futures contract or
related option, the Fund will create a segregated account of liquid assets or
will otherwise cover its position in accordance with applicable SEC require-
ments.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in-
struments held by the Portfolio and the price of the futures contract or op-
tion; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c)
losses caused by unanticipated market movements, which are potentially unlim-
ited; and (d) the sub-adviser's inability to predict correctly the direction
of securities prices, interest rates, currency exchange rates and other eco-
nomic factors. For further discussion of risks involved with domestic and for-
eign futures and options, see the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolio from registration as a "commodity pool
operator."
LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de-
termines that market conditions warrant, the Portfolio may invest without lim-
itation in high quality money market instruments. The Portfolio may also in-
vest in high quality money market instruments pending investment or to meet
anticipated redemption requests.
High quality money market instruments include U.S. government obligations,
U.S. government agency obligations, dollar denominated obligations of foreign
issuers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and ob-
ligations of supranational organizations. Generally, such obligations will ma-
ture within one year from the date of settlement, but may mature within two
years from the date of settlement. Under a repurchase agreement, the Portfolio
agrees to purchase securities from financial institutions subject to the sell-
er's agreement to repurchase them at an agreed upon time and price. Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller
would expose the Portfolio to possible loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. The Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by the
Portfolio to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), and permit
the Portfolio to lock in a price or yield on a security it owns or intends to
purchase, regardless of future changes in interest rates or market
8.
<PAGE>
- --------------------------------------------------------------------------------
action. When-issued and forward commitment transactions involve the risk, how-
ever, that the price or yield obtained in a transaction may be less favorable
than the price or yield available in the market when the securities delivery
takes place. The Portfolio's when-issued purchases and forward commitments are
not expected to exceed 25% of the value of its total assets absent unusual mar-
ket conditions.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. The Portfolio is authorized
to borrow money. If the securities held by the Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
by the Portfolio through reverse repurchase agreements under which the Portfo-
lio sells portfolio securities to financial institutions such as banks and bro-
ker-dealers and agrees to repurchase them at a particular date and price. The
Portfolio may use the proceeds of reverse repurchase agreements to purchase
other securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase agree-
ment. Reverse repurchase agreements involve the risks that the interest income
earned in the investment of the proceeds will be less than the interest ex-
pense, that the market value of the securities sold by the Portfolio may de-
cline below the price of the securities the Portfolio is obligated to repur-
chase and that the securities may not be returned to the Portfolio. During the
time a reverse repurchase agreement is outstanding, the Portfolio will maintain
a segregated account with the Fund's custodian containing cash, U.S. Government
or other appropriate liquid securities having a value at least equal to the re-
purchase price. The Portfolio's reverse repurchase agreements, together with
any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value
of its total assets. Whenever borrowings exceed 5% of the Portfolio's total as-
sets, the Portfolio will not make any investments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolio may invest in securities issued by other investment com-
panies which invest in short-term debt securities and which seek to maintain a
$1.00 net asset value per share. The Portfolio may also invest in securities
issued by other investment companies with similar investment objectives. Secu-
rities of other investment companies will be acquired within limits prescribed
by the Investment Company Act of 1940 (the "1940 Act"). As a shareholder of an-
other investment company, the Portfolio would bear, along with other sharehold-
ers, its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the expenses each bears
directly in connection with its own operations.
SECURITIES LENDING. The Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. The Portfolio may not
make such loans in excess of 33 1/3% of the value of its total assets. Securi-
ties loans involve risks of delay in receiving additional collateral or in re-
covering the loaned securities, or possibly loss of rights in the collateral if
the borrower of the securities becomes insolvent.
ILLIQUID SECURITIES. The Portfolio will not invest more than 15% of the value
of its net assets in securities that are illiquid. Variable and floating rate
instruments that cannot be disposed of within seven days, and repurchase agree-
ments and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to these limits. The Port-
folio may purchase securities which are not registered under the Securities Act
of 1933 (the "1933 Act") but which can be sold to "qualified institutional buy-
ers" in accordance with Rule 144A under the 1933 Act. These securities will not
be considered illiquid so long as it is determined by the adviser or sub-ad-
viser that an adequate trading market exists for the securities. This invest-
ment practice could have the effect of increasing the level of illiquidity in
the Portfolio during any period that qualified institutional buyers become un-
interested in purchasing these restricted securities.
9.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the Portfolio will not exceed 100%. The
Portfolio's annual portfolio turnover rate will not be a factor preventing a
sale or purchase when the adviser or sub-adviser believes investment considera-
tions warrant such sale or purchase. Portfolio turnover may vary greatly from
year to year as well as within a particular year. High portfolio turnover rates
(i.e. 100% or more) will generally result in higher transaction costs to the
Portfolio and may result in the realization of short-term capital gains that
are taxable to shareholders as ordinary income.
10.
<PAGE>
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WHAT ARE THE PORTFOLIO'S FUNDAMENTAL INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
The Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any change to the Portfolio's investment
objective. No assurance can be provided that the Portfolio will achieve its in-
vestment objective.
The Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of the Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolio's fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
The Portfolio may not:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of the Portfolio's total assets may be invested without re-
gard to this 5% limitation;
(2) subject to the foregoing 25% exception, purchase more than 10% of the out-
standing voting securities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets at
the time of such borrowing.
These investment limitations are applied at the time investment securities are
purchased.
11.
<PAGE>
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of Compass Capital Funds are managed
TRUSTEES under the direction of the Board of Trustees. The following
persons currently serve as trustees of Compass Capital Funds:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial
Officer of USX Corporation.
Anthony M. Santomero--Professor of Finance and Director of
the Financial Institutions Center, The Wharton School,
University of Pennsylvania.
David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
ates, Inc.
The Statement of Additional Information furnishes additional
information about the trustees and officers of the Fund.
ADVISER AND The Adviser to Compass Capital Funds is PNC Asset Management
SUB-ADVISER Group, Inc. ("PAMG"). PAMG was organized in 1994 to perform
advisory services for investment companies, and has its prin-
cipal offices at 1600 Market Street, 29th Floor, Philadel-
phia, Pennsylvania 19103. PAMG is an indirect wholly-owned
subsidiary of PNC Bank Corp., a multi-bank holding company.
The subadviser to the Portfolio is PNC Equity Advisors Com-
pany ("PEAC"), a wholly-owned subsidiary of PAMG, with pri-
mary offices at 1600 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103. PEAC is a registered investment adviser,
formed by PNC Bank in 1994. William J. Wykle, Thomas Callan
and William McVail serve as portfolio managers of the Portfo-
lio. Mr. Wykle has been an investment manager at PEAC since
1995. From 1986 to 1995, Mr. Wykle was an investment adviser
with PNC Bank. Mr. Callan has been an investment manager at
PEAC since 1996, prior to which he was an equity analyst with
PNC Bank since 1993. Prior to 1993, Mr. Callan was a Trust
Department Trainee at PNC Bank. Mr. McVail has been an in-
vestment manager at PEAC since 1994, prior to which he was an
equity and fixed income analyst with PNC Bank since 1988.
For their investment advisory and sub-advisory services, PAMG
and PEAC are entitled to fees, computed daily on a portfolio-
by-portfolio basis and payable monthly, at the maximum annual
rates set forth below. As stated under "What Are the Expenses
of the Portfolio?" PAMG and PEAC intend to waive a portion of
their fees during the current fiscal year. All sub-advisory
fees are paid by PAMG and do not represent an extra charge to
the Portfolio.
12.
<PAGE>
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MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion --% --%
$1 billion -- $2 billion -- --
$2 billion -- $3 billion -- --
greater than $3 billion -- --
</TABLE>
PEAC strives to achieve best execution on all transactions. In-
frequently, brokerage transactions for the Portfolio may be di-
rected to registered broker/dealers who have entered into
dealer agreements with Compass Capital's distributor.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve
as the Fund's co-administrators. CCG and PFPC are indirect
wholly-owned subsidiaries of PNC Bank Corp. CDI is a wholly-
owned subsidiary of Provident Distributors, Inc. ("PDI"). A ma-
jority of the outstanding stock of PDI is owned by its offi-
cers.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records and fund accounting. As
compensation for these services, CCG is entitled to receive a
fee, computed daily and payable monthly, at an annual rate of
.03% of each Portfolio's average daily net assets. PFPC and CDI
are entitled to receive a combined administration fee, computed
daily and payable monthly, at the aggregate annual rate of (i)
.085% of the first $500 million of each Portfolio's average
daily net assets, .075% of the next $500 million of each Port-
folio's average daily net assets and .065% of the average daily
net assets of each Portfolio in excess of $1 billion and (ii)
.115% of the first $500 million of the average daily net assets
allocated to Service Shares of each Portfolio, .105% of the
next $500 million of such average daily net assets and .095% of
the average daily net assets allocated to Service Shares of
each Portfolio in excess of $1 billion. From time to time the
Administrators may waive some or all of their administration
fees from a Portfolio.
For information about the operating expenses the Portfolio ex-
pects to incur in the current fiscal year, see "What Are The
Expenses Of The Portfolio?"
TRANSFER PNC Bank serves as the Portfolio's custodian and PFPC serves as
AGENT, its transfer agent and dividend disbursing agent. PFPC has its
DIVIDEND principal offices at Bellevue Corporate Center, 400 Bellevue
DISBURSING Parkway, Wilmington, Delaware 19809.
AGENT AND
CUSTODIAN
SHAREHOLDER The Fund intends to enter into service arrangements with insti-
SERVICING tutional investors ("Institutions") (including PNC Bank and its
affiliates) which provide that the Institutions will render
support services to their customers who are the beneficial own-
ers of Service Shares. These services are intended to supple-
ment the services provided by the Fund's Administrators and
transfer agent to the Fund's shareholders of record. In consid-
eration for payment of a shareholder processing fee of up to
.15% (on an annualized basis) of the average daily net asset
value of Service Shares owned beneficially by their customers,
Institutions may provide one or more of the follow- ing servic-
es: processing purchase and redemption requests from customers
and placing orders with the Fund's transfer agent or the dis-
tributor; processing dividend payments from the Fund on behalf
of customers; providing sub-accounting with respect to Service
Shares beneficially owned by customers or the information nec-
essary for sub-accounting; and providing other similar servic-
es. In consideration for payment of
13.
<PAGE>
- -------------------------------------------------------------------------------
a separate shareholder servicing fee of up to .15% (on an
annualized basis) of the average daily net asset value of
Service Shares owned beneficially by their customers, Insti-
tutions may provide one or more of these additional services
to such customers: responding to customer inquiries relating
to the services performed by the Institution and to customer
inquiries concerning their investments in Service Shares;
assisting customers in designating and changing dividend op-
tions, account designations and addresses; and providing
other similar shareholder liaison services. Customers who
are beneficial owners of Service Shares should read this
Prospectus in light of the terms and fees governing their
accounts with Institutions.
Conflict-of-interest restrictions may apply to the receipt
of compensation paid by the Fund in connection with the in-
vestment of fiduciary funds in Portfolio shares. Institu-
tions, including banks regulated by the Comptroller of the
Currency, Federal Reserve Board and state banking commis-
sions, and investment advisers and other money managers sub-
ject to the jurisdiction of the SEC, the Department of Labor
or state securities commissions, are urged to consult their
legal counsel before entering into agreements with the Fund.
The Glass-Steagall Act and other applicable laws, among
other things, prohibit banks from engaging in the business
of underwriting securities. It is intended that the services
provided by Institutions under their service agreements will
not be prohibited under these laws. Under state securities
laws, banks and financial institutions that receive payments
from the Fund may be required to register as dealers.
EXPENSES Expenses are deducted from the total income of the Portfolio
before dividends and distributions are paid. Expenses in-
clude, but are not limited to, fees paid to the investment
adviser and the Administrators, transfer agency and custo-
dian fees, trustee fees, taxes, interest, professional fees,
shareholder servicing and processing fees, 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 addi-
tional information and of printing and distributing prospec-
tuses and statements of additional information to existing
shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, insurance pre-
miums, the expense of independent pricing services, and
other expenses which are not expressly assumed by PAMG or
the Fund's service providers under their agreements with the
Fund. Any general expenses of the Fund that do not belong to
a particular investment portfolio will be allocated among
all investment portfolios by or under the direction of the
Board of Trustees in a manner the Board determines to be
fair and equitable.
14.
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE SHARES PURCHASED AND REDEEMED?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolio are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at Four
Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Fund is not required or permitted under the Plan to
make distribution payments with respect to Service Shares. However, 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 ac-
tivities out of their past profits or other sources available to them which,
subject to applicable NASD regulations, may include contributions to various
non-cash and cash incentive arrangements to promote the sale of shares, as well
as sponsorship of various educational programs, sales contests and promotions
in which participants may receive reimbursement of expenses, entertainment and
prizes such as travel awards, merchandise and cash. For further information,
see "Investment Advisory, Administration, Distribution and Servicing Arrange-
ments" in the Statement of Additional Information.
PURCHASE OF SHARES. Service Shares are offered without a sales load to Institu-
tions acting on behalf of their customers, as well as to certain persons who
were shareholders of Compass Capital Group of Funds at the time of its combina-
tion with The PNC(R) Fund during the first quarter of 1996. Service Shares will
normally be held of record by Institutions or in the names of nominees of In-
stitutions. Share purchases are normally effected through a customer's account
at an Institution through procedures established in connection with the re-
quirements of the account. In these cases, confirmations of share purchases and
redemptions will be sent to the Institutions. Beneficial ownership of shares
will be recorded by the Institutions and reflected in the account statements
provided by such Institutions to their customers. Investors wishing to purchase
shares should contact their Institutions.
Service Shares are sold at their net asset value per share next computed after
an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern
Time) on a Business Day are priced the same day. A "Business Day" is any week-
day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank
of Philadelphia (the "FRB") are open for business. Purchase orders may be
placed by telephoning PFPC at (800) 441-7450. Orders received by PFPC after
4:00 p.m. (Eastern Time) are priced on the following Business Day.
Payment for Service Shares must normally be made in Federal funds or other
funds immediately available to the Fund's custodian. Payment may also, in the
discretion of the Fund, be made in the form of securities that are permissible
investments for the Portfolio. For further information, see the Statement of
Additional Information. The minimum initial investment is $5,000; however, In-
stitutions may set a higher minimum for their customers. There is no minimum
subsequent investment requirement.
The Fund may in its discretion waive the minimum investment amount and may re-
ject any order for Service Shares, and may suspend and resume the sale of any
share class of the Portfolio at any time.
REDEMPTION OF SHARES. Customers of Institutions may redeem Service Shares in
accordance with the procedures applicable to their accounts with the Institu-
tions. These procedures will vary according to the type of account and the In-
stitution involved, and customers should consult their account managers in this
regard. It is the responsibility of Institutions to transmit redemption orders
to PFPC and credit their customers' accounts with redemption proceeds on a
timely basis. In the case of shareholders holding share certificates, the cer-
tificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Fund, the
15.
<PAGE>
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Administrators and the Distributor will employ reasonable procedures to con-
firm that instructions communicated by telephone are genuine. The Fund and its
service providers will not be liable for any loss, liability, cost or expense
for acting upon telephone instructions that are reasonably believed to be
genuine in accordance with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption
orders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's
custodian is closed is normally wired in Federal funds on the next Business
Day following redemption on which the Fund's custodian is open for business.
The Fund reserves the right to wire redemption proceeds within seven days af-
ter receiving a redemption order if, in the judgment of PAMG, an earlier pay-
ment could adversely affect the Portfolio. No charge for wiring redemption
payments is imposed by the Fund, although Institutions may charge their cus-
tomer accounts for redemption services. Information relating to such redemp-
tion services and charges, if any, should be obtained by customers from their
Institutions.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC
at 400 Bellevue Parkway, Wilmington, DE 19809.
The Fund reserves the right to redeem Service Shares in any shareholder's ac-
count if the account balance drops below $5,000 as the result of redemption
requests and the shareholder does not increase the balance to at least $5,000
upon thirty days' written notice. If a customer has agreed with an Institution
to maintain a minimum balance in his or her account with the Institution, and
the balance in the account falls below that minimum, the customer may be obli-
gated to redeem all or part of his or her shares in the Portfolio to the ex-
tent necessary to maintain the minimum balance required.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Fund's responsi-
bilities under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal
Plan ("SWP") which may be used by investors who wish to receive regular dis-
tributions from their accounts. Upon commencement of the SWP, the account must
have a current value of $10,000 or more in the Portfolio. Shareholders may
elect to receive automatic cash payments of $50 or more either monthly, every
other month, quarterly, three times a year, semi-annually, or annually. Auto-
matic withdrawals are normally processed on the 25th day of the applicable
month or, if such day is not a Business Day, on the next Business Day and are
paid promptly thereafter. An investor may utilize the SWP by completing the
SWP Application Form which may be obtained from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested. Shareholders
may change or cancel the SWP at any time, upon written notice to PFPC.
16.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Share price is based on net asset value. Net asset value is calculated sepa-
rately for Service Shares of the Portfolio as of the close of regular trading
hours on the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by
dividing the value of all securities and other assets owned by the Portfolio
that are allocated to its Service Shares, less the liabilities charged to its
Service Shares, by the number of its Service Shares that are outstanding.
Most securities held by the Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless the Portfolio's sub-adviser under the supervision of the Board
of Trustees determines such method does not represent fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
The Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. The net investment in-
come of the Portfolio is declared quarterly as a dividend to investors who are
shareholders of the Portfolio at the close of business on the day of declara-
tion. All dividends are paid not later than ten days after the end of each
quarter. Any net realized capital gains (including net short-term capital
gains) will be distributed by the Portfolio at least annually. The period for
which dividends are payable and the time for payment are subject to change by
the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional Service Shares, unless a shareholder elects to receive distributions in
cash. This election, or any revocation thereof, must be made in writing to
PFPC, and will become effective with respect to distributions paid after its
receipt by PFPC.
17.
<PAGE>
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HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
The Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If the Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), whether the distributions are paid in cash or
reinvested in additional shares.
Distributions paid out of the Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolio will be eligible for the dividends received de-
duction allowed to certain corporations only to the extent of the total quali-
fying dividends received by the Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum and environmental tax purposes. The dividends received deduc-
tion is not available for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by the Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolio. The application of state and local income taxes to investments in
the Portfolio may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolio.
18.
<PAGE>
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HOW IS THE FUND ORGANIZED?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital Funds SM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in thirty-six investment portfolios.
The Portfolio currently offers five separate classes of shares--Institutional
Shares, Service Shares, Investor A Shares, Investor B Shares and Investor C
Shares. This Prospectus relates only to Service Shares of the Portfolio.
Shares of each class bear their pro rata portion of all operating expenses paid
by the Portfolio, except transfer agency fees, certain administration fees and
amounts payable under the Fund's Distribution and Service Plan. In addition,
each class of Investor Shares is sold with different sales charges. Because of
these "class expenses" and sales charges, the performance of the Portfolio's
Institutional Shares is expected to be higher than the performance of the Port-
folio's Service Shares, and the performance of each of the Institutional Shares
and Service Shares of the Portfolio is expected to be higher than the perfor-
mance of the Portfolio's three classes of Investor Shares. The performance of
each class of Investor Shares may be different. The Portfolio offers various
services and privileges in connection with its Investor Shares that are not
generally offered in connection with its Institutional and Service Shares, in-
cluding an automatic investment plan and an automatic withdrawal plan. For fur-
ther information regarding the Portfolio's Institutional or Investor Share
classes, contact PFPC at (800) 441-7764 (Institutional Shares) or (800) 441-
7762 (Investor Shares).
Each share of the Portfolio has a par value of $.001, represents an interest in
the Portfolio and is entitled to the dividends and distributions earned on the
Portfolio's assets that are declared in the discretion of the Board of Trust-
ees. The Fund's shareholders are entitled to one vote for each full share held
and proportionate fractional votes for fractional shares held, and will vote in
the aggregate and not by class, except where otherwise required by law or as
determined by the Board of Trustees. The Fund does not currently intend to hold
annual meetings of shareholders for the election of trustees (except as re-
quired under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 31, 1997, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
19.
<PAGE>
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HOW IS PERFORMANCE CALCULATED?
- -------------------------------------------------------------------------------
Performance information for Service Shares of the Portfolio may be quoted in
advertisements and communications to shareholders. Total return will be calcu-
lated on an average annual total return basis for various periods. Average an-
nual total return reflects the average annual percentage change in value of an
investment in Service Shares of 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 dividend and cap-
ital gain distributions made by the Portfolio with respect to its Service
Shares are reinvested in shares of the same class.
The performance of the Portfolio's Service Shares may be compared to the per-
formance of other mutual funds with similar investment objectives and to rele-
vant indices, as well as to ratings or rankings prepared by independent serv-
ices or other financial or industry publications that monitor the performance
of mutual funds. For example, the performance of the Portfolio's Service
Shares may be compared to data prepared by Lipper Analytical Services, Inc.,
CDA Investment Technologies, Inc. and Weisenberger Investment Company Service,
and to the performance of the Dow Jones Industrial Average, the "stocks, bonds
and inflation Index" published annually by Ibbotson Associates, the Lipper Mi-
cro Cap Fund Index and the Financial Times World Stock Index, as well as the
Wilshire MicroCap Index. Performance information may also include evaluations
of the Portfolio and its Service Shares published by nationally recognized
ranking services, and information as reported in financial publications such
as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications
of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Service Shares of the Portfolio, the Portfolio may provide
other information demonstrating hypothetical investment returns. This informa-
tion may include, but is not limited to, illustrating the compounding effects
of dividends in a dividend reinvestment plan or the impact of tax-deferred in-
vesting.
Performance quotations for shares of the Portfolio represent past performance
and should not be considered representative of future results. The investment
return and principal value of an investment in the Portfolio will fluctuate so
that an investor's Service Shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data
for Service Shares of the Portfolio cannot necessarily be used to compare an
investment in such shares with bank deposits, savings accounts and similar in-
vestment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Performance is generally a function of the kind
and quality of the instruments held in a portfolio, portfolio maturity, oper-
ating expenses and market conditions. Any fees charged by brokers or other in-
stitutions directly to their customer accounts in connection with investments
in Service Shares will not be included in the Portfolio performance calcula-
tions.
20.
<PAGE>
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HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the Compass Capital Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
MUTUAL FUND SPECIALISTS: 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
Available to provide Monday through Friday toll-free 888-426-6727
performance and market toll-free 800-388-8734
trends.
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 888-4COMPASS
COMMENTARY: toll-free 888-426-6727
(Audio recording updated toll-free 800-388-8734
periodically)
SHAREHOLDER SERVICES
TELEPHONE ACCESS: 24 Hours, 7 days a week toll-free 800-441-7764
ACCOUNT SERVICE 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
REPRESENTATIVES: Monday through Friday
Available to discuss
account balance
information, mutual fund
prospectus, literature
and discuss programs and
services available.
PURCHASES AND 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
REDEMPTIONS: Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.compassfunds.com
information and specific
fund performance.
Request mutual fund
prospectuses and
literature. Forward
mutual fund inquiries.
E-MAIL:
Request prospectuses and 24 Hours, 7 days a week [email protected]
literature. Forward
mutual fund inquiries.
WRITTEN CORRESPONDENCE: POST OFFICE BOX ADDRESS STREET ADDRESS
Compass Capital Funds Compass Capital Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
21.
<PAGE>
COMPASS CAPITAL FUNDS
THE COMPASS CAPITAL FUNDS
Compass Capital Funds is a leading mutual fund company currently managing in
excess of $13 billion in 33 portfolios designed to fit a broad range of
investment goals. Each portfolio is managed by recognized experts in equity,
fixed income, international, and tax-free investing who adhere to a pure
investment styleSM.
STOCK PORTFOLIOS
- --------------------------------------------------------------------------------
Large Cap Growth Equity Micro-Cap Equity
Large Cap Value Equity Index Equity
Mid-Cap Growth Equity Select Equity
Mid-Cap Value Equity International Equity
Small Cap Growth Equity International Small Cap Equity
Small Cap Value Equity International Emerging Markets
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
Intermediate Bond High Yield
Core Bond International Bond
TAX-FREE BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Tax-Free Income New Jersey Tax-Free Income
Pennsylvania Tax-Free Income Ohio Tax-Free Income
MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------
Money Market North Carolina Municipal Money Market
U.S. Treasury Money Market Ohio Municipal Money Market
Municipal Money Market Pennsylvania Municipal Money Market
New Jersey Municipal Money Market Virginia Municipal Money Market
<PAGE>
January , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE LOW DURATION BOND, CORE BOND AND INTERMEDIATE BOND PORTFOLIOS
BLACKROCK SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASKING THE KEY
QUESTIONS
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?.....................
What Are The Portfolios' Financial Highlights?...............
What Are The Portfolios?.....................................
What Are The Differences Among The Portfolios................
What Types Of Securities Are In The Portfolios...............
What Are The Portfolios' Fundamental Investment Limitations..
What Additional Investment Policies And Risks Apply..........
Who Manages The Fund.........................................
How Are Shares Purchased And Redeemed........................
How Is Net Asset Value Calculated............................
How Frequently Are Dividends And Distributions Made To
Investors...................................................
How Are Fund Distributions Taxed.............................
How Is The Fund Organized....................................
How Is Performance Calculated................................
How Can I Get More Information...............................
</TABLE>
This Prospectus contains information about the Low Duration Bond,
Core Bond and Intermediate Bond Portfolios of Compass Capital
FundsSM that a prospective investor needs to know before invest-
ing. Please keep it for future reference. A Statement of Addi-
tional Information dated January , 1998 has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of
Additional Information may be obtained free of charge from the
Fund by calling (800) 441-7764. The Statement of Additional In-
formation, as supplemented from time to time, is incorporated by
reference into this Prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other infor-
mation regarding the Fund.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY
OTHER BANK AND ARE NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF
OR OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN THE PORTFOLIOS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT IN-
VESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE LOW DURATION BOND, CORE BOND AND INTERMEDIATE BOND PORTFOLIOS OF
COMPASS CAPITAL FUNDS
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 33 portfolios and
has been structured to include many different investment styles
across the spectrum of fixed income investments so that invest-
ors may participate across multiple disciplines in order to
seek their long-term financial goals.
This Prospectus describes three diversified portfolios of Com-
pass Capital Funds that invest primarily in taxable bonds--the
Low Duration Bond, Core Bond and Intermediate Bond Portfolios
(the "Portfolios"). A detailed description of each Portfolio
begins on page 7.
COMPASS PERFORMANCE
CAPITAL BENCHMARK LIPPER PEER GROUP
PORTFOLIO
LOW DURATION Merrill 1-3 Short-Intermediate U.S.
BOND Year Treasury Government
(PREVIOUSLY Index
CALLED THE
SHORT
GOVERNMENT
BOND
PORTFOLIO)
CORE BOND Lehman Intermediate Investment
Aggregate Grade Debt
Lehman
INTERMEDIATE Brothers Intermediate
BOND Intermediate Government/Corporate
Government/Corporate
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the Portfolios. We intend this
PORTFOLIOS document to be an effective tool as you explore different di-
rections in fixed income investing.
There can be no assurance that any mutual fund will achieve its
CONSIDERING investment objective. The Portfolios may purchase mortgage-re-
THE RISKS IN lated, asset-backed, foreign, stripped and illiquid securities;
BOND enter into repurchase and reverse repurchase agreements and en-
INVESTING gage in leveraging techniques; lend portfolio securities to
third parties; and enter into futures contracts and options. Up
to 20% of the total assets of the Low Duration Bond Portfolio
may be invested in non-investment grade securities that present
additional risks. See "What Additional Investment Policies And
Risks Apply?"
For information on how to purchase and redeem shares of the
INVESTING IN Portfolios, see "How Are Shares Purchased And Redeemed?"
THE COMPASS
CAPITAL
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by BlackRock
Shares of (i) the Low Duration and Core Bond Portfolios for the fiscal period
ended September 30, 1997 and (ii) the Intermediate Bond Portfolio for the cur-
rent fiscal year, as a percentage of average daily net assets. The figures
shown for the Intermediate Bond Portfolio under "Other expenses" are estimated
for the current fiscal year. No BlackRock Shares were outstanding during the
Intermediate Bond Portfolio's last fiscal period ended September 30, 1997. An
example based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE
DURATION BOND CORE BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Advisory fees (after fee
waivers)(/1/) .22% .22% .22%
Other Operating expenses (after fee
waivers)(/1/) .18 .18 .18
Administration fees .10 .10 .10
Other Expenses .08 .08 .08
------ ---- ------
Total Portfolio operating expenses
(after fee waivers)(/1/) .40% .40% .40%
====== ==== ======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. PAMG and the administrators are under no obli-
gation to waive fees or reimburse expenses, but have informed the Fund that
they expect to do so during the current fiscal year. Without waivers,
"Other operating expenses" would be .31% and "Total Portfolio operating ex-
penses" would be .81% for each Portfolio. "Total Portfolio operating ex-
penses" do not include interest that may be paid in the current fiscal year
by the Portfolios in connection with their investment operations.
EXAMPLE
An investor in BlackRock Shares would pay the following expenses on a $1,000
investment assuming (1) 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio $ 4 $13 $22 $51
Core Bond Portfolio 4 13 22 51
Intermediate Bond Portfolio 4 13 22 51
</TABLE>
The foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses that an investor in the Portfolios will bear either
directly or indirectly. They do not reflect any charges that may be imposed by
brokers or other institutions directly on their customer accounts in connection
with investments in the Portfolios. Information about the performance of Black-
Rock Shares of the Portfolios will be available in the Fund's annual and semi-
annual reports to shareholders, which may be obtained from the Fund free of
charge by calling (800) 441-7764 when they become available.
In addition to the compensation itemized in the expense table, institutions
that sell Portfolio shares and/or their salespersons may receive compensation
for the sale and distribution of shares or for services to the Portfolios. For
information regarding such compensation, see "How Are Shares Purchased And Re-
deemed?--Distributor" in the Prospectus and "Investment Advisory, Administra-
tion, Distribution and Servicing Arrangements" in the Statement of Additional
Information.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
4.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the State-
ment of Additional Information and has been audited by the
Portfolios' independent accountants. This financial information
should be read together with those financial statements. Fur-
ther information about the performance of the Portfolios is
available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder
reports may be obtained from the Fund free of charge by calling
(800) 441-7762. During the periods shown, no BlackRock Shares
of the Intermediate Bond Portfolio were outstanding.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A BLACKROCK SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MARCH 29, 1997/1/
THROUGH
SEPTEMBER 30, 1997
LOW
DURATION BOND CORE BOND
PORTFOLIO PORTFOLIO
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ $
--- ---
Net investment income
Net realized and unrealized loss on investments
--- ---
Net increase from investment operations
--- ---
Distributions from net investment income
Distributions from net realized capital gains
--- ---
Total dividends and distributions
--- ---
NET ASSET VALUE, END OF PERIOD $ $
=== ===
Total investment return/2/ % %
RATIOS TO AVERAGE NET ASSETS:
Expenses %/3/ %/3/
Excluding waivers %/3/ %/3/
Net investment income %/3/ %/3/
Excluding waivers %/3/ %/3/
SUPPLEMENTAL DATA:
% %
PORTFOLIO TURNOVER % %
NET ASSETS, END OF PERIOD (IN THOUSANDS) $ $
</TABLE>
/1/Commencement of investment operations of share class.
/2/Including interest expense, ratios would have been % for the fiscal period
ended September 30, 1997.
/3/Annualized.
5.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The COMPASS CAPITAL FUND Family consists of 33 portfolios and
has been structured to include many different investment
styles across the spectrum of fixed income investments so
that investors may participate across multiple disciplines in
order to seek their long-term financial goals.
This Prospectus describes three bond portfolios of COMPASS
CAPITAL FUNDS--the Low Duration Bond, Core Bond and Interme-
diate Bond Portfolios.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 year Treasury Index.
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Intermediate Bond To seek current income consistent with
the preservation of capital.
</TABLE>
6.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS:
<TABLE>
<CAPTION>
DOLLAR-WEIGHTED CREDIT MINIMUM
PERFORMANCE AVERAGE MATURITY QUALITY CREDIT
PORTFOLIO BENCHMARK* (APPROXIMATE)** CONCENTRATION QUALITY
<S> <C> <C> <C> <C>
Low Duration Merrill 1-3 Year Treasury 3-5 Years Investment Grade B
Bond Index Spectrum
Core Bond 5-10 Years Investment Grade BBB
Lehman Aggregate Spectrum
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Government/Corporate
</TABLE>
*For more information on a Portfolio's benchmark, see Appendix A at the back
of this Prospectus.
**The Portfolios' sub-adviser will normally attempt to structure the Portfolios
to have comparable durations to the benchmarks. Duration, which measures price
sensitivity to interest rate changes, is not necessarily equal to average matu-
rity.
7.
<PAGE>
- --------------------------------------------------------------------------------
WHAT TYPES OF SECURITIES ARE IN THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The following table summarizes the types of securities found in each Portfolio,
according to the following designations:
Yes: The Portfolio will hold a significant concentration of these securi-
ties under normal circumstances.
Elig.: Eligible; the Portfolio may purchase these securities, but they may
or may not be a significant holding at a given time.
Temp.: Temporary; the Portfolio may purchase these securities, but under
normal market conditions is not expected to do so.
No: The Portfolio may not purchase these securities.
<TABLE>
<CAPTION>
NON
AGENCY/ FOREIGN
U.S. AGENCY COMMERCIAL SECURITIES/
TREASURIES AGENCIES/1/ MBS/2/ MBS/2/ CORP. ABS/3/ CURRENCY MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Yes Yes Yes Elig. Elig. Elig. Elig. Elig.
Bond
Core Bond Yes Yes Yes Elig. Yes Yes No Elig.
Intermediate Yes Yes Yes Elig. Yes Yes No Elig.
Bond
</TABLE>
/1/Obligations of U.S. Government agencies and instrumentalities
/2/MBS = mortgage-backed securities
/3/ABS = asset-backed securities
8.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
A Portfolio's investment objective and policies may be changed by the Fund's
Board of Trustees without shareholder approval. However, shareholders will be
given at least 30 days' notice before any change to a Portfolio's investment
objective. No assurance can be provided that a Portfolio will achieve its in-
vestment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except U.S. Government securities) if more than 5% of
its total assets will be invested in the securities of any one issuer, ex-
cept that up to 25% of a Portfolio's total assets may be invested without
regard to this 5% limitation; and
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry.
The investment limitations stated above are applied at the time investment se-
curities are purchased.
9.
<PAGE>
- -------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- -------------------------------------------------------------------------------
INVESTMENT QUALITY. Securities acquired by the Portfolios will generally be
rated investment grade at the time of purchase (within the four highest rating
categories by Standard & Poor's Ratings Group ("S&P"), Moody's Investors Serv-
ice, Inc. ("Moody's"), Duff & Phelps Credit Co. or Fitch Investor Services,
Inc.) or, if unrated, of comparable quality as determined by the Portfolios'
sub-adviser. Securities rated "Baa" on "BBB" are generally considered to be
investment grade although they have speculative characteristics. In addition,
the Low Duration Bond Portfolio may invest up to 20% of its total assets in
non-investment grade securities. If a security's rating is reduced below the
minimum rating that is permitted for a Portfolio, the Portfolio's sub-adviser
will consider whether the Portfolio should continue to hold the security.
INVESTMENT CONCENTRATION. Each Portfolio will normally invest at least 80% of
the value of its total assets in debt securities.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios may make signifi-
cant investments in residential and commercial mortgage-related and other as-
set-backed securities (i.e., securities backed by home equity loans, install-
ment sale contracts, credit card receivables or other assets) issued by gov-
ernmental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, adjustable rate
mortgage-related securities ("ARMs") and collateralized mortgage obligations
("CMOs"), which provide the holder with a specified interest in the cash flow
of a pool of underlying mortgages or other mortgage-backed securities. Issuers
of CMOs ordinarily elect to be taxed as pass-through entities known as real
estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in a variety of ways. In most cases, however, payments of prin-
cipal are applied to the CMO classes in the order of their respective stated
maturities, so that no principal payments will be made on a CMO class until
all other classes having an earlier stated maturity date are paid in full. The
classes may include accrual certificates (also known as "Z-Bonds"), which only
accrue interest at a specified rate until other specified classes have been
retired and are converted thereafter to interest-paying securities. They may
also include planned amortization classes ("PACs") which generally require,
within certain limits, that specified amounts of principal be applied on each
payment date, and generally exhibit less yield and market volatility than
other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to the pro-
tection of a number of state and Federal consumer credit laws many of which
give debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile receivables per-
mit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have
an effective security interest in all of the obligations backing such receiv-
ables. Therefore, there is a possibility that recoveries on repossessed col-
lateral may not, in some cases, be able to support payments on these securi-
ties.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may normally be
10.
<PAGE>
- --------------------------------------------------------------------------------
prepaid at any time because the underlying assets (i.e., loans) generally may
be prepaid at any time. In calculating the average weighted maturity of a Port-
folio, the maturity of mortgage-related and other asset-backed securities held
by the Portfolio will be based on estimates of average life which take prepay-
ments into account. The average life of a mortgage-related instrument, in par-
ticular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as the result of scheduled principal
payments and mortgage prepayments. In general, the collateral supporting non-
mortgage asset-backed securities is of shorter maturity than mortgage loans and
is less likely to experience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by a Portfolio will generally be at
lower rates than the rates that were carried by the obligations that have been
prepaid. Because of these and other reasons, an asset-backed security's total
return and maturity may be difficult to predict precisely. To the extent that a
Portfolio purchases asset-backed securities at a premium, prepayments (which
may be made without penalty) may result in loss of the Portfolio's principal
investment to the extent of premium paid.
The Portfolios may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged and master serviced by PNC Mortgage
Securities Corp. or mortgage-related securities containing loans or mortgages
originated by PNC Bank, National Association ("PNC Bank") or its affiliates. It
is possible that under some circumstances, PNC Mortgage Securities Corp. or its
affiliates could have interests that are in conflict with the holders of these
mortgage-backed securities, and such holders could have rights against PNC
Mortgage Securities Corp. or its affiliates.
STRIPPED AND ZERO COUPON OBLIGATIONS. To the extent consistent with their in-
vestment objectives, the Portfolios may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government and other obliga-
tions. These participations, which may be issued by the U.S. Government (or a
U.S. Government agency or instrumentality) or by private issuers such as banks
and other institutions, are issued at a discount to their "face value," and may
include stripped mortgage-backed securities ("SMBS"). Stripped securities, par-
ticularly SMBS, may exhibit greater price volatility than ordinary debt securi-
ties because of the manner in which their principal and interest are returned
to investors.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of mort-
gage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class receives all of the principal. How-
ever, in some cases, one class will receive some of the interest and most of
the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, a Portfolio may fail to fully recoup
its initial investment. The market value of SMBS can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that re-
ceives all or most of the interest are generally higher than prevailing market
yields on other mortgage- related obligations because their cash flow patterns
are also volatile and there is a greater risk that the initial investment will
not be fully recouped.
Each Portfolio may invest in zero-coupon bonds, which are normally issued at a
significant discount from face value and do not provide for periodic interest
payments. Zero-coupon bonds may experience greater volatility in market value
than similar maturity debt obligations which provide for regular interest pay-
ments.
CORPORATE AND BANK OBLIGATIONS. The Portfolios may invest in debt obligations
of domestic or foreign corporations and banks, and may acquire commercial obli-
gations issued by Canadian corporations and Canadian counterparts of U.S. cor-
porations, as well as Europaper, which is U.S. dollar-denominated commercial
paper of a foreign issuer. Bank obligations may include certificates of depos-
it, notes, bankers' acceptances
11.
<PAGE>
- -------------------------------------------------------------------------------
and fixed time deposits. These obligations may be general obligations of the
parent bank or may be limited to the issuing branch or subsidiary by the terms
of a specific obligation or by government regulation. The Portfolios may also
make interest-bearing savings deposits in commercial and savings banks in
amounts not in excess of 5% of their respective total assets.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their inter-
est rates, maturities and times of issuance. Obligations of certain agencies
and instrumentalities of the U.S. Government such as the Government National
Mortgage Association are supported by the United States' full faith and cred-
it; others such as those of the Federal National Mortgage Association and the
Student Loan Marketing Association are supported by the right of the issuer to
borrow from the Treasury; others such as those of the Federal Farm Credit
Banks or the Federal Home Loan Mortgage Corporation are supported only by the
credit of the instrumentality. No assurance can be given that the U.S. Govern-
ment will provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law.
NON-INVESTMENT GRADE SECURITIES. The Low Duration Bond Portfolio may invest in
non-investment grade or "high yield" fixed income or convertible securities,
commonly known to investors as "junk bonds," when the Portfolio's sub-adviser
believes that the investment characteristics of such securities make them de-
sirable in light of the Portfolio's investment objective and current portfolio
mix, so long as under normal market conditions, (i) no more than 20% of its
total assets are invested in non-investment grade debt securities and (ii)
such securities are rated "B" or higher at the time of purchase by at least
one major rating agency.
High yield securities are bonds that are issued by a company whose credit rat-
ing (based on rating agencies' evaluation of the likelihood of repayment) ne-
cessitates offering a higher coupon and yield on its issues when selling them
to investors who may otherwise be hesitant in purchasing the debt of such a
company. While generally providing greater income and opportunity for gain,
non-investment grade debt securities may be subject to greater risks than se-
curities which have higher credit ratings, including a high risk of default,
and their yields will fluctuate over time. High Yield securities will gener-
ally be in the lower rating categories of recognized rating agencies (rated Ba
or lower by Moody's or BB or lower by Standard & Poor's) or non-rated. The
credit rating of a high yield security does not necessarily address its market
value risk, and rating may from time to time change, positively or negatively,
to reflect developments regarding the issuer's financial condition. High yield
securities are considered to be speculative with respect to the capacity of
the issuer to timely repay principal and pay interest or dividends in accor-
dance with the terms of the obligation and may have more credit risk than
higher rated securities.
While the market values of high yield securities tend to react less to fluctu-
ations in interest rates than do those of higher rated securities, the values
of high yield securities often reflect individual corporate developments and
have a high sensitivity to economic changes to a greater extent than do higher
rated securities. Issuers of high yield securities are often in the growth
stage of their development and/or involved in reorganization or takeover. The
companies are often highly leveraged (have a significant amount of debt rela-
tive to shareholders' equity) and may not have available to them more tradi-
tional financing methods, thereby increasing the risk associated with acquir-
ing these types of securities. In some cases, obligations with respect to high
yield securities are subordinated to the prior repayment of senior indebted-
ness, which will potentially limit a Portfolio's ability to fully recover
principal or to receive interest payments when senior securities are in de-
fault. Thus, investors in high yield securities have a lower degree of protec-
tion with respect to principal and interest payments when senior securities
are in default. Thus, investors in high yield securities have a lower degree
of protection with respect to principal and interest payments than do invest-
ors in higher rated securities.
During an economic downturn, a substantial period of rising interest rates or
a recession, highly leveraged issuers of high yield securities may experience
financial distress possibly resulting in insufficient revenues to meet their
principal and interest payment obligations, to meet projected business goals
and to obtain additional financing. An economic downturn could also disrupt
the market for lower-rated securities and adversely
12.
<PAGE>
- --------------------------------------------------------------------------------
affect the value of outstanding securities, the Portfolio's net asset value and
the ability of the issuers to repay principal and interest. If the issuer of a
security held by a Portfolio defaulted, the Portfolio may not receive full in-
terest and principal payments due to it and could incur additional expenses if
it chose to seek recovery of its investment.
The secondary markets for high yield securities are not as liquid as the sec-
ondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and partici-
pants in the markets are mostly institutional investors, including insurance
companies, banks, other financial institutions and mutual funds. In addition,
the trading volume for high yield securities is generally lower than that for
higher rated securities and the secondary markets could contract under adverse
market or economic conditions independent of any specific adverse changes in
the condition of a particular issuer. Under certain economic and/or market con-
ditions, a Portfolio may have difficulty disposing of certain high yield secu-
rities due to the limited number of investors in that sector of the market. An
illiquid secondary market may adversely affect the market price of the high
yield security, which may result in increased difficulty selling the particular
issue and obtaining accurate market quotations on the issue when valuing a
Portfolio's assets. Market quotations on high yield securities are available
only from a limited number of dealers, and such quotations may not be the ac-
tual prices available for a purchase or sale.
The high yield markets may react strongly to adverse news about an issuer or
the economy, or to the perception or expectation of adverse news, whether or
not it is based on fundamental analysis. Additionally, prices for high yield
securities may be affected by legislative and regulatory developments. These
developments could adversely affect a Portfolio's net asset value and invest-
ment practices, the secondary market for high yield securities,the financial
condition of issuers of these securities and the value and liquidity of out-
standing high yield securities, especially in a thinly traded market. For exam-
ple, federal legislation requiring the divestiture by federally insured savings
and loan associations of their investments in high yield bonds and limiting the
deductibility of interest by certain corporate issuers of high yield bonds ad-
versely affected the market in recent years.
When the secondary market for high yield securities becomes more illiquid, or
in the absence of readily available market quotations for such securities, the
relative lack of reliable objective data makes it more difficult to value a
Portfolio's securities, and judgment plays a more important role in determining
such valuations. Increased illiquidity in the junk bond market, in combination
with the relative youth and growth of the market for such securities, also may
affect the ability of a Portfolio to dispose of such securities at a desirable
price. Additionally, if the secondary markets for high yield securities con-
tract due to adverse economic conditions or for other reasons, certain of a
Portfolio's liquid securities may become illiquid and the proportion of the
Portfolio's assets invested in illiquid securities may significantly increase.
The Low Duration Bond Portfolio may invest in securities rated "B" and above or
determined by the sub-adviser to be of comparable quality. Such securities are
considered to have the current capacity to meet interest and principal pay-
ments, but have a greater vulnerability to default than higher rated securi-
ties. Adverse business, financial or economic conditions will likely impair ca-
pacity or willingness to pay interest and principal.
The rating assigned by a rating agency evaluates the safety of a non-investment
grade security's principal and interest payments, but does not address market
value risk. Because such ratings of the ratings agencies may not always reflect
current conditions and events, in addition to using recognized rating agencies
and other sources, the sub-adviser performs its own analysis of the issuers
whose non-investment grade securities the Portfolio holds. Because of this, the
Portfolio's performance may depend more on the sub-adviser's own credit analy-
sis than in the case of mutual funds investing in higher-rated securities. For
a description of these ratings, see Appendix B.
In selecting non-investment grade securities, the sub-adviser considers factors
such as those relating to the creditworthiness of issuers, the ratings and per-
formance of the securities, the protections afforded the securi -
13.
<PAGE>
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ties and the diversity of the Portfolio. The sub-adviser continuously monitors
the issuers of non-investment grade securities held by the Portfolio for their
ability to make required principal and interest payments, as well as in an ef-
fort to control the liquidity of the Portfolio so that it can meet redemption
requests. If a security's rating is reduced below the minimum credit rating
that is permitted for the Portfolio, BlackRock will consider whether the Port-
folio should continue to hold the security.
In the event that a Portfolio investing in high yield securities experiences an
unexpected level of net redemptions, the Portfolio could be forced to sell its
holdings without regard to the investment merits, thereby decreasing the assets
upon which the Portfolio's rate of return is based.
FOREIGN INVESTMENTS. The Low Duration Bond Portfolio may invest up to 20% of
its total assets in debt securities of foreign issuers on either a currency
hedged or unhedged basis, and may hold from time to time various foreign cur-
rencies pending investment or conversion into U.S. dollars. Investing in secu-
rities of foreign issuers involves considerations not typically associated with
investing in securities of companies organized and operated in the United
States. Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, the value of a Portfolio that invests in
foreign securities will be affected favorably or unfavorably by changes in cur-
rency exchange rates.
The Low Duration Bond Portfolio's investments in foreign securities may also be
adversely affected by changes in foreign political or social conditions, diplo-
matic relations, confiscatory taxation, expropriation, limitations on the re-
moval of funds or assets, or imposition of (or change in) exchange control reg-
ulations. In addition, changes in government administrations or economic or
monetary policies in the U.S. or abroad could result in appreciation or depre-
ciation of portfolio securities and could favorably or adversely affect the
Portfolio's operations. In general, less information is publicly available with
respect to foreign issuers than is available with respect to U.S. companies.
Most foreign companies are also not subject to the uniform accounting and fi-
nancial reporting requirements applicable to issuers in the United States.
While the volume of transactions effected on foreign stock exchanges has in-
creased in recent years, it remains appreciably below that of the New York
Stock Exchange. Accordingly, the Portfolio's foreign investments may be less
liquid and their prices may be more volatile than comparable investments in se-
curities in U.S. companies. In addition, there is generally less government su-
pervision and regulation of securities exchanges, brokers and issuers in for-
eign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
To maintain greater flexibility, the Low Duration Bond Portfolio may invest in
instruments which have the characteristics of futures contracts. These instru-
ments may take a variety of forms, such as debt securities with interest or
principal payments determined by reference to the value of a currency or com-
modity at a future point in time. The risks of such investments could reflect
the risks of investing in futures, currencies and securities, including vola-
tility and illiquidity.
MUNICIPAL INVESTMENTS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced.
14.
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Revenue securities include private activity bonds which are not payable from
the unrestricted revenues of the issuer. Consequently, the credit quality of
private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the property in the event of foreclosure might prove difficult.
These securities represent a relatively new type of financing that is not yet
as marketable as more conventional securities.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less than
that for taxable obligations. Accordingly, the ability of a Portfolio to buy
and sell Municipal Obligations may, at any particular time and with respect to
any particular securities, be limited. In addition, Municipal Obligations pur-
chased by the Portfolios include obligations backed by letters of credit and
other forms of credit enhancement issued by domestic and foreign banks, as well
as other financial institutions. Changes in the credit quality of these insti-
tutions could cause loss to a Portfolio and affect its share price.
Opinions relating to the validity of Municipal Obligations and to the exemption
of interest thereon from Federal and state income tax are rendered by counsel
to the respective issuers and sponsors of the obligations at the time of issu-
ance. The Fund and its service providers will rely on such opinions and will
not review independently the underlying proceedings relating to the issuance of
Municipal Obligations, the creation of any tax-exempt derivative securities, or
the bases for such opinions.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios may enter into these transactions primarily to preserve a return or spread
on a particular investment or portion of their holdings, as a duration manage-
ment technique or to protect against an increase in the price of securities a
Portfolio anticipates purchasing at a later date. The Portfolios intend to use
these transactions as a hedge and not as a speculative investment.
Interest rate swaps involve the exchange by a Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of inter-
est on a notional principal amount from the party selling such interest rate
floor.
In addition, the Low Duration Bond Portfolio may engage in foreign currency ex-
change transactions to protect against uncertainty in the level of future ex-
change rates. The Portfolio may engage in foreign currency exchange transac-
tions in connection with the purchase and sale of portfolio securities (trans-
action hedging) and to protect the value of specific portfolio positions (posi-
tion hedging). The Portfolio may purchase or sell a foreign currency on a spot
(or cash) basis at the prevailing spot rate in connection with the settlement
of
15.
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transactions in portfolio securities denominated in that foreign currency, and
may also enter into contracts to purchase or sell foreign currencies at a fu-
ture date ("forward contracts") and purchase and sell foreign currency futures
contracts ("futures contracts"). The Portfolio may also purchase exchange-
listed and over-the-counter call and put options on futures contracts and on
foreign currencies, and may write covered call options on up to 100% of the
currencies in its portfolio. In order to protect against currency fluctua-
tions, the Portfolio may enter into currency swaps. Currency swaps involve the
exchange of the rights of the Portfolio and another party to make or receive
payments in specified currencies.
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment
objective, each Portfolio may write (i.e. sell) covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative, or
cross-hedging. For the payment of a premium, the purchaser of an option ob-
tains the right to buy (in the case of a call option) or to sell (in the case
of a put option) a security at a stated exercise price for a specific period
of time. These options may relate to particular securities, securities indices
or the yield differential between two securities, or, in the case of the Low
Duration Bond Portfolio, foreign currencies, and may or may not be listed on a
securities exchange and may or may not be issued by the Options Clearing Cor-
poration. A Portfolio will not purchase put and call options when the aggre-
gate premiums on outstanding options exceed 5% of its net assets at the time
of purchase, and will not write options on more than 25% of the value of its
net assets (measured at the time an option is written). Options trading is a
highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections af-
forded purchasers of listed options issued by the Options Clearing Corpora-
tion, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may
also invest in futures contracts and options on futures contracts for hedging
purposes or to maintain liquidity. The value of a Portfolio's contracts may
equal or exceed 100% of its total assets, although a Portfolio will not pur-
chase or sell a futures contract unless immediately afterwards the aggregate
amount of margin deposits on its existing futures positions plus the amount of
premiums paid for related futures options entered into for other than bona
fide hedging purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order
to offset an expected decrease in the value of its portfolio positions that
might otherwise result from a market decline or currency exchange fluctuation.
A Portfolio may do so either to hedge the value of its securities portfolio as
a whole, or to protect against declines occurring prior to sales of securities
in the value of the securities to be sold. In addition, a Portfolio may uti-
lize futures contracts in anticipation of changes in the composition of its
holdings or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a purchaser or
a seller of a futures contract at a specified exercise price during the option
period. When a Portfolio sells an option on a futures contract, it becomes ob-
ligated to sell or buy a futures contract if the option is exercised. In con-
nection with a Portfolio's position in a futures contract or related option,
the Fund will create a segregated account of liquid assets or will otherwise
cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options are
(a) the imperfect correlation between the change in market value of the in-
struments held by a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; (d)
the sub-adviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors;
and (e) the possibility that the
16.
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counterparty will default to the performance of its obligations. For further
discussion of risks involved with domestic and foreign futures and options, see
the Statement of Additional Information.
The Fund intends to comply with the regulations of the Commodity Futures Trad-
ing Commission exempting the Portfolios from registration as a "commodity pool
operator."
GUARANTEED INVESTMENT CONTRACTS. The Portfolios may make limited investments in
guaranteed investment contracts ("GICs") issued by highly rated U.S. insurance
companies. Under these contracts, a Portfolio makes cash contributions to a de-
posit fund of the insurance company's general account. The insurance company
then credits to the Portfolio, on a monthly basis, interest which is based on
an index (such as the Salomon Brothers CD Index), but is guaranteed not to be
less than a certain minimum rate. Each Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or ir-
revocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. A Portfolio may not make
such loans in excess of 33 1/3% of the value of its total assets. Securities
loans involve risks of delay in receiving additional collateral or in recover-
ing the loaned securities, or possibly loss of rights in the collateral if the
borrower of the securities becomes insolvent.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Portfolios may purchase rated and
unrated variable and floating rate instruments. These instruments may include
variable amount master demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Portfolios may invest up to 10% of their total assets in leveraged inverse
floating rate debt instruments ("inverse floaters"). The interest rate of an
inverse floater resets in the opposite direction from the market rate of inter-
est to which it is indexed. An inverse floater may be considered to be
leveraged to the extent that its interest rate varies by a magnitude that ex-
ceeds the magnitude of the change in the index rate of interest. The higher de-
gree of leverage inherent in inverse floaters is associated with greater vola-
tility in their market values. Issuers of unrated variable and floating rate
instruments must satisfy the same criteria as set forth above for a Portfolio.
The absence of an active secondary market with respect to particular variable
and floating rate instruments, however, could make it difficult for a Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase
them at an agreed upon time and price ("repurchase agreements"). Repurchase
agreements are, in substance, loans. Default by or bankruptcy of a seller would
expose a Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying obligations.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS. Each Portfolio is autho-
rized to borrow money. If the securities held by a Portfolio should decline in
value while borrowings are outstanding, the net asset value of the Portfolio's
outstanding shares will decline in value by proportionately more than the de-
cline in value suffered by the Portfolio's securities. Borrowings may be made
through reverse repurchase agreements under which a Portfolio sells portfolio
securities to financial institutions such as banks and broker-dealers and
agrees to repurchase them at a particular date and price. The Portfolios may
use the proceeds of reverse repurchase agreements to purchase other securities
either maturing, or under an agreement to resell, on a date simultaneous with
or prior to the expiration of the reverse repurchase agreement. The Portfolios
may use reverse repurchase agreements when it is anticipated that the interest
income to be earned from the investment of the proceeds of the transaction is
greater than the interest expense of the transaction. This use of reverse re-
purchase agreements may be regarded as leveraging and, therefore, speculative.
Reverse
17.
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repurchase agreements involve the risks that the interest income earned in the
investment of the proceeds will be less than the interest expense, that the
market value of the securities sold by a Portfolio may decline below the price
of the securities the Portfolio is obligated to repurchase and that the securi-
ties may not be returned to the Portfolio. During the time a reverse repurchase
agreement is outstanding, a Portfolio will maintain a segregated account with
the Fund's custodian containing cash, U.S. Government or other appropriate liq-
uid securities having a value at least equal to the repurchase price. A Portfo-
lio's reverse repurchase agreements, together with any other borrowings, will
not exceed, in the aggregate, 33 1/3% of the value of its total assets. In ad-
dition, a Portfolio may borrow up to an additional 5% of its total assets for
temporary purposes.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a share-
holder of another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that each Portfolio bears directly in connection with its
own operations.
ILLIQUID SECURITIES. No Portfolio will invest more than 15% of the value of its
net assets in securities that are illiquid. GICs, variable and floating rate
instruments that cannot be disposed of within seven days, and repurchase agree-
ments and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to this 15% limit. Each
Portfolio may purchase securities which are not registered under the Securities
Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the Portfolios' sub-
adviser in accordance with guidelines established by the Fund's Board of Trust-
ees that an adequate trading market exists for the securities. This investment
practice could have the effect of increasing the level of illiquidity in a
Portfolio during any period that qualified institutional buyers become uninter-
ested in purchasing these restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security that it owns or intends to
purchase, regardless of future changes in interest rates or market action.
When-issued and forward commitment transactions involve the risk, however, that
the price or yield obtained in a transaction may be less favorable than the
price or yield available in the market when the securities delivery takes
place. Each Portfolio's when-issued purchases and forward commitments are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio may enter into
dollar roll transactions. A dollar roll transaction involves a sale by the
Portfolio of a mortgage-backed or other security concurrently with an agreement
by the Portfolio to repurchase a similar security at a later date at an agreed-
upon price. The securities that are repurchased will bear the same interest
rate and stated maturity as those sold, but pools of mortgages collateralizing
those securities may have different prepayment histories than those sold. Dur-
ing the period between the sale and repurchase, a Portfolio will not be enti-
tled to receive interest and principal payments on the securities sold. Pro-
ceeds of the sale will be invested in additional instruments for the Portfolio,
and the income from these investments will generate income for the Portfolio.
If such income does not exceed the income, capital appreciation and gain or
loss that would have been realized on the securities sold as part of the dollar
roll, the use of this technique will diminish the investment performance of a
Portfolio compared with what the performance would have been without the use of
dollar rolls. At the time a Portfolio enters into a dollar roll transaction, it
will place in a segregated account maintained with its custodian cash, U.S.
Government securities or other liquid securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that its value is maintained. A Portfolio's dollar
18.
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rolls, together with its reverse repurchase agreements and other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the sub-adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully em-
ployed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
PORTFOLIO TURNOVER RATES. In the past, the annualized portfolio turnover rates
of the Portfolios have exceeded 500%. A Portfolio's annual portfolio turnover
rate will not be a factor preventing a sale or purchase when the sub-adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular
year. High portfolio turnover rates (i.e., 100% or more) will generally result
in higher transaction costs to a Portfolio and may result in the realization of
short-term capital gains that are taxable to shareholders as ordinary income.
INTEREST RATE AND EXTENSION RISK. The value of fixed income securities in the
Portfolios can be expected to vary inversely with changes in prevailing inter-
est rates. Fixed income securities with longer maturities, which tend to pro-
duce higher yields, are subject to potentially greater capital appreciation and
depreciation than securities with shorter maturities. The Portfolios are not
restricted to any maximum or minimum time to maturity in purchasing individual
portfolio securities, and the average maturity of a Portfolio's assets is ex-
pected to vary within the limits stated above under "What Are the Differences
Among the Portfolios?" based upon the sub-adviser's assessment of economic and
market conditions. Although the Portfolios' sub-adviser will normally attempt
to structure each Portfolio to have a comparable duration to its benchmark as
stated in that section, there can be no assurance that it will be able to do so
at all times.
19.
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of its Board of Trustees. The following persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Corporation.
Raymond J. Clark--Treasurer of Princeton University.
Robert M. Hernandez--Vice Chairman and Chief Financial Offi-
cer of USX Corporation.
Anthony M. Santomero--Professor of Finance and Director of
the Financial Institutions Center, The Wharton School, Uni-
versity of Pennsylvania.
David R. Wilmerding, Jr.--Chairman, Gee, Wilmerding & Associ-
ates, Inc.
ADVISER AND The Adviser to the Compass Capital Funds is PNC Asset Manage-
SUB-ADVISER ment Group ("PAMG"). Each of the Portfolios is managed by a
specialized portfolio manager who is a member of PAMG's fixed
income portfolio management subsidiary, BlackRock Financial
Management, Inc. ("BlackRock"). BlackRock has its primary of-
fices at 345 Park Avenue, New York, New York 10154.
The Portfolios and their portfolio managers are as follows:
<TABLE>
<CAPTION>
COMPASS CAPITAL PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<C> <S>
Low Duration Bond Robert S. Kapito; Vice Chairman of BlackRock since
1988; Portfolio co-manager since its inception.
Scott Amero; Managing Director of BlackRock since
1990; Portfolio co-manager since its inception.
Jody Kochansky; Vice President
of BlackRock since 1992; Portfolio co-manager since
1995.
Core Bond Keith Anderson; Managing Director of BlackRock and
co-head of the portfolio management group since
1988; has participated in the management of the
Portfolio since its inception; Portfolio co-manager
since June 1997.
Robert Michele, CPA; Managing Director of BlackRock
since 1996; Director and Head of U.S. Fixed Income
Investments at CS First Boston Investment Management
Corporation from 1993 to 1995; Deputy Manager and
Senior Portfolio Manager at Brown Brothers Harriman
& Co. from 1985 to 1993; has participated in the
management of the Portfolio since 1995; Portfolio
co-manager since June 1997.
Intermediate Bond Robert S. Kapito (see above); Portfolio co-manager
since 1995.
Michael P. Lustig; Vice President of BlackRock since
1989; Portfolio co-manager since 1995.
Scott Amero (see above); Portfolio co-manager since
1995.
</TABLE>
PAMG was organized in 1994 to perform advisory services for
investment companies, and has its principal offices at 1600
Market Street, 29th Floor, Philadelphia, Pennsylvania 19103.
PAMG is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company.
20.
<PAGE>
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For their investment advisory and sub-advisory services, PAMG
and the Portfolios' sub-adviser are entitled to fees, computed
daily on a Portfolio-by-Portfolio basis and payable monthly, at
the maximum annual rates set forth below. As stated under "What
Are The Expenses Of The Portfolios?" PAMG and the sub-adviser
intend to waive a portion of their fees during the current fis-
cal year. All sub-advisory fees are paid by PAMG, and do not
represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
-------------------------
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
------------------------ ------------ ------------
<S> <C> <C>
first $1 billion .500% .350%
$1 billion--$2 billion .450 .300
$2 billion--$3 billion .425 .275
greater than $3 billion .400 .250
</TABLE>
For the twelve months ended September 30, 1997, the Low Dura-
tion Bond and Core Bond Portfolios paid investment advisory
fees, after voluntary fee waivers, at the annual rates of
[.22%] and [.22%] of their respective average daily net assets.
The Portfolios' sub-adviser strives to achieve best execution
on all transactions. Infrequently, brokerage transactions for
the Portfolios may be directed through registered
broker/dealers who have entered into dealer agreements with
Compass Capital's distributor, subject to the requirements of
best execution.
ADMINISTRATORS Compass Capital Group, Inc. ("CCG"), PFPC Inc. ("PFPC") and
Compass Distributors, Inc. ("CDI") (the "Administrators") serve
as the 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 ma-
jority of the outstanding stock of PDI is owned by its offi-
cers.
The Administrators generally assist the Fund in all aspects of
its administration and operation, including matters relating to
the maintenance of financial records, fund accounting and ser-
vicing relating to investments in BlackRock Shares. As compen-
sation for these services, CCG is entitled to receive a fee,
computed daily and payable monthly, at an annual rate of .03%
of each Portfolio's average daily net assets. PFPC and CDI are
entitled to receive a combined fee, computed daily and payable
monthly, at an aggregate annual rate of (i) .085% of the first
$500 million of each Portfolio's average daily net assets,
.075% of the next $500 million of each Portfolio's average
daily net assets and .065% of the average daily net assets of
each Portfolio in excess of $1 billion and (ii) .115% of the
first $500 million of average daily net assets allocated to the
BlackRock Shares of each Portfolio, .105% of the next $500 mil-
lion of such average daily net assets and .095% of the average
daily net assets allocated to the BlackRock Shares of each
Portfolio in excess of $1 billion. From time to time the Admin-
istrators may waive some or all of their administration fees
from a Portfolio.
For information about the operating expenses the Portfolios ex-
pect to pay for the current fiscal period, see "What Are The
Expenses Of The Portfolios?"
TRANSFER PNC Bank serves as the Portfolios' custodian and PFPC serves as
AGENT, their transfer agent and dividend disbursing agent.
DIVIDEND
DISBURSING
AGENT AND
CUSTODIAN
21.
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EXPENSES Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses in-
clude, but are not limited to, fees paid to PAMG and the Ad-
ministrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, fees and expenses
in registering and qualifying the Portfolios and their shares
for distribution under Federal and state securities laws, ex-
penses of preparing prospectuses and statements of additional
information and of printing and distributing prospectuses and
statements of additional information to existing sharehold-
ers, expenses relating to shareholder reports, shareholder
meetings and proxy solicitations, insurance premiums, the ex-
pense of independent pricing services, and other expenses
which are not expressly assumed by PAMG or the Fund's service
providers under their agreements with the Fund. Any general
expenses of the Fund that do not belong to a particular in-
vestment portfolio will be allocated among all investment
portfolios by or under the direction of the Board of Trustees
in a manner the Board determines to be fair and equitable.
22.
<PAGE>
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HOW ARE SHARES PURCHASED AND REDEEMED?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by CDI
as distributor (the "Distributor"). CDI maintains its principal offices at Four
Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The Fund is not required or permitted under the Plan to
make distribution payments with respect to BlackRock Shares. However, 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 ac-
tivities out of their past profits or other sources available to them which,
subject to applicable NASD regulations, may include contributions to various
non-cash and cash incentive arrangements to promote the sale of shares, as well
as sponsorship of various educational programs, sales contests and promotions
in which participants may receive reimbursement of expenses, entertainment and
prizes such as travel awards, merchandise and cash. For further information,
see "Investment Advisory, Administration, Distribution and Servicing Arrange-
ments" in the Statement of Additional Information.
PURCHASE OF SHARES. BlackRock Shares are offered to institutional investors
with a minimum investment of $5,000,000. There is no minimum subsequent invest-
ment requirement.
BlackRock Shares are sold at their net asset value per share next computed af-
ter an order is received by PFPC. Orders received by PFPC by 4:00 p.m. (Eastern
Time) on a Business Day are priced the same day. A "Business Day" is any week-
day that the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank
of Philadelphia (the "FRB") are open for business.
Purchase orders may be placed by telephoning PFPC at (800) 441-7450. Orders re-
ceived by PFPC after 4:00 p.m. (Eastern Time) are priced on the following Busi-
ness Day.
Payment for BlackRock Shares must normally be made in Federal funds or other
funds immediately available to the Fund's custodian. Payment may also, in the
discretion of the Fund, be made in the form of securities that are permissible
investments for the respective Portfolios. For further information, see the
Statement of Additional Information.
Compass Capital may in its discretion waive the minimum investment amount and
may reject any order for BlackRock Shares.
REDEMPTION OF SHARES. Redemption orders for BlackRock Shares may be placed by
telephoning PFPC at (800) 441-7450. BlackRock Shares are redeemed at their net
asset value per share next determined after PFPC's receipt of the redemption
order. The Fund, the Administrators and the Distributor will employ reasonable
procedures to confirm that instructions 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 be-
lieved to be genuine in accordance with such procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of PAMG, an earlier payment could
adversely affect a Portfolio. No charge for wiring redemption payments is im-
posed by the Fund.
23.
<PAGE>
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During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may redeem BlackRock Shares in any Portfolio account if the account
balance drops below $5,000,000 as the result of redemption requests and the
shareholder does not increase the balance to at least $5,000,000 on thirty
days' written notice.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
24.
<PAGE>
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HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for BlackRock Shares of each Portfolio
as of the close of regular trading hours on the NYSE (currently 4:00 p.m. East-
ern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio that are allocated to its BlackRock Shares,
less the liabilities charged to its BlackRock Shares, by the number of its
BlackRock Shares that are outstanding.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees. The amortized cost method of valuation will also
be used with respect to debt obligations with sixty days or less remaining to
maturity unless a Portfolio's sub-adviser under the supervision of the Board of
Trustees determines such method does not represent fair value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Each Portfolio will distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. All distributions are
reinvested at net asset value in the form of additional full and fractional
shares of BlackRock Shares of the relevant Portfolio unless a shareholder
elects otherwise. Such election, or any revocation thereof, must be made in
writing to PFPC, and will become effective with respect to dividends paid after
its receipt by PFPC. Each Portfolio declares a dividend each day on "settled"
shares (i.e. shares for which the particular Portfolio has received payment in
Federal funds) on the first Business Day after a purchase order is placed with
the Fund. Over the course of a year, substantially all of the Portfolios' net
investment income will be declared as dividends. The amount of the daily divi-
dend for each Portfolio will be based on periodic projections of its net in-
vestment income. All dividends are paid within ten days after the end of each
month. Net realized capital gains (including net short-term capital gains), if
any, will be distributed by each Portfolio at least annually.
25.
<PAGE>
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HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), whether the distributions are paid in cash or
reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before the record date for a
capital gains distribution should be aware that the amount of the forthcoming
payment, although in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Dividends paid by each Portfolio may be taxable to investors under
state or local law as dividend income even though a portion of the dividends
may be derived from interest on obligations which, if realized directly, would
be exempt from such income taxes. In addition, shareholders who are non-resi-
dent alien individuals, foreign trusts or estates, foreign corporations or for-
eign partnerships may be subject to different Federal income tax treatment. Fu-
ture legislative or administrative changes or court decisions may materially
affect the tax consequences of investing in a Portfolio. For additional infor-
mation concerning the tax treatment of dividends and distributions by the
states listed below, including certain restrictions applicable to such treat-
ment, see "Taxes" in the Statement of Additional Information.
26.
<PAGE>
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HOW IS THE FUND ORGANIZED?
- --------------------------------------------------------------------------------
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. On January 12, 1996 the Fund changed its name from The PNC(R) Fund to
Compass Capital FundsSM. The Declaration of Trust authorizes the Board of
Trustees to classify and reclassify any unissued shares into one or more clas-
ses of shares. Pursuant to this authority, the Trustees have authorized the is-
suance of an unlimited number of shares in 36 investment portfolios. Each port-
folio has the ability to offer five separate classes of shares--Institutional
Shares, Service Shares, Investor A Shares, Investor B Shares and Investor C
Shares. In addition, the Low Duration Bond Portfolio, Core Bond Portfolio and
Intermediate Bond Portfolio offer a sixth share class--BlackRock Shares. This
Prospectus relates only to BlackRock Shares of the Portfolios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, certain administrative/servicing
fees and amounts payable under the Fund's Distribution and Service Plan. In ad-
dition, each class of Investor Shares is sold with different sales charges. Be-
cause of these "class expenses" and sales charges, the performance of the
BlackRock Shares of a Portfolio is expected to be no less than the performance
of the Portfolio's Institutional Shares, the performance of both the BlackRock
Shares and Institutional Shares of a Portfolio is expected to be higher than
the performance of the Portfolio's Service Shares, and the performance of the
BlackRock Shares, Institutional Shares and Service Shares of a Portfolio is ex-
pected to be higher than the performance of the Portfolio's classes of Investor
Shares. The performance of each class of Investor Shares may be different. The
Fund offers various services and privileges in connection with its Investor
Shares that are not generally offered in connection with its BlackRock, Insti-
tutional and Service Shares, including an automatic investment plan and an au-
tomatic withdrawal plan. For further information regarding the Fund's Institu-
tional, Service and Investor Share classes, contact PFPC at (800) 441-7764 (In-
stitutional and Service Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets that are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On December 31, 1997, PNC Bank held of record approximately % of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
27.
<PAGE>
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HOW IS PERFORMANCE CALCULATED?
- -------------------------------------------------------------------------------
Performance information for BlackRock Shares of the Portfolios may be quoted
in advertisements and communications to shareholders. Total return will be
calculated on an average annual total return basis for various periods. Aver-
age annual total return reflects the average annual percentage change in value
of an investment in BlackRock Shares of a Portfolio over the measuring period.
Total return may also be calculated on an aggregate total return basis. Aggre-
gate total return reflects the total percentage change in value over the mea-
suring period. Both methods of calculating total return assume that dividend
and capital gain distributions made by a Portfolio with respect to its Black-
Rock Shares are reinvested in BlackRock Shares.
The yield of BlackRock Shares is computed by dividing the Portfolio's net in-
come per share allocated to its BlackRock Shares during a 30-day (or one
month) period by the net asset value per share on the last day of the period
and annualizing the result on a semi-annual basis.
The performance of a Portfolio's BlackRock Shares may be compared to the per-
formance of other mutual funds with similar investment objectives and to rele-
vant indices, as well as to ratings or rankings prepared by independent serv-
ices or other financial or industry publications that monitor the performance
of mutual funds. For example, the performance of a Portfolio's BlackRock
Shares may be compared to data prepared by Lipper Analytical Services, Inc.,
CDA Investment Technologies, Inc. and Weisenberger Investment Company Service,
and with the performance of the Lehman GMNA Index, the T-Bill Index, the
"stocks, bonds and inflation index" published annually by Ibbotson Associates
and the Lehman Government Corporate Bond Index, as well as the benchmarks at-
tached to this Prospectus. Performance information may also include evalua-
tions of the Portfolios and their BlackRock Shares published by nationally
recognized ranking services, and information as reported in financial publica-
tions such as Business Week, Fortune, Institutional Investor, Money Magazine,
Forbes, Barron's, The Wall Street Journal and The New York Times, or in publi-
cations of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of BlackRock Shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance
and should not be considered representative of future results. The investment
return and principal value of an investment in a Portfolio will fluctuate so
that an investor's BlackRock Shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data
for BlackRock Shares of a Portfolio cannot necessarily be used to compare an
investment in such shares with bank deposits, savings accounts and similar in-
vestment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Performance is generally a function of the kind
and quality of the instruments held in a portfolio, portfolio maturity, oper-
ating expenses and market conditions. Any fees charged by brokers or other in-
stitutions directly to their customer accounts in connection with investments
in BlackRock Shares will not be included in the Portfolio's performance calcu-
lations.
28.
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HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
CONVENIENT WAYS TO ACCESS FUND INFORMATION
Below is a brief description of how investors can easily access information
about the Compass Capital Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
MUTUAL FUND SPECIALISTS 9 AM to 6 PM, E.S.T. toll-free 888-4COMPASS
Available to provide Monday through Friday toll-free 888-426-6727
performance and market toll-free 800-388-8734
trends.
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 888-4COMPASS
COMMENTARY toll-free 888-426-6727
(Audio recording updated toll-free 800-388-8734
periodically)
SHAREHOLDER SERVICES
TELEPHONE ACCESS: 24 Hours, 7 days a week toll-free 800-441-7764
ACCOUNT SERVICE 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
REPRESENTATIVES: Monday through Friday
Available to discuss
account balance
information, mutual fund
prospectus, literature
and discuss programs and
services available.
PURCHASES AND 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
REDEMPTIONS: Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.compassfunds.com
information and specific
fund performance.
Request mutual fund
prospectuses and
literature. Forward
mutual fund inquiries.
E-MAIL:
Request prospectuses and 24 Hours, 7 days a week [email protected]
literature. Forward
mutual fund inquiries.
WRITTEN CORRESPONDENCE: POST OFFICE BOX ADDRESS STREET ADDRESS
Compass Capital Funds Compass Capital Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
29.
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APPENDIX A
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1
Treasury Index to 2.99 years
Core Bond Lehman Aggregate The Lehman Aggregate contains issues that
meet the following criteria:
. At least $100 million par amount
outstanding for entry and exit
. Rated investment grade (at least Baa-3)
by Moody's or S&P (if not rated by
Moody's)
. At least one year at maturity
. Coupon must have a fixed rate
. Excludes CMOs, ARMs, manufactured homes,
non-agency bonds, buydowns, graduated
equity mortgages, project loans and non-
conforming ("jumbo") mortgages
. As of November 1996, the composition of
the Lehman Brothers Aggregate Index is:
52% allocation to Treasury and government
securities
29% allocation to mortgage-backed
securities
19% allocation to corporate and asset-
backed securities
Intermediate Bond Lehman Brothers Treasury, agency and corporate issues in
Intermediate the Lehman Aggregate, excluding maturities
Government/Corporate above 9.99 years.
</TABLE>
30.
<PAGE>
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APPENDIX B
DESCRIPTIONS OF RATING CATEGORIES
The following are descriptions of ratings assigned by Standard & Poor's Corpo-
ration ("S&P") and Moody's Investors Service, Inc. ("Moody's") to certain debt
securities in which the Compass Capital Bond Portfolios may invest. See the
Statement of Additional Information for descriptions of other Moody's and S&P
rating categories and those of other rating agencies.
STANDARD & POOR'S:
"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 re-
pay principal and differs from AAA issues only in small degree.
"A"--Debt is considered to have a strong capacity to pay interest and repay
principal although such issues are somewhat more susceptible to the adverse ef-
fects 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 re-
pay principal. Whereas such issues normally exhibit adequate protection parame-
ters, 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 ac-
cordance 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 ca-
pacity 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 inter-
est and repay principal. The "B" rating category is also used for debt subordi-
nated to senior debt that is assigned an actual or implied "BB" or "BB-" rat-
ing.
"CCC"--Debt has a currently identifiable vulnerability to default, and is de-
pendent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the capac-
ity to pay interest and repay principal. The "CCC" rating category is also used
for debt subordinated to senior debt that is assigned an actual or implied "B"
or "B-" rating.
"CC"--This rating is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC" rating.
"C"--This rating is typically applied to debt subordinated to senior debt which
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt serv-
ice payments are continued.
"CI"--This rating is reserved for income bonds on which no interest is being
paid.
31.
<PAGE>
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"D"--Debt is in payment default. This rating is used when interest payments or
principal payments are not made on the date due, even if the applicable grace
period has not expired, unless S & P believes that such payments will be made
during such grace period. "D" rating is also used upon the filing of a bank-
ruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-)--The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"r"--This rating is attached to highlight derivative, hybrid, and certain other
obligations that S & P believes may experience high volatility or high vari-
ability in expected returns due to non-credit risks. Examples of such obliga-
tions are: securities whose principal or interest return is indexed to equi-
ties, commodities, or currencies; certain swaps and options; and interest only
and principal only mortgage securities. The absence of an "r" symbol should not
be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
MOODY'S:
"Aaa"--Bonds are judged to be of the best quality. They carry the smallest de-
gree 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 fun-
damentally strong position of such issues.
"Aa"--Bonds are judged to be of high quality by all standards. Together with
the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A"--Bonds possess many favorable investment attributes and are to be consid-
ered 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 character-
istics as well.
"Ba," "B," "Caa," "Ca," and "C"--Bonds that possess one of these ratings pro-
vide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of desir-
able 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 pro-
jects unseasoned in operation experience, (c) rentals which begin when facili-
ties are completed, or (d) payments to which some other limiting condition at-
taches. 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 qual-
ity of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Baa1, Ba1 and B1.
32.
<PAGE>
COMPASS CAPITAL FUNDS
THE COMPASS CAPITAL FUNDS
Compass Capital Funds is a leading mutual fund company currently managing in
excess of $12 billion in 33 portfolios designed to fit a broad range of
investment goals. Each portfolio is managed by recognized experts in equity,
fixed income, international, and tax-free investing who adhere to pure
investment styleSM.
STOCK PORTFOLIOS
- --------------------------------------------------------------------------------
Large Cap Growth Equity Small Cap Growth Equity
Large Cap Value Equity Small Cap Value Equity
Mid-Cap Growth Equity International Equity
Mid-Cap Value Equity International Emerging Markets
Index Equity
Select Equity
International Small Cap Equity
Micro-Cap Equity
STOCK & BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
Intermediate Bond
Core Bond International Bond
High Yield
TAX-FREE BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Tax-Free Income New Jersey Tax-Free Income
Pennsylvania Tax-Free Income Ohio Tax-Free Income
MONEY MARKET PORTFOLIOS
- --------------------------------------------------------------------------------
Money Market North Carolina Municipal Money Market
U.S. Treasury Money Market Ohio Municipal Money Market
Municipal Money Market Pennsylvania Municipal Money Market
New Jersey Municipal Money Market Virginia Municipal Money Market
<PAGE>
COMPASS CAPITAL FUNDSSM
(formerly, The PNC(R) Fund)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary information
pertaining to shares representing interests in the Money Market, Municipal Money
Market, U.S. Treasury Money Market (formerly, the Government Money Market
Portfolio), Ohio Municipal Money Market, Pennsylvania Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money Market, New
Jersey Municipal Money Market, Large Cap Value Equity (formerly, the Value
Equity Portfolio), Large Cap Growth Equity (formerly, the Growth Equity
Portfolio), Index Equity, Small Cap Value Equity, Mid-Cap Value Equity,
Micro-Cap Equity, International Equity, International Emerging Markets,
International Small Cap Equity, Balanced, Small Cap Growth Equity, Mid-Cap
Growth Equity, Select Equity (formerly, the Core Equity Portfolio), Managed
Income, High Yield, Tax-Free Income, Intermediate Government Bond (formerly, the
Intermediate Government Portfolio), Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Low Duration Bond (formerly, the Short Government Bond Portfolio),
Intermediate Bond (formerly, the Intermediate-Term Bond Portfolio), Government
Income, International Bond (formerly, the International Fixed Income Portfolio),
New Jersey Tax-Free Income and Core Bond Portfolios (collectively, the
"Portfolios") of Compass Capital Funds (the "Fund"). The Money Market, Municipal
Money Market, U.S. Treasury Money Market, Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, North Carolina Municipal Money Market,
Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios
are called "Money Market Portfolios," and the other Portfolios are called
"Non-Money Market Portfolios." This Statement of Additional Information is not a
prospectus, and should be read only in conjunction with the Prospectuses of the
Fund relating to the Portfolios dated January 28, 1998, as amended from time to
time (the "Prospectuses"). Prospectuses may be obtained from the Fund's
distributor by calling toll-free (800) 441-7379. This Statement of Additional
Information is dated January 28, 1998. Capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the
Prospectuses.
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CONTENTS
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Investment Policies....................................................... 3
Special Considerations for State-Specific
Portfolios............................................................... 22
Trustees and Officers..................................................... 51
Shareholder and Trustee Liability of the Fund............................. 62
Investment Advisory, Administration,
Distribution and Servicing Arrangements.................................. 63
Portfolio Transactions.................................................... 90
Purchase and Redemption Information....................................... 95
Valuation of Portfolio Securities......................................... 102
Performance Information................................................... 106
Taxes..................................................................... 137
Additional Information Concerning Shares.................................. 146
Miscellaneous............................................................. 148
Financial Statements ..................................................... 151
Appendix A (Description of Securities Ratings)............................ A-1
Appendix B (Description of Futures)....................................... B-1
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No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or the
Prospectuses in connection with the offering made by the Prospectuses and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Fund or its distributor. The Prospectuses do not
constitute an offering by the Fund or by the Fund's distributor in any
jurisdiction in which such offering may not lawfully be made.
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INVESTMENT POLICIES
The following supplements information contained in the Prospectuses
concerning the Portfolios' investment policies. Except as indicated, the
information below relates only to those Portfolios that are authorized to invest
in the instruments or securities described below.
The Index Equity Portfolio invests all of its investable assets in The U.S.
Large Company Series (the "Index Master Portfolio") of The DFA Investment Trust
Company (the "Trust"). Accordingly, the following discussion relates to: (i) the
investment policies of all the Portfolios including the Index Equity Portfolio;
and (ii) where indicated the investment policies of the Index Master Portfolio.
Additional Information on Investment Strategy
The Large Cap Value Equity, Large Cap Growth Equity, Mid-Cap Value Equity
and Mid-Cap Growth Equity Portfolios will invest primarily in securities of
established companies. For this purpose, an established company is one which,
together with its predecessors, has at least three years of continuous operating
history.
The Low Duration Bond Portfolio will seek to maintain a duration for its
portfolio in a range of +/-20% of the current duration of the Merrill Lynch 1-3
Year Treasury Index. The Government Income Portfolio will seek to maintain an
interest rate sensitivity within a range comparable to that of 7 to 10 year U.S.
Treasury bonds.
Additional Information on Portfolio Investments.
Reverse Repurchase Agreements. Each Portfolio (including the Index Master
Portfolio) other than the Municipal Money Market, Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, North Carolina Municipal Money Market,
Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios
(the "Municipal Money Market Portfolios") may invest in reverse repurchase
agreements. Reverse repurchase agreements involve the sale of securities held by
a Portfolio pursuant to a Portfolio's agreement to repurchase the securities at
an agreed upon price, date and interest rate. Such agreements are considered to
be borrowings under the Investment Company Act of 1940 (the "1940 Act"). While
reverse repurchase transactions are outstanding, a Portfolio will maintain in a
segregated account liquid assets in an amount at least equal to the market value
of the securities, plus accrued interest, subject to the agreement.
Variable and Floating Rate Instruments. With respect to purchasable
variable and floating rate instruments, the adviser
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or sub-adviser will consider the earning power, cash flows and liquidity ratios
of the issuers and guarantors of such instruments and, if the instruments are
subject to a demand feature, will monitor their financial status to meet payment
on demand. Such instruments may include variable amount master demand notes that
permit the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. The absence of an active secondary market with
respect to particular variable and floating rate instruments could make it
difficult for a Portfolio to dispose of a variable or floating rate note if the
issuer defaulted on its payment obligation or during periods that the Portfolio
is not entitled to exercise its demand rights, and the Portfolio could, for
these or other reasons, suffer a loss with respect to such instruments. In
determining average-weighted portfolio maturity, an instrument will be deemed to
have a maturity equal to either the period remaining until the next interest
rate adjustment or the time the Portfolio involved can recover payment of
principal as specified in the instrument, depending on the type of instrument
involved.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign
Branches of U.S. Banks. Each Portfolio may purchase bank obligations, such as
certificates of deposit, bankers' acceptances and time deposits, including
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions having total assets at the time of purchase in excess of $1
billion. The assets of a bank or savings institution will be deemed to include
the assets of its domestic and foreign branches for purposes of each Portfolio's
investment policies. Investments in short-term bank obligations may include
obligations of foreign banks and domestic branches of foreign banks, and also
foreign branches of domestic banks.
The Index Master Portfolio may purchase obligations of U.S. banks and
savings and loan associations and dollar-denominated obligations of U.S.
subsidiaries and branches of foreign banks, such as certificates of deposit
(including marketable variable rate certificates of deposit) and bankers'
acceptances. Bank certificates of deposit will only be acquired by the Index
Master Portfolio if the bank has assets in excess of $1 billion.
Mortgage-Related Securities. There are a number of important differences
among the agencies and instrumentalities of the U.S. Government that issue
mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government
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corporation within the Department of Housing and Urban Development. GNMA
certificates also are supported by the authority of GNMA to borrow funds from
the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA, are not backed by or entitled to
the full faith and credit of the United States and are supported by the right of
the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of principal and interest by FNMA. Mortgage-related
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC")
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "Pcs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Banks and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
The Managed Income, High Yield, Intermediate Government, Low Duration Bond,
Intermediate Bond, Government Income, International Bond, Core Bond, Tax-Free
Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio
Tax-Free Income Portfolios (the "Bond Portfolios") and the Balanced Portfolio
may invest in multiple class pass-through securities, including collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduit
("REMIC") pass-through or participation certificates ("REMIC Certificates").
These multiple class securities may be issued by U.S. Government agencies or
instrumentalities, including FNMA and FHLMC, or by trusts formed by private
originators of, or investors in, mortgage loans. In general, CMOs and REMICs are
debt obligations of a legal entity that are collateralized by, and multiple
class pass-through securities represent direct ownership interests in, a pool of
residential or commercial mortgage loans or mortgage pass-through securities
(the "Mortgage Assets"), the payments on which are used to make payments on the
CMOs or multiple pass-through securities. Investors may purchase beneficial
interests in CMOs and REMICs, which are known as "regular" interests or
"residual" interests. The residual in a CMO or REMIC structure generally
represents the interest in any excess
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cash flow remaining after making required payments of principal of and interest
on the CMOs or REMICs, as well as the related administrative expenses of the
issuer. Residual interests generally are junior to, and may be significantly
more volatile than, "regular" CMO and REMIC interests. The Portfolios do not
currently intend to purchase residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a "tranche,"
is issued at a specific adjustable or fixed interest rate and must be fully
retired no later than its final distribution date. Principal prepayments on the
Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or all
of the classes of CMOs or REMIC Certificates to be retired substantially earlier
than their final distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally
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have the highest priority on each payment date after interest due has been paid
to all classes entitled to receive interest currently. Shortfalls, if any, are
added to the amount payable on the next payment date. The PAC Certificate
payment schedule is taken into account in calculating the final distribution
date of each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than the PAC classes.
FNMA REMIC Certificates are issued and guaranteed as to timely distribution
of principal and interest by FNMA. In addition, FNMA will be obligated to
distribute on a timely basis to holders of FNMA REMIC Certificates required
installments of principal and interest and to distribute the principal balance
of each class of REMIC Certificates in full, whether or not sufficient funds are
otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally guarantees
ultimate collection of all principal of the related mortgage loans without
offset or deduction. FHLMC also guarantees timely payment of principal on
certain Pcs, referred to as "Gold Pcs."
Asset-Backed Securities. Asset-backed securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different parties.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage-related securities. Like other fixed-income securities,
when interest rates rise the value of an asset-backed security generally will
decline; however, when interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other
fixed-income securities.
U.S. Government Obligations. Examples of the types of U.S. Government
obligations which the Portfolios may hold include U.S. Treasury bills, Treasury
instruments and Treasury bonds and the
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obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, the Farmers Home Administration, the
Export-Import Bank of the United States, the Small Business Administration,
FNMA, GNMA, the General Services Administration, the Student Loan Marketing
Association, the Central Bank for Cooperatives, FHLMC, the Federal Intermediate
Credit Banks, the Maritime Administration, the International Bank for
Reconstruction and Development (the "World Bank"), the Asian-American
Development Bank and the Inter-American Development Bank.
The Index Master Portfolio may purchase (i) debt securities issued by the
U.S. Treasury which are direct obligations of the U.S. Government, including
bills, notes and bonds, and (ii) obligations issued or guaranteed by U.S.
Government-sponsored instrumentalities and federal agencies, including FNMA,
Federal Home Loan Bank and the Federal Housing Administration.
Supranational Organization Obligations. The Portfolios may purchase debt
securities of supranational organizations such as the European Coal and Steel
Community, the European Economic Community and the World Bank, which are
chartered to promote economic development.
Lease Obligations. The Portfolios may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
The Sub-Adviser will monitor the credit standing of each municipal borrower
and each entity providing credit support and/or a put option relating to lease
obligations. In determining whether a lease obligation is liquid, the
Sub-Adviser will consider, among other factors, the following: (i) whether the
lease can be cancelled; (ii) the degree of assurance that assets represented by
the lease could be sold; (iii) the strength of the lessee's general credit
(e.g., its debt, administrative, economic, and financial characteristics); (iv)
the likelihood that the municipality would discontinue appropriating funding for
the leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance;
and (vii) any limitations which are imposed on the lease obligor's ability to
utilize substitute property or services other than those covered by the lease
obligation.
The Municipal Money Market, Pennsylvania Municipal Money Market, Ohio
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market Portfolios will
only invest in lease
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obligations with puts that (i) may be exercised at par on not more than seven
days notice, and (ii) are issued by institutions deemed by the sub-adviser to
present minimal credit risks. Such obligations will be considered liquid.
However, a number of puts are not exercisable at the time the put would
otherwise be exercised if the municipal borrower is not contractually obligated
to make payments (e.g., an event of nonappropriation with a "nonappropriation"
lease obligation). Under such circumstances, the lease obligation while
previously considered liquid would become illiquid, and a Portfolio might lose
its entire investment in such obligation.
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to a Portfolio, and could result in a reduction in the value of the
municipal lease experiencing non-payment and a potential decrease in the net
asset value of a Portfolio. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, a Portfolio could experience delays and limitations with respect to the
collection of principal and interest on such municipal leases and a Portfolio
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in lease
payments, the Fund might take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase a Portfolio's
operating expenses and adversely affect the net asset value of a Portfolio. When
the lease contains a non-appropriation clause, however, the failure to pay would
not be a default and a Portfolio would not have the right to take possession of
the assets. Any income derived from a Portfolio's ownership or operation of such
assets may not be tax-exempt. In addition, a Portfolio's intention to qualify as
a "regulated investment company" under the Internal Revenue Code of 1986, as
amended, may limit the extent to which a Portfolio may exercise its rights by
taking possession of such assets, because as a regulated investment company a
Portfolio is subject to certain limitations on its investments and on the nature
of its income.
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Commercial Paper. The Money Market Portfolios may purchase commercial paper
rated in one of the two highest rating categories of a nationally recognized
statistical rating organization ("NRSRO"). The Non-Money Market Portfolios,
except the Index Master Portfolio, may purchase commercial paper rated (at the
time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when deemed advisable
by a Portfolio's adviser or sub-adviser, "high quality" issues rated "A-2" or
"Prime-2" by S&P or Moody's, respectively. The Index Master Portfolio may
purchase commercial paper rated (at the time of purchase) "A-1" or better by S&P
or "Prime-1" by Moody's, or, if not rated, issued by a corporation having an
outstanding unsecured debt issue rated "Aaa" by Moody's or "AAA" by S&P, and
having a maximum maturity of nine months. These ratings symbols are described in
Appendix A.
Commercial paper purchasable by each Portfolio includes "Section 4(2)
paper," a term that includes debt obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition under
the Federal securities laws, and is frequently sold (and resold) to
institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. Certain transactions in Section 4(2) paper may qualify for
the registration exemption provided in Rule 144A under the Securities Act of
1933.
Repurchase Agreements. Each Portfolio may invest in repurchase agreements.
The repurchase price under the repurchase agreements described in the
Prospectuses generally equals the price paid by a Portfolio involved plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on securities underlying the repurchase agreement). The
financial institutions with which a Portfolio may enter into repurchase
agreements will be banks and non-bank dealers of U.S. Government securities that
are listed on the Federal Reserve Bank of New York's list of reporting dealers,
if such banks and non-bank dealers are deemed creditworthy by the Portfolio's
adviser or sub-adviser. A Portfolio's adviser or sub-adviser will continue to
monitor creditworthiness of the seller under a repurchase agreement, and will
require the seller to maintain during the term of the agreement the value of the
securities subject to the agreement to equal at least the repurchase price
(including accrued interest). In addition, the Portfolio's adviser or
sub-adviser will require that the value of this collateral, after transaction
costs (including loss of interest) reasonably expected to be incurred on a
default, be equal to or greater than the repurchase price (including accrued
premium) provided in the repurchase agreement. The accrued premium is the amount
specified in the repurchase agreement or the daily
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amortization of the difference between the purchase price and the repurchase
price specified in the repurchase agreement. The Portfolio's adviser or
sub-adviser will mark-to-market daily the value of the securities. Securities
subject to repurchase agreements will be held by the Fund's custodian (or
sub-custodian) in the Federal Reserve/Treasury book-entry system or by another
authorized securities depository. Repurchase agreements are considered to be
loans by the Portfolios under the 1940 Act.
The Index Master Portfolio may enter into repurchase agreements, but will
not enter into a repurchase agreement with a duration of more than seven days
if, as a result, more than 10% of the value of its total assets would be so
invested. The Index Master Portfolio will also only invest in repurchase
agreements with a bank if the bank has at least $1 billion in assets and is
approved by the Investment Committee of DFA. DFA will monitor the market value
of transferred securities plus any accrued interest thereon so that the value of
such securities will at least equal the repurchase price. The securities
underlying the repurchase agreements will be limited to U. S. Government and
agency obligations described under "U.S. Government Obligations" above.
Investment Grade Debt Obligations. Each of the Money Market Portfolios may
invest in securities in the two highest rating categories of NRSROs. The
Non-Money Market Portfolios, except the Index Master Portfolio and the Low
Duration Bond, Intermediate Government Bond and Government Income Portfolios,
may invest in "investment grade securities," which are securities rated in the
four highest rating categories of an NRSRO. The Low Duration Bond, Intermediate
Government Bond and Government Income Portfolios may invest in debt securities
rated Aaa by Moody's or AAA by S&P. It should be noted that debt obligations
rated in the lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by
S&P) are considered to have some speculative characteristics and are more
sensitive to economic change than higher rated securities.
The Index Master Portfolio may invest in non-convertible corporate debt
securities which are issued by companies whose commercial paper is rated
"Prime-1" by Moody's or "A-1" by S&P and dollar-denominated obligations of
foreign issuers issued in the U.S. If the issuer's commercial paper is unrated,
then the debt security would have to be rated at least "AA" by S&P or "Aa2" by
Moody's. If there is neither a commercial paper rating nor a rating of the debt
security, then the Index Master Portfolio's investment adviser must determine
that the debt security is of comparable quality to equivalent issues of the same
issuer rated at least "AA" or "Aa2."
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See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.
When-Issued Purchases and Forward Commitments. The Portfolios may enter
into "when-issued" and "forward" commitments, including "TBA" (to be announced)
purchase commitments, to purchase or sell securities at a fixed price at a
future date. When a Portfolio agrees to purchase securities on this basis, the
custodian will set aside liquid assets equal to the amount of the commitment in
a separate account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case the Portfolio may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Portfolio's commitments. It may be expected that the market value of a
Portfolio's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because a Portfolio's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Portfolio expects that its forward commitments and
commitments to purchase when-issued or TBA securities will not exceed 25% of the
value of its total assets absent unusual market conditions.
If deemed advisable as a matter of investment strategy, a Portfolio may
dispose of or renegotiate a commitment after it has been entered into, and may
sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a taxable capital gain or loss.
When a Portfolio engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Portfolio starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.
Rights Offerings and Warrants to Purchase. Each equity Portfolio (except
the Index Master Portfolio) and the Balanced Portfolio may participate in rights
offerings and may purchase warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares of
the corporation at a specified price during a specified
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period of time. Subscription rights normally have a short life span to
expiration. The purchase of rights or warrants involves the risk that a
Portfolio could lose the purchase value of a right or warrant if the right to
subscribe to additional shares is not exercised prior to the rights' and
warrants' expiration. Also, the purchase of rights and/or warrants involves the
risk that the effective price paid for the right and/or warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. A Portfolio will not invest more than 5% of
its net assets, taken at market value, in warrants, or more than 2% of its net
assets, taken at market value, in warrants not listed on the New York or
American Stock Exchanges. Warrants acquired by a Portfolio in units or attached
to other securities are not subject to this restriction.
Foreign Currency Transactions. Forward foreign currency exchange contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow a
Portfolio to establish a rate of exchange for a future point in time. A
Portfolio may use forward foreign currency exchange contracts to hedge against
movements in the value of foreign currencies (including the "ECU" used in the
European Community) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A Portfolio may
enter into forward foreign currency exchange contracts when deemed advisable by
its adviser or sub-adviser under two circumstances. First, when entering into a
contract for the purchase or sale of a security, a Portfolio may enter into a
forward foreign currency exchange contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Portfolio may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. With respect to any forward foreign currency contract,
it will not generally be possible to match precisely the amount covered by that
contract and the value of the securities involved due to the changes in the
values of such securities resulting from market movements between the date the
forward contract is entered into and the date it matures. In addition, while
forward contracts may offer
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protection from losses resulting from declines in the value of a particular
foreign currency, they also limit potential gains which might result from
increases in the value of such currency. A Portfolio will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
A Portfolio may also engage in proxy hedging transactions to reduce the
effect of currency fluctuations on the value of existing or anticipated holdings
of portfolio securities. Proxy hedging is often used when the currency to which
the Portfolio is exposed is difficult to hedge or to hedge against the dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Portfolio's securities are, or are
expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Portfolio if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. In addition, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that a Portfolio is engaging in proxy hedging. A Portfolio may
also cross-hedge currencies by entering into forward contracts to sell one or
more currencies that are expected to decline in value relative to other
currencies to which the Portfolio has or in which the Portfolio expects to have
portfolio exposure. For example, a Portfolio may hold both French government
bonds and German government bonds, and the Adviser or Sub-Adviser may believe
that French francs will deteriorate against German marks. The Portfolio would
sell French francs to reduce its exposure to that currency and buy German marks.
This strategy would be a hedge against a decline in the value of French francs,
although it would expose the Portfolio to declines in the value of the German
mark relative to the U.S. dollar.
In general, currency transactions are subject to risks different from those
of other portfolio transactions, and can result in greater losses to a Portfolio
than would otherwise be incurred, even when the currency transactions are used
for hedging purposes.
A separate account of a Portfolio consisting of liquid assets equal to the
amount of the Portfolio's assets that could be required to consummate forward
contracts entered into under the second circumstance, as set forth above, will
be established with the Fund's custodian. For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or
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securities will be placed in the account daily so that the value of the account
will equal the amount of such commitments by the Portfolio.
Options. Options trading is a highly specialized activity which entails
greater than ordinary investment risks. Options on particular securities may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in the underlying securities themselves. A Portfolio will
write call options only if they are "covered." In the case of a call option on a
security, the option is "covered" if a Portfolio owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
liquid assets in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if a Portfolio maintains with its
custodian liquid assets equal to the contract value. A call option is also
covered if a Portfolio holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the difference is maintained by the Portfolio in
liquid assets in a segregated account with its custodian.
When a Portfolio purchases a put option, the premium paid by it is recorded
as an asset of the Portfolio. When a Portfolio writes an option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of the Portfolio's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the mean between the last bid and asked
prices. If an option purchased by a Portfolio expires unexercised the Portfolio
realizes a loss equal to the premium paid. If the Portfolio enters into a
closing sale transaction on an option purchased by it, the Portfolio will
realize a gain if the premium received by the Portfolio on the closing
transaction is more than the premium paid to purchase the option, or a loss if
it is less. If an option written by a Portfolio expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option is sold) and the deferred
credit related to such option will be eliminated. If an option written by a
Portfolio is exercised, the proceeds of the sale will be increased by the net
premium originally received and the Portfolio will realize a gain or loss.
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There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
Futures Contracts and Related Options. Each Non-Money Market Portfolio
(including the Index Master Portfolio) may invest in futures contracts and
options thereon (interest rate futures contracts or index futures contracts, as
applicable). These instruments are described in Appendix B to this Statement of
Additional Information.
Stand-by Commitments. Under a stand-by commitment for a Municipal
Obligation, a dealer agrees to purchase at the Portfolio's option a specified
Municipal Obligation at a specified price. Stand-by commitments for Municipal
Obligations may be exercisable by a Portfolio at any time before the maturity of
the underlying Municipal Obligations and may be sold, transferred or assigned
only with the instruments involved. It is expected that such stand-by
commitments will generally be available without the payment of any direct or
indirect consideration. However, if necessary or advisable, a Portfolio may pay
for such a stand-by commitment either separately in cash or by paying a higher
price for Municipal Obligations which are acquired subject to the commitment for
Municipal Obligations (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments for Municipal Obligations held by a Portfolio will not
exceed 1/2 of 1% of the value of such Portfolio's total assets calculated
immediately after each stand-by commitment is acquired.
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Stand-by commitments will only be entered into with dealers, banks and
broker-dealers which, in a sub-adviser's opinion, present minimal credit risks.
A Portfolio will acquire stand-by commitments solely to facilitate portfolio
liquidity and not to exercise its rights thereunder for trading purposes.
Stand-by commitments will be valued at zero in determining net asset value.
Accordingly, where a Portfolio pays directly or indirectly for a stand-by
commitment, its cost will be reflected as an unrealized loss for the period
during which the commitment is held by such Portfolio and will be reflected as a
realized gain or loss when the commitment is exercised or expires.
Tax-Exempt Derivatives. The Municipal Money Market Portfolios and the
Tax-Free Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income and New
Jersey Tax-Free Income Portfolios (collectively, the "Money and Non-Money Market
Municipal Portfolios") may hold tax-exempt derivatives which may be in the form
of tender option bonds, participations, beneficial interests in a trust,
partnership interests or other forms. A number of different structures have been
used. For example, interests in long-term fixed-rate municipal debt obligations,
held by a bank as trustee or custodian, are coupled with tender option, demand
and other features when the tax-exempt derivatives are created. Together, these
features entitle the holder of the interest to tender (or put) the underlying
municipal debt obligation to a third party at periodic intervals and to receive
the principal amount thereof. In some cases, municipal debt obligations are
represented by custodial receipts evidencing rights to receive specific future
interest payments, principal payments, or both, on the underlying securities
held by the custodian. Under such arrangements, the holder of the custodial
receipt has the option to tender the underlying securities at their face value
to the sponsor (usually a bank or broker dealer or other financial institution),
which is paid periodic fees equal to the difference between the securities'
fixed coupon rate and the rate that would cause the securities, coupled with the
tender option, to trade at par on the date of a rate adjustment. The Money and
Non-Money Market Municipal Portfolios may hold tax-exempt derivatives, such as
participation interests and custodial receipts, for municipal debt obligations
which give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service has not ruled on
whether the interest received on tax-exempt derivatives in the form of
participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinions of counsel
to the sponsors of such derivative securities. Neither the Fund nor its
investment adviser or sub-advisers will review the proceedings related to the
creation of any tax-exempt derivatives or the basis for such opinions.
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Securities Lending. A Portfolio would continue to accrue interest on loaned
securities and would also earn income on investment collateral for such loans.
Any cash collateral received by a Portfolio in connection with such loans may be
invested in a broad range of high quality, U.S. dollar-denominated money market
instruments that meet Rule 2a-7 restrictions for money market funds.
Specifically, cash collateral may be invested in any of the following
instruments: (a) securities issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities and related
custodial receipts; (b) "first tier" quality commercial paper and other
obligations issued or guaranteed by U.S. and foreign corporations and other
issuers rated (at the time of purchase) in the highest rating category by at
least two NRSRO's, or one if only rated by one NRSRO; (c) U.S.
dollar-denominated obligations issued or supported by the credit of U.S. or
foreign banks or savings institutions with total assets in excess of $1 billion
(including obligations of foreign branches of such banks) (i.e. CD's, BA's and
time deposits); (d) repurchase agreements relating to the above instruments, as
well as corporate debt; and (e) unaffiliated money market funds. Any such
investments must be rated "first tier" and must have a maturity of 397 days or
less from the date of purchase.
While the Index Master Portfolio may earn additional income from lending
securities, such activity is incidental to the investment objective of the Index
Master Portfolio. The value of securities loaned may not exceed 33 1/3% of the
value of the Index Master Portfolio's total assets. In connection with such
loans, the Index Master Portfolio will receive collateral consisting of cash or
U.S. Government securities, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities. In
addition, the Index Master Portfolio will be able to terminate the loan at any
time, will receive reasonable interest on the loan, as well as amounts equal to
any dividends, interest or other distributions on the loaned securities. In the
event of the bankruptcy of the borrower, the Trust could experience delay in
recovering the loaned securities. Management of the Trust believes that this
risk can be controlled through careful monitoring procedures.
Yields and Ratings. The yields on certain obligations are dependent on a
variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"), Fitch
Investor Services, Inc. ("Fitch") and S&P represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently,
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obligations with the same rating, maturity and interest rate may have different
market prices. Subsequent to its purchase by a Portfolio, a rated security may
cease to be rated. A Portfolio's adviser or sub-adviser will consider such an
event in determining whether the Portfolio should continue to hold the security.
Interest Rate Transactions and Currency Swaps. The Bond Portfolios may
enter into interest rate swaps, caps and floors on either an asset-based or
liability-based basis, depending on whether a Portfolio is hedging its assets or
its liabilities. Interest rate swaps involve the exchange by a Portfolio with
another party of their respective commitments to pay or receive interest (e.g.,
an exchange of floating rate payments for fixed rate payments). The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate floor.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The International Bond Portfolio may also enter into currency swaps,
which involve the exchange of the rights of a Portfolio and another party to
make or receive payments in specified currencies.
A Portfolio will usually enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. In
contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
A Portfolio will accrue the net amount of the excess, if any, of its
obligations over its entitlements with respect to each interest rate or currency
swap on a daily basis and will deliver an amount of liquid assets having an
aggregate net asset value at least equal to the accrued excess to a custodian
that satisfies the requirements of the 1940 Act. If the other party to an
interest rate swap defaults, a Portfolio's risk of loss consists of the net
amount of interest payments that the Portfolio is contractually entitled to
received. Because currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. A Portfolio will not enter into any interest rate or currency swap
unless the unsecured commercial paper, senior debt or claims paying ability of
the other party is rated either "A" or "A-1" or
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better by S&P, Duff & Phelps or Fitch, or "A" or "P-1" or better by Moody's.
A Portfolio will enter into currency or interest rate swap, cap and floor
transactions only with institutions deemed the creditworthy by the Portfolio's
adviser or sub-adviser. If there is a default by the other party to such a
transaction, a Portfolio will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations and, accordingly, they are less liquid than swaps.
Investment Companies. Each Portfolio, other than the Index Equity
Portfolio, currently intends to limit its investments so that, as determined
immediately after a securities purchase is made: (i) not more than 5% of the
value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio or by the Fund as a whole.
Special Consideration Regarding the Ohio Tax-Free Income Portfolio. The
Ohio Tax-Free Income Portfolio will not trade its securities for the purpose of
seeking profits. For purposes of this policy, the Portfolio may vary its
portfolio securities if (i) there has been an adverse change in a security's
credit rating or in that of its issuer or in the adviser's or sub-adviser's
credit analysis of the security or its issuer; (ii) there has been, in the
opinion of the adviser and sub-adviser, a deterioration or anticipated
deterioration in general economic or market conditions affecting issuers of Ohio
Municipal Obligations, or a change or anticipated change in interest rates;
(iii) adverse changes or anticipated changes in market conditions or economic or
other factors temporarily affecting the issuers of one or more portfolio
securities make necessary or desirable the sale of such security or securities
in anticipation of the Portfolio's repurchase of the same or comparable
securities at a later date; or (iv) the adviser or sub-adviser engages in
temporary defensive strategies.
SPECIAL CONSIDERATIONS FOR STATE-SPECIFIC PORTFOLIOS
The following information regarding the State-Specific Portfolios is
derived from official statements of certain issuers published in connection with
their issuance of securities and from other publicly available information, and
is believed to be
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accurate. All information regarding the State-Specific Portfolios contained in
this section is as of January 1, 1997. No independent verification has been made
of any of the following information.
Special Considerations Regarding Investments in Ohio State-Specific
Obligations. The Ohio Tax-Free Money Market and Ohio Tax-Free Income Portfolios
(the "Ohio Portfolios") will invest most of their respective net assets in
securities issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of the
State, or agencies or instrumentalities of the State or its political
subdivisions ("Ohio State-Specific Obligations"). The Ohio Portfolios are
therefore susceptible to general or particular economic, political or regulatory
factors that may affect issuers of Ohio State-Specific Obligations. The
following information constitutes only a brief summary of some of the many
complex factors that may have an effect. The information does not apply to
"conduit" obligations on which the public issuer itself has no financial
responsibility.
Generally, the creditworthiness of Ohio State-Specific Obligations of local
issuers is unrelated to that of obligations of the State itself, and the State
has no responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection
with investment in particular Ohio State-Specific Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio State-Specific Obligations, or in those of particular
issuers, as to which those factors apply. However, the information below is
intended only as a general summary, and is not intended as a discussion of any
specific factors that may affect any particular obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1994 is 11,102,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
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In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
five years the State rates were below the national rates (4.8% versus 5.6% in
1995). The unemployment rate and its effects vary among geographic areas of the
State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
State-Specific Obligations held in the Ohio Portfolios or the ability of
particular obligors to make timely payments of debt service on (or lease
payments relating to) those Obligations.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year (FY) or fiscal biennium in a deficit position. Most State operations
are financed through the General Revenue Fund (GRF), for which the personal
income and sales-use taxes are the major sources. Growth and depletion of GRF
ending fund balances show a consistent pattern related to national economic
conditions, with the ending FY balance reduced during less favorable and
increased during more favorable economic periods. The State has well-established
procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million in
the GRF and $353 million in the Budget Stabilization Fund (BSF, a cash and
budgetary management fund). June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included GRF debt service and lease rental appropriations for the entire
1992-93 biennium, while continuing most other appropriations for a month.
Pursuant to the general appropriations act for the entire biennium, passed on
July 11, 1991, $200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed a FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending
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in the last six months of FY 1992 by a total of approximately $184 million; the
$100.4 million BSF balance and additional amounts from certain other funds were
transferred late in the FY to the GRF; and adjustments were made in the timing
of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for
debt service on or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based
on June 30, 1994 balances, an additional $260 million was deposited in the BSF.
The biennium ended June 30, 1995 with a GRF ending fund balance of $928 million,
of which $535.2 million was transferred into the BSF (which had an October 7,
1996 balance of over $828 million).
The GRF appropriations act for the current 1996-97 biennium was passed on
June 28, 1995 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. In accordance with
the appropriations act, the significant June 30, 1995 GRF fund balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, was
transferred to the BSF and other funds, including school assistance funds and,
in anticipation of possible federal program changes, a human services
stabilization fund.
The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio voters have
authorized the incurrence of State debt and the pledge of taxes or excises to
its payment. At October 7, 1996,
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$854 million (excluding certain highway bonds payable primarily from highway use
receipts) of this debt was outstanding. The only such State debt at that date
still authorized to be incurred were portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($34.9 million outstanding); (b)
$240 million of obligations authorized for local infrastructure improvements, no
more than $120 million of which may be issued in any calendar year ($774.7
million outstanding); and (c) up to $200 million in general obligation bonds for
parks, recreation and natural resources purposes which may be outstanding at any
one time ($44.2 million outstanding, with no more than $50 million to be issued
in any one year).
The electors approved in November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, and authorizes not more than $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $4.8 billion of
which were outstanding or sold and awaiting delivery at October 7, 1996.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
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State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate approximately 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in approximately
120 districts from voter-authorized income taxes, for significant portions of
their budgets. Litigation, similar to that in other states, is pending
questioning the constitutionality of Ohio's system of school funding. The trial
court concluded that aspects of the system (including basic operating
assistance) are unconstitutional, and ordered the State to provide for and fund
a system complying with the Ohio Constitution. The State appealed and a court of
appeals reversed the trial court's findings for plaintiff districts. The case is
now pending on appeal in the Ohio Supreme Court. A small number of the State's
612 local school districts have in any year required special assistance to avoid
year-end deficits. A current program provides for school district cash need
borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under this program
totalled $94.5 million for 27 districts (including $75 million for one) in FY
1993, $41.1 million for 28 districts in FY 1994, and $71.1 million for 29
districts in FY 1995 (including $29.5 million for one), and $87.2 million for 20
districts in fiscal year 1996 (including $42.1 million for one).
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State.
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception for
municipalities in 1979, these procedures have been applied to 23 cities and
villages; for 19 of them the fiscal situation was resolved and the procedures
terminated. The 1996 school district provision has been applied to two
districts.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The
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Constitution has since 1934 limited to 1% of true value in money the amount of
the aggregate levy (including a levy for unvoted general obligations) of
property taxes by all overlapping subdivisions, without a vote of the electors
or a municipal charter provision, and statutes limit the amount of that
aggregate levy to 10 mills per $1 of assessed valuation (commonly referred to as
the "ten-mill limitation"). Voted general obligations of subdivisions are
payable from property taxes that are unlimited as to amount or rate.
Special Considerations Regarding Investment in Pennsylvania State-Specific
Obligations. The concentration of investments in Pennsylvania State-Specific
Obligations by the Pennsylvania Municipal Money Market and Pennsylvania Tax-Free
Income Portfolios raises special investment considerations. In particular,
changes in the economic condition and governmental policies of the Commonwealth
of Pennsylvania and its municipalities could adversely affect the value of those
Portfolios and their portfolio securities. This section briefly describes
current economic trends in Pennsylvania.
Pennsylvania has historically been dependent on heavy industry, although
recent declines in the coal, steel and railroad industries have led to
diversification of the Commonwealth's economy. Recent sources of economic growth
in Pennsylvania are in the service sector, including trade, medical and health
services, education and financial institutions. Agriculture continues to be an
important component of the Commonwealth's economic structure, with nearly
one-third of the Commonwealth's total land area devoted to cropland, pasture and
farm woodlands.
The population of Pennsylvania experienced a slight increase in the period
1980 through 1990, and has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 85% of the 1980 census population
residing in metropolitan statistical areas. The two largest metropolitan
statistical areas, those containing the Cities of Philadelphia and Pittsburgh,
together comprise approximately 50% of the Commonwealth's total population.
The Commonwealth utilizes the fund method of accounting and over 120 funds
have been established for purposes of recording receipts and disbursements of
the Commonwealth, of which the General Fund is the largest. Most of the
Commonwealth's operating and administrative expenses are payable from the
General Fund. The major tax sources for the General Fund are the sales tax, the
personal income tax and the corporate net income tax. Major expenditures of the
Commonwealth include funding for education, public health and welfare,
transportation, and economic development.
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The constitution of the Commonwealth provides that operating budget
appropriations of the Commonwealth may not exceed the estimated revenues and
available surplus in the fiscal year for which funds are appropriated. Annual
budgets are enacted for the General Fund (the principal operating fund of the
Commonwealth) and for certain special revenue funds which together represent the
majority of expenditures of the Commonwealth. Although a negative balance was
experienced applying generally accepted accounting principles ("GAAP") in the
General Fund for fiscal 1990 and 1991, tax increases and spending decreases have
resulted in surpluses in subsequent years; and as of June 30, 1995, the General
Fund had a surplus of $688.3 million. The deficit in the Commonwealth's
unreserved/undesignated funds also had been eliminated.
Certain litigation is pending against the Commonwealth that could adversely
affect the ability of the Commonwealth to pay debt service on its obligations
including suits relating to the following matters: (a) the ACLU has filed suit
in Federal court demanding additional funding for child welfare services; the
Commonwealth settled a similar suit in the Commonwealth Court of Pennsylvania
and is seeking the dismissal of the federal suit, inter alia, because of that
settlement. After its earlier denial was reversed by the Third Circuit Court of
Appeals, the district court granted class certification to the ACLU, and the
parties are proceeding with discovery; (b) in 1987, the Supreme Court of
Pennsylvania held the statutory scheme for county funding of the judicial system
to be in conflict with the constitution of the Commonwealth, but stayed judgment
pending enactment by the legislature of funding consistent with the opinion, and
the legislature has yet to consider legislation implementing the judgment. In
1992, a new action in mandamus was filed seeking to compel the Commonwealth to
comply with the original decision; (c) litigation has been filed in both state
and Federal court by an association of rural and small schools and several
individual school districts and parents challenging the constitutionality of the
Commonwealth's system for funding local school districts --the Federal case has
been stayed pending resolution of the state case and the state case is in the
pre-trial stage; and (d) both the Commonwealth and the City of Philadelphia are
involved in Commonwealth Court cases that may result in their being required to
fund remedies for the unintentional racial segregation in the Philadelphia
public schools.
The City of Philadelphia (the "City") has been experiencing severe
financial difficulties which has impaired its access to public credit markets
and a long-term solution to the City's financial crisis is still being sought.
The City experienced a series of General Fund deficits for fiscal years 1988
through 1992. The City has no legal authority to issue deficit reduction bonds
on its own behalf, but state legislation has been enacted to create an
Intergovernmental Cooperation Authority (the
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"Authority") to provide fiscal oversight for Pennsylvania cities (primarily
Philadelphia) suffering recurring financial difficulties. The Authority is
broadly empowered to assist cities in avoiding defaults and eliminating deficits
by encouraging the adoption of sound budgetary practices and issuing bonds. In
order for the Authority to issue bonds on behalf of the City, the City and the
Authority entered into an intergovernmental cooperative agreement providing the
Authority with certain oversight powers with respect to the fiscal affairs of
the City. Philadelphia currently is operating under a five year plan approved by
the Authority on April 30, 1996. The audited balance of the City's General Fund
as of June 30, 1995 was $80.5 million.
The Authority's power to issue further bonds to finance capital projects or
deficit expired on December 31, 1994. The Authority may continue to issue debt
to finance a cash flow deficit until December 31, 1996, and its ability to
refund outstanding bonds is unrestricted. The Authority had $1,146.2 million in
special revenue bonds outstanding as of June 30, 1996.
Most recently, Moody's has rated the long-term general obligation bonds of
the Commonwealth "A1," and Standard & Poor's has rated such bonds "AA-." There
can be no assurance that the economic conditions on which these ratings are
based will continue or that particular bonds issues may not be adversely
affected by changes in economic or political conditions.
Special Considerations Regarding Investment in North Carolina
State-Specific Obligations. The concentration of investments in North Carolina
State-Specific Obligations by the North Carolina Municipal Money Market
Portfolio raises special investment considerations. In particular, changes in
the economic condition and governmental policies of North Carolina and its
political subdivisions, agencies, instrumentalities, and authorities could
adversely affect the value of the Portfolio and its portfolio securities. This
section briefly describes current economic trends in North Carolina.
The State of North Carolina has three major operating funds: the General
Fund, the Highway Fund and the Highway Trust Fund. North Carolina derives most
of its revenue from taxes, including individual income tax, corporation income
tax, sales and use taxes, corporation franchise tax, alcoholic beverage tax,
insurance tax, inheritance tax, tobacco products tax and soft drink tax
(currently being phased out). North Carolina receives other non-tax revenues
which are also deposited in the General Fund. The most important are Federal
funds collected by North Carolina agencies, university fees and tuition,
interest earned by the North Carolina Treasurer on investments of General Fund
moneys and revenues from the judicial branch. The proceeds from
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the motor fuel tax, highway use tax and motor vehicle license tax are deposited
in the Highway Fund and the Highway Trust Fund.
During the 1989-92 budget years, growth of North Carolina tax revenues
slowed considerably, requiring tax increases and budget adjustments, including
hiring freezes and restrictions, spending constraints, changes in timing and
certain collections and payments, and other short-term budget adjustments
necessary to comply with North Carolina's constitutional mandate for a balanced
budget. Many areas of North Carolina government were affected. Reductions in
capital spending, local government aid, and the use of the budget stabilization
reserve, combined with other budget adjustments, brought the budget into
balance. Tax increases in the fiscal 1992 budget included a $.01 increase in the
North Carolina sales tax and increases in the personal and corporate income tax
rates, as well as increases in the tax on cigarettes and alcohol, among other
items.
Fiscal year 1992 ended with a positive fund balance of approximately $164.8
million. By law, $41.2 million of such positive fund balance was required to be
reserved in the General Fund of North Carolina as part of a "Savings Reserve,"
leaving an unrestricted General Fund balance at June 30, 1992 of $123.6 million.
Fiscal year 1993 ended with a positive General Fund balance of approximately
$537.3 million. Of this amount, $134.3 million was reserved in the Savings
Reserve and $57 million was reserved in a Reserve for Repair and Renovation of
State Facilities, leaving an unrestricted General Fund balance at June 30, 1993
of $346 million. Fiscal year 1994 ended with a positive General Fund balance of
approximately $444.7 million. An additional $178 million was available from a
reserved fund balance. Of this aggregate amount, $155.7 million was reserved in
the Savings Reserve (bringing the total reserve to $210.6 million after prior
withdrawals) and $60 million was reserved in the Reserve for Repair and
Renovation of State Facilities (bringing the total reserve to $60 million after
prior withdrawals), leaving an unrestricted General Fund balance at June 30,
1994 of $407 million.
Fiscal year 1995 ended with a positive General Fund balance of
approximately $343.4 million. An additional $269.9 million was available from a
reserved fund balance. Of this aggregate amount, $146.3 million was reserved in
the Savings Reserve (bringing the total reserve to $423.6 million after prior
contributions) and $146.3 million was reserved in the Reserve for Repair and
Renovation of State Facilities (bringing the total reserve to $146.3 million
after prior withdrawals), leaving an unrestricted General Fund balance at June
30, 1995 of $292.6 million after certain other reservations. Fiscal year 1996
ended with a positive General Fund balance of approximately $573.4 million. An
additional $153.1 million was available from a reserved fund balance. Of this
aggregate amount, $77.3 million
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was reserved in the Savings Reserve (bringing the total reserve to $500.9
million) and $130.0 million was reserved in the Reserve for Repair and
Renovation of State Facilities (bringing the total reserve to $151.3 million
after prior withdrawals). An additional $47.1 million was transferred to a
newly-created Clean Water Management Trust Fund, $39.5 million was reserved in a
Capital Improvement Reserve, and $26.2 million was transferred to newly-created
Federal Retiree Refund and Administration Accounts, leaving an unrestricted
General Fund balance at June 30, 1996 of approximately $406.1 million.
The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles (GAAP). Based on a modified accrual
basis (GAAP), the General Fund balance at June 30, 1993, 1994, and 1995 was
$681.5 million, $900.6 million, and $1,024.6 million, respectively. The
foregoing amounts for fiscal years 1994 and 1995 reflect adjustments for GASB
Statement No. 22 adopted by the State during fiscal 1995. The foregoing results
for fiscal year 1996 are based upon unaudited financial information supplied by
the Office of State Budget and Management. Modified accrual basis results were
not available as of the date this disclosure was prepared.
The 1995-97 biennium budget adopted by the General Assembly authorized
continuation funding from the General Fund of $9,512 million for fiscal 1996 and
$9,763 million for fiscal 1997. Expansion funds of $280 million for fiscal 1996
were approved, along with capital improvements of $114 million for such fiscal
year. For fiscal 1997, $267 million of expansion funds were approved, along with
$157 million of capital improvements. Tax reductions of approximately $363
million for fiscal 1996 and $400 million for fiscal 1997 were authorized,
principally through the repeal of North Carolina's intangible personal property
tax and reductions in North Carolina's unemployment and personal income taxes.
The General Assembly also took several measures that benefitted North Carolina's
Department of Corrections, including a reservation of $33 million to build new
prison beds. State workers generally received a 2% pay increase. The General
Assembly also passed a package of tort reform bills that included a cap on
punitive damage awards.
In the 1996 Special Session, the General Assembly reviewed and adjusted the
fiscal 1997 budget to take into account a General Fund surplus of over $700
million for the 1996 fiscal year. The General Assembly agreed to spend
approximately $415.4 million on new or expanded programs, apply approximately
$143 million to tax cuts and refunds, and reserve approximately $100 million in
various savings and other reserve accounts. Funding for education and salaries
for teachers and other state employees
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was increased. The tax cuts included a reduction in North Carolina's corporate
income tax, sales tax on food, and inheritance tax, among other tax cuts.
Legislators also significantly expanded North Carolina's industrial development
policies, including the adoption of four new tax credits designed to make North
Carolina more competitive in industrial recruitment. Overall, changes were made,
or new credits added, in the following areas: investment tax credit, business
tax credit, worker training tax credit, jobs creation tax credit, and research
and development tax credit. The tax cuts will reduce North Carolina revenues by
approximately $68.4 million for fiscal 1997 and by approximately $337 million
when all cuts are phased in by 2001. The General Assembly also created a Clean
Water Management Trust Fund, which will be used to finance projects to clean up
or prevent surface water pollution. The Fund will receive 6.5% of the General
Fund's unspent credit balance each year. The initial allocation to this Fund
from the fiscal 1996 credit balance was $47.1 million.
The North Carolina budget is based upon a number of existing and assumed
State and non-State factors, including State and national economic conditions,
international activity, Federal government policies and legislation and the
activities of the State's General Assembly. Such factors are subject to change
which may be material and affect the budget. The Congress of the United States
is considering a number of matters affecting the federal government's
relationship with State governments that, if enacted into law, could affect
fiscal and economic policies of the states, including North Carolina.
During recent years North Carolina has moved from an agricultural to a
service and goods producing economy. According to the North Carolina Employment
Security Commission (the "Commission"), in June 1996, North Carolina ranked
eleventh among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in August 1996 to be 4.1% of the labor force, as
compared with an unemployment rate of 5.1% nationwide.
The following are certain cases pending in which the State of North
Carolina faces the risk of either a loss of revenue or an unanticipated
expenditure which, in the opinion of the North Carolina Department of State
Treasurer, would not materially adversely affect the State's ability to meet its
financial obligations:
1. Swanson v. State of North Carolina -- State Tax Refunds - Federal
Retirees. In Davis v. Michigan (1989), the United States Supreme Court ruled
that a Michigan income tax statute which taxed federal retirement benefits while
exempting those paid by state and local governments violated the constitutional
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doctrine of intergovernmental tax immunity. At the time of the Davis decision,
North Carolina law contained similar exemptions in favor of state and local
retirees. Those exemptions were repealed prospectively, beginning with the 1989
tax year. All public pension and retirement benefits are now entitled to a
$4,000 annual exclusion.
Following Davis, federal retirees filed a class action suit in federal
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members. A companion suit was filed in
state court in 1990. The complaints alleged that the amount in controversy
exceeded $140 million. The North Carolina Department of Revenue estimate of
refunds and interest liability is $280.89 million as of June 30, 1994. In 1991,
the North Carolina Supreme Court ruled in favor of the State in the state court
action, concluding that Davis could only be applied prospectively and that the
taxes collected from the federal retirees were thus not improperly collected. In
1993, the United States Supreme Court vacated that decision and remanded the
case back to the North Carolina Supreme Court. The North Carolina Supreme Court
then ruled in favor of the State on the grounds that the federal retirees had
failed to comply with state procedures for challenging unconstitutional taxes.
Plaintiffs petitioned the United States Supreme Court for review of that
decision, which petition was denied. The United States District Court ruled in
favor of the defendants in the companion federal case, and a petition for
reconsideration was denied. Plaintiffs appealed to the United States Court of
Appeals, which concurred with the lower court's ruling. The United States
Supreme Court rejected an appeal, ruling that the lawsuit was a state matter,
leaving the North Carolina Supreme Court's ruling in force. Despite these
victories in court, the General Assembly in its 1996 Special Session adopted
legislation allowing for a refund of taxes for federal retirees. Effective for
tax years beginning on or after January 1, 1996, federal retirees are entitled
to a North Carolina income tax credit for taxes paid on their pension benefits
during tax years 1985 through 1988. In the alternative, a partial refund may be
claimed in lieu of a credit for eligible taxpayers.
An additional lawsuit was filed in 1995 in State Court by federal
pensioners to recover State income taxes paid on federal retirement benefits.
This case grew out of a claim by federal pensioners in the original federal
court case in Swanson. In the new lawsuit, the plaintiffs allege that when the
State granted an increase in retirement benefits to State retirees in the same
legislation that equalized tax treatment between state and federal retirees, the
increased benefits to State retirees constituted an indirect violation of Davis.
The lawsuit seeks a refund of taxes paid by federal retirees on federal
retirement benefits received in the years 1989 through 1993 and refunds or
monetary relief sufficient to equalize the alleged on-going
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discriminatory treatment for those years. Potential refunds exceed $300 million.
This case has been suspended pending final judgment in Bailey (discussed below),
and no court date has been set. The North Carolina Attorney General believes
that sound legal authority and arguments support the denial of this claim.
2. Bailey v. State of North Carolina -- State Tax Refunds - State Retirees.
State and local governmental retirees filed a class action suit in 1990 as a
result of the repeal of the income tax exemptions for state and local government
retirement benefits. The original suit was dismissed after the North Carolina
Supreme Court ruled in 1991 that the plaintiffs had failed to comply with state
law requirements for challenging unconstitutional taxes and the United States
Supreme Court denied review. In 1992, many of the same plaintiffs filed a new
lawsuit alleging essentially the same claims, including breach of contract,
unconstitutional impairment of contract rights by the State in taxing benefits
that were allegedly promised to be tax-exempt and violation of several state
constitutional provisions. On May 31, 1995 the Superior Court issued an order
ruling in favor of the plaintiffs. Under the terms of the order, the Superior
Court found that the act of the General Assembly that repealed the tax exemption
on State and local government retirement benefits is null, void, and
unenforceable and that retirement benefits which were vested before August 1989
are exempt from taxation. The North Carolina Attorney General has appealed this
order.
The North Carolina Attorney General's office estimates that the amount in
controversy is approximately $40-$45 million annually for the tax years 1989
through 1991. In addition, it is anticipated that the decision reached in this
case will govern the resolution of tax refund claims made by retired state and
local government employees for taxes paid on retirement benefit income for tax
years after 1991. Furthermore, if the order of the Superior Court is upheld, its
provisions would apply prospectively to prevent future taxation of State and
local government retirement benefits that were vested before August 1989.
3. Fulton Corp. v. Justus. The State's intangible personal property tax
levied on certain shares of stock was challenged by the plaintiff on grounds
that it violated the Commerce Clause of the United States Constitution by
discriminating against stock issued by corporations that do all or part of their
business outside the State. The plaintiff in the action was a North Carolina
corporation that did all or part of its business outside the State. The
plaintiff sought to invalidate the tax in its entirety and to recover tax paid
on the value of its shares in other corporations. The North Carolina Court of
Appeals invalidated the taxable percentage deduction and excised it from the
statute beginning with the 1994 tax year.
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The effect of this ruling was to increase collections by rendering all stock
taxable on 100% of its value. The North Carolina Supreme Court reversed the
decision of the Court of Appeals, upholding the tax on intangible personal
property. The United States Supreme Court reversed, ruled in the plaintiff's
favor that the tax was discriminatory, and ordered the case back to the State
Court for a ruling on the appropriate remedy. It is anticipated that the State
Court will order the State to pay refunds aggregating between $130 million and
$140 million, including interest, although other alternative remedies are
possible. In April 1995, the North Carolina General Assembly repealed the
State's intangible personal property tax, effective for taxable years beginning
on or after January 1, 1995.
On November 2, 1993, a total of $740 million general obligation bonds
(consisting of $310 million University Improvement Bonds, $250 million Community
College Bonds, $145 million Clean Water Bonds, and $35 million State Parks
Bonds) were approved by the voters of the State. Pursuant to this authorization,
the State issued $400 million general obligation bonds (Capital Improvement
Bonds) in January, 1994. The proceeds of these Capital Improvement Bonds may be
used for any purpose for which the proceeds of the University Improvement Bonds,
Community College Bonds, and State Parks Bonds may be used (none of such
proceeds may be used for Clean Water purposes). An additional $60 million
general obligation bonds (Clean Water Bonds) were issued in September and
October, 1994. The remaining $85 million general obligation bonds (Clean Water
Bonds) were issued in June and July, 1995. The offering of the remaining $195
million of these authorized bonds is anticipated to occur during January 1997.
In its 1996 Short Session, the North Carolina General Assembly approved
additional North Carolina general obligation bonds in the amount of $950 million
for highways and $1.8 billion for schools. These bonds were approved by the
voters of the State in November, 1996.
Currently, Moody's, S&P and Fitch rate North Carolina general obligation
bonds "Aaa," "AAA," and "AAA," respectively. See Appendix A.
Special Considerations Regarding Investment in Virginia State-Specific
Obligations. The Virginia State-Specific Money Market Portfolio will invest
primarily in Virginia State-Specific Obligations. For this reason, the Portfolio
is affected by political, economic, regulatory or other developments that
constrain the taxing, revenue-collecting and spending authority of Virginia
issuers or otherwise affect the ability of Virginia issuers to pay interest,
principal or any premium. The following information constitutes only a brief
summary of certain of these developments and does not purport to be a complete
description of
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them. The information has been obtained from recent official statements prepared
by the Commonwealth of Virginia relating to its securities, and no independent
investigation has been undertaken to verify its accuracy. Moreover, the
information relates only to the state itself and not to the numerous special
purpose or local government units whose issues may also be held by the
Portfolio. The credits represented by such issues may be affected by a wide
variety of local factors or structuring concerns, and no disclosure is made here
relating to such matters.
The rate of economic growth in the Commonwealth of Virginia has increased
steadily over the past decade. Per capita income in Virginia has been
consistently above national levels during that time. The services sector in
Virginia generates the largest number of jobs, followed by wholesale and retail
trade, state and local government and manufacturing. Because of Northern
Virginia, with its proximity to Washington, D.C. and Hampton Roads, which has
the nation's largest concentration of military installations, the Federal
government has a greater economic impact on Virginia relative to its size than
any state other than Alaska and Hawaii. It is unclear what effect the current
efforts by the Federal government to restructure the defense budget will have on
long-term economic conditions in Virginia.
According to statistics published by the U.S. Department of Labor, Virginia
typically has one of the lowest unemployment rates in the nation. This is
generally attributed to the balance among the various sectors represented in the
economy. Virginia is one of twenty states with a right-to-work law and is
generally regarded as having a favorable business climate marked by few strikes
or work stoppages. Virginia is also one of the least unionized among the
industrialized states.
Virginia's state government operates on a two-year budget. The Constitution
vests the ultimate responsibility and authority for levying taxes and
appropriating revenue in the General Assembly, but the Governor has broad
authority to manage the budgetary process. Once an appropriation act becomes
law, revenue collections and expenditures are constantly monitored by the
Governor, assisted by the Secretary of Finance and the Department of Planning
and Budget, to ensure that a balanced budget is maintained. If projected revenue
collections fall below amounts appropriated at any time, the Governor must
reduce expenditures and withhold allotments of appropriations (other than for
debt service and other specified purposes) to restore balance. An amendment to
the Constitution, effective January 1, 1993, established a Revenue Stabilization
Fund. This Fund is used to offset a portion of anticipated shortfalls in
revenues in years when appropriations based on initial forecasts exceed expected
revenues in any subsequent forecast. The Revenue Stabilization Fund consists of
an amount not to exceed 10 percent
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of Virginia's average annual tax revenues derived from taxes on income and
retail sales for the three preceding fiscal years.
General Fund revenues are principally comprised of direct taxes. In recent
fiscal years, most of the total tax revenues have been derived from five major
taxes imposed by Virginia on individual and fiduciary income, sales and use,
corporate income, public service corporations and premiums of insurance
companies.
In September 1991, the Debt Capacity Advisory Committee was created by the
Governor through an executive order. The committee is charged with annually
estimating the amount of tax-supported debt that may prudently be authorized
consistent with the financial goals, capital needs and policies of Virginia. The
committee reviews the outstanding debt of all agencies, institutions, boards and
authorities of Virginia for which Virginia has either a direct or indirect
pledge of tax revenues or moral obligation.
The Constitution of Virginia prohibits the creation of debt by or on behalf
of Virginia that is backed by Virginia's full faith and credit, except as
provided in Section 9 of Article X. Section 9 of Article X contains several
different provisions for the issuance of general obligation and other debt, and
Virginia is well within its limit for each:
Section 9(a)(2) provides that the General Assembly may incur general
obligation debt to meet certain types of emergencies, subject to limitations on
amount and duration; to meet casual deficits in the revenue or in anticipation
of the collection of revenues of Virginia; and to redeem a previous debt
obligation of Virginia. Total indebtedness issued pursuant to this Section may
not exceed 30 percent of an amount equal to 1.15 times the annual tax revenues
derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts for the preceding fiscal year.
Section 9(b) provides that the General Assembly may authorize the creation
of general obligation debt for capital projects. Such debt is required to be
authorized by an affirmative vote of a majority of each house of the General
Assembly and approved in a statewide election. The outstanding amount of such
debt is limited to an amount equal to 1.15 times the average annual tax revenues
derived from taxes on income and retail sales, as certified by the Auditor of
Public Accounts for the three preceding fiscal years less the total amount of
bonds outstanding. The amount of 9(b) debt that may be authorized in any single
fiscal year is limited to 25 percent of the limit on all 9(b) debt less the
amount of 9(b) debt authorized in the current and prior three fiscal years.
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Section 9(c) provides that the General Assembly may authorize the creation
of general obligation debt for revenue-producing capital projects (so-called
"double-barrel" debt). Such debt is required to be authorized by an affirmative
vote of two-thirds of each house of the General Assembly and approved by the
Governor. The Governor must certify before the enactment of the authorizing
legislation and again before the issuance of the debt that the net revenues
pledged are expected to be sufficient to pay principal of and interest on the
debt. The outstanding amount of 9(c) debt is limited to an amount equal to 1.15
times the average annual tax revenues derived from taxes on income and retail
sales, as certified by the Auditor of Public Accounts for the three preceding
fiscal years. While the debt limits under Sections 9(b) and 9(c) are each
calculated as the same percentage of the same average tax revenues, these debt
limits are separately computed and apply separately to each type of debt.
Article X further provides in Section 9(d) that the restrictions of Section
9 are not applicable to any obligation incurred by Virginia or any of its
institutions, agencies or authorities if the full faith and credit of Virginia
is not pledged or committed to the payment of such obligation. There are
currently outstanding various types of such 9(d) revenue bonds. Certain of these
bonds, however, are paid in part or in whole from revenues received as
appropriations by the General Assembly from general tax revenues, while others
are paid solely from revenues of the applicable project. The debt repayments of
the Virginia Public Building Authority, the Virginia Port Authority, the
Virginia College Building Authority Equipment Leasing Program and The Innovative
Technology Authority are supported in large part by General Fund appropriations.
The Commonwealth Transportation Board is a substantial issuer of bonds for
highway projects. These bonds are secured by and payable from funds appropriated
by the General Assembly from the Transportation Trust Fund for such purpose. The
Transportation Trust Fund was established by the General Assembly in 1986 as a
special non-reverting fund administered and allocated by the Transportation
Board to provide increased funding for construction, capital and other needs of
state highways, airports, mass transportation and ports. The Virginia Port
Authority has also issued bonds which are secured by a portion of the
Transportation Trust Fund.
Virginia is involved in numerous leases that are subject to appropriation
of funding by the General Assembly. Virginia also finances the acquisition of
certain personal property and equipment through installment purchase agreements.
Bonds issued by the Virginia Housing Development Authority, the Virginia
Resources Authority and the Virginia Public School Authority are designed to be
self-supporting from their
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individual loan programs. A portion of the Virginia Housing Development
Authority and Virginia Public School Authority bonds and all of the Virginia
Resources Authority bonds are secured in part by a moral obligation pledge of
Virginia. Should the need arise, Virginia may consider funding deficiencies in
the respective debt service reserves for such moral obligation debt. To date,
none of these authorities has advised Virginia that any such deficiencies exist.
Local government in the Commonwealth is comprised of 95 counties, 40
incorporated cities, and 190 incorporated towns. Virginia is unique among the
several states in that cities and counties are independent, and their land areas
do not overlap. The largest expenditures by local governments in Virginia are
for education, but local governments also provide other services such as water
and sewer, police and fire protection and recreational facilities. The Virginia
Constitution imposes numerous restrictions on local indebtedness, affecting both
its incurrence and amount.
In Davis v. Michigan (decided March 28, 1989), the United States Supreme
Court ruled unconstitutional states' exempting from state income tax the
retirement benefits paid by the state or local governments without exempting
retirement benefits paid by the Federal government. At that time, Virginia
exempted state and local retirement benefits but not Federal retirement
benefits. At a Special Session held in April 1989, the General Assembly repealed
the exemption of state and local retirement benefits. Following Davis, at least
five suits, some with multiple plaintiffs, for refunds of Virginia income taxes,
were filed by Federal retirees. These suits were consolidated under the name of
Harper v. Virginia Department of Taxation.
In a Special Session, the Virginia General Assembly on July 9, 1994, passed
emergency legislation to provide payments in five annual installments to Federal
retirees in a settlement of the retirees' claims as a result of Davis. In 1995
and 1996, the General Assembly passed legislation allowing more retirees to
participate in the settlement. As of April 15, 1996, the estimated total cost to
Virginia for the settlement was approximately $316.2 million.
On September 15, 1995, the Virginia Supreme Court rendered its decision in
Harper, reversing the judgment of the trial court, entering final judgment in
favor of the plaintiff retirees who elected not to settle, and dictating that
the amounts unlawfully collected be refunded with statutory interest. The total
cost to Virginia of the settlement and judgment is approximately $394.9 million,
of which approximately $203.2 million has been paid, leaving $191.7 million
payable in respect of the settlement - approximately $63.2 million in fiscal
year
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1997, $62.5 million on March 31, 1998, and (subject to appropriation) $66
million on March 31, 1999.
Most recently, Moody's has rated the long-term general obligation bonds of
the Commonwealth Aaa, and Standard & Poor's has rated such bonds AAA. There can
be no assurance that the economic conditions on which these ratings are based
will continue or that particular bond issues may not be adversely affected by
changes in economic or political conditions.
Special Considerations Regarding Investment in New Jersey State-Specific
Obligations. The State of New Jersey and its political subdivisions, agencies
and public authorities are authorized to issue two general classes of
indebtedness: general obligation bonds and revenue bonds. Both classes of bonds
may be included in the New Jersey Municipal Money Market and New Jersey Tax-Free
Income Portfolios. The repayment of principal and interest on general obligation
bonds is secured by the full faith and credit of the issuer, backed by the
issuer's taxing authority, without recourse to any special project or source of
revenue. Special obligation or revenue bonds may be repaid only from revenues
received in connection with the project for which the bonds are issued, special
excise taxes, or other special revenue sources and generally are issued by
entities without taxing power. Neither the State of New Jersey nor any of its
subdivisions is liable for the repayment of principal or interest on revenue
bonds except to the extent stated in the preceding sentences.
General obligation bonds of the State are repaid from revenues obtained
through the State's general taxing authority. An inability to increase taxes may
adversely affect the State's ability to authorize or repay debt.
Public authorities, private non-profit corporations, agencies and similar
entities of New Jersey ("Authorities") are established for a variety of
beneficial purposes, including economic development, housing and mortgage
financing, health care facilities and public transportation. The Authorities are
not operating entities of the State of New Jersey, but are separate legal
entities that are managed independently. The State oversees the Authorities by
appointing the governing boards, designating management, and by significantly
influencing operations. The Authorities are not subject to New Jersey
constitutional restrictions on the incurrence of debt, applicable to the State
of New Jersey itself, and may issue special obligation or private activity bonds
in legislatively authorized amounts.
An absence or reduction of revenue will affect a bond-issuing Authority's
ability to repay debt on special obligation bonds and no assurance can be given
that sufficient revenues will
-39-
<PAGE>
be obtained to make such payments, although in some instances repayment may be
guaranteed or otherwise secured.
Various Authorities have issued bonds for the construction of health care
facilities, transportation facilities, office buildings and related facilities,
housing facilities, pollution control facilities, water and sewage facilities
and power and electric facilities. Each of these facilities may incur different
difficulties in meeting its debt repayment obligations. Hospital facilities, for
example, are subject to changes in Medicare and Medicaid reimbursement
regulations, attempts by Federal and state legislatures to limit the costs of
health care and management's ability to complete construction projects on a
timely basis as well as to maintain projected rates of occupancy and
utilization. At any given time, there are several proposals pending on a Federal
and state level concerning health care which may further affect a hospital's
debt service obligation.
Housing facilities may be subject to increases in operating costs,
management's ability to maintain occupancy levels, rent restrictions and
availability of Federal or state subsidies, while power and electric facilities
may be subject to increased costs resulting from environmental restrictions,
fluctuations in fuel costs, delays in licensing procedures and the general
regulatory framework in which these facilities operate. All of these entities
are constructed and operated under rigid regulatory guidelines.
Some entities which financed facilities with proceeds of private activity
bonds issued by the New Jersey Economic Development Authority, a major issuer of
special obligation bonds, have defaulted on their debt service obligations.
Because these special obligation bonds were repayable only from revenue received
from the specific projects which they funded, the New Jersey Economic
Development Authority was unable to repay the debt service to bondholders for
such facilities. Each issue of special obligation bonds, however, depends on its
own revenue for repayment, and thus these defaults should not affect the ability
of the New Jersey Economic Development Authority to repay obligations on other
bonds that it issues in the future.
The State has, in the past, experienced a period of substantial economic
growth with unemployment levels below the national average. Recently, however,
the state has experienced an economic slowdown, and its unemployment rate has
risen to the extent the State has lost its relative advantage over the nation.
To the extent that any adverse conditions exist in the future which affect the
obligor's ability to repay debt, the value of the Portfolio may be immediately
and substantially affected.
The following are cases presently pending or threatened in which the State
has a potential for either a significant loss of
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<PAGE>
revenue or a significant unanticipated expenditure: (i) several labor unions
have challenged 1994 legislation that caused changes to the State's funding of
several public employee pension funds and resulted in significant ongoing annual
savings to the State; the Court of Appeals for the Third Circuit has upheld the
federal district court's decision to grant summary judgment on some of the
plaintiffs' claims and to deny summary judgment on the remainder; (ii) the New
Jersey Hospital Association and certain hospitals have challenged the adequacy
of Medicaid reimbursement for hospital services; the Court of Appeals for the
Third Circuit has affirmed denial of the plaintiffs' application for a
preliminary injunction; (iii) various hospitals have challenged the calculation
of the hospital assessment authorized by the Health Care Reform Act of 1992; the
case has been remanded by the Appellate Division to the Department of Health,
which held a hearing on August 30, 1995, and a determination is now pending;
(iv) the County of Passaic and other parties have filed suit alleging the State
and the New Jersey Department of Environmental Protection violated a 1984
consent order concerning the construction of a resource recovery facility in
that county; the plaintiffs have appealed the trial court's grant of summary
judgment to the defendants; (v) Robert E. Brennan has sued two members of the
New Jersey Bureau of Securities asserting numerous violations of his rights and
abuse of state power; he has appealed the trial court's grant of summary
judgment to the defendants; (vi) several cases filed in the State courts
challenge the basis on which recoveries of certain costs for residents in State
psychiatric hospitals and other facilities are shared between the State
Department of Human Services and the State's county governments and certain
counties are seeking the recovery from the Department of costs they have
incurred for the maintenance of such residents; most of those cases are now
pending before the Appellate Division; (vii) a coalition of churches and church
leaders in Hudson County have filed suits asserting the State-owned Liberty
State Park in Jersey City violates environmental standards and seeking
injunctive and monetary relief; (viii) Waste Management of Pennsylvania, Inc.
and an affiliate have filed suit alleging their constitutional rights were
violated by the State's issuance of two emergency redirection orders and a draft
permit; and (ix) representatives of the trucking industry have filed a
constitutional challenge to annual hazardous and solid waste licensure renewal
fees, seeking a declaratory judgment, injunctive relief, a refund of past fees
and attorneys fees; they are seeking class certification of their action.
Although the New Jersey State-Specific Money Market Portfolio generally
intends to invest its assets primarily in New Jersey State-Specific Obligations
rated within the two highest rating categories of an NRSRO, and the New Jersey
Tax-Free Income Portfolio intends to invest its assets primarily in New Jersey
State-Specific Obligations rated within the four highest rating
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<PAGE>
categories of an NRSRO, there can be no assurance that such ratings will remain
in effect until such obligations mature or are redeemed or will not be revised
downward or withdrawn. Such revisions or withdrawals may have an adverse affect
on the market price of such securities.
Although there can be no assurance that such conditions will continue, the
State's general obligation bonds are currently rated "AA+" by S&P and "AA1" by
Moody's.
Additional Investment Limitations.
Each Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed with respect to a particular Portfolio only by a
vote of the holders of a majority of such Portfolio's outstanding shares (as
defined below under "Miscellaneous"). The Index Master Portfolio's fundamental
investment limitations are described separately.
Money Market Portfolios:
1) Each of the Money Market, Municipal Money Market and U.S. Treasury Money
Market Portfolios may not purchase securities of any one issuer (other than
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or certificates of deposit for any such securities) if more
than 5% of the value of the Portfolio's total assets (taken at current value)
would be invested in the securities of such issuer, or more than 10% of the
issuer's outstanding voting securities would be owned by the Portfolio or the
Fund, except that up to 25% of the value of the Portfolio's total assets (taken
at current value) may be invested without regard to these limitations. For
purposes of this limitation, a security is considered to be issued by the entity
(or entities) whose assets and revenues back the security. A guarantee of a
security is not deemed to be a security issued by the guarantor when the value
of all securities issued and guaranteed by the guarantor, and owned by the
Portfolio, does not exceed 10% of the value of the Portfolio's total assets.
2) No Portfolio may borrow money or issue senior securities, except that
each Portfolio may borrow from banks and (other than a Municipal Money Market
Portfolio) enter into reverse repurchase agreements for temporary purposes in
amounts up to one-third of the value of its total assets at the time of such
borrowing; or mortgage, pledge or hypothecate any assets, except in connection
with any such borrowing and then in amounts not in excess of one-third of the
value of the Portfolio's total assets at the time of such borrowing. No
Portfolio will purchase securities while its aggregate borrowings (including
reverse repurchase agreements and borrowings from banks) in excess of 5% of its
total assets are outstanding. Securities held in escrow
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<PAGE>
or separate accounts in connection with a Portfolio's investment practices are
not deemed to be pledged for purposes of this limitation.
3) Each of the Municipal Money Market, U.S. Treasury Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal
Money Market Portfolios may not purchase securities which would cause 25% or
more of the value of its total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry. The Money Market Portfolio, on the other hand,
may not purchase any securities which would cause, at the time of purchase, less
than 25% of the value of its total assets to be invested in the obligations of
issuers in the banking industry, or in obligations, such as repurchase
agreements, secured by such obligations (unless the Portfolio is in a temporary
defensive position) or which would cause, at the time of purchase, more than 25%
of the value of its total assets to be invested in the obligations of issuers in
any other industry. In applying the investment limitations stated in this
paragraph, (i) there is no limitation with respect to the purchase of (a)
instruments issued (as defined in Investment Limitation number 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, (b) instruments issued by domestic
banks (which may include U.S. branches of foreign banks) and (c) repurchase
agreements secured by the instruments described in clauses (a) and (b); (ii)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (iii) utilities will be divided according to
their services, for example, gas, gas transmission, electric and gas, electric
and telephone will be each considered a separate industry.
4) Each of the Ohio Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia Municipal Money Market
and New Jersey Municipal Money Market Portfolios will invest at least 80% of its
net assets in AMT Paper and instruments the interest on which is exempt from
regular Federal income tax, except during defensive periods or during periods of
unusual market conditions.
5) The Municipal Money Market Portfolio will invest at least 80% of its net
assets in instruments the interest on which is exempt from regular Federal
income tax and is not an item of tax preference for purposes of Federal
alternative minimum tax, except during defensive periods or during periods of
unusual market conditions.
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<PAGE>
Non-Money Market Portfolios:
Each of the Non-Money Market Portfolios (other than the Ohio Tax-Free
Income, Pennsylvania Tax-Free Income and New Jersey Tax- Free Income Portfolios)
may not:
1) Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the value of
the Portfolio's total assets would (taken at current value) be invested in the
securities of such issuer, or more than 10% of the issuer's outstanding voting
securities would be owned by the Portfolio or the Fund, except that up to 25% of
the value of the Portfolio's total assets may (taken at current value) be
invested without regard to these limitations. For purposes of this limitation, a
security is considered to be issued by the entity (or entities) whose assets and
revenues back the security. A guarantee of a security shall not be deemed to be
a security issued by the guarantors when the value of all securities issued and
guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of
the value of the Portfolio's total assets.
Each of the Non-Money Market Portfolios may not:
2) Purchase any securities which would cause 25% or more of the value of
the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued (as defined in Investment Limitation No. 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and (ii) repurchase agreements
secured by the instruments described in clause (i); (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(c) utilities will be divided according to their services; for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.
Each Non-Money Market Portfolio (other than the Managed Income, High Yield,
Intermediate Government Bond, Low Duration Bond, Intermediate Bond, Government
Income, International Bond, Core Bond and Balanced Portfolios) may not:
3) Borrow money or issue senior securities, except that each Portfolio may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such
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<PAGE>
borrowing; or mortgage, pledge or hypothecate any assets, except in connection
with any such borrowing and then in amounts not in excess of one-third of the
value of the Portfolio's total assets at the time of such borrowing. No
Portfolio will purchase securities while its aggregate borrowings (including
reverse repurchase agreements and borrowings from banks) in excess of 5% of its
total assets are outstanding. Securities held in escrow or separate accounts in
connection with a Portfolio's investment practices are not deemed to be pledged
for purposes of this limitation.
None of the Managed Income, High Yield, Intermediate Government Bond, Low
Duration Bond, Intermediate Bond, Government Income, Core Bond, International
Bond and Balanced Portfolios may:
4) Issue senior securities, borrow money or pledge its assets, except that
a Portfolio may borrow from banks or enter into reverse repurchase agreements or
dollar rolls in amounts aggregating not more than 33 1/3% of the value of its
total assets (calculated when the loan is made) to take advantage of investment
opportunities and may pledge up to 33 1/3% of the value of its total assets to
secure such borrowings. Each Portfolio is also authorized to borrow an
additional 5% of its total assets without regard to the foregoing limitations
for temporary purposes such as clearance of portfolio transactions and share
redemptions. For purposes of these restrictions, the purchase or sale of
securities on a "when-issued," delayed delivery or forward commitment basis, the
purchase and sale of options and futures contracts and collateral arrangements
with respect thereto are not deemed to be the issuance of a senior security, a
borrowing or a pledge of assets.
All Portfolios:
No Portfolio may:
1. Purchase or sell real estate, except that each Portfolio may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
2. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of the Securities
Act of 1933 except to the extent that the purchase of obligations directly from
the issuer thereof, or
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<PAGE>
the disposition of securities, in accordance with the Portfolio's investment
objective, policies and limitations may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options on futures contracts and, in
the case of the International Bond Portfolio, currencies.
5. Purchase securities of companies for the purpose of exercising control.
6. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Portfolio's transactions in futures contracts and related options or
a Portfolio's sale of securities short against the box, and (b) a Portfolio may
obtain short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
7. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each Portfolio may, to the
extent appropriate to its investment policies, purchase securities (publicly
traded securities in the case of each Money Market Portfolio) of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options.
8. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities.
9. Purchase or sell commodities except that each Portfolio may, to the
extent appropriate to its investment policies, purchase securities of companies
engaging in whole or in part in such activities, may engage in currency
transactions and may enter into futures contracts and related options.
10. Notwithstanding the investment limitations of the Index Equity
Portfolio, the Index Equity Portfolio may invest all of its assets in shares of
an open-end management investment company with substantially the same investment
objective, policies and limitations as the Portfolio.
Although the foregoing investment limitations would permit the Money Market
Portfolios to invest in options, futures contracts and options on futures
contracts, and to sell securities short against the box, those Portfolios do not
currently intend to trade in such instruments or engage in such transactions
during the next twelve months (except to the extent
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<PAGE>
a portfolio security may be subject to a "demand feature" or "put" as permitted
under SEC regulations for money market funds). Prior to making any such
investments, a Money Market Portfolio would notify its shareholders and add
appropriate descriptions concerning the instruments and transactions to its
Prospectus.
Index Master Portfolio:
The investment limitations of the Index Master Portfolio, the Portfolio in
which the Index Equity Portfolio invests all of its investable assets, are
separate from those of the Index Equity Portfolio. The Index Master Portfolio
may not:
1. Invest in commodities or real estate, including limited partnership
interests therein, although it may purchase and sell securities of companies
which deal in real estate and securities which are secured by interests in real
estate, and may purchase or sell financial futures contracts and options
thereon;
2. Make loans of cash, except through the acquisition of repurchase
agreements and obligations customarily purchased by institutional investors;
3. As to 75% of the total assets of the Index Master Portfolio, invest in
the securities of any issuer (except obligations of the U.S. Government and its
instrumentalities) if, as a result, more than 5% of the Index Master Portfolio's
total assets, at market, would be invested in the securities of such issuer;
4. Purchase or retain securities of an issuer if those officers and
trustees of the Trust or officers and directors of the Trust's investment
adviser owning more than 1/2 of 1% of such securities together own more than 5%
of such securities;
5. Borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 5% of the Index Master
Portfolio's gross assets valued at the lower of market or cost; provided that it
may borrow amounts not exceeding 33% of its net assets from banks and pledge not
more than 33% of such assets to secure such loans;
6. Pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value, except as described in (5)
above;
7. Invest more than 10% of the value of its total assets in illiquid
securities which include certain restricted securities, repurchase agreements
with maturities of greater than seven days, and other illiquid investments;
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<PAGE>
8. Engage in the business of underwriting securities issued by others;
9. Invest for the purpose of exercising control over management of any
company;
10. Invest its assets in securities of any investment company, except in
connection with a merger, acquisition of assets, consolidation or
reorganization;
11. Invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation;
12. Acquire any securities of companies within one industry if, as a result
of such acquisition, more than 25% of the value of its total assets would be
invested in securities of companies within such industry;
13. Write or acquire options (except as described in (1) above) or
interests in oil, gas or other mineral exploration, leases or development
programs;
14. Purchase warrants; however, it may acquire warrants as a result of
corporate actions involving its holdings of other equity securities;
15. Purchase securities on margin or sell short; or
16. Acquire more than 10% of the voting securities of any issuer.
Although (2) above prohibits cash loans, the Index Master Portfolio is
authorized to lend portfolio securities. With respect to (7) above, pursuant to
Rule 144A under the 1993 Act, the Index Master Portfolio may purchase certain
unregistered (i.e. restricted) securities upon a determination that a liquid
institutional market exists for the securities. If it is decided that a liquid
market does exist, the securities will not be subject to the 10% limitation on
holdings of illiquid securities stated in (7) above. While maintaining
oversight, the Board of Trustees of the Trust has delegated the day-to-day
function of making liquidity determinations to DFA, the Index Master Portfolio's
adviser. For Rule 144A securities to be considered liquid, there must be at
least two dealers making a market in such securities. After purchase, the Board
of Trustees of the Trust and DFA will continue to monitor the liquidity of Rule
144A securities.
For purposes of (12) above, utility companies will be divided according to
their services; e.g., gas, gas transmission,
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<PAGE>
electric and gas, electric, water and telephone will each be considered a
separate industry.
Because the structure of the Index Master Portfolio is based on the
relative market capitalizations of eligible holdings, it is possible that the
Index Master Portfolio might include at least 5% of the outstanding voting
securities of one or more issuers. In such circumstances, the Trust and the
issuer would be deemed "affiliated persons" under the Investment Company Act of
1940, and certain requirements of the Act regulating dealings between affiliates
might become applicable.
TRUSTEES AND OFFICERS
THE FUND
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
William O. Albertini Trustee Executive Vice President,
Bell Atlantic Corporation Chief Financial Officer
1717 Arch Street and Director since
47th Floor West February 1995, Vice
Philadelphia, PA 19103 President and Chief
Age: 54 Financial Officer from
January 1991 - February
1995, Bell Atlantic
Corporation (a
diversified
telecommunications
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.
(cellular communications
company) since June 1994;
Director, American
Waterworks, Inc. (water
utility) since May 1990;
Trustee, The Carl E. &
Emily I. Weller
Foundation since October
1991.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<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: 62 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;
Trustee, Medical Center
of Princeton; 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: 52 Accounting and 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 and
Chairman of the Executive
Committee, ACE Limited
(insurance company);
Trustee, Allegheny
General Hospital and
Allegheny Health,
Education and Research
Foundation; Director,
</TABLE>
- --------
1 This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Marinette Marine
Corporation; Director,
Pittsburgh Baseball, Inc.
from 1994-96; Director,
Transtar, Inc.
(transportation company)
since 1996; and Director
and Chairman of the
Board, RMI Titanium
Company.
Anthony M. Santomero Vice Chairman Deputy Dean from
The Wharton School of the Board 1990 to 1994, Richard
University of Pennsylvania K. Mellon Professor
Room 2344 of Finance since April
Steinberg Hall-Dietrich Hall 1984, Director, Wharton
Philadelphia, PA 19104-6367 Financial Institutions
Age: 50 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; Editorial Advisory
Board, Open Economics
Review since November
1990; Director, The Zweig
Fund and The Zweig Total
Return Fund; Director of
Municipal Fund for
California Investors,
Inc. and Municipal Fund
for New York Investors,
Inc.
David R. Wilmerding, Jr. Chairman of Chairman, Gee,
One Aldwyn Center the Board Wilmerding & Asso-
Villanova, PA 19085 ciates, Inc.
Age: 61 (investment advisers)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
since February 1989;
Director, Beaver
Management Corporation;
Director, Independence
Square Income Securities,
Inc.; Director, The
Mutual Fire, Marine and
Inland Insurance Company;
Director, U.S. Retirement
Communities, Inc.;
Director, Trustee or
Managing General Partner
of a number of investment
companies advised by PIMC
and its affiliates.
Karen H. Sabath Assistant President, Compass
Compass Capital Group Secretary Capital Group, Inc. since
Inc. 1995; Managing Director
345 Park Avenue of BlackRock Financial
New York, NY 10154 Management, Inc. since
Age: 31 1993; prior to 1993, Vice
President of BlackRock
Financial Management,
Inc.
Ellen Corson Assistant _________________
PFPC Inc. Treasurer
103 Bellevue Parkway
Wilmington, DE 19809
Age: __
Brian Kindelan Secretary Senior Counsel, PNC Bank
PNC Bank Corp. Corp. since May 1995;
1600 Market Street, Associate, Stradley, Ronon,
28th Fl. Stevens & Young from March
Philadelphia, PA 19103 1990 to May 1995.
Age: 38
</TABLE>
The Fund pays trustees who are not affiliated with PNC Asset Management
Group, Inc. ("PAMG") or Compass Distributors, Inc. ("CDI" or "Distributor")
$10,000 annually and $275 per Portfolio for each full meeting of the Board that
they attend. The Fund pays the Chairman and Vice Chairman of the Board an
additional $10,000 and $5,000 per year, respectively, for their service in such
capacities. Trustees who are not affiliated with PAMG or the Distributor are
reimbursed for any expenses incurred in
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<PAGE>
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"),
CastleInternational Asset Management Limited ("CastleInternational"), PFPC Inc.
("PFPC"), Compass Capital Group, Inc. ("CCG"), CDI (collectively with PFPC and
CCG, the "Administrators"), or PNC Bank, National Association ("PNC Bank" or the
"Custodian") currently receives any compensation from the Fund. As of the date
of this Statement of Additional Information, the trustees and officers of the
Fund, as a group, owned less than 1% of the outstanding shares of each
Portfolio.
The table below sets forth the compensation actually received from the Fund
and the Fund Complex of which the Fund is a part by the trustees for the fiscal
year ended September 30, 1997:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from Registrant
Aggregate Benefits Estimated and Fund
Compensation Accrued as Annual Complex1
Name of Person, from Part of Fund Benefits upon Paid to
Position Registrant Expenses Retirement Trustees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anthony M. $ N/A N/A ( )2 $
Santomero, Vice
Chairman of the
Board
David R. Wilmerding, $ N/A N/A ( )2 $
Jr., Chairman of the
Board
William O. $ N/A N/A ( )2 $
Albertini, Trustee
Raymond J. Clark, $ N/A N/A ( )2 $
Trustee
Robert M. Hernandez, $ N/A N/A ( )2 $
Trustee
</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
investment services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
2. Total number of investment company boards trustees served on within the
Fund Complex.
-53-
<PAGE>
THE TRUST
The names, ages and addresses of the trustees and officers of the
Trust and a brief statement of their present positions and principal occupations
during the past five years are set forth below. As used below, "DFA Entities"
refers to the following: Dimensional Fund Advisors Inc., Dimensional Fund
Advisors Ltd., DFA Australia Pty Limited, DFA Investment Dimensions Group Inc.
(Registered Investment Company), Dimensional Emerging Markets Fund Inc.
(Registered Investment Company), Dimensional Investment Group Inc. (Registered
Investment Company) and DFA Securities Inc.
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
David G. Booth* Trustee, President President, Chairman-Chief
Santa Monica, and Chairman-Chief Executive Officer and Director
CA Executive Officer of all DFA Entities, except
Age: 50 Dimensional Fund Advisors Ltd.,
of which he is Chairman and
Director
George M. Trustee Leo Melamed Professor of
Constantinides Finance, Graduate School of
Chicago, IL Business, University of
Age: 49 Chicago. Director, DFA
Investment Dimensions Group
Inc., Dimensional Investment
Group Inc. and Dimensional
Emerging Markets Fund Inc.
John P. Gould Trustee Steven G. Rothmeier
Chicago, IL Distinguished Service Professor
Age: 58 of Economics, Graduate School
of Business, University of
Chicago. Trustee, First
Prairie Funds (registered
investment companies).
Director, DFA Investment
Dimensions Group Inc.,
Dimensional Investment Group
Inc., Dimensional Emerging
Markets Fund Inc. and Harbor
Investment Advisors. Executive
Vice President, Lexacon Inc.
(economics, law, strategy, and
finance consulting).
</TABLE>
-54-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Roger G. Trustee Professor in Practice of
Ibbotson Finance, Yale School of
New Haven, CT Management. Director, DFA
Age: 54 Investment Dimensions Group
Inc., Dimensional Investment
Group Inc., Dimensional
Emerging Markets Fund Inc.,
Hospital Fund, Inc. (investment
management services) and BIRR
Portfolio Analysis, Inc.
(software products). Chairman
and President, Ibbotson
Associates, Inc., Chicago, IL
(software, data, publishing and
consulting).
Merton H. Trustee Robert R. McCormick
Miller Distinguished Service Professor
Chicago, IL Emeritus, Graduate School of
Age: 74 Business, University of
Chicago. Director, DFA
Investment Dimensions Group
Inc., Dimensional Investment
Group Inc. and Dimensional
Emerging Markets Fund Inc.
Public Director, Chicago
Mercantile Exchange.
Myron S. Trustee Limited Partner, Long-Term
Scholes Capital Management L.P. (money
Greenwich, CT manager). Frank E. Buck
Age: 55 Professor Emeritus of Finance,
Graduate School of Business and
Professor of Law, Law School,
Senior Research Fellow, Hoover
Institution, (all) Stanford
University.
Director, DFA Investment
Dimensions Group Inc.,
Dimensional Investment Group
Inc., Dimensional Emerging
Markets Fund Inc., Benham
Capital Management Group of
Investment Companies and Smith
Breedon Group of Investment
Companies.
</TABLE>
-55-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Rex A. Trustee, Chairman Chairman, Chief Investment
Sinquefield* and Chief Officer and Director of all DFA
Santa Monica, Investment Officer Entities, except Dimensional
CA Fund Advisors Ltd., of which he
Age: 52 is Chairman, Chief Executive
Officer and Director.
*Interested
Trustees of the
Trust.
- -------------
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Officers Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Arthur Barlow Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 42
Truman Clark Vice President Vice President of all DFA
Santa Monica, Entities. Consultant until
CA October 1995 and Principal and
Age: 56 Manager of Product Development,
Wells Fargo Nikko Investment
Advisors from 1990-1994.
Maureen Connors Vice President
Santa Monica, Vice President of all DFA
CA Entities.
Age: 61
Robert Deere Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Age: 40
Irene R. Vice President, Vice President and Secretary of
Diamant Secretary all DFA Entities, except
Santa Monica, Dimensional Fund Advisors Ltd.,
CA for which she is Vice
Age: 46 President.
Eugene Fama, Vice President Vice President of all DFA
Jr. Entities.
Santa Monica,
CA
Age: 36
Kamyab Hashemi- Vice President, Controller and Assistant
Nejad, Controller and Treasurer, Vice President,
Santa Monica, Assistant Secretary Controller and Assistant
CA. Treasurer of all DFA Entities.
Age: 36
Stephen P. Vice President Managing Director, ANB
Manus, Investment Management and Trust
Santa Monica, Company from 1985-1993;
CA. President, ANB Investment
Age: 46 Management and Trust Company
from 1993-1997. Vice President
of all DFA Entities.
</TABLE>
-57-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Officers Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Karen McGinley, Vice President Vice President of all DFA
Santa Monica, Entities.
CA.
Age: 31
Catherine L. Vice President Associate, Morrison & Foerster,
Newell, LLP from 1989-1996. Vice
Santa Monica, President of all DFA Entities.
CA.
Age: 33
David Plecha Vice President Vice President of all DFA
Santa Monica, Entities.
CA.
Age: 36
George Sands Vice President Vice President of all DFA
Santa Monica, Entities. Managing Director,
CA Assets Strategy Consulting, Los
Age: 41 Angeles, CA from 1991 to 1992
and previously Vice President
of Wilshire Associates, Santa
Monica, CA.
Michael T. Vice President, Vice President, Chief Financial
Scardina Chief Financial Officer, Controller and
Santa Monica, Officer, Controller Treasurer of all DFA Entities.
CA and Treasurer
Age: 42
Jeanne C. Executive Vice Executive Vice President of all
Sinquefield, President DFA Entities.
Ph.D.
Santa Monica,
CA
Age: 51
Scott Thornton, Vice President Vice President of all DFA
Santa Monica, Entities.
CA.
Age: 34
Weston Vice President Vice President of all DFA
Wellington, Entities. Vice President,
Santa Monica, Director of Research, LPL
CA. Financial Services, Inc.
Age: 46
Rex A. Trustee Chairman and Chief Investment
Sinquefield, Officer of the Trust, and
Jeanne C. Sinquefield,
Executive Vice President of the
Trust, are husband and wife.
</TABLE>
-58-
<PAGE>
Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife.
Set forth below is a table listing, for each trustee of the Trust entitled
to receive compensation, the compensation received from the Trust during the
fiscal year ended November 30, 1996 and the total compensation received from all
four registered investment companies for which Dimensional Fund Advisors Inc.
("DFA") served as investment adviser during that same fiscal year.
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from
Aggregate Benefits Estimated Registrant and
Compensation Accrued as Annual Trust Complex/1
Name of Person, from Part of Trust Benefits upon Paid to
Position Registrant Expenses Retirement Trustees
- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
George M $ 5,000 N/A N/A $30,000
Constantinides,
Trustee
John P. Gould, $ 5,000 N/A N/A $30,000
Trustee
Roger G. Ibbotson, $ 5,000 N/A N/A $30,000
Trustee
Merton H. Miller, $ 5,000 N/A N/A $30,000
Trustee
Myron S. Scholes, $ 5,000 N/A N/A $30,000
Trustee
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, the Fund's Declaration of Trust provides that
shareholders shall not be subject to any personal liability in connection with
the assets of the Fund for the acts or obligations of the Fund, and that every
note, bond, contract, order or other undertaking made by the Fund shall contain
a provision to the effect that the shareholders are not personally liable
thereunder. The Declaration of Trust provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
being or having been a shareholder and not because of his acts or omissions or
some other reason. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund, and shall satisfy any judgment thereon.
- -----------
1. A Trust Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
-59-
<PAGE>
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the Declaration
of Trust provides that a trustee is entitled to be indemnified against all
liabilities and expenses reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the Fund will indemnify officers, representatives and employees of the Fund
to the same extent that trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
Advisory and Sub-Advisory Agreements. The advisory and sub-advisory
services provided by PAMG, PIMC, BlackRock, PCM, PEAC, CastleInternational and,
with respect to the Index Master Portfolio, Dimensional Fund Advisors Inc.
("DFA") and the fees received by each of them for such services are described in
the Prospectuses. As stated in the Prospectuses, PAMG may from time to time
voluntarily waive its advisory fees with respect to a Portfolio and may
voluntarily reimburse the Portfolios for expenses.
PAMG renders advisory services to each of the Portfolios, except the Index
Equity Portfolio, pursuant to an Investment Advisory Agreement. From the
commencement of operations of each Portfolio (other than the New Jersey
Municipal Money Market, New Jersey Tax-Free Income, High Yield, Core Bond, Low
Duration Bond and International Bond Portfolios) until January 4, 1996 (June 1,
1996 in the case of the Index Equity Portfolio), PIMC served as adviser.
From July 1, 1991 to December 31, 1995, Midlantic Bank, N.A. ("Midlantic
Bank") served as investment adviser to the predecessor portfolios of the
International Bond, New Jersey Tax-Free Income and New Jersey Municipal Money
Market Portfolios.
-60-
<PAGE>
From January 1, 1996 through January 12, 1996 (February 12, 1996 with respect to
the predecessor portfolio of the International Bond Portfolio): (i) PAMG and
Morgan Grenfell Investment Services Limited ("Morgan Grenfell") served as
investment adviser and sub-adviser, respectively, to the predecessor portfolio
to the International Bond Portfolio; (ii) PIMC served as investment adviser to
the predecessor portfolio to the New Jersey Municipal Money Market Portfolio;
and (iii) BlackRock served as investment adviser to the predecessor portfolio to
the New Jersey Tax-Free Income Portfolio pursuant to interim advisory and
sub-advisory agreements approved by the shareholders of the Compass Capital
Group of Funds. From December 9, 1992 to January 13, 1996, BlackRock served as
investment adviser to the predecessor portfolio of the Core Bond Portfolio. From
July 17, 1992 to January 13, 1996, BlackRock served as investment adviser to the
predecessor portfolio of the Low Duration Bond Portfolio.
PCM renders sub-advisory services to the Balanced, Large Cap Value Equity,
Mid-Cap Value Equity, Small Cap Value Equity and Select Equity Portfolios
pursuant to Sub-Advisory Agreements. CastleInternational renders sub-advisory
services to the International Equity and International Emerging Markets
Portfolios pursuant to a Sub-Advisory Agreement. PIMC renders sub-advisory
services to the Money Market, U.S. Treasury Money Market, Municipal Money
Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, Virginia Municipal Money Market and New Jersey
Municipal Money Market Portfolios pursuant to Sub-Advisory Agreements. BlackRock
renders sub-advisory services to the Balanced, Managed Income, High Yield,
Intermediate Government Bond, Tax-Free Income, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Low Duration Bond, Intermediate Bond, New Jersey
Tax-Free Income, Core Bond, Government Income and International Bond Portfolios
pursuant to Sub-Advisory Agreements. PEAC renders sub-advisory services to the
Large Cap Growth Equity, Mid-Cap Growth Equity and Small Cap Growth Equity
Portfolios pursuant to Sub-Advisory Agreements. DFA renders advisory services to
the Index Master Portfolio, the registered investment company in which the Index
Equity Portfolio invests all of its assets, pursuant to an Investment Management
Agreement. The Investment Advisory Agreement with PAMG, the Investment
Management Agreement with DFA and the above-referenced Sub-Advisory Agreements
are collectively referred to as the "Advisory Contracts."
From December 1, 1992 (commencement of operations) to March 29, 1995, PNC
Bank, Ohio, National Association ("PNC Bank Ohio") served as sub-adviser to the
Ohio Tax-Free Income Portfolio. From November 1, 1989 (commencement of
operations) to September 10, 1993, PNC Bank Ohio served as sub-adviser to the
Municipal Money Market Portfolio. From November 1, 1989 (commencement of
operations) to September 10, 1993, PNC Bank Ohio served as sub-
-61-
<PAGE>
adviser to the Managed Income and Large Cap Growth Equity Portfolios. From April
20, 1992 to September 10, 1993, PCM served as sub-adviser to the Intermediate
Government Bond Portfolio. From July 23, 1992 to March 29, 1995, PNC Bank served
as sub-adviser to the Index Equity Portfolio. From September 11, 1993 to March
29, 1995, PNC Bank served as sub-adviser to the Managed Income, Intermediate
Government Bond and Large Cap Growth Equity Portfolios. From December 1, 1992
(commencement of operations) to March 29, 1995, PNC Bank served as sub-adviser
to the Ohio Tax-Free Income and Pennsylvania Tax-Free Income Portfolios. From
September 13, 1993 (commencement of operations) to March 29, 1995, PNC Bank
served as sub-adviser to the Select Equity Portfolio. From September 14, 1993
(commencement of operations) to March 29, 1995, PNC Bank served as sub-adviser
to the Small Cap Growth Equity Portfolio. From September 17, 1993 (commencement
of operations) to March 29, 1995, PNC Bank served as sub-adviser to the
Intermediate Bond Portfolio. From May 14, 1990 (commencement of operations) to
July 1, 1995, PNC Bank served as sub-adviser to the Tax-Free Income Portfolio.
PCM served as sub-adviser to the International Equity and International Emerging
Markets Portfolios from commencement of operations (April 27, 1992 in the case
of the International Equity Portfolio; June 17, 1994 in the case of the
International Emerging Markets Portfolio) to April 19, 1996.
PNC Bank served as sub-adviser for the Money Market Portfolio from October
4, 1989 (commencement of operations) to January 4, 1996; for the Municipal Money
Market Portfolio from September 10, 1993 to January 4, 1996; for the U.S.
Treasury Money Market Portfolio from November 1, 1989 (commencement of
operations) to January 4, 1996; for the Ohio Municipal Money Market Portfolio
from June 1, 1993 (commencement of operations) to January 4, 1996; for the
Pennsylvania Municipal Money Market Portfolio from June 1, 1993 (commencement of
operations) to January 4, 1996; for the North Carolina Municipal Money Market
Portfolio from May 4, 1993 (commencement of operations) to January 4, 1996; for
the Virginia Municipal Money Market Portfolio from July 25, 1994 (commencement
of operations) to January 4, 1996; and for the New Jersey Municipal Money Market
Portfolio from January 13, 1996 to June 6, 1996. From April 4, 1990
(commencement of operations) to January 4, 1996, PNC Bank served as sub-adviser
to the Balanced Portfolio. From March 1, 1993 to January 4, 1996, PEAC served as
sub-adviser to the Select Equity Portfolio. From March 29, 1995 to June 1, 1996,
PEAC served as sub-adviser to the Index Equity Portfolio. From July 1, 1996
through December 31, 1996, Morgan Grenfell served as sub-adviser to the
International Bond Portfolio.
-62-
<PAGE>
Under the relevant Advisory Contracts, PAMG, PIMC, PCM, PEAC, BlackRock and
CastleInternational are not liable for any error of judgment or mistake of law
or for any loss suffered by the Fund or a Portfolio in connection with the
performance of the Advisory Contracts. Under the Advisory Contracts, PAMG, PIMC,
PCM, PEAC, BlackRock, CastleInternational and DFA are liable for a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of their respective duties or from reckless disregard of their
respective duties and obligations thereunder. Each of the Advisory Contracts
(except the Advisory Contract relating to the Index Master Portfolio) is
terminable as to a Portfolio by vote of the Fund's Board of Trustees or by the
holders of a majority of the outstanding voting securities of the relevant
Portfolio, at any time without penalty, on 60 days' written notice to PAMG,
PIMC, PCM, PEAC, BlackRock or CastleInternational, as the case may be. PAMG,
PIMC, PCM, PEAC, BlackRock and CastleInternational may also terminate their
advisory relationship with respect to a Portfolio on 60 days' written notice to
the Fund. The Advisory Contract relating to the Index Master Portfolio is
terminable by vote of the Trust's Board of Trustees or by the holders of a
majority of the outstanding voting securities of the Index Master Portfolio at
any time without penalty on 60 days' written notice to DFA. DFA may also
terminate its advisory relationship with respect to the Index Master Portfolio
on 90 days' written notice to the Trust. Each of the Advisory Contracts
terminates automatically in the event of its assignment.
For the period from October 1, 1996 (December 27, 1996 in the case of the
Mid-Cap Growth Equity and Mid-Cap Value Equity Portfolios; and September 26,
1997 in the case of the International Small Cap Equity Portfolio) through
September 30, 1997, the Fund paid PAMG advisory fees, and PAMG waived advisory
fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- -------- ------- --------------
<S> <C> <C> <C>
Money Market $ $ $
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money Market
North Carolina Municipal Money Market
Virginia Municipal Money Market
New Jersey Municipal Money Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government Bond
Ohio Tax-Free Income
</TABLE>
-63-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- -------- ------- --------------
<S> <C> <C> <C>
Pennsylvania Tax-Free Income $ $ $
Intermediate Bond
New Jersey Tax-Free Income
International Bond
Core Bond
Low Duration Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Small Cap Value Equity
International Equity
International Emerging Markets
Balanced
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap Equity
</TABLE>
For the period from October 1, 1995 through January 4, 1996,
the Fund paid PIMC advisory fees, and PIMC waived advisory fees and reimbursed
expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- -------- ------- -----
<S> <C> <C> <C>
Money Market $ 321,268 $1,818,401 $ 0
Municipal Money Market 46,804 304,226 0
U.S. Treasury Money Market 114,639 745,150 0
Ohio Municipal Money Market 11,052 71,841 0
Pennsylvania Municipal Money Market 64,257 417,675 0
North Carolina Municipal Money Market 11,026 71,666 0
Virginia Municipal Money Market 0 7,024 0
Managed Income 520,724 223,168 0
Government Income 0 17,234 0
Tax-Free Income 3,933 11,137 0
Intermediate Government Bond 114,345 130,122 0
Ohio Tax-Free Income 723 10,100 0
Pennsylvania Tax-Free Income 43,145 37,663 0
Intermediate Bond 136,544 119,059 0
Large Cap Value Equity 829,764 147,027 0
Large Cap Growth Equity 361,240 95,914 0
Small Cap Growth Equity 304,284 23,327 0
Select Equity 369,071 97,791 0
Index Equity 4,647 88,292 0
Small Cap Value Equity 320,588 24,942 0
International Equity 697,319 127,354 0
International Emerging Markets 144,937 11,380 0
Balanced 201,642 53,929 0
</TABLE>
-64-
<PAGE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio), the
Fund paid PAMG (PIMC in the case of the Index Equity Portfolio) advisory fees,
and PAMG (PIMC in the case of the Index Equity Portfolio) waived advisory fees
and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- -------- ------- --------------
<S> <C> <C> <C>
Money Market $1,443,913 $6,290,596 $ 0
Municipal Money Market 158,379 1,029,459 0
U.S. Treasury Money Market 691,448 3,584,858 0
Ohio Municipal Money Market 32,275 209,784 0
Pennsylvania Municipal Money Market 240,350 1,562,271 0
North Carolina Municipal Money Market 45,997 298,983 0
Virginia Municipal Money Market 0 180,685 14,604
New Jersey Municipal Money Market 32,663 212,365 0
Managed Income 1,796,762 770,041 0
Government Income 0 52,817 7,027
Tax-Free Income 109,211 74,939 0
Intermediate Government Bond 425,069 283,380 0
Ohio Tax-Free Income 4,764 31,253 3,479
Pennsylvania Tax-Free Income 185,302 123,326 0
Intermediate Bond 514,322 342,880 0
New Jersey Tax-Free Income 184,448 122,966 0
International Bond 133,797 4,580 0
Core Bond 424,691 283,127 0
Low Duration Bond 338,287 225,525 0
Large Cap Value Equity 4,159,395 421,173 0
Large Cap Growth Equity 2,109,685 210,969 0
Small Cap Growth Equity 1,596,126 7,204 0
Select Equity 1,457,052 145,705 0
Index Equity 28,380 174,535 0
Small Cap Value Equity 1,223,651 0 0
International Equity 2,836,323 202,595 0
International Emerging Markets 740,140 63,810 0
Balanced 917,400 91,740 0
</TABLE>
-65-
<PAGE>
For the year or periods ended September 30, 1995, the Fund
paid PIMC advisory fees, and PIMC waived advisory fees and reimbursed expenses,
as follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- -------- ------- -----
<S> <C> <C> <C>
Money Market $1,051,446 $5,217,130 $ 0
Municipal Money Market 189,929 921,718 0
U.S. Treasury Money Market 489,209 2,327,266 0
Ohio Municipal Money Market 49,133 245,955 0
Pennsylvania Municipal Money Market 304,651 1,264,187 0
North Carolina Municipal Money Market 46,472 369,591 4,999
Managed Income 1,790,332 767,285 0
Tax-Free Income 0 49,671 1,599
Intermediate Government Bond 379,534 569,302 0
Ohio Tax-Free Income 0 42,044 6,713
Pennsylvania Tax-Free Income 161,038 137,951 0
Intermediate Bond 342,301 335,908 0
Large Cap Value Equity 2,832,644 746,727 0
Large Cap Growth Equity 866,271 324,851 0
Small Cap Growth Equity 618,374 137,615 0
Select Equity 691,447 259,293 0
Index Equity 30,772 382,205 0
Small Cap Value Equity 1,143,071 114,307 0
International Equity 2,391,607 597,902 0
Balanced 642,763 241,037 0
Virginia Municipal Money Market 0 85,063 35,957
International Emerging Markets 258,648 52,186 0
Government Income1 0 37,256 11,980
</TABLE>
1 For the period from commencement of operations (October 3, 1994) through
September 30, 1995.
For the period from October 1, 1997 (December 27, 1996 in the case of the
Mid-Cap Growth Equity and Mid-Cap Value Equity Portfolios; and September 26,
1997 in the case of the International Small Cap Equity Portfolio) through
September 30, 1997, PAMG paid sub-advisory fees to the specified Portfolios'
sub-advisers, after waivers, and such sub-advisers waived sub-advisory fees as
follows:
-66-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- -------- -------
<S> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
New Jersey Municipal Money
Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government
Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Intermediate Bond
New Jersey Tax-Free Income
International Bond
Core Bond
Low Duration Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Small Cap Value Equity
International Equity
International Emerging Markets
Balanced
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap
</TABLE>
-67-
<PAGE>
For the period from October 1, 1995 through January 4, 1996, PIMC
paid sub-advisory fees to the specified Portfolios' sub-advisers, after waivers,
and such sub-advisers waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- -------- -------
<S> <C> <C>
Money Market $ 0 $235,363
Municipal Money Market 0 38,613
U.S. Treasury Money Market 0 94,577
Ohio Municipal Money Market 0 9,118
Pennsylvania Municipal Money Market 0 53,013
North Carolina Municipal Money Market 0 9,096
Virginia Municipal Money Market 0 773
Managed Income 497,581 82,654
Government Income 0 12,063
Tax-Free Income 3,693 9,207
Intermediate Government Bond 73,585 97,542
Ohio Tax-Free Income 3,258 4,318
Pennsylvania Tax-Free Income 24,323 32,242
Intermediate Bond 76,937 101,986
Large Cap Value Equity 213,057 0
Large Cap Growth Equity 333,722 0
Small Cap Growth Equity 239,156 0
Select Equity 340,809 0
Index Equity 12,385 73,920
Small Cap Value Equity 252,237 0
International Equity 659,738 0
International Emerging Markets 137,559 0
Balanced 186,567 0
</TABLE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio),
PAMG (PIMC in the case of the Index Equity Portfolio) paid sub-advisory fees to
the specified Portfolios' sub-advisers, after waivers, and such sub-advisers
waived sub-advisory fees as follows:
-68-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- -------- -------
<S> <C> <C>
Money Market $1,443,913 $5,342,421
Municipal Money Market 158,382 897,064
U.S. Treasury Money Market 694,221 3,095,647
Ohio Municipal Money Market 32,275 182,796
Pennsylvania Municipal Money Market 240,350 1,361,445
North Carolina Municipal Money Market 45,997 260,560
Virginia Municipal Money Market 0 160,601
New Jersey Municipal Money Market 32,663 149,411
Managed Income 1,488,836 248,415
Government Income 0 36,973
Tax-Free Income 95,609 50,559
Intermediate Government Bond 412,698 2,499
Ohio Tax-Free Income 1,428 23,786
Pennsylvania Tax-Free Income 170,395 84,589
Intermediate Bond 402,873 188,333
New Jersey Tax-Free Income 153,707 61,483
International Bond 106,486 0
Core Bond 353,907 141,564
Low Duration Bond 281,905 112,763
Large Cap Value Equity 3,314,383 0
Large Cap Growth Equity 1,686,503 0
Small Cap Growth Equity 1,164,980 0
Select Equity 1,164,368 0
Index Equity 20,642 123,200
Small Cap Value Equity 888,986 0
International Equity 2,431,134 0
International Emerging Markets 707,475 0
Balanced 733,223 0
</TABLE>
For the year or periods ended September 30, 1995, PIMC paid sub-advisory
fees to the specified Portfolios' sub-advisers, after waivers, and such
sub-advisers waived sub-advisory fees as follows:
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<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers
- ---------- -------- -------
<S> <C> <C>
Money Market $ 0 $ 721,072
Municipal Money Market 0 123,516
U.S. Treasury Money Market 0 312,942
Ohio Municipal Money Market 0 32,788
Pennsylvania Municipal Money Market 0 174,315
North Carolina Municipal Money Market 0 46,229
Managed Income 1,253,232 537,100
Tax-Free Income 0 34,770
Intermediate Government Bond 265,674 398,511
Ohio Tax-Free Income 0 29,431
Pennsylvania Tax-Free Income 112,727 96,566
Intermediate Bond 239,611 235,136
Large Cap Value Equity 2,060,105 543,074
Large Cap Growth Equity 630,015 236,255
Small Cap Growth Equity 449,727 100,084
Select Equity 502,871 188,576
Index Equity 30,772 286,654
Small Cap Value Equity 831,324 83,132
International Equity 1,913,286 478,322
Balanced 467,464 175,299
Virginia Municipal Money Market 0 9,451
International Emerging Markets 227,610 45,924
Government Income1 0 26,079
</TABLE>
(1) Commenced operations October 3, 1994.
For the services it provides as investment adviser to the Index Master
Portfolio, DFA is paid a monthly fee calculated as a percentage of average net
assets of the Index Master Portfolio. For the fiscal years ending November 30,
1995, 1996 and 1997, the Index Master Portfolio paid advisory fees to DFA
totalling $18,816, $62,405 and $_____, respectively. The Index Equity Portfolio
did not invest in the Index Master Portfolio until June 2, 1996.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio was
advised by Midlantic Bank from July 1, 1991 through December 31, 1995, and by
BlackRock from January 1, 1996 through January 12, 1996. For the period from
January 1, 1996 through January 12, 1996, the predecessor portfolio to the New
Jersey
-70-
<PAGE>
Tax-Free Income Portfolio paid $20,165 in advisory fees to BlackRock. For the
period from March 1, 1995 through December 31, 1995 and for the fiscal years
ended February 28, 1995 and 1994, the predecessor portfolio to the New Jersey
Tax-Free Income Portfolio paid $496,305, $607,485 and $159,582, respectively, in
investment advisory fees to Midlantic Bank pursuant to its prior investment
advisory contract. In addition, during the period from March 1, 1995 through
December 31, 1995 and during the fiscal year ended February 28, 1995, Midlantic
Bank waived $0 and $2,451, respectively, in investment advisory fees. During the
period from January 13, 1996 through January 31, 1996, the New Jersey Tax-Free
Income Portfolio paid PAMG $12,779 in investment advisory fees, and PAMG waived
$8,520 in investment advisory fees. During the period from January 13, 1996
through January 31, 1996, PAMG paid BlackRock $8,945 in sub-advisory fees with
respect to the New Jersey Tax-Free Income Portfolio and BlackRock waived $5,964
in sub-advisory fees.
The predecessor portfolio to the International Bond Portfolio was advised
by Midlantic Bank from July 1, 1991 through December 31, 1995, and by PAMG from
January 1, 1996 through February 12, 1996. For the period from February 1, 1996
through February 12, 1996, the predecessor portfolio to the International Bond
Portfolio paid $4,134 in advisory fees to PAMG, and PAMG waived advisory fees
and reimbursed expenses totalling $0 and $0, respectively. For the period from
February 1, 1996 through February 12, 1996, PAMG paid Morgan Grenfell $4,898 in
sub-advisory fees with respect to the predecessor portfolio to the International
Bond Portfolio, and Morgan Grenfell waived sub-advisory fees totalling $0. For
the period from January 1, 1996 through January 31, 1996, the predecessor
portfolio to the International Bond Portfolio paid $24,832 in advisory fees to
PAMG. For the period from January 1, 1996 through January 31, 1996, PAMG paid
Morgan Grenfell $20,176 in sub-advisory fees with respect to the predecessor
portfolio to the International Bond Portfolio. For the period from March 1, 1995
through December 31, 1995 and for the fiscal year ended February 28, 1995, the
predecessor portfolio to the International Bond Portfolio paid $305,176 and
$361,620, respectively, in investment advisory fees to Midlantic Bank pursuant
to its prior investment advisory contract.
The predecessor portfolio to the New Jersey Municipal Money Market
Portfolio was advised by Midlantic Bank from July 1, 1991 through December 31,
1995, and by PIMC from January 1, 1996 through January 12, 1996. For the period
from January 1, 1996 through January 12, 1996, the predecessor portfolio to the
New Jersey Municipal Money Market Portfolio paid $8,000 in advisory fees to
PIMC. For the period from March 1, 1995 through December 31, 1995 and for the
fiscal years ended February 28, 1995, the predecessor portfolio to the New
Jersey Municipal Money Market Portfolio paid $155,696 and $158,240,
respectively, in investment
-71-
<PAGE>
advisory fees to Midlantic Bank pursuant to its prior investment advisory
contract. During the period from January 13, 1996 through January 31, 1996, the
New Jersey Municipal Money Market Portfolio paid PIMC $2,128 in investment
advisory fees, and PIMC waived $13,826 in investment advisory fees. During the
period from January 13, 1996 through January 31, 1996, PNC Bank waived all of
the sub-advisory fees (in the amount of $1,125) with respect to the New Jersey
Municipal Money Market Portfolio.
The predecessor portfolio to the Core Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996, the
predecessor portfolio to the Core Bond Portfolio paid BlackRock $53,125 in
investment advisory fees and BlackRock waived $21,255 in investment advisory
fees. For the fiscal years ended June 30, 1995 and 1994, BlackRock waived its
investment advisory fee with respect to the predecessor portfolio to the Core
Bond Portfolio in the amounts of $56,894 and $34,010, respectively, and
reimbursed expenses amounting to $137,364 and $137,179, respectively. During the
period from January 13, 1996 through March 31, 1996, the Core Bond Portfolio
paid PAMG $182,709 in investment advisory fees, and PAMG waived $121,806 in
investment advisory fees. During the period from January 13, 1996 through March
31, 1996, PAMG paid BlackRock $127,896 in sub-advisory fees with respect to the
Core Bond Portfolio, and BlackRock waived $85,264 in sub-advisory fees.
The predecessor portfolio to the Low Duration Bond Portfolio was advised by
BlackRock. For the period from July 1, 1995 through January 12, 1996, the
predecessor portfolio to the Low Duration Bond Portfolio paid BlackRock $56,481
in investment advisory fees and BlackRock waived $11,186 in investment advisory
fees. For the fiscal years ended June 30, 1995 and 1994, BlackRock waived its
investment advisory fee with respect to the predecessor portfolio to the Low
Duration Bond Portfolio in the amounts of $102,707 and $110,232, respectively,
and reimbursed expenses amounting to $61,195 and $55,582, respectively. During
the period from January 13, 1996 through March 31, 1996, the Low Duration Bond
Portfolio paid PAMG $149,488 in investment advisory fees, and PAMG waived
$99,659 in investment advisory fees. During the period from January 13, 1996
through March 31, 1996, PAMG paid BlackRock $104,642 in sub-advisory fees with
respect to the Low Duration Bond Portfolio, and BlackRock waived $69,761 in
sub-advisory fees.
Administration Agreements. CCG, PFPC and CDI serve as the Fund's
co-administrators pursuant to administration agreements (collectively, the
"Administration Agreement"). PFPC and CDI have agreed to maintain office
facilities for the Fund, furnish the Fund with statistical and research data,
clerical, accounting, and bookkeeping services, and certain other services
required by the Fund. As stated in the Prospectuses, the Administrators may from
time to time voluntarily waive
-72-
<PAGE>
administration fees with respect to a Portfolio and may voluntarily reimburse
the Portfolios for expenses.
CCG serves as an Administrator to the Fund pursuant to a Co-Administration
Agreement. Under the Co-Administration Agreement, CCG is responsible for: (i)
the supervision and coordination of the performance of the Fund's service
providers; (ii) the negotiation of service contracts and arrangements between
the Fund and its service providers; (iii) acting as liaison between the trustees
of the Fund and the Fund's service providers; and (iv) providing ongoing
business management and support services in connection with the Fund's
operations.
The Administration Agreement provides that CCG, PFPC and CDI will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or a Portfolio in connection with the performance of the Administration
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from reckless
disregard of their respective duties and obligations thereunder.
PFPC serves as the administrative services agent for the Index Master
Portfolio pursuant to an Administration and Accounting Services Agreement. The
services provided by PFPC are subject to supervision by the executive officers
and the Board of Trustees of the Trust, and include day-to-day keeping and
maintenance of certain records, calculation of the offering price of the shares,
preparation of reports and acting as liaison with the Trust's custodians and
dividend and disbursing agents. For its services, PFPC is entitled to
compensation from the Index Master Portfolio at the annual rate of .015% of the
Index Master Portfolio's average daily net assets. In addition, PFPC charges
each investor in the Index Master Portfolio a monthly fee of $2,600.
From February 1, 1993 until January 13, 1996, PFPC and Provident
Distributors, Inc. ("PDI") served as co-administrators to the Fund. CCG became
an Administrator to the Fund on December 1, 1995.
For the period from October 1, 1996 (December 27, 1996 in the case of the
Mid-Cap Growth Equity and Mid-Cap Value Equity Portfolios; and September 26,
1997 in the case of the International Small Cap Equity Portfolio) through
September 30, 1997, the Fund paid the Administrators combined administration
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<PAGE>
fees (after waivers), and the Administrators waived combined administration fees
and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- -------- ------- -----
<S> <C> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal
Money Market
North Carolina Municipal
Money Market
Virginia Municipal Money
Market
New Jersey Municipal Money
Market
Managed Income
Government Income
Tax-Free Income
Intermediate Government
Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free
Income
Intermediate Bond
New Jersey Tax-Free Income
International Bond
Core Bond
Low Duration Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
International Emerging
Markets
Balanced
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap
Equity
</TABLE>
-74-
<PAGE>
For the period from October 1, 1995 through January 13, 1996, the Fund paid
CCG, PFPC and PDI combined administration fees (after waivers), and CCG, PFPC
and PDI waived combined administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- -------- ------- -----
<S> <C> <C> <C>
Money Market $645,001 $51,681 $0
Municipal Money Market 117,010 8,088 0
U.S. Treasury Money Market 242,075 52,266 0
Ohio Municipal Money Market 17,189 12,366 0
Pennsylvania Municipal Money Market 143,962 28,455 0
North Carolina Municipal Money Market 11,644 17,455 0
Virginia Municipal Money Market 0 12,768 0
Managed Income 226,271 82,078 0
Government Income 353 6,893 0
Tax-Free Income $ 1,455 $ 4,890 $0
Intermediate Government Bond 69,369 33,385 0
Ohio Tax-Free Income 604 3,942 0
Pennsylvania Tax-Free Income 23,054 10,922 0
Intermediate Bond 70,091 37,396 0
Large Cap Value Equity 287,181 75,970 0
Large Cap Growth Equity 142,578 32,289 0
Small Cap Growth Equity 105,681 19,886 0
Select Equity 150,292 28,337 0
Index Equity 32,455 65,337 0
Small Cap Value Equity 127,936 4,181 0
International Equity 200,396 30,791 0
International Emerging Markets 26,329 0 0
Balanced 73,163 24,504 0
</TABLE>
For the period from January 14, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996, the Fund paid the Administrators combined administration
fees (after waivers), and the Administrators
-75-
<PAGE>
waived combined administration fees and reimbursed expenses, as
follows:
<TABLE>
<CAPTION>
Fees Paid
(After Reimburse-
Portfolios Waivers) Waivers ments
- ---------- -------- ------- -----
<S> <C> <C> <C>
Money Market $2,319,935 $460,119 $ 0
Municipal Money Market 303,192 171,943 0
U.S. Treasury Money Market 1,325,463 264,620 0
Ohio Municipal Money Market 57,595 37,497 0
Pennsylvania Municipal Money Market 576,488 139,781 0
North Carolina Municipal Money Market 57,612 78,873 0
Virginia Municipal Money Market 0 60,792 4,868
New Jersey Municipal Money Market 47,930 52,585 0
Managed Income 740,845 412,076 0
Government Income $1,394 $22,902 0
Tax-Free Income 47,371 37,838 0
Intermediate Government Bond 207,399 118,488 0
Ohio Tax-Free Income 10,045 6,523 0
Pennsylvania Tax-Free Income 85,441 56,528 0
Intermediate Bond 221,810 172,503 0
New Jersey Tax-Free Income 68,934 69,374 0
International Bond 27,454 28,993 0
Core Bond 196,853 128,743 0
Low Duration Bond 175,769 83,391 0
Large Cap Value Equity 1,589,313 235,958 0
Large Cap Growth Equity 729,234 236,170 0
Small Cap Growth Equity 652,784 17,700 0
Select Equity 471,931 198,312 0
Index Equity 55,265 345,636 0
Small Cap Value Equity 511,980 3,984 0
International Equity 727,738 201,501 0
International Emerging Markets 147,927 0 0
Balanced 339,671 80,233 0
</TABLE>
For the year or periods ended September 30, 1995, the Fund paid PFPC and
PDI combined administration fees (after waivers),
-76-
<PAGE>
and PFPC and PDI waived combined administration fees and
reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- -------- ------- --------------
<S> <C> <C> <C>
Money Market $1,686,008 $200,348 $0
Municipal Money Market 208,246 162,303 0
U.S. Treasury Money Market 631,041 281,107 0
Ohio Municipal Money Market 43,263 55,100 0
Pennsylvania Municipal Money Market 322,632 200,313 0
North Carolina Municipal Money Market 24,058 114,630 1,666
Managed Income 751,452 267,310 0
Tax-Free Income 0 19,868 2,132
Intermediate Government Bond $244,417 $135,117 0
Ohio Tax-Free Income 0 16,817 8,950
Pennsylvania Tax-Free Income 68,050 51,546 0
Intermediate Bond 139,960 131,323 0
Large Cap Value Equity 1,083,967 187,474 0
Large Cap Growth Equity 360,966 72,170 0
Small Cap Growth Equity 238,595 36,310 0
Select Equity 288,666 57,058 0
Index Equity 96,814 316,163 0
Small Cap Value Equity 359,637 97,592 0
International Equity 689,601 107,601 0
Balanced 216,630 104,752 0
Virginia Municipal Money Market 0 28,354 11,986
International Emerging Markets 41,383 8,350 0
Government Income(1) 0 14,903 15,973
</TABLE>
(1) Commenced operations October 3, 1994.
The predecessor portfolios to the New Jersey Municipal Money Market,
International Bond and New Jersey Tax-Free Income Portfolios received
administrative services from SEI Financial Management Corporation ("SEI").
During the period from March 1, 1995 through January 12, 1996 and during the
fiscal year ended February 28, 1995, the predecessor portfolio to the New Jersey
Municipal Money Market Portfolio paid $73,663 and $44,863, respectively, in
administration fees to SEI pursuant to the prior administration agreement, and
SEI waived $0 and $26,345, respectively, in administration fees. During the
period from
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<PAGE>
January 13, 1996 through January 31, 1996, the New Jersey Municipal Money Market
Portfolio paid the Administrators $3,050 in administration fees, and the
Administrators waived $3,691 in administration fees. During the period from
March 1, 1995 through January 12, 1996 and during the fiscal year ended February
28, 1995, the predecessor portfolio to the New Jersey Tax-Free Income Portfolio
paid $154,232 and $105,029, respectively, in administrative fees to SEI pursuant
to the prior administration agreement, and SEI waived $4 and $77,951,
respectively, in administrative fees. During the period from January 13, 1996
through January 31, 1996, the New Jersey Tax-Free Income Portfolio paid the
Administrators $4,443 in administration fees, and the Administrators waived
$5,347 in administration fees. During the period from March 1, 1995 through
January 12, 1996 and during the fiscal year ended February 28, 1995, the
predecessor portfolio to the International Bond Portfolio paid $77,924 and
$81,364, respectively, in administrative fees to SEI pursuant to the prior
administration agreement. During the period from January 13, 1996 through
January 31, 1996, the predecessor portfolio to the International Bond Portfolio
paid the Administrators $2,141 in administrative fees. During the period from
February 1, 1996 through February 12, 1996, the predecessor portfolio to the
International Bond Portfolio paid the Administrators $2,357 in administrative
fees, and the Administrators waived fees and reimbursed expenses totalling
$1,212 and $0, respectively.
The predecessor portfolios to the Low Duration Bond and Core Bond
Portfolios received administrative services from State Street Bank and Trust
Company ("State Street"). During the period from July 1, 1995 through January
12, 1996 and during the fiscal year ended June 30, 1995, the predecessor
portfolio to the Core Bond Portfolio paid $29,752 and $73,257, respectively, in
administrative fees to State Street pursuant to the prior administration
agreement, and State Street waived $0 and $0, respectively, in administrative
fees. During the period from January 13, 1996 through March 31, 1996, the Core
Bond Portfolio paid the Administrators $79,269 in administration fees, and the
Administrators waived $60,808 in administration fees. During the period from
July 1, 1995 through January 12, 1996 and during the fiscal year ended June 30,
1995, the predecessor portfolio to the Low Duration Bond Portfolio paid $31,578
and $69,234, respectively, in administrative fees to State Street pursuant to
the prior administration agreement. During the period from January 13, 1996
through March 31, 1996, the Low Duration Bond Portfolio paid the Administrators
$74,552 in administration fees, and the Administrators waived $40,055 in
administration fees.
The Fund and its service providers may engage third party plan
administrators who provide trustee, administrative and recordkeeping services
for certain employee benefit, profit-sharing and retirement plans as agent for
the Fund with respect
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<PAGE>
to such plans, for the purpose of accepting orders for the purchase and
redemption of shares of the Fund.
Custodian and Transfer Agency Agreements. PNC Bank is custodian of the Fund's
assets pursuant to a custodian agreement (the "Custodian Agreement"). Under the
Custodian Agreement, PNC Bank or a sub-custodian (i) maintains a separate
account or accounts in the name of each Portfolio, (ii) holds and transfers
portfolio securities on account of each Portfolio, (iii) accepts receipts and
makes disbursements of money on behalf of each Portfolio, (iv) collects and
receives all income and other payments and distributions on account of each
Portfolio's securities and (v) makes periodic reports to the Board of Trustees
concerning each Portfolio's operations. PNC Bank is authorized to select one or
more banks or trust companies to serve as sub-custodian on behalf of the Fund,
provided that, with respect to sub-custodians other than sub-custodians for
foreign securities, PNC Bank remains responsible for the performance of all its
duties under the Custodian Agreement and holds the Fund harmless from the acts
and omissions of any sub-custodian. Citibank, N.A. serves as the international
sub-custodian for various Portfolios of the Fund.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon each investment portfolio's
average gross assets, with a minimum monthly fee of $1,000 per investment
portfolio. PNC Bank is also entitled to out-of-pocket expenses and certain
transaction charges. PNC Bank has undertaken to waive its custody fees with
respect to the Index Equity Portfolio, which invests substantially all of its
assets in the Index Master Portfolio.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems Service,
Investor, Institutional and BlackRock classes of shares in each Portfolio, (ii)
addresses and mails all communications by each Portfolio to record owners of its
shares, including reports to shareholders, dividend and distribution notices and
proxy materials for its meetings of shareholders, (iii) maintains shareholder
accounts and, if requested, sub-accounts and (iv) makes periodic reports to the
Board of Trustees concerning the operations of each Portfolio. PFPC may, on 30
days' notice to the Fund, assign its duties as transfer and dividend disbursing
agent to any other affiliate of PNC Bank Corp. For its services with respect to
the Fund's Institutional and Service Shares under the Transfer Agency Agreement,
PFPC receives fees at the annual rate of .03% of the average net asset value of
outstanding Institutional and Service Shares in each Portfolio, plus per account
fees and disbursements. For its services with respect to the Fund's BlackRock
Shares under the Transfer Agency Agreement, PFPC receives fees at the annual
rate of .01% of the average net asset
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<PAGE>
value of outstanding BlackRock Shares in each Portfolio, plus per account fees
7nd disbursements. For its services under the Transfer Agency Agreement with
respect to Investor Shares, PFPC receives per account fees, with minimum annual
fees of $24,000 for each series of Investor Shares in each Portfolio, plus
disbursements. Until further notice, the transfer agency fees for each series of
Investor Shares in each Portfolio will not exceed the annual rate of .10% of the
series' average daily net assets.
PNC Bank serves as the Trust's custodian and PFPC serves as the Trust's
transfer and dividend disbursing agent. The Index Equity Portfolio bears its pro
rata portion of the Index Master Portfolio's custody and transfer and dividend
disbursing fees and expenses.
Distributor and Distribution and Service Plan. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of each Portfolio on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares.
Pursuant to the Fund's Amended and Restated Distribution and Service Plan
(the "Plan"), the Fund may pay the Distributor and/or CCG or any other affiliate
of PNC Bank fees for distribution and sales support services. Currently, as
described further below, only Investor A Shares, Investor B Shares and Investor
C Shares bear the expense of distribution fees under the Plan. In addition, the
Fund may pay CCG fees for the provision of personal services to shareholders and
the processing and administration of shareholder accounts. CCG, in turn,
determines the amount of the service fee and shareholder processing fee to be
paid to brokers, dealers, financial institutions and industry professionals
(collectively, "Service Organizations"). The Plan provides, among other things,
that: (i) the Board of Trustees shall receive quarterly reports regarding the
amounts expended under the Plan and the purposes for which such expenditures
were made; (ii) the Plan will continue in effect for so long as its continuance
is approved at least annually by the Board of Trustees in accordance with Rule
12b-1 under the 1940 Act; (iii) any material amendment thereto must be approved
by the Board of Trustees, including the trustees who are not "interested
persons" of the Fund (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Plan or any agreement
entered into in connection with the Plan (the "12b-1 Trustees"), acting in
person at a meeting called for said purpose; (iv) any amendment to increase
materially the costs which any class of shares may bear for distribution
services pursuant to the Plan shall be effective only upon approval by a vote of
a majority of the outstanding shares of such class and by a majority of the
12b-1 Trustees; and (v) while the Plan remains
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<PAGE>
in effect, the selection and nomination of the Fund's trustees who are not
"interested persons" of the Fund shall be committed to the discretion of the
Fund's non-interested trustees.
The Plan is terminable as to any class of shares without penalty at any
time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of
a majority of the shares of such class.
With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at a maximum annual rate of .10% of the
average daily net asset value of each Portfolio's outstanding Investor A Shares)
are used to pay commissions and other fees payable to Service Organizations and
other broker/dealers who sell Investor A Shares.
With respect to Investor B Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor B
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor B Shares) are intended to cover
the expense to the Distributor of paying such up-front commissions, as well as
to cover ongoing commission payments to broker/dealers. The contingent deferred
sales charge is calculated to charge the investor with any shortfall that would
occur if Investor B Shares are redeemed prior to the expiration of the
conversion period, after which Investor B Shares automatically convert to
Investor A Shares.
With respect to Investor C Shares, Service Organizations and other
broker/dealers receive commissions from the Distributor for selling Investor C
Shares, which are paid at the time of the sale. The distribution fees payable
under the Plan (at a maximum annual rate of .75% of the average daily net asset
value of each Portfolio's outstanding Investor C Shares) are intended to cover
the expense to the Distributor of paying such up-front commissions, as well as
to cover ongoing commission payments to the broker/dealers. The contingent
deferred sales charge is calculated to charge the investor with any shortfall
that would occur if Investor C Shares are redeemed within 12 months of purchase.
The Fund is not required or permitted under the Plan to make distribution
payments with respect to Service, Institutional or BlackRock Shares. However,
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
Distributor, CCG and their affiliates may pay financial institutions,
broker/dealers and/or their salespersons certain compensation for the sale and
distribution of shares of
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<PAGE>
the Fund or for services to the Fund. These payments ("Additional Payments")
would be in addition to the payments by the Fund described in the Fund's
Prospectuses and this Statement of Additional Information for distribution and
shareholder servicing and processing, and would also be in addition to the sales
commissions payable to dealers as set forth in the Prospectuses for Investor
Shares. These Additional Payments may take the form of "due diligence" payments
for a dealer's examination of the Portfolios and payments for providing extra
employee training and information relating to Portfolios; "listing" fees for the
placement of the Portfolios on a dealer's list of mutual funds available for
purchase by its customers; "finders" or "referral" fees for directing investors
to the Fund; "marketing support" fees for providing assistance in promoting the
sale of the Funds' shares; and payments for the sale of shares and/or the
maintenance of share balances. In addition, the Distributor, CCG and their
affiliates may make Additional Payments for subaccounting, administrative and/or
shareholder processing services that are in addition to the shareholder
servicing and processing fees paid by the Fund. The Additional Payments made by
the Distributor, CCG and their affiliates may be a fixed dollar amount, may be
based on the number of customer accounts maintained by a financial institution
or broker/dealer, or may be based on a percentage of the value of shares sold
to, or held by, customers of the financial institutions or dealers involved, and
may be different for different institutions and dealers. Furthermore, the
Distributor, CCG and their affiliates may contribute to various non-cash and
cash incentive arrangements to promote the sale of shares, and may sponsor
various contests and promotions subject to applicable NASD regulations in which
participants may receive prizes such as travel awards, merchandise and cash. The
Distributor, CCG and their affiliates may also pay for the travel expenses,
meals, lodging and entertainment of broker/dealers, financial institutions and
their salespersons in connection with educational and sales promotional programs
subject to applicable NASD regulations.
Service Organizations may charge their clients additional fees for
account-related services.
The Fund intends to enter into service arrangements with Service
Organizations pursuant to which Service Organizations will render certain
support services to their customers ("Customers") who are the beneficial owners
of Service, Investor A, Investor B and Investor C Shares. Such services will be
provided to Customers who are the beneficial owners of Shares of such classes
and are intended to supplement the services provided by the Fund's
Administrators and transfer agent to the Fund's shareholders of record. In
consideration for payment of a service fee of up to .25% (on an annualized
basis) of the average daily net asset value of the Investor A, Investor B and
Investor
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<PAGE>
C Shares owned beneficially by their Customers and .15% (on an annualized basis)
of the average daily net asset value of the Service Shares beneficially owned by
their Customers, Service Organizations may provide general shareholder liaison
services, including, but not limited to (i) answering customer inquiries
regarding account status and history, the manner in which purchases, exchanges
and redemptions of shares may be effected and certain other matters pertaining
to the Customers' investments; and (ii) assisting Customers in designating and
changing dividend options, account designations and addresses. In consideration
for payment of a shareholder processing fee of up to a separate .15% (on an
annualized basis) of the average daily net asset value of Service, Investor A,
Investor B and Investor C Shares owned beneficially by their Customers, Service
Organizations may provide one or more of these additional services to such
Customers: (i) providing necessary personnel and facilities to establish and
maintain Customer accounts and records; (ii) assistance in aggregating and
processing purchase, exchange and redemption transactions; (iii) placement of
net purchase and redemption orders with the Distributor; (iv) arranging for
wiring of funds; (v) transmitting and receiving funds in connection with
Customer orders to purchase or redeem shares; (vi) processing dividend payments;
(vii) verifying and guaranteeing Customer signatures in connection with
redemption orders and transfers and changes in Customer-designated accounts, as
necessary; (viii) providing periodic statements showing Customers' account
balances and, to the extent practicable, integrating such information with other
Customer transactions otherwise effected through or with a Service Organization;
(ix) furnishing (either separately or on an integrated basis with other reports
sent to a shareholder by a Service Organization) monthly and year-end statements
and confirmations of purchases, exchanges and redemptions; (x) transmitting on
behalf of the Fund, proxy statements, annual reports, updating prospectuses and
other communications from the Fund to Customers; (xi) receiving, tabulating and
transmitting to the Fund proxies executed by Customers with respect to
shareholder meetings; (xii) providing subaccounting with respect to shares
beneficially owned by Customers or the information to the Fund necessary for
subaccounting; (xiii) providing sub-transfer agency services; and (xiv)
providing such other similar services as the Fund or a Customer may request.
For the twelve months ended September 30, 1997 (from December 27, 1996
through September 30, 1997 in the case of the Mid-Cap Growth Equity and Mid-Cap
Value Equity Portfolios; and from September 26, 1997 through September 30, 1997
in the case of the International Small Cap Equity Portfolio), the Portfolios'
share classes bore the following distribution, shareholder servicing and
shareholder processing fees under the Portfolios' current and prior plans:
-83-
<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor A Shares Fees Servicing Fees Processing Fees
- ------------------------------ ---- -------------- ---------------
<S> <C> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond
Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Income
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Free Income
Intermediate Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap Equity
</TABLE>
-84-
<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor B Shares Fees Servicing Fees Processing Fees
- ------------------------------ ---- -------------- ---------------
<S> <C> <C> <C>
Money Market
Low Duration Bond
Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
Government Income
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Free Income
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap Equity
</TABLE>
-85-
<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor C Shares Fees Servicing Fees Processing Fees
- ------------------------------ ---- -------------- ---------------
<S> <C> <C> <C>
Money Market
Low Duration Bond
Core Bond
Intermediate Government Bond
Tax-Free Income
Government Income
International Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap Equity
</TABLE>
-86-
<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Service Shares Fees Servicing Fees Processing Fees
- --------------------------- ---- -------------- ---------------
<S> <C> <C> <C>
Money Market
Municipal Money Market
U.S. Treasury Money Market
Ohio Municipal Money Market
Pennsylvania Municipal Money
Market
New Jersey Municipal Money
Market
North Carolina Municipal Money
Market
Virginia Municipal Money Market
Low Duration Bond
Core Bond
Managed Income
Intermediate Government Bond
Tax-Free Income
International Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
New Jersey Tax-Free Income
Intermediate Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap Equity
</TABLE>
EXPENSES
Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to PAMG and the Administrators, transfer agency fees, fees
and expenses of officers and trustees who are not affiliated with PAMG, the
-87-
<PAGE>
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, distribution fees, shareholder processing fees, shareholder
servicing fees, fees and expenses in registering and qualifying the Portfolios
and their shares for distribution under federal and state securities laws,
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, fidelity bond and trustees and
officers liability insurance premiums, the expense of independent pricing
services and other expenses which are not expressly assumed by PAMG or the
Fund's service providers under their agreements with the Fund. Any general
expenses of the Fund that do not belong to a particular investment portfolio
will be allocated among all investment portfolios by or under the direction of
the Board of Trustees in a manner the Board determines to be fair and equitable.
PAMG, the sub-advisers and the Administrators expect to waive voluntarily a
portion of their respective advisory, sub-advisory and administration fees
during the Portfolios' current fiscal year.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-advisers seek to
obtain the best price and most favorable execution for a Portfolio, taking into
account such factors as the price (including the applicable brokerage commission
or dealer spread), size of the order, difficulty of execution and operational
facilities of the firm involved. While the adviser and sub-advisers generally
seek reasonably competitive commission rates, payment of the lowest commission
or spread is not necessarily consistent with obtaining the best price and
execution in particular transactions. Payments of commissions to brokers who are
affiliated persons of the Fund, or the Trust with respect to the Index Master
Portfolio, (or affiliated persons of such persons) will be made in accordance
with Rule 17e-1 under the 1940 Act. With respect to the Index Master Portfolio,
commissions paid on such transactions would be commensurate with the rate of
commissions paid on similar transactions to brokers that are not so affiliated.
No Portfolio has any obligation to deal with any broker or group of brokers
in the execution of Portfolio transactions. The adviser and sub-advisers may,
consistent with the interests of a Portfolio, select brokers on the basis of the
research, statistical and pricing services they provide to a Portfolio and the
adviser's or sub-adviser's other clients. Information and research received from
such brokers will be in addition to, and
-88-
<PAGE>
not in lieu of, the services required to be performed by the adviser and
sub-advisers under their respective contracts. A commission paid to such brokers
may be higher than that which another qualified broker would have charged for
effecting the same transaction, provided that the adviser or sub-adviser
determines in good faith that such commission is reasonable in terms either of
the transaction or the overall responsibility of the adviser or sub-adviser to a
Portfolio and its other clients and that the total commissions paid by a
Portfolio will be reasonable in relation to the benefits to a Portfolio over the
long-term. With respect to the Index Master Portfolio, it will seek to acquire
and dispose of securities in a manner which would cause as little fluctuation in
the market prices of stocks being purchased or sold as possible in light of the
size of the transactions being effected, and brokers will be selected with this
goal in view. DFA monitors the performance of brokers which effect transactions
for the Index Master Portfolio to determine the effect that the Index Master
Portfolio's trading has on the market prices of the securities in which they
invest. DFA also checks the rate of commission being paid by the Index Master
Portfolio to its brokers to ascertain that they are competitive with those
charged by other brokers for similar services. Transactions also may be placed
with brokers who provide DFA with investment research, such as reports
concerning individual issuers, industries and general economic and financial
trends and other research services. The Investment Management Agreement permits
DFA knowingly to pay commissions on such transactions which are greater than
another broker might charge if DFA, in good faith, determines that the
commissions paid are reasonable in relation to the research or brokerage
services provided by the broker or dealer when viewed in terms of either a
particular transaction or DFA's overall responsibilities to the Trust.
Commission rates for brokerage transactions on foreign stock exchanges are
generally fixed. In addition, the adviser or sub-adviser may take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers (including brokers that are affiliated with them
or Distributor).
For the year or period ended September 30, 1997, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Large Cap Value Equity $
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
</TABLE>
-89-
<PAGE>
<TABLE>
<S> <C>
Small Cap Value Equity $
International Equity
Balanced
International Emerging Markets
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap Equity
</TABLE>
For the year or period ended September 30, 1996, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Large Cap Value Equity $1,455,318
Large Cap Growth Equity 696,494
Small Cap Growth Equity 165,153
Select Equity 443,114
Index Equity 44,380
Small Cap Value Equity 380,356
International Equity 1,912,522
Balanced 95,277
International Emerging Markets 588,860
</TABLE>
For the year or period ended September 30, 1995, the following Portfolios
paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Portfolios Brokerage Commissions
- ---------- ---------------------
<S> <C>
Large Cap Value Equity $ 364,680
Large Cap Growth Equity 356,156
Small Cap Growth Equity 88,691
Select Equity 341,935
Index Equity 73,946
Small Cap Value Equity 251,396
International Equity 2,667,245
Balanced 144,451
International Emerging Markets 356,727
</TABLE>
For the Index Master Portfolio's fiscal years ended November 30,
1995, 1996 and 1997, the Index Master Portfolio paid brokerage commissions
totalling $15,289, $72,562 and $_____, respectively.
-90-
<PAGE>
Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolios
will primarily engage in transactions with these dealers or deal directly with
the issuer unless a better price or execution could be obtained by using a
broker. Prices paid to a dealer with respect to both foreign and domestic
securities will generally include a "spread," which is the difference between
the prices at which the dealer is willing to purchase and sell the specific
security at the time, and includes the dealer's normal profit.
Purchases of money market instruments by a Portfolio are made from dealers,
underwriters and issuers. The Portfolios do not currently expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Each Money Market
Portfolio intends to purchase only securities with remaining maturities of 13
months or less as determined in accordance with the rules of the SEC. As a
result, the portfolio turnover rates of a Money Market Portfolio will be
relatively high. However, because brokerage commissions will not normally be
paid with respect to investments made by a Money Market Portfolio, the turnover
rates should not adversely affect the Portfolio's net asset values or net
income.
Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.
The adviser or sub-advisers may seek to obtain an undertaking from issuers
of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from a Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that a Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that a Portfolio would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of such commercial paper.
Investment decisions for each Portfolio and for other investment accounts
managed by the adviser or sub-advisers are made independently of each other in
light of differing conditions. However, the same investment decision may be made
for two or more such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then
-91-
<PAGE>
averaged as to price and allocated as to amount in a manner deemed equitable to
each such account. While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as a Portfolio is
concerned, in other cases it could be beneficial to a Portfolio. A Portfolio
will not purchase securities during the existence of any underwriting or selling
group relating to such securities of which PAMG, PIMC, BlackRock, PNC Bank, PCM,
PEAC, CastleInternational, the Administrators, the Distributor or any affiliated
person (as defined in the 1940 Act) thereof is a member except pursuant to
procedures adopted by the Board of Trustees in accordance with Rule 10f-3 under
the 1940 Act. In no instance will portfolio securities be purchased from or sold
to PAMG, PIMC, BlackRock, PNC Bank, PCM, PEAC, CastleInternational, the
Administrators, the Distributor or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law.
The portfolio turnover rate of a Portfolio is calculated by dividing the
lesser of a Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year. The Index Master Portfolio
ordinarily will not sell portfolio securities except to reflect additions or
deletions of stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions and, to the extent necessary, to
provide cash to pay redemptions of the Index Master Portfolio's shares.
The Fund is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by
the Fund as of the end of its most recent fiscal year. As of September 30, 1997,
the following Portfolios held the following securities:
<TABLE>
<CAPTION>
Portfolio Security Value
- --------- -------- -----
<S> <C> <C>
</TABLE>
PURCHASE AND REDEMPTION INFORMATION
Computation of Public Offering Prices for Investor A Shares of the
Non-Money Market Portfolios. An illustration of the computation of the public
offering price per Investor A Share
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<PAGE>
of the respective Non-Money Market Portfolios, based on the value of such
Portfolios' net assets as of September 30, 1997 follows:
<TABLE>
<CAPTION>
TABLE
Large Cap Large Cap
Value Growth Small Cap Index
Equity Equity Growth Equity Select Equity Equity
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets.................
Outstanding
Shares....................
Net Asset Value
Per Share.................
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share)*.........
Offering to Public.........
</TABLE>
- -------
* 3.00%/3.09% for Index Equity Portfolio.
<TABLE>
<CAPTION>
Small
Cap Value International Managed Tax-Free
Equity Equity Balanced Income Income
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets.................
Outstanding
Shares....................
Net Asset Value
Per Share.................
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset value
per hare)*.........
Offering to Public.........
</TABLE>
- -------
* 5.00%/5.26% for International Equity Portfolio; 4.00%/4.17% for Tax-Free
Income Portfolio.
-93-
<PAGE>
<TABLE>
<CAPTION>
Intermediate Pennsylvania Low
Government Ohio Tax- Tax-Free Duration Intermediate
Bond Free Income Income Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets.................
Outstanding
Shares....................
Net Asset Value
Per Share.................
Maximum Sales Charge,
4.00% of offering price
(4.17% of net asset
value per share)*.........
Offering to Public.........
</TABLE>
- -------------
* 3.00%/3.09% for Low Duration Bond Portfolio.
<TABLE>
<CAPTION>
International New Jersey
Government International Emerging Tax-Free Core
Income Bond Markets Income Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets.................
Outstanding
Shares....................
Net Asset Value
Per Share.................
Maximum Sales Charge,
4.00% of offering price
(4.17% of net asset
value per share)*.........
Offering to Public.........
</TABLE>
- ----------
* 4.50%/4.71% for Government Income Portfolio; 5.00%/5.26% for International
Bond and International Emerging Markets Portfolios.
-94-
<PAGE>
<TABLE>
<CAPTION>
Mid-Cap Mid-Cap International
Value Growth Small Cap
Equity Equity Equity
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
Net Assets.................
Outstanding
Shares....................
Net Asset Value
Per Share.................
Maximum Sales Charge,
4.50% of offering price
(4.71% of net asset
value per share).........
Offering to Public.........
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1997 (for the period from
[inception date] through September 30, 1997 in the case of the Mid-Cap Growth
Equity and Mid-Cap Value Equity Portfolios; and for the period from [inception
date] through September 30, 1997 in the case of the International Small Cap
Equity Portfolio) were as follows: [Dave: What requirement drives this
disclosure? Can we delete the 1994 data?]
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
Managed Income $
Tax-Free Income
Intermediate Government Bond
Ohio Tax-Free Income
Pennsylvania Tax-Free Income
Intermediate Bond
Large Cap Value Equity
Large Cap Growth Equity
Small Cap Growth Equity
Select Equity
Index Equity
Small Cap Value Equity
International Equity
Balanced
International Emerging Markets
Government Income
Core Bond
New Jersey Tax Free Income
Low Duration Bond
International Bond
Mid-Cap Growth Equity
Mid-Cap Value Equity
International Small Cap Equity
</TABLE>
-95-
<PAGE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1996 (for the period from
February 1, 1996 through September 30, 1996 in the case of the New Jersey
Tax-Free Income and International Bond Portfolios; for the period from April 1,
1996 through September 30, 1996 in the case of the Low Duration Bond and Core
Bond Portfolios) were as follows:
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
Managed Income $ 43,417
Tax-Free Income 9,109
Intermediate Government Bond 22,989
Ohio Tax-Free Income 4,649
Pennsylvania Tax-Free Income 81,436
Intermediate Bond 8,598
Large Cap Value Equity 141,011
Large Cap Growth Equity 95,694
Small Cap Growth Equity 344,911
Select Equity 44,112
Index Equity 78,263
Small Cap Value Equity 51,676
International Equity 85,795
Balanced 143,547
International Emerging Markets 18,147
Government Income 30,034
Core Bond 8,481
New Jersey Tax Free Income 17,606
Low Duration Bond 6,294
International Bond $ 7,565
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
Managed Income $ 37,132
Tax-Free Income 8,850
Intermediate Government Bond 42,765
Ohio Tax-Free Income 2,725
Pennsylvania Tax-Free Income 121,089
Intermediate Bond 1,513
Large Cap Value Equity 68,289
Large Cap Growth Equity 47,859
Small Cap Growth Equity 77,356
Select Equity 34,761
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Index Equity 51,229
Small Cap Value Equity 61,709
International Equity 83,938
Balanced 144,255
International Emerging Markets 24,915
Government Income 69,712
</TABLE>
Total front-end sales charges paid by shareholders of Investor A Shares of the
Portfolios for the year or period ended September 30, 1994 were as follows:
<TABLE>
<CAPTION>
Portfolios Front-End Sales Charges
- ---------- -----------------------
<S> <C>
Managed Income $150,150
Tax-Free Income $37,504
Intermediate Government Bond 50,694
Ohio Tax-Free Income 64,596
Pennsylvania Tax-Free Income 678,464
Intermediate Bond 2,124
Large Cap Value Equity 195,675
Large Cap Growth Equity 81,496
Small Cap Growth Equity 44,054
Select Equity 17,550
Index Equity 38,454
Small Cap Value Equity 230,590
International Equity 303,547
Balanced $1,213,056
International Emerging Markets 130,755
</TABLE>
For the period from January 13, 1996 through January 31, 1996, the total
front-end sales charges paid by the shareholders of Investor A Shares of the New
Jersey Tax-Free Income Portfolio were $435. For the period from January 13, 1996
through March 31, 1996, the total front-end sales charges paid by the
shareholders of Investor A Shares of the Low Duration Bond and Core Bond
Portfolios were $3,848 and $1,723, respectively.
There is no initial sales charge on purchases of $1,000,000 or more of
Investor A Shares of the Non-Money Market Portfolios. However, a contingent
deferred sales charge of 1.00% will be imposed on the lesser of the net offering
price or the asset value of the shares on the redemption date for Investor A
Shares purchased on a no-load basis and subsequently redeemed within 18 months
after purchase.
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<PAGE>
Investor A Shares of the Non-Money Market Portfolios will be made available
to plan participants at net asset value with the waiver of the initial sales
charge on purchases through an eligible 401(k) plan participating in a Merrill
Lynch 401(k) Program (an "ML 401(k) Plan") if:
(i) the ML 401(k) Plan is recordkept on a daily valuation basis by Merrill
Lynch and, on the date the ML 401(k) Plan sponsor signs the Merrill Lynch
Recordkeeping Service Agreement, the ML 401(k) Plan has $3 million or more
in assets invested in broker/dealer funds not advised or managed by Merrill
Lynch Asset Management, L.P. ("MLAM") that are made available pursuant to a
Services Agreement between Merrill Lynch and the fund's principal
underwriter or distributor and in funds advised or managed by MLAM
(collectively, the "Applicable Investments"); or
(ii) the ML 401(k) Plan is recordkept on a daily valuation basis by an
independent recordkeeper whose services are provided through a contract or
alliance arrangement with Merrill Lynch, and on the date the ML 401(k) Plan
sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the ML
401(k) Plan has $3 million or more in assets, excluding money market funds,
invested in Applicable Investments; or
(iii) the ML 401(k) Plan has 500 or more eligible employees, as determined
by the Merrill Lynch plan conversion manager, on the date the ML 401(k)
Plan sponsor signs the Merrill Lynch Recordkeeping Service Agreement.
Investor B Shares of the Non-Money Market Portfolios are sold at the net
asset value per share next determined after a purchase order is received.
Investor B Shares of the Non-Money Market Portfolios are subject to a contingent
deferred sales charge which is payable on redemption of such Investor B Shares.
Investor B Shares of the Non-Money Market Portfolios will be made available
to plan participants at net asset value with the waiver of the contingent
deferred sales charge if the shares were purchased through an ML 401(k) Plan if:
(i) the ML 401(k) Plan is recordkept on a daily valuation basis by Merrill
Lynch and, on the date the ML 401(k) Plan sponsor signs the Merrill Lynch
Recordkeeping Service Agreement, the ML 401(k) Plan has less than $3
million in assets invested in Applicable Investments; or
(ii) the ML 401(k) Plan is recordkept on a daily valuation basis by an
independent recordkeeper whose services are provided through a contract or
alliance arrangement with Merrill Lynch, and on the date the ML 401(k) Plan
sponsor signs the Merrill Lynch Recordkeeping Service Agreement, the
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<PAGE>
ML 401(k) Plan has less than $3 million in assets, excluding money market
funds, invested in Applicable Investments; or
(iii) the ML 401(k) Plan has less than 500 eligible employees, as
determined by the Merrill Lynch plan conversion manager, on the date the ML
401(k) Plan sponsor signs the Merrill Lynch Recordkeeping Service
Agreement.
ML 401(k) Plans recordkept on a daily basis by Merrill Lynch or an
independent recordkeeper under a contract with Merrill Lynch that are currently
investing in Investor B shares of Non-Money Market Portfolios of the Fund
convert to Investor A shares once the ML 401(k) Plan has reached $5 million
invested in Applicable Investments. The ML 401(k) Plan will receive a plan-level
share conversion.
Investor C Shares of the Non-Money Market Portfolios are sold at the net
asset value per share next determined after a purchase order is received. In
addition, Investor C Shares of the Non-Money Market Portfolios are subject to a
contingent deferred sales charge which is payable on redemptions of such
Investor C Shares within 12 months of purchase.
Service and Institutional Shares of each Portfolio are sold at the net
asset value per share next determined after a purchase order is received without
a sales charge.
Exchange Privilege. By use of the exchange privilege, the investor
authorizes the Fund's transfer agent to act on telephonic or written exchange
instructions from any person representing himself to be the investor and
believed by the Fund's transfer agent to be genuine. The records of the Fund's
transfer agent pertaining to such instructions are binding. The exchange
privilege may be modified or terminated at any time upon 60 days' notice to
affected shareholders. The exchange privilege is only available in states where
the exchange may legally be made.
A front-end sales charge or a contingent deferred sales charge will be
imposed (unless an exemption from either sales charge applies) when Investor
Shares of a Money Market Portfolio are redeemed and the proceeds are used to
purchase Investor A Shares, Investor B Shares or Investor C Shares of a
Non-Money Market Portfolio.
Investments of Redemption Proceeds from Other Investment Companies.
Investors may purchase Investor A Shares of the Non-Money Market Portfolios at
net asset value, without a sales charge, with the proceeds from the redemption
of shares of any other investment company which were sold with a sales charge or
commission in accordance with the terms set forth in the Prospectuses. This does
not include shares of an affiliated mutual fund which were or would be subject
to a contingent
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<PAGE>
deferred sales charge upon redemption. For purposes of this restriction, the
term "affiliated mutual fund" means:
i) any Portfolio of the Fund; and
ii) any other investment company, if such company and the Fund hold
themselves out to investors as related companies for purposes of
investment and investor services, and if:
a) that company and the Fund have a common investment adviser or
distributor; or
b) the investment adviser or distributor of such company or the Fund
is an "affiliated person" (as defined in Section 2(a)(3) of the
1940 Act) of the investment adviser or distributor of the Fund or
the company, respectively.
Miscellaneous. The Fund reserves the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption or repurchase of
a Portfolio's shares by making payment in whole or in part in securities chosen
by the Fund and valued in the same way as they would be valued for purposes of
computing a Portfolio's net asset value. If payment is made in securities, a
shareholder may incur transaction costs in converting these securities into
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the 1940
Act so that a Portfolio is obligated to redeem its shares solely in cash up to
the lesser of $250,000 or 1% of its net asset value during any 90-day period for
any one shareholder of a Portfolio.
With respect to the Index Master Portfolio, if the Board of Trustees of the
Trust determines that it would be detrimental to the best interests of the
remaining shareholders of the Index Master Portfolio to make payment wholly or
partly in cash, the Index Master Portfolio may pay the redemption price in whole
or in part by a distribution of portfolio securities from the Index Master
Portfolio of the shares being redeemed in lieu of cash in accordance with Rule
18f-1 under the Investment Company Act of 1940. Investors, such as the
Portfolio, may incur brokerage charges and other transaction costs selling
securities that were received in payment of redemptions.
The Fund will accept and process purchase and redemption orders with
respect to the Large Cap Value Equity, Large Cap Growth Equity, Index Equity,
Small Cap Value Equity, Small Cap Growth Equity, Mid-Cap Value Equity, Mid-Cap
Growth Equity, Select Equity, Micro-Cap Equity, International Equity,
International Emerging Markets, Balanced and International Small Cap Equity
Portfolios on days on which the Federal Reserve Bank of Philadelphia is closed
if the New York Stock Exchange (the "NYSE") is open for business.
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<PAGE>
Under the 1940 Act, a Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed (other than customary weekend and holiday closings), or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC by rule or regulation) an emergency exists as a result of which disposal or
valuation of portfolio securities is not reasonably practicable, or for such
other periods as the SEC may permit. (A Portfolio may also suspend or postpone
the recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.)
In addition to the situations described in the Prospectuses, the Fund may
redeem shares involuntarily to reimburse a Portfolio for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any charge relating to a transaction effected
for the benefit of a shareholder as provided in the Prospectus from time to
time.
VALUATION OF PORTFOLIO SECURITIES
In determining the market value of portfolio investments, the Fund may
employ outside organizations, which may use, without limitation, a matrix or
formula method that takes into consideration market indexes, matrices, yield
curves and other specific adjustments. This may result in the securities being
valued at a price different from the price that would have been determined had
the matrix or formula method not been used. All cash, receivables and current
payables are carried on the Fund's books at their face value. Other assets, if
any, are valued at fair value as determined in good faith under the supervision
of the Board of Trustees.
Money Market Portfolios. The net asset value for each class of each share
of the Money Market Portfolios for the purpose of pricing purchase and
redemption orders is determined twice each day, once as of 12:00 noon (Eastern
Time) and once as of 4:00 p.m. (Eastern Time) on each Business Day. Each
Portfolio's net asset value per share is calculated by adding the value of all
securities, cash and other assets of the respective classes of the Portfolio,
subtracting the liabilities and dividing the result by the number of outstanding
shares of such classes. The net asset value per share of each class of each
Portfolio is determined independently of the other classes and the other
Portfolios.
The Fund seeks to maintain for each of the Money Market Portfolios a net
asset value of $1.00 per share for purposes of purchase and redemptions and
values their portfolio securities on the basis of the amortized cost method of
valuation.
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<PAGE>
Under this method the market value of an instrument is approximated by
amortizing the difference between the acquisition cost and value at maturity of
the instrument on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a result
of fluctuating interest rates is not taken into account. The market value of
debt securities usually reflects yields generally available on securities of
similar quality. When such yields decline, market values can be expected to
increase, and when yields increase, market values can be expected to decline.
As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Money Market Portfolio would receive if the security were sold prior to
maturity. The Fund's Board of Trustees has established procedures for the
purpose of maintaining a constant net asset value of $1.00 per share for each
Money Market Portfolio, which include a review of the extent of any deviation of
net asset value per share, based on available market quotations, from the $1.00
amortized cost per share. Should that deviation exceed 1/2 of 1% for a Money
Market Portfolio, the Fund's Board of Trustees will promptly consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redeeming shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends, shortening the average portfolio maturity, reducing the number of
outstanding shares without monetary consideration, and utilizing a net asset
value per share as determined by using available market quotations.
Each Money Market Portfolio will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
deemed maturity under Rule 2a-7 of the 1940 Act greater than 13 months, and will
limit portfolio investments, including repurchase agreements, to those
instruments that the adviser or sub-adviser determines present minimal credit
risks pursuant to guidelines adopted by the Fund's Board of Trustees. There can
be no assurance that a constant net asset value will be maintained for any Money
Market Portfolio.
Equity Portfolios. Net asset value is calculated separately for each class
of shares of each Equity Portfolio as of the close of regular trading hours on
the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by dividing the
value of all securities, cash and other assets owned by a Portfolio that are
allocated to a particular class of shares, less the liabilities charged to that
class, by the total number of outstanding shares of the class.
Valuation of securities held by each Equity Portfolio is as follows:
securities traded on a national securities exchange or on the NASDAQ National
Market System are valued at the last
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<PAGE>
reported sale price that day; securities traded on a national securities
exchange or on the NASDAQ National Market System for which there were no sales
on that day and securities traded on other over-the-counter markets for which
market quotations are readily available are valued at the mean of the bid and
asked prices; an option or futures contract is valued at the last sales price
prior to 4:00 p.m. (Eastern Time), as quoted on the principal exchange or board
of trade on which such option or contract is traded, or in the absence of a
sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern
Time); and securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the
direction of the Fund's Board of Trustees. The amortized cost method of
valuation will also be used with respect to debt obligations with sixty days or
less remaining to maturity unless the investment adviser and/or sub-adviser
under the supervision of the Board of Trustees determines such method does not
represent fair value.
Valuation of securities of foreign issuers is as follows: to the extent
sale prices are available, securities which are traded on a recognized stock
exchange, whether U.S. or foreign, are valued at the latest sale price on that
exchange prior to the time when assets are valued or prior to the close of
regular trading hours on the NYSE. In the event that there are no sales, the
mean between the last available bid and asked prices will be used. If a security
is traded on more than one exchange, the latest sale price on the exchange where
the stock is primarily traded is used. An option or futures contract is valued
at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on the
principal exchange or board of trade on which such option or contract is traded,
or in the absence of a sale, the mean between the last bid and asked prices
prior to 4:00 p.m. (Eastern Time). In the event that application of these
methods of valuation results in a price for a security which is deemed not to be
representative of the market value of such security, the security will be valued
by, under the direction of or in accordance with a method specified by the Board
of Trustees as reflecting fair value. The amortized cost method of valuation
will be used with respect to debt obligations with sixty days or less remaining
to maturity unless the investment adviser and/or sub-adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value. All other assets and securities held by the Portfolios (including
restricted securities) are valued at fair value as determined in good faith by
the Board of Trustees or by someone under its direction. Any assets which are
denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
Certain of the securities acquired by the International Equity,
International Emerging Markets and International Small Cap Equity Portfolios may
be traded on foreign exchanges or over-the-counter markets on days on which a
Portfolio's net asset
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<PAGE>
value is not calculated. In such cases, the net asset value of the Portfolio's
shares may be significantly affected on days when investors can neither purchase
nor redeem shares of the Portfolio.
A Portfolio may use a pricing service, bank or broker/dealer experienced in
such matters to value the Portfolio's securities.
The valuation of securities held by the Index Master Portfolio is discussed
in its Registration Statement.
Bond Portfolios. Net asset value is calculated separately for each class of
shares of each Bond Portfolio as of the close of regular trading hours on the
NYSE on each Business Day by dividing the value of all securities, cash and
other assets owned by a Portfolio that are allocated to a particular class of
shares, less the liabilities charged to that class, by the total number of
outstanding shares of the class.
Valuation of securities held by each Bond Portfolio is as follows: domestic
securities traded on a national securities exchange or on the NASDAQ National
Market system are valued at the last reported sale price that day; domestic
securities traded on a national securities exchange or on the NASDAQ National
Market System for which there were no sales on that day are valued at the mean
of the bid and asked prices; foreign securities traded on a recognized stock
exchange, whether U.S. or foreign, are valued at the latest sale price on that
exchange prior to the time when assets are valued or prior to the close of
regular trading hours on the NYSE (if a security is traded on more than one
exchange, the latest sale price on the exchange where the stock is primarily
traded is used); foreign securities traded on a recognized stock exchange for
which there were no sales on that day are valued at the mean of the bid and
asked prices; other securities are valued on the basis of valuations provided by
a pricing service approved by the Board of Trustees, provided that if the
investment adviser or sub-adviser concludes that the price provided by a pricing
service does not represent the fair value of a security, such security will be
valued at fair value determined by the adviser or sub-adviser based on
quotations or the equivalent thereof received from dealers; an option or futures
contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as
quoted on the principal exchange or board of trade on which such option or
futures contract is traded, or in the absence of a sale, the mean between the
last bid and asked prices prior to 4:00 p.m. (Eastern Time); the amortized cost
method of valuation is used with respect to debt obligations with sixty days or
less remaining to maturity; and securities for which market quotations are not
readily available are valued at fair market value as determined in good faith by
or under the direction of the Fund's Board of Trustees. Any securities which are
denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
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<PAGE>
Certain of the securities acquired by the International Bond Portfolio may
be traded on foreign exchanges or over-the-counter markets on days on which the
Portfolio's net asset value is not calculated. In such cases, the net asset
value of the Portfolio's shares may be significantly affected on days when
investors can neither purchase nor redeem shares of the Portfolio.
PERFORMANCE INFORMATION
A Portfolio may quote performance in various ways. All performance
information supplied by a Portfolio in advertising is historical and is not
intended to indicate future returns.
Money Market Portfolio Performance. Each Money Market Portfolio's current
and effective yields for Service, Investor A, Investor B, Investor C and
Institutional Shares are computed separately using standardized methods required
by the SEC. The annualized yield for a class of Service, Investor A, Investor B,
Investor C or Institutional Shares is computed by: (a) determining the net
change in the value of a hypothetical account having a balance of one share at
the beginning of a seven-calendar day period; (b) dividing the net change by the
value of the account at the beginning of the period to obtain the base period
return; and (c) annualizing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the account reflects the value
of additional shares purchased with dividends declared and all dividends
declared on both the original share and such additional shares, but does not
include realized gains and losses or unrealized appreciation and depreciation.
Compound effective yields are computed by adding 1 to the base period return
(calculated as described above) raising the sum to a power equal to 365/7 and
subtracting 1. In addition, a standardized "tax-equivalent yield" may be quoted
for Service, Investor A, Investor B, Investor C and Institutional Shares in the
Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios, which is computed
separately for each class by: (a) dividing the portion of the Portfolio's yield
for shares (as calculated above) that is exempt from Federal or state income tax
by one minus a stated Federal or state income tax rate; and (b) adding the
figure resulting from (a) above to that portion, if any, of the yield that is
not exempt from Federal and state income tax.
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<PAGE>
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1997 before waivers was as follows:
<TABLE>
<CAPTION>
Tax-Equivalent Yield
(assumes a Federal
Effective income
Portfolio Yield Yield tax rate of 28%)
- --------- ----- ----- ----------------
<S> <C> <C> <C>
Money Market
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Investor C Shares
Municipal Money Market
Service Shares
Investor A Shares
Institutional Shares
Investor C Shares
U.S. Treasury Money Market
Service Shares
Investor A Shares
Institutional Shares
Ohio Municipal Money Market
Service Shares
Investor A Shares
Institutional Shares
Pennsylvania Municipal Money
Market
Service Shares
Investor A Shares
Institutional Shares
North Carolina Municipal
Money Market
Service Shares
Investor A Shares
Institutional Shares
Virginia Municipal Money
Market
Service Shares
Investor A Shares
Institutional Shares
New Jersey Municipal Money
Market Portfolio
Service Shares
Investor A Shares
Institutional Shares
</TABLE>
The Investor B Class and Investor C Class had not commenced operations as
of September 30, 1997, except with respect to the Money Market and Municipal
Money Market Portfolios.
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<PAGE>
The annualized yield information for each Money Market Portfolio for the
seven-day period ended September 30, 1997 after waivers was as follows:
<TABLE>
<CAPTION>
Tax-Equivalent Yield
(assumes a Federal
Effective income
Portfolio Yield Yield tax rate of 28%)
- --------- ----- ----- ----------------
<S> <C> <C> <C>
Money Market
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Investor C Shares
Municipal Money Market
Service Shares
Investor A Shares
Institutional Shares
Investor C Shares
U.S. Treasury Money Market
Service Shares
Investor A Shares
Institutional Shares
Ohio Municipal Money Market
Service Shares
Investor A Shares
Institutional Shares
Pennsylvania Municipal Money
Market
Service Shares
Investor A Shares
Institutional Shares
North Carolina Municipal
Money Market
Service Shares
Investor A Shares
Institutional Shares
Virginia Municipal Money
Market
Service Shares
Investor A Shares
Institutional Shares
New Jersey Municipal Money
Market Portfolio
Service Shares
Investor A Shares
Institutional Shares
</TABLE>
The Investor B Class and Investor C Class had not commenced operations as
of September 30, 1997, except with respect to the Money Market and Municipal
Money Market Portfolios.
The fees which may be imposed by institutions on their Customers are not
reflected in the calculations of yields for the Money Market Portfolios. Yields
on Institutional Shares will
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<PAGE>
generally be higher than yields on Service Shares; yields on Service Shares will
generally be higher than yields on Investor A Shares; and yields on Investor A
Shares will generally be higher than yields on Investor B Shares and Investor C
Shares.
From time to time, in advertisements, sale literature, reports to
shareholders and other materials, the yields of a Money Market Portfolio's
Service, Investor A, Investor B, Investor C or Institutional Shares may be
quoted and compared to those of other mutual funds with similar investment
objectives and relevant securities indexes. For example, the yield of a
Portfolio's Service, Investor A, Investor B, Investor C or Institutional Shares
may be compared to the Donoghue's Money Fund Average, which is an average
compiled by IBC/Donoghue's MONEY FUND REPORT(R), a widely-recognized independent
publication that monitors the performance of money market funds, the average
yields reported by the Bank Rate Monitor from money market deposit accounts
offered by the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas, or to the data prepared by Lipper Analytical
Services, Inc., a widely-recognized independent service that monitors the
performance of mutual funds. Yield may also be compared to yields set forth in
the weekly statistical release H.15(519) or the monthly statistical release
designated G.13(415) published by the Board of Governors of the Federal Reserve
system. In addition, each Money Market Portfolio may quote from time to time its
total return in accordance with SEC regulations.
Total Return. For purposes of quoting and comparing the performance of
shares of the Non-Money Market Portfolios to the performance of other mutual
funds and to stock or other relevant indexes in advertisements, sales
literature, communications to shareholders and other materials, performance may
be stated in terms of total return. The total return for each class of a
Non-Money Market Portfolio will be calculated independently of the other classes
within that Portfolio. Under the rules of the SEC, funds advertising performance
must include total return quotes calculated according to the following formula:
ERV
T = [(---) to the first power divided by n - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at
the end of the period
covered by the computation
of a hypothetical $1,000
payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation,
expressed in terms of years.
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<PAGE>
In calculating the ending redeemable value for Investor A Shares of the
Fund's Non-Money Market Portfolios, the maximum front-end sales charge is
deducted from the initial $1,000 payment and all dividends and distributions by
the particular Portfolio are assumed to have been reinvested at net asset value
as described in the particular Prospectus on the reinvestment dates during the
period. In calculating the ending redeemable value for Investor B Shares of the
Non-Money Market Portfolios, the maximum contingent deferred sales charge is
deducted at the end of the period and all dividends and distributions by the
particular Portfolio are assumed to have been reinvested at net asset value as
described in the particular Prospectus on the reinvestment dates during the
period. In calculating the ending redeemable value for Investor C Shares of the
Fund's Non-Money Market Portfolios, the maximum contingent deferred sales charge
is deducted at the end of the period, and all dividends and distributions by the
particular Portfolio are assumed to have been reinvested at net asset value as
described in the particular Prospectus on the reinvestment dates during the
period. Total return, or "T" in the formula above, is computed by finding the
average annual compounded rates of return over the specified periods that would
equate the initial amount invested to the ending redeemable value.
Performance information presented for the following Non-Money Market
Portfolios includes performance information for a corresponding predecessor
portfolio which transferred its assets and liabilities to the related Non-Money
Market Portfolio pursuant to a reorganization consummated on January 13, 1996
(February 13, 1996 with respect to the International Bond Portfolio):
<TABLE>
<CAPTION>
Commencement of
Non-Money Market Predecessor Operations of
Portfolio Portfolio Predecessor Portfolio
- --------- --------- ---------------------
<S> <C> <C>
New Jersey Tax-Free Income Compass Capital Group July 1, 1991
Portfolio New Jersey Municipal
Bond Fund
International Bond Portfolio Compass Capital Group July 1, 1991
International Fixed Income
Fund
Core Bond Portfolio BFM Institutional Trust December 9, 1992
Core Fixed Income
Portfolio
Low Duration Bond Portfolio BFM Institutional Trust July 17, 1992
Short Duration Portfolio
</TABLE>
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<PAGE>
Each Non-Money Market Portfolio presents performance information for each
class thereof since the commencement of operations of that Portfolio (or the
related predecessor portfolio), rather than the date such class was introduced.
Performance information for each class introduced after the commencement of
operations of the related Portfolio (or predecessor portfolio) is therefore
based on the performance history of a predecessor class or predecessor classes.
If a class of shares in a Portfolio (the "Subsequent Class") has more than one
predecessor class, the performance data predating the introduction of the
Subsequent Class is based initially on the performance of the Portfolio's first
operational predecessor class (the "Initial Class"); thereafter, the performance
of the Subsequent Class is based upon the performance of any other predecessor
class or classes which were introduced after the Initial Class and which had
total operating expenses more similar to those of the Subsequent Class.
Performance information is restated to reflect the current maximum front-end
sales charge (in the case of Investor A Shares) or the maximum contingent
deferred sales charge (in the case of Investor B Shares) when presented
inclusive of sales charges. Additional performance information is presented
which does not reflect the deduction of sales charges. Historical expenses
reflected in performance information are based upon the distribution,
shareholder servicing and processing fees and other expenses actually incurred
during the periods presented and have not been restated, in cases in which the
performance information for a particular class includes the performance history
of a predecessor class or predecessor classes, to reflect the ongoing expenses
currently borne by the particular class.
Based on the foregoing, the average annual total returns for each Non-Money
Market Portfolio for periods ended September 30, 1997 were as follows*:
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*Notes
Performance information presented for Investor A, Investor B, Investor
C and Service Shares of a Portfolio prior to their introduction dates
does not reflect shareholder servicing and processing and/or
distribution fees and certain other expenses borne by these share
classes which, if reflected, would reduce the performance quoted.
Performance information presented assumes the reinvestment of
dividends and distributions. Performance information presented for
Investor A, Investor B, Investor C and Service Shares of a Portfolio
prior to their introduction as indicated in the table above is based
upon historical expenses of the predecessor class or classes which do
not reflect the actual expenses that an investor would incur as a
holder of shares of these classes of the Portfolios. The ongoing fees
and expenses borne by Investor B Shares and Investor C Shares are
greater than those borne by Investor A Shares; the ongoing fees and
expenses borne by a Portfolio's Investor A, Investor B and Investor C
Shares are greater than those borne by the Portfolio's Service Shares;
the ongoing fees and expenses borne by a Portfolio's Investor A,
Investor B, Investor C and Service Shares are greater than those borne
by the Portfolio's Institutional Shares; and the ongoing fees and
expenses borne by a Portfolio's Investor A, Investor B, Investor C,
Service and Institutional Shares are greater than those borne by the
Portfolio's BlockRock Shares. Performance information presented for
Institutional Shares of the Balanced, Tax-Free Income, New Jersey
Tax-Free Income and International Bond Portfolios prior to their
introduction dates is based upon historical expenses of predecessor
classes which are higher than the actual expenses that an investor
would incur as a holder of Institutional Shares of the above-mentioned
Portfolios. Accordingly, the performance information may be used in
assessing each Portfolio's performance history but does not reflect
how the distinct classes would have performed on a relative basis
prior to the introduction of these classes, which would require an
adjustment to the ongoing expenses.
The original class or classes of shares of each Portfolio were as
follows: Balanced - Investor A Shares; Index Equity - Institutional
Shares; Select Equity - Institutional Shares; Large Cap Growth Equity
- Institutional Shares; Large Cap Value Equity Institutional Shares;
Small Cap Value Equity Institutional Shares; Small Cap Growth Equity
Institutional Shares; International Equity -
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<PAGE>
Institutional Shares; International Emerging Markets Investor A,
Institutional and Service Shares; Low Duration Bond - Institutional
Shares; Intermediate Government Bond - Institutional Shares;
Intermediate Bond - Institutional Shares; Core Bond - Institutional
Shares; Managed Income - Institutional Shares; Tax-Free Income -
Investor A Shares; New Jersey Tax-Free Income - Service Shares;
Pennsylvania Tax-Free Income Investor A and Institutional Shares; Ohio
Tax-Free Income - Investor A and Institutional Shares; Government
Income - Investor A Shares; International Bond - Service Shares;
Mid-Cap Growth Equity - Investor A, Investor B, Investor C,
Institutional and Service Shares; Mid-Cap Value Equity - Investor A,
Investor B, Investor C, Institutional and Service Shares and
International Small Cap Equity - Investor A, Investor B, Investor C,
Institutional and Service Shares.
The performance quoted reflects fee waivers that subsidize and reduce
the total operating expenses of each Portfolio. The Portfolios'
returns would have been lower if there were not such waivers. PAMG and
the Portfolio's Administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain each Portfolio's total
operating expenses during the remainder of the current fiscal year at
the levels set forth in the applicable Prospectus.
Each class of the Non-Money Market Portfolios may also from time to time
include in advertisements, sales literature, communications to shareholders and
other materials a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
each class of a Non-Money Market Portfolio's shares with other performance
measures. For example, in comparing the total return of a Non-Money Market
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow
Jones Industrial Average or the Shearson Lehman Hutton Government Corporate Bond
Index, as appropriate, a Non-Money Market Portfolio may calculate the aggregate
total return for its shares of a certain class for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
such Non-Money Market Portfolio's shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. A Non-Money Market Portfolio may not, for these
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<PAGE>
purposes, deduct from the initial value invested or the ending value any amount
representing front-end and deferred sales charges charged to purchasers of
Investor A, Investor B or Investor C Shares. The Investor A, Investor B and
Investor C classes of the Portfolio will, however, disclose, if appropriate, the
maximum applicable sales charges and will also disclose that the performance
data does not reflect sales charges and that inclusion of sales charges would
reduce the performance quoted.
In addition to average annual total returns, a Non-Money Market Portfolio
may quote unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns may be quoted on a before-tax or
after-tax basis and may be quoted with or without taking sales charges into
account. Excluding the sales charge from a total return calculation produces a
higher total return figure. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph or similar
illustration.
Non-Money Market Portfolio Yield. The Balanced, Managed Income, High Yield,
Tax-Free Income, Intermediate Government Bond, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Low Duration Bond,
Intermediate Bond, Government Income, Core Bond and International Bond
Portfolios may advertise the yields on their Service, Investor A, Investor B,
Investor C, Institutional and BlackRock Shares. Under the rules of the SEC, each
such Portfolio advertising the respective yields for its Service, Investor A,
Investor B, Investor C, Institutional and BlackRock Shares must calculate yield
using the following formula:
a-b
YIELD = 2[(---- +1) to the sixth power - 1]
cd
Where: a = dividends and interest earned during
the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number
of shares outstanding during
the period that were
entitled to receive
dividends.
d = the maximum offering price per share on
the last day of the period.
-112-
<PAGE>
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Portfolio is recognized by accruing 1/360th of the stated dividend rate of
the security each day that the security is in the Portfolio. Except as noted
below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. However,
interest earned on tax-exempt obligations that are issued without original issue
discount and have a current market discount is calculated by using the coupon
rate of interest instead of the yield to maturity. In the case of tax-exempt
obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have discounts based on current market value that are less
than the then-remaining portion of the original issue discount (market premium),
the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not
-114-
<PAGE>
available, or (ii) not to amortize discount or premium on the remaining
security. The amortization schedule will be adjusted monthly to reflect changes
in the market values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
dividend shortly thereafter. In the case of Investor A Shares of a Non-Money
Market Portfolio, a Portfolio's maximum offering price per share for purposes of
the formula includes the maximum front-end sales charge imposed by the Portfolio
- -- currently as much as 5.00% of the per share offering price.
Each of the Tax-Free Income, Ohio Tax-Free Income, New Jersey Tax-Free
Income and Pennsylvania Tax-Free Income Portfolios may advertise the
tax-equivalent yield for shares of a specified class. Under the rules of the
SEC, a Portfolio advertising its tax-equivalent yield must calculate such
tax-equivalent yield by dividing that portion of the yield of the Portfolio
which is tax-exempt by one minus a stated income tax rate and adding the product
to that portion, if any, of the yield of the Portfolio which is not tax-exempt.
The annualized yield information for the 30-day period ended September 30,
1997 for the Portfolios referenced below was as follows:
<TABLE>
<CAPTION>
After Waivers Before Waivers
---------------------------------------- ---------------------------------
Tax-Equivalent Tax-Equivalent
Yield Yield
(assumes a (assumes a
Federal income Federal income
tax rate of tax rate of
Portfolio Yield 28%) Yield 28%)
- --------- ----- -------------- ----- --------------
<S> <C> <C> <C> <C>
Managed Income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Tax-Free Income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Investor C Shares
</TABLE>
-115-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Intermediate Government
Bond
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Investor C Shares
Ohio Tax-Free Income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Pennsylvania Tax-Free
Income
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Intermediate Bond
Service Shares
Investor A Shares
Institutional Shares
Government Income
Investor A Shares
Investor B Shares
Investor C Shares
New Jersey Tax-Free Income
Portfolio
Service Shares
Investor A Shares
Investor B Shares
International Bond
Portfolio
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Investor C Shares
Low Duration Bond
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Investor C Shares
BlackRock Shares
</TABLE>
-116-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Core Bond
Service Shares
Investor A Shares
Institutional Shares
Investor B Shares
Investor C Shares
BlackRock Shares
</TABLE>
Other Information Regarding Investment Returns. In addition to providing
performance information that demonstrates the total return or yield of shares of
a particular class of a Portfolio over a specified period of time, the Fund may
provide certain other information demonstrating hypothetical investment returns.
Such information may include, but is not limited to, illustrating the
compounding effects of dividends in a dividend reinvestment plan or the impact
of tax-free investing. As illustrated below, the Fund may demonstrate, using
certain specified hypothetical data, the compounding effect of dividend
reinvestment on investments in a Non-Money Market Portfolio.
-117-
<PAGE>
The Money and Non-Money Market Municipal Portfolios may illustrate in
advertising, sales literature, communications to shareholders and other
materials the benefits of tax-free investing. For example, Table 1 shows
taxpayers how to translate Federal tax savings from investments the income on
which is not subject to Federal income tax into an equivalent yield from a
taxable investment. Similarly, Tables 2, 3, 4, 5 and 6 show Pennsylvania, Ohio,
North Carolina, Virginia and New Jersey shareholders the approximate yield that
a taxable investment must earn at various income brackets to produce after-tax
yields equivalent to those of the Pennsylvania Municipal Money Market and
Pennsylvania Tax-Free Income Portfolios, the Ohio Municipal Money Market and
Ohio Tax-Free Income Portfolios, the North Carolina Municipal Money Market
Portfolio, the Virginia Municipal Money Market Portfolio, and the New Jersey
Municipal Money Market and New Jersey Tax-Free Income Portfolios, respectively.
The yields below are for illustration purposes only and are not intended to
represent current or future yields for the Money and Non-Money Market Municipal
Portfolios, which may be higher or lower than the yields shown. The following
information regarding tax rates and tax-exempt yields is as of January 1, 1997.
-118-
<PAGE>
TABLE 1 - Federal Only
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1997 Taxable Marginal
Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $24,000 $ 0 - $40,100 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$24,001 - $58,150 $40,101 - $96,900 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$58,151 -$121,300 $96,901 -$147,700 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$121,301-$263,750 $147,701-$263,750 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $263,750 Over $263,750 39.6% 4.967% 5.795% 6.623% 7.450% 8.278% 9.106% 9.934%
</TABLE>
*Rates do not include the phase out of personal exemptions or itemized
deductions. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are limited
in the case of higher income individuals. For 1997, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $117,950 are
subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the threshold of approximately $117,950 or (ii) 80% of the
amount of such itemized deductions otherwise allowable. The benefit of each
personal exemption is phased out at the rate of two percentage points for each
$2,500 (or fraction thereof) of adjusted gross income in the phase-out zone. For
single taxpayers the range of adjusted gross income comprising the phase-out
zone for 1997 is estimated to be from $117,950 to $240,451 and for married
taxpayers filing a joint return from $176,950 to $299,451. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1997.
-119-
<PAGE>
TABLE 2 - Federal and Pennsylvania
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1997 Federal Marginal
Taxable Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ---------------------------------------------------------------------------------------------------------------------------
Single Return Joint Return
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - $ 24,000 $ 0 - $40,100 17.380% 3.631% 4.236% 4.841% 5.447% 6.052% 6.657% 7.262%
$24,001 - $ 58,150 $ 40,101 - $96,900 30.016% 4.287% 5.001% 5.716% 6.430% 7.144% 7.859% 8.573%
$58,151 - $121,300 $ 96,901 -$147,700 32.932% 4.473% 5.219% 5.964% 6.710% 7.455% 8.201% 8.946%
$121,301- $263,750 $147,701 -$263,750 37.792% 4.823% 5.626% 6.430% 7.234% 8.038% 8.841% 9.645%
Over $263,750 Over $263,750 41.291% 5.110% 5.962% 6.813% 7.665% 8.517% 9.368% 10.220%
</TABLE>
*The income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state income taxes). If the standard deduction is taken for
Federal income tax purposes, the taxable equivalent yield required to equal a
specified tax-exempt yield is at least as great as that shown in the table. It
is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1997, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $117,950 are subject to an overall
limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
the threshold of approximately $117,950 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1997 is
estimated to be from $117,950 to $240,451 and for married taxpayers filing a
joint return from $176,950 to $299,451. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be further adjusted for
inflation for each year after 1997.
-120-
<PAGE>
TABLE 3 - Federal and Ohio
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
---------------------------------------------------------------------------
3 3.5 4 4.5 5 5.5 6
1997 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE* RATE SINGLE RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24,650 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
24,651 - 40,000 28% 4.457% 31.21% 4.36% 5.09% 5.81% 6.54% 7.27% 8.00% 8.72%
40,001 - 59,750 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
59,751 - 80,000 31% 5.201% 34.59% 4.59% 5.35% 6.12% 6.88% 7.64% 8.41% 9.17%
80,001 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 124,650 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
124,651 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 271,050 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 271,050 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</TABLE>
-121-
<PAGE>
<TABLE>
<CAPTION>
1997 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS TAX RATE TAX RATE* RATE JOINT RETURN
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 40,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
40,001 - 40,100 15% 5.201% 19.42% 3.72% 4.34% 4.96% 5.58% 6.20% 6.82% 7.45%
40,101- 80,000 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
80,001 - 99,600 28% 5.943% 32.28% 4.43% 5.17% 5.91% 6.64% 7.38% 8.12% 8.86%
99,601 - 100,000 31% 5.943% 35.10% 4.62% 5.39% 6.16% 6.93% 7.70% 8.47% 9.25%
100,001 - 151,750 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
151,751 - 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001 - 271,050 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 271,050 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</TABLE>
*The income brackets applicable to the state of Ohio do not correspond to the
Federal taxable income brackets. In addition, Ohio taxable income will likely be
different than Federal taxable income because it is computed by reference to
Federal adjusted gross income with specifically-defined Ohio modifications and
exemptions, and does not consider many of the deductions allowed from Federal
adjusted gross income in computing Federal taxable income. No other state tax
credits, exemptions, or local taxes have been taken into account in arriving at
the combined marginal tax rate. In 1996, due to the state having surplus
revenue, a 6.609% across the board reduction in the Ohio income tax rates for
1996 only was effected pursuant to Ohio Revised Code sections 131.44 and
5747.02. These Mandatory tax rate reduction provisions will expire after 1997.
It is not yet known whether a reduction in the Ohio income tax rates will occur
in 1997. A reduction in Ohio income tax rates, such as the 1996 reduction, has
the effect of reducing the after-tax advantage of Ohio tax-exempt securities
relative to taxable securities. The income amount shown is income subject to
Federal income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not subject
to the alternative minimum tax. Where applicable, investors should consider that
the benefit of certain itemized deductions and the benefit of personal
exemptions are limited in the case of higher income individuals. For 1997,
taxpayers with adjusted gross income in excess of a $121,200 threshold amount
are subject to an overall limitation on certain itemized deductions, requiring a
reduction in such deductions equal to the lesser of (i) 3% of adjusted gross
income in excess of the $121,200 threshold or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1997 is
from $121,200 to $243,700 and for married taxpayers filing a joint return the
range is from $181,800 to $304,300. The Federal tax brackets, the threshold
amounts at which itemized deductions are subject to reduction, and the range
over which personal exemptions are phased out will be further adjusted for
inflation for each year after 1997.
-122-
<PAGE>
Table 4 - Federal and North Carolina
<TABLE>
<CAPTION>
1997 Taxable North
Income Bracket Federal Carolina Combined Federal
Marginal Marginal and North Carolina
Single Return Joint Return Tax Rate Tax Rate Marginal Tax Rate*
- ------------- ------------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0 - 12,750 $ 0 - 21,250 15.0% 6.00% 20.100%
12,751 - 24,650 21,251 - 41,200 15.0% 7.00% 20.950%
24,651 - 59,750 41,201 - 99,600 28.0% 7.00% 33.040%
59,751 - 60,000 99,601 -100,000 31.0% 7.00% 35.830%
60,001 - 124,650 100,001 -151,750 31.0% 7.75% 36.348%
124,651 - 271,050 151,751- 271,050 36.0% 7.75% 40.960%
Over 271,050 Over 271,050 39.6% 7.75% 44.281%
<CAPTION>
1997 Taxable
Income Bracket Tax-Exempt Yield
Single Return Joint Return 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------- ------------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 12,750 $ 0 - 21,250 3.755% 4.380% 5.006% 5.632% 6.258% 6.884% 7.509%
12,751 - 24,650 21,251 - 41,200 3.795% 4.428% 5.060% 5.693% 6.325% 6.958% 7.590%
24,651 - 59,750 41,201 - 99,600 4.480% 5.227% 5.974% 6.720% 7.467% 8.214% 8.961%
59,751 - 60,000 99,601 -100,000 4.675% 5.454% 6.233% 7.013% 7.792% 8.571% 9.350%
60,001 - 124,650 100,001 -151,750 4.713% 5.499% 6.284% 7.070% 7.855% 8.641% 9.426%
124,651 - 271,050 151,751- 271,050 5.081% 5.928% 6.775% 7.622% 8.469% 9.316% 10.163%
Over 271,050 Over 271,050 5.384% 6.282% 7.179% 8.076% 8.974% 9.871% 10.768%
</TABLE>
*The taxable income brackets applicable to North Carolina do not correspond to
the Federal taxable income brackets. The taxable income brackets presented in
this table represent the breakpoints for both the Federal and North Carolina
marginal tax rate changes. When applying these brackets, Federal taxable income
may be different than North Carolina taxable income. No state tax credits,
exemptions, or local taxes have been taken into account in arriving at the
combined marginal tax rate. The income amount shown is income subject to Federal
income tax reduced by adjustments to income, exemptions, and itemized deductions
(including the deduction for state and local income taxes). If the standard
deduction is taken for Federal income tax purposes, the taxable equivalent yield
required to equal a specified tax-exempt yield is at least as great as that
shown in the table. It is assumed that the investor is not subject to the
alternative minimum tax. Where applicable, investors should consider that the
benefit of certain itemized deductions and the benefit of personal exemptions
are limited in the case of higher-income individuals. For 1997, taxpayers with
adjusted gross income in excess of $121,200 are subject to an overall limitation
on certain itemized deductions, requiring a reduction in such deductions equal
to the lesser of (i) 3% of adjusted gross income in excess of $121,200 or (ii)
80% of the amount of such itemized deductions otherwise allowable. The benefit
of each personal exemption is phased out at the rate of two percentage points
for each $2,500 (or fraction thereof) of adjusted gross income in the phase-out
zone. For single taxpayers the range of adjusted gross income comprising the
phase-out zone for 1997 is from $121,200 to $243,701, and for married taxpayers
filing a joint return the range is from $181,800 to $304,301. The Federal tax
brackets, the threshold amounts at which itemized deductions are subject to
reduction, and the range over which personal exemptions are phased out will be
further adjusted for inflation for each year after 1997.
-123-
<PAGE>
Table 5 - Federal and Virginia
<TABLE>
<CAPTION>
1997 Taxable
Income Bracket Federal Virginia Combined Federal
Marginal Marginal and Virginia
Single Return Joint Return Tax Rate Tax Rate Marginal Tax Rate*
- ------------- ------------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 15.0% 5.75% 19.888%
12,751 - 55,100 38,001 - 91,850 28.0% 5.75% 32.140%
55,101 - 115,000 91,851 - 140,000 31.0% 5.75% 34.968%
115,001 - 250,000 140,001 - 250,000 36.0% 5.75% 39.680%
OVER 250,000 OVER 250,000 39.6% 5.75% 43.073%
<CAPTION>
1997 Taxable
Income Bracket Tax-Exempt Yield
Single Return Joint Return 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ------------- ------------ ---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 22,750 $ 0 - 38,000 3.745% 4.369% 4.993% 5.617% 6.241% 6.865% 7.489%
12,751 - 55,100 38,001 - 91,850 4.421% 5.158% 5.894% 6.631% 7.368% 8.105% 8.842%
55,101 - 115,000 91,851 - 140,000 4.613% 5.382% 6.151% 6.920% 7.688% 8.457% 9.226%
115,001 - 250,000 140,001 - 250,000 4.973% 5.802% 6.631% 7.460% 8.289% 9.118% 9.947%
OVER 250,000 OVER 250,000 5.270% 6.148% 7.027% 7.905% 8.783% 9.661% 10.540%
</TABLE>
*The taxable income brackets applicable to Virginia do not correspond to the
Federal taxable income brackets. Because Virginia imposes a maximum tax rate of
5.75% on taxable income over $17,000, the taxable income brackets presented in
this table represent the breakpoints only for the Federal marginal tax rate
changes. When applying these brackets, Federal taxable income may be different
than Virginia taxable income. No state tax credits, exemptions, or local taxes
have been taken into account in arriving at the combined marginal tax rate. The
income amount shown is income subject to Federal income tax reduced by
adjustments to income, exemptions, and itemized deductions (including the
deduction for state and local income taxes). If the standard deduction is taken
for Federal income tax purposes, the taxable equivalent yield required to equal
a specified tax-exempt yield is at least as great as that shown in the table. It
is assumed that the investor is not subject to the alternative minimum tax.
Where applicable, investors should consider that the benefit of certain itemized
deductions and the benefit of personal exemptions are limited in the case of
higher income individuals. For 1995, taxpayers with adjusted gross income in
excess of $114,700 are subject to an overall limitation on certain itemized
deductions, requiring a reduction in such deductions equal to the lesser of (i)
3% of adjusted gross income excess of $114,700 or (ii) 80% of the amount of such
itemized deductions otherwise allowable. The benefit of each personal exemption
is phased out at the rate of two percentage points for each $2,500 (or fraction
thereof) of adjusted gross income in the phase-out zone. For single taxpayers
the range of adjusted gross income comprising the phase-out zone for 1995 is
from $114,700 to $237,201 and for married taxpayers filing a joint return from
$172,050 to $294,551. The Federal tax brackets, the threshold amounts at which
itemized deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1995.
-124-
<PAGE>
Table 6 - Federal and New Jersey
<TABLE>
<CAPTION>
Approximate
Federal NJ Combined Federal
1997 Taxable Marginal Marginal and NJ
Income Bracket* Tax Rate Tax Rate Marginal Tax Rate
- --------------- -------- -------- -----------------
Single Return
-------------
<S> <C> <C> <C> <C>
$ 0 - 20,000 15.0% 1.400% 16.190%
20,001 - 24,650 15.0% 1.750% 16.488%
24,651 - 35,000 28.0% 1.750% 29.260%
35,001 - 40,000 28.0% 3.500% 30.520%
40,001 - 59,750 28.0% 5.525% 31.978%
59,751 - 75,000 31.0% 5.525% 34.812%
75,001 - 124,650 31.0% 6.370% 35.395%
124,651 - 271,050 36.0% 6.370% 40.077%
OVER 271,050 39.6% 6.370% 43.447%
Joint Return
------------
$ 0 - 20,000 15.0% 1.400% 16.190%
20,001 - 41,200 15.0% 1.750% 16.488%
40,201 - 50,000 28.0% 1.750% 29.260%
50,001 - 70,000 28.0% 2.450% *29.764%
70,001 - 80,000 28.0% 3.500% 30.520%
80,001 - 99,600 28.0% 5.525% 31.978%
99,601 - 150,000 31.0% 5.525% 34.812%
150,001 - 151,750 36.0% 5.525% *39.536%
151,751 - 271,050 36.0% 6.370% 40.077%
OVER 271,050 39.6% 6.370% 43.447%
<CAPTION>
Tax-Exempt Yield
1997 Taxable
Income Bracket* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- --------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
Single Return Taxable Yield - Single Return
-------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 20,000 3.580% 4.176% 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 24,650 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
24,651 - 35,000 4.240% 4.948% 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
35,001 - 40,000 4.318% 5.037% 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
40,001 - 59,750 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
59,751 - 75,000 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
75,001 - 124,650 4.643% 5.418% 6.191% 6.965% 7.739% 8.513% 9.287% 10.061 10.835%
124,651 - 271,050 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 271,050 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
Joint Return Taxable Yield - Joint Return
------------
$ 0 - 20,000 3.580% 4.176% 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 41,200 3.592% 4.191% 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
40,201 - 50,000 4.240% 4.948% 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
50,001 - 70,000 4.271% 4.983% 5.695% 6.407% 7.189% 7.831% 8.543% 9.255% 9.966%
70,001 - 80,000 4.318% 5.037% 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
80,001 - 99,600 4.410% 5.145% 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
99,601 - 150,000 4.602% 5.369% 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
150,001 - 151,750 4.961% 5.789% 6.616% 7.442% 8.269% 9.096% 9.923% 10.750 11.577%
151,751 - 271,050 5.006% 5.841% 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 271,050 5.305% 6.189% 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
</TABLE>
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* The taxable income brackets applicable to New Jersey do not correspond to the
Federal taxable income brackets. The taxable income brackets presented in this
table represent the breakpoints for both the Federal and New Jersey marginal tax
rate changes. When applying these brackets, Federal taxable income will be
different than New Jersey taxable income because New Jersey does not start with
Federal taxable income in computing its own state income tax base. No state tax
credits, exemptions, or local taxes have been taken into account in arriving at
the combined marginal tax rate. The income amount shown is income subject to
Federal income tax reduced by adjustments to income, exemptions, and itemized
deductions (including the deduction for state and local income taxes). If the
standard deduction is taken for Federal income tax purposes, the taxable
equivalent yield required to equal a specified tax-exempt yield is at least as
great as that shown in the table. It is assumed that the investor is not subject
to the alternative minimum tax. Where applicable, investors should consider that
the benefit of certain itemized deductions and the benefit of personal
exemptions are limited in the case of higher-income individuals. For 1997,
taxpayers with adjusted gross income in excess of $117,950 are subject to an
overall limitation on certain itemized deductions, requiring a reduction in such
deductions equal to the lesser of (i) 3% of adjusted gross income in excess of
$117,950 or (ii) 80% of the amount of such itemized deductions otherwise
allowable. The benefit of each personal exemption is phased out at the rate of
two percentage points for each $2,500 (or fraction thereof) of adjusted gross
income in the phase- out zone. For single taxpayers the range of adjusted gross
income comprising the phase-out zone for 1997 is from $117,950 to $240,451, and
for married taxpayers filing a joint return the range is from $176,950 to
$299,451. The Federal tax brackets, the threshold amounts at which itemized
deductions are subject to reduction, and the range over which personal
exemptions are phased out will be further adjusted for inflation for each year
after 1997.
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Miscellaneous. Yields on shares of a Portfolio may fluctuate daily and do
not provide a basis for determining future yields. Because such yields will
fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one Portfolio to another,
consideration should be given to each Portfolio's investment policies, including
the types of investments made, lengths of maturities of the portfolio
securities, market conditions, operating expenses and whether there are any
special account charges which may reduce the effective yield. The fees which may
be imposed by Service Organizations and other institutions on their customers
are not reflected in the calculations of total returns or yields for the
Portfolios.
When comparing a Portfolio's performance to stock, bond, and money market
mutual fund performance indices prepared by Lipper or other organizations, it is
important to remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher potential
returns, they also carry the highest degree of share price volatility. Likewise,
money market funds may offer greater stability of principal, but generally do
not offer the higher potential returns from stock mutual funds.
From time to time, a Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
Portfolios to one another in appropriate categories over specific periods of
time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. Portfolios may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolios. The Portfolios may also compare performance to that of other
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compilations or indices that may be developed and made available
in the future.
The Fund may also from time to time include discussions or illustrations of
the effects of compounding in advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on a Portfolio investment are
reinvested by being paid in additional Portfolio shares, any future income or
capital appreciation of a Portfolio would increase the value, not only of the
original investment in the Portfolio, but also of the additional Portfolio
shares received through reinvestment. The Fund may also include discussions or
illustrations of the potential investment goals of a prospective investor,
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting,
questionnaires designed to help create a personal financial profile, worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return and action plans offering investment alternatives)
investment management techniques, policies or investment suitability of a
Portfolio (such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic account rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic and political conditions and the relationship between
sectors of the economy and the economy as a whole, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements, sales
literature, communications to shareholders or other materials may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Portfolio), as well as the views of the Portfolios'
adviser and/or sub-advisers as to current market, economy, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Portfolio. In
addition, selected indices may be used to illustrate historic performance of
select asset classes. The Fund may also include in advertisements, sales
literature, communications to shareholders or other materials, charts, graphs or
drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, stocks, bonds,
Treasury bills and shares of a Portfolio. In addition, advertisements, sales
literature, shareholder communications or other materials may include a
discussion of certain attributes or benefits to be derived by an investment in a
Portfolio and/or other mutual funds, benefits, characteristics or services
associated with a particular class of shares, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and investment alternative to certificates of deposit
and other financial instruments. Such advertisements or communicators may
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<PAGE>
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. Materials may include lists of
representative clients of the Portfolios' investment adviser and sub-advisers.
Materials may refer to the CUSIP numbers of the various classes of the
Portfolios and may illustrate how to find the listings of the Portfolios in
newspapers and periodicals. Materials may also include discussions of other
Portfolios, products, and services.
Charts and graphs using net asset values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV includes
any distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.
A Portfolio may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for a
specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.
A Portfolio may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Portfolio may compare these measures
to those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be. All
measures of volatility and correlation are calculated using averages of
historical data.
Momentum indicators indicate a Portfolio's price movements over specific
periods of time. Each point on the momentum indicator represents the Portfolio's
percentage change in price movements over that period.
A Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. A Portfolio may be available for purchase
through retirement plans or other programs offering
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<PAGE>
deferral of, or exemption from, income taxes, which may produce superior
after-tax returns over time.
A Portfolio may advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Portfolio may include
information regarding the background, experience and expertise of the investment
adviser and/or portfolio manager for the Portfolio.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not described
in the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolios or their shareholders, and the discussion here
and in the Prospectuses is not intended as a substitute for careful tax
planning. Investors are urged to consult their tax advisers with specific
reference to their own tax situation.
Please note that for purposes of satisfying certain of the requirements for
taxation as a regulated investment company described below, the Index Equity
Portfolio is deemed to own a proportionate share of the assets and gross income
of the Index Master Portfolio in which the Index Equity Portfolio invests all of
its assets. Also, with respect to the Index Equity Portfolio, the discussion
below that relates to the taxation of futures contracts and other rules
pertaining to the timing and character of income apply to the Index Master
Portfolio.
Each Portfolio has elected and intends to qualify for taxation as a
regulated investment company under Part I of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Portfolio generally is exempt from Federal income tax on its net
investment income and realized capital gains that it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of (a) 90% of its investment company taxable income (net investment income and
the excess of net short-term capital gain over net long-term capital loss, if
any, for the year) and (b) 90% of its net tax-exempt interest income, if any,
for the year (the "Distribution Requirement") and satisfies certain other
requirements of the Code that are described below. Distributions of investment
company taxable income and net tax-exempt interest income made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year will satisfy the Distribution Requirement.
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<PAGE>
In addition to satisfaction of the Distribution Requirement, each Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement") and derive less than 30% of
its gross income from the sale or other disposition of stock, securities and
certain other investments (including foreign currencies or options, futures or
forward contracts on foreign currencies but only to the extent that such
currencies or options, futures or forward contracts are not directly related to
the Portfolio's principal business of investing in stock or securities) held for
less than three months (the "Short-Short Gain Test"). Future Treasury
regulations may provide that foreign currency gains that are not "directly
related" to a Portfolio's principal business of investing in stock or securities
will not satisfy the Income Requirement. Interest (including original issue
discount and "accrued market discount") received by a Portfolio at maturity or
upon disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security held for less than three months for purposes of the Short-Short Gain
Test. However, any other income that is attributable to realized market
appreciation will be treated as gross income from the sale or other disposition
of securities for this purpose.
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of each Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Each of the Money and Non-Money Market Municipal Portfolios is designed to
provide investors with tax-exempt interest income. Shares of the Money and
Non-Money Market Municipal Portfolios would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the
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<PAGE>
Portfolio's dividends being tax-exempt but also such dividends would be taxable
when distributed to the beneficiary. In addition, the Money and Non-Money Market
Municipal Portfolios may not be an appropriate investment for entities which are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person who regularly uses a part of such facilities in
his trade or business and (a) whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, (b) who occupies more than 5%
of the entire usable area of such facilities, or (c) for whom such facilities or
a part thereof were specifically constructed, reconstructed or acquired.
"Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
In order for the Money and Non-Money Market Municipal Portfolios to pay
exempt interest dividends for any taxable year, at the close of each quarter of
the taxable year at least 50% of the value of each such Portfolio must consist
of exempt interest obligations. Exempt interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
Federal income tax purposes. However, gain realized by such Portfolios from the
disposition of a tax-exempt bond that was acquired after April 30, 1993 for a
price less than the principal amount of the bond is taxable to shareholders as
ordinary income to the extent of accrued market discount. Also, all shareholders
required to file a Federal income tax return are required to report the receipt
of exempt interest dividends and other exempt interest on their returns.
Moreover, while such dividends and interest are exempt from regular Federal
income tax, they may be subject to alternative minimum tax (currently imposed at
the rate of 26% (28% on the taxable excess over $175,000) or 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers) in two circumstances. First, exempt interest dividends derived from
certain "private activity" bonds issued after August 7, 1986, generally will
constitute an item of tax preference for both corporate and non-corporate
taxpayers. Second, exempt interest dividends derived from all bonds, regardless
of the date of issue, must be taken into account by corporate taxpayers in
determining certain adjustments for alternative minimum tax purposes. Receipt of
exempt interest dividends may result in collateral Federal income tax
consequences to certain other taxpayers, including financial institutions,
property and casualty insurance companies, individual recipients of Social
Security or Railroad Retirement benefits, and foreign corporations engaged in
trade or business in the United States. Prospective investors should consult
their own tax advisors as to such consequences.
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If a Money or Non-Money Market Municipal Portfolio distributes exempt
interest dividends during the shareholder's taxable year, no deduction generally
will be allowed for any interest expense on indebtedness incurred to purchase or
carry shares of such Portfolio.
Individuals and estates that are subject to Ohio personal income tax or
municipal or school district income taxes in Ohio will not be subject to such
taxes on distributions from the Ohio Municipal Money Market Portfolio or Ohio
Tax-Free Income Portfolio to the extent that such distributions are properly
attributable to interest on Ohio State-Specific Obligations or obligations
issued by the U.S. Government, its agencies, instrumentalities or territories if
the interest on such obligations is exempt from state income taxation under the
laws of the United States (collectively with Ohio State-Specific Obligations,
the "Obligations") if (a) the Portfolio continues to qualify as a regulated
investment company for Federal income tax purposes and (b) at all times at least
50% of the value of the total assets of the Portfolio consists of Ohio
State-Specific Obligations or similar obligations of other states or their
subdivisions. The Ohio Municipal Money Market and Ohio Tax-Free Income
Portfolios are not subject to the Ohio personal income tax, school district
income taxes in Ohio, the Ohio corporation franchise tax, or the Ohio dealer in
intangibles tax, provided that, with respect to the Ohio corporation franchise
tax and the Ohio dealer in intangibles tax, the Fund timely files the annual
report required by Section 5733.09 of the Ohio Revised Code. The Ohio Tax
Commissioner, however, has waived this annual filing requirement for each year
(including 1996) since it was originally enacted in 1989. Distributions with
respect to shares of the Ohio Municipal Money Market and Ohio Tax-Free Income
Portfolios properly attributable to proceeds of insurance paid to those
Portfolios that represent maturing or matured interest on defaulted Obligations
held by those Portfolios and that are excluded from gross income for Federal
income tax purposes will not be subject to Ohio personal income tax or municipal
or school district income taxes in Ohio, nor included in the net income base of
the Ohio corporation franchise tax.
Distributions of exempt-interest dividends, to the extent attributable to
interest on North Carolina State-Specific Obligations and to interest on direct
obligations of the United States (including territories thereof), are not
subject to North Carolina individual or corporate income tax. Distributions of
gains attributable to certain obligations of the State of North Carolina and its
political subdivisions issued prior to July 1, 1995 are not subject to North
Carolina individual or corporate income tax; however, distributions of gains
attributable to such types of obligations that were issued after June 30, 1995
will be subject to North Carolina individual or corporate income tax. An
investment in a Portfolio (including the North Carolina Municipal
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<PAGE>
Money Market Portfolio) by a corporation subject to the North Carolina franchise
tax will be included in the capital stock, surplus and undivided profits base in
computing the North Carolina franchise tax. Investors in a Portfolio including,
in particular, corporate investors which may be subject to the North Carolina
franchise tax, should consult their tax advisors with respect to the effects on
such tax of an investment in a Portfolio and with respect to their North
Carolina tax situation in general.
As a regulated investment company, the Virginia Municipal Money Market
Portfolio may distribute dividends that are exempt from the Virginia income tax
to its shareholders if the Portfolio satisfies all requirements for conduit
treatment under Federal law and, at the close of each quarter of its taxable
year, at least 50% of the value of its total assets consists of obligations the
interest on which is exempt from taxation under Federal law. If the Portfolio
fails to qualify, no part of its dividends will be exempt from the Virginia
income tax. To the extent any portion of the dividends are derived from taxable
interest for Virginia purposes or from net short-term capital gains, such
portion will be taxable to the shareholders as ordinary income. The character of
long-term capital gains realized and distributed by the Portfolio will follow
through to its shareholders regardless of how long the shareholders have held
their shares. Generally, interest on indebtedness incurred by shareholders to
purchase or carry shares of the Portfolio will not be deductible for Virginia
income tax purposes.
To be classified as a qualified investment fund for New Jersey personal
income tax purposes, at least 80% of the investments of the New Jersey Municipal
Money Market Portfolio and New Jersey Tax-Free Income Portfolio must consist of
New Jersey State-Specific Obligations or direct U.S. Government obligations; the
Portfolios must have no investments other than interest-bearing obligations,
obligations issued at a discount, and cash and cash items (including
receivables); and the Portfolios must satisfy certain reporting obligations and
provide certain information to shareholders.
Distributions of investment company taxable income will be taxable (other
than the possible allowance of the dividends received deduction described below)
to shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in shares. Shareholders receiving any
distribution from a Portfolio in the form of additional shares will be treated
as receiving a taxable distribution in an amount equal to the fair market value
of the shares received, determined as of the reinvestment date. The Money and
Non-Money Market Municipal Portfolios may each purchase securities that do not
bear tax-exempt interest. Any income on such securities
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<PAGE>
recognized by the Portfolio will be distributed and will be taxable to its
shareholders.
Each Portfolio intends to distribute to shareholders any of its excess of
net long-term capital gain over net short-term capital loss ("net capital gain")
for each taxable year. Such gain is distributed as a capital gain dividend and
is taxable to shareholders as long-term capital gain, regardless of the length
of time the shareholder has held his shares, whether such gain was recognized by
the Portfolio prior to the date on which a shareholder acquired shares of the
Portfolio and whether the distribution was paid in cash or reinvested in shares.
In the case of corporate shareholders, distributions (other than capital
gain dividends) of a Non-Money Market Portfolio for any taxable year generally
qualify for the dividends received deduction to the extent of the gross amount
of "qualifying dividends" received by such Portfolio for the year. Generally, a
dividend will be treated as a "qualifying dividend" if it has been received from
a domestic corporation. Distributions of net investment income from debt
securities and of net realized short-term capital gains will be taxable to
shareholders as ordinary income and will not be treated as "qualifying
dividends" for purposes of the dividends received deduction.
Under current law, 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%. Under both the House and Senate versions of the
Revenue Reconciliation Act of 1997, the maximum rate of tax on long-term capital
gains of individuals would generally be reduced from 28% to 20%. Additionally,
long-term capital gain presently taxed to an individual at a 15% rate would be
taxed at a 10% rate. The provision would apply to gains recognized in taxable
years ending after May 6, 1997. It is uncertain whether this or similar
legislation will ultimately be adopted.
Investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends have been paid with
respect to such shares. For shareholders of the Non-Money Market Portfolios, any
loss incurred on the sale or exchange of a Portfolio's shares, held six months
or less, will be disallowed to the extent of exempt-interest dividends paid with
respect to such shares, and any loss not so disallowed will be treated as a
long-term capital
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loss to the extent of capital gain dividends received with respect to such
shares.
Generally, futures contracts held by a Portfolio at the close of the
Portfolio's taxable year will be treated for Federal income tax purposes as sold
for their fair market value on the last business day of such year, a process
known as "marking-to-market." Forty percent of any gain or loss resulting from
such constructive sale will be treated as short-term capital gain or loss and
60% of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time a Portfolio holds the futures contract
("the 40-60 rule"). The amount of any capital gain or loss actually realized by
a Portfolio in a subsequent sale or other disposition of those futures contracts
will be adjusted to reflect any capital gain or loss taken into account by the
Portfolio in a prior year as a result of the constructive sale of the contracts.
With respect to futures contracts to sell, which will be regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Portfolio, losses as to such contracts to sell
will be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof which
exceeds the unrecognized gain (if any) with respect to the other part of the
straddle, and to certain wash sales regulations. Under short sales rules, which
also will be applicable, the holding period of the securities forming part of
the straddle will (if they have not been held for the long-term holding period)
be deemed not to begin prior to termination of the straddle. With respect to
certain futures contracts, deductions for interest and carrying charges will not
be allowed. Notwithstanding the rules described above, with respect to futures
contracts to sell which are properly identified as such, a Portfolio may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for Federal income tax purposes as sold on the last
business day of the Fund's taxable year, but gains and losses will be subject to
such short sales, wash sales, loss deferral rules and the requirement to
capitalize interest and carrying charges. Under temporary regulations, a
Portfolio would be allowed (in lieu of the foregoing) to elect either (1) to
offset gains or losses from portions which are part of a mixed straddle by
separately identifying each mixed straddle to which such treatment applies, or
(2) to establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under either
election, the 40-60 rule will apply to the net gain or loss attributable to the
futures contracts, but in the case of a mixed straddle account election, not
more than 50% of any net gain may be treated as long-term and no more than 40%
of any net loss may be treated as short-term. Options on futures contracts
generally receive Federal tax treatment similar to that described above.
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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 "Short-Short Gain Test"). The Internal Revenue
Service has issued a private letter ruling with respect to certain other
investment companies to the following effect: gains realized from a futures
contract to purchase or to sell will be treated for purposes of the Short-Short
Gain Test as being derived from a security held for three months or more
regardless of the actual period for which the contract is held if the gain
arises as a result of a constructive sale of the contract at the end of the
taxable year as described above, and will be treated as being derived from a
security held for less than three months only if the contract is terminated (or
transferred) during the taxable year (other than by reason of marking-to-market)
and less than three months elapses between the date the contract is acquired and
the termination date. Although private letter rulings are not binding on the
Internal Revenue Service with respect to the Portfolios, the Fund believes that
the Internal Revenue Service would take a comparable position with respect to
the Portfolios. In determining whether the Short-Short Gain Test is met for a
taxable year, increases and decreases in the value of a Portfolio's futures
contracts and securities that qualify as part of a "designated hedge," as
defined in the Code, may be netted.
Special rules govern the Federal income tax treatment of the portfolio
transactions of the International Equity, International Emerging Markets,
International Small Cap Equity and International Bond Portfolios and certain
transactions of the other Portfolios that are denominated in terms of a currency
other than the U.S. dollar or determined by reference to the value of one or
more currencies other than the U.S. dollar. The types of transactions covered by
the special rules include the following: (i) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, certain preferred stock); (ii) the accruing of
certain trade receivables and payables; (iii) the entering into or acquisition
of any forward contract or similar financial instruments; and (iv) the entering
into or acquisition of any futures contract, option or similar financial
instrument, if such instrument is not marked-to-market. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer also is treated as a
transaction subject to the special currency rules. With respect to such
transactions, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts that are
capital assets in the hands of the taxpayer and which are not part of a straddle
("Capital
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Asset Election"). In accordance with Treasury regulations, certain transactions
with respect to which the taxpayer has not made the Capital Asset Election and
that are part of a "Section 988 hedging transaction" (as defined in the Code and
the Treasury regulations) are integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" (as identified by such Treasury regulations) are not subject to
the mark-to-market or loss deferral rules under the Code. Some of the non-U.S.
dollar-denominated investments that the Portfolios may make (such as non-U.S.
dollar-denominated debt securities and obligations and preferred stock) and some
of the foreign currency contracts the International Equity, International
Emerging Markets, International Small Cap Equity and International Bond
Portfolios may enter into will be subject to the special currency rules
described above. Gain or loss attributable to the foreign currency component of
transactions engaged in by a Portfolio which is not subject to the special
currency rules (such as foreign equity investments other than certain preferred
stocks) will be treated as capital gain or loss and will not be segregated from
the gain or loss on the underlying transaction.
In addition, certain forward foreign currency contracts held by a Portfolio
at the close of the Fund's taxable year will be subject to "mark-to-market"
treatment. If the Fund makes the Capital Asset Election with respect to such
contracts, the contract will be subject to the 40-60 rule described above.
Otherwise, such gain or loss will be ordinary in nature. To receive such Federal
income tax treatment, a foreign currency contract must meet the following
conditions: (1) the contract must require delivery of a foreign currency of a
type in which regulated futures contracts are traded or upon which the
settlement value of the contract depends; (2) the contract must be entered into
at arm's length at a price determined by reference to the price in the interbank
market; and (3) the contract must be traded in the interbank market. The
Treasury Department has broad authority to issue regulations under these
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information the Treasury has not issued any such
regulations. Forward foreign currency contracts entered into by the
International Equity, International Emerging Markets, International Small Cap
Equity and International Bond Portfolios also may result in the creation of one
or more straddles for Federal income tax purposes, in which case certain loss
deferral, short sales, and wash sales rules and requirements to capitalize
interest and carrying charges may apply.
If for any taxable year any Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions (including amounts derived from interest on Municipal
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Obligations) will be taxable as ordinary dividends to the extent of such
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
prior to the end of each calendar year to avoid liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund when required to do so
that he is not subject to backup withholding or that he is an "exempt
recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolios each year.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the Federal income tax consequences
described above.
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ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and only
such conversion and exchange rights as the Board may grant in its discretion.
When issued for payment as described in the Prospectus, shares will be fully
paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund shall be called by the trustees upon
the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment portfolio affected by such matter. Rule 18f-2 further provides that
an investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement, a distribution plan
subject to Rule 12b-1 under the 1940 Act or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding shares of such
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Fund voting together in the aggregate without regard
to a particular investment portfolio.
The proceeds received by each Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of each Portfolio will be segregated on the books of account, and will be
charged with the liabilities in respect to that Portfolio and with a share of
the general liabilities of the Fund. As
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stated in the Prospectuses, certain expenses of a Portfolio may be charged to a
specific class of shares representing interests in that Portfolio.
The Funds' Declaration of Trust authorizes the Board of Trustees, without
shareholder approval (unless otherwise required by applicable law), to: (i) sell
and convey the assets belonging to a class of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
class to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (ii) sell and convert the
assets belonging to one or more classes of shares into money and, in connection
therewith, to cause all outstanding shares of such class to be redeemed at their
net asset value; or (iii) combine the assets belonging to a class of shares with
the assets belonging to one or more other classes of shares if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such class to be redeemed or converted into shares of another class of shares at
their net asset value. The Board of Trustees may authorize the liquidation and
termination of any Portfolio or class of shares. Upon any liquidation of a
Portfolio, Shareholders of each class of the Portfolio are entitled to share pro
rata in the net assets belonging to that class available for distribution.
MISCELLANEOUS
Counsel. The law firm of Simpson Thacher & Bartlett (a partnership which
includes professional corporations), 425 Lexington Avenue, New York, New York
10017, serves as the Fund's counsel. The law firm of Stradley, Ronon, Stevens &
Young, LLP, 2600 One Commerce Square, Philadelphia, Pennsylvania 19103, serves
as the Trust's counsel.
Independent Accountants. Coopers & Lybrand L.L.P., with offices located at
2400 Eleven Penn Center, Philadelphia, Pennsylvania, serves as the Fund's and
the Trust's independent accountants.
Five Percent Owners. The name, address and percentage ownership of each
person that on December 31, 1997 owned of record or beneficially 5% or more of
the outstanding shares of a Portfolio which had commenced operations as of that
date was as follows:
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On December 31, 1997, PNC Bank held of record approximately __% of the
Fund's outstanding shares, and may be deemed a controlling person of the Fund
under the 1940 Act. PNC Bank is a national bank organized under the laws of the
United States. All of the capital stock of PNC Bank is owned by PNC Bancorp,
Inc. All of the capital stock of PNC Bancorp, Inc. is owned by PNC Bank Corp., a
publicly-held bank holding company.
Banking Laws. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. PAMG, PIMC, BlackRock, PCM, PEAC,
CastleInternational, PNC Bank and other institutions that are banks or bank
affiliates are subject to such banking laws and regulations.
PAMG, PIMC, BlackRock, PCM, PEAC, CastleInternational and PNC Bank believe
they may perform the services for the Fund contemplated by their respective
agreements with the Fund without violation of applicable banking laws or
regulations. It should be noted, however, that there have been no cases deciding
whether bank and non-bank subsidiaries of a registered bank holding company may
perform services comparable to those that are to be performed by these
companies, and future changes in either Federal or state statutes and
regulations relating to permissible activities of banks and their subsidiaries
or affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
these companies from continuing to perform such services for the Fund. If such
were to occur, it is expected that the Board of Trustees would recommend that
the Fund enter into new agreements or would consider the possible termination of
the Fund. Any new advisory or sub-advisory agreement would normally be subject
to shareholder approval. It is not anticipated that any change in the Fund's
method of operations as a result of these occurrences would affect its net asset
value per share or result in a financial loss to any shareholder.
Shareholder Approvals. As used in this Statement of Additional Information
and in the Prospectuses, a "majority of the outstanding shares" of a class,
series or Portfolio means, with respect to the approval of an investment
advisory agreement, a distribution plan or a change in a fundamental investment
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policy, the lesser of (1) 67% of the shares of the particular class, series or
Portfolio represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.
FINANCIAL STATEMENTS
Compass Capital Funds. The audited financial statements and notes thereto
in the Fund's Annual Report to Shareholders for the fiscal year ended September
30,[1996] (the "1996 Annual Report") are incorporated in this Statement
Additional Information by reference. No other parts of the 1996 Annual Report
are incorporated by reference herein. The financial statements included in the
1996 Annual Report have been audited by the Fund's independent accountants,
Coopers & Lybrand, L.L.P., except
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for the statements of changes in net assets for the year ended June 30, 1995 for
the Core Bond Portfolio and Short Government Bond Portfolio (now known as Low
Duration Bond Portfolio) and the financial highlights for the periods ended June
30, 1995, 1994 and 1993 for those same Portfolios which have been audited by
other auditors. The reports of Coopers & Lybrand L.L.P. are incorporated herein
by reference. Such financial statements have been incorporated herein in
reliance upon such reports given upon their authority as experts in accounting
and auditing. Additional copies of the 1996 Annual Report may be obtained at no
charge by telephoning the Distributor at the telephone number appearing on the
front page of this Statement of Additional Information.
The financial highlights included in the 1996 Annual Report for each of the
two years in the period ended June 30, 1995, and for the period from July 17,
1992 through June 30, 1993 for the Short Government Bond Portfolio (now known as
the Low Duration Bond Portfolio) and the period from December 9, 1992 through
June 30, 1993 for the Core Bond Portfolio, and the statements of changes in net
assets for the year ended June 30, 1995 for those same Portfolios have been
audited by the former independent accountants of the Predecessor BFM Portfolios,
Deloitte & Touche, L.L.P., whose report thereon is also incorporated herein by
reference. Such financial statements have been incorporated herein by reference
in reliance on the reports of Coopers & Lybrand L.L.P. and Deloitte & Touche,
L.L.P. given upon their authority as experts in accounting and auditing.
The financial statements and notes thereto in the Fund's Semi-Annual
Reports to Shareholders for the Equity Portfolios, the Bond Portfolios and the
Money Market Portfolios of the Fund, each dated March 31, 1997 (collectively,
the "1997 Semi-Annual Report") are incorporated by reference in this Statement
of Additional Information. No other parts of the 1997 Semi-Annual Report are
incorporated by reference herein. Additional copies of the 1997 Semi-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.
Index Master Portfolio. The audited financial statements for The U.S. Large
Company Series of The DFA Investment Trust Company (the "Trust") for the fiscal
year ended November 30, [1996] (the "1996 Index Master Report") are incorporated
by reference into this Statement of Additional Information. No other parts of
the 1996 Index Master Report are incorporated by reference Therein. The
financial statements included in the 1996 Index Master Report have been audited
by the Trust's independent accountants, Coopers & Lybrand L.L.P., whose reports
thereon are incorporated herein by reference. Such financial statements have
been incorporated herein by reference in reliance upon such reports given upon
their authority as experts in accounting and
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auditing. Additional copies of the 1996 Index Master Report may
be obtained at no charge by telephoning the Trust at (310) 395-
8005.
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APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
"A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is, however,
somewhat more vulnerable to the adverse effects of changes in circumstances than
an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-
A-1
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term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D- 1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
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"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely payment
is adequate; however, near-term adverse changes could cause these securities to
be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely payment
and are vulnerable to near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
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"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit feature are
supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which are
currently in default.
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Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by Standard
& Poor's to a debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest and
repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
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"CCC" - Debt has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and certain
other obligations that S & P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are
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likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that the rating
is provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
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Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future
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developments, short-term debt of these issuers is generally rated
"F-1+."
"A" - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these bonds, and
therefore, impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess one
of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "BBB" may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions may
increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal
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and interest is strong, although adverse changes in business, economic or
financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
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"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and "CC"
the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable quality,
with all security elements accounted for
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but lacking the undeniable strength of the preceding grades. Liquidity and cash
flow protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - Loans bearing this designation are of speculative quality and lack
margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in the Prospectus, the Portfolios may enter
into certain futures transactions. Such transactions are
described in this Appendix.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established in both
the cash market and the futures market. In the cash market, bonds are purchased
and sold with payment for the full purchase price of the bond being made in
cash, generally within five business days after the trade. In the futures
market, only a contract is made to purchase or sell a bond in the future for a
set price on a certain date. Historically, the prices for bonds established in
the futures markets have tended to move generally in the aggregate in concert
with the cash market prices and have maintained fairly predictable
relationships. Accordingly, a Portfolio may use interest rate futures contracts
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
A Portfolio could accomplish a similar result to that which it hopes to
achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Portfolio, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by a Portfolio, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specific future time for a specified price. A futures contract purchase would
create an obligation by a Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
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Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Portfolio is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges --principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term U.S. Treasury Bonds and Notes; Government
National Mortgage Association (GNMA) modified pass-through mortgage backed
securities; three-month U.S. Treasury Bills; and ninety-day commercial paper.
The Portfolios may trade in any interest rate futures contracts for which there
exists a public market, including, without limitation, the foregoing
instruments.
With regard to each Portfolio, the Adviser also anticipates engaging in
transactions, from time to time, in foreign stock index futures such as the
ALL-ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
II. Index Futures Contracts
General. A stock or bond index assigns relative values to the stocks or
bonds included in the index, which fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based on
broad market indexes, such as Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indexes, such as the Standard & Poor's 100 or indexes based
on an industry or market indexes, such as Standard & Poor's 100 or indexes based
on an industry or market segment, such as oil and gas stocks. Futures
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contracts are traded on organized exchanges regulated by the Commodity Futures
Trading Commission. Transactions on such exchanges are cleared through a
clearing corporation, which guarantees the performance of the parties to each
contract. With regard to each Portfolio, to the extent consistent with its
investment objective, the Adviser anticipates engaging in transactions, from
time to time, in foreign stock index futures such as the ALL-ORDS (Australia),
CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
A Portfolio may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Portfolio may do so either to hedge the value of its portfolio
as a whole, or to protect against declines, occurring prior to sales of
securities, in the value of the securities to be sold. Conversely, a Portfolio
may purchase index futures contracts in anticipation of purchases of securities.
A long futures position may be terminated without a corresponding purchase of
securities.
In addition, a Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
A Portfolio may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
III. Futures Contracts on Foreign Currencies
A futures contract on foreign currency creates a binding obligation on one
party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of foreign currency, for an amount fixed in U.S.
dollars (or another currency). Foreign currency futures may be used by a
Portfolio to hedge against exposure to fluctuations in exchange rates between
different currencies arising from multinational transactions.
IV. Margin Payments
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Portfolio upon the purchase or sale of a futures contract.
Initially, a Portfolio will be required to deposit with the broker or in a
segregated account with a custodian an amount of liquid assets known as initial
margin, based on the value of the contract. The nature of
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initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Portfolio upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-the-market. For example, when a particular Portfolio
has purchased a futures contract and the price of the contract has risen in
response to a rise in the underlying instruments, that position will have
increased in value and the Portfolio will be entitled to receive from the broker
a variation margin payment equal to that increase in value. Conversely, where
the Portfolio has purchased a futures contract and the price of the future
contract has declined in response to a decrease in the underlying instruments,
the position would be less valuable and the Portfolio would be required to make
a variation margin payment to the broker. Prior to expiration of the futures
contract, the Adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will operate
to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
V. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of a hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not hedged
at all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Portfolio involved will experience either a loss or gain on the futures
which will not be completely offset by movements in the price of the instruments
which are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of instruments being hedged and movements in the price
of
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futures contracts, a Portfolio may buy or sell futures contracts in a greater
dollar amount than the dollar amount of instruments being hedged if the
volatility over a particular time period of the prices of such instruments has
been greater than the volatility over such time period of the futures, or if
otherwise deemed to be appropriate by the Adviser. Conversely, a Portfolio may
buy or sell fewer futures contracts if the volatility over a particular time
period of the prices of the instruments being hedged is less than the volatility
over such time period of the futures contract being used, or if otherwise deemed
to be appropriate by the Adviser. It is also possible that, where a Portfolio
has sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of instruments held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Portfolio is able to invest its cash
(or cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Portfolio then concludes not to invest its cash at that
time because of concern as to possible further market decline or for other
reasons, the Portfolio will realize a loss on the futures contract that is not
offset by a reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the adviser may still not result in
a successful hedging transaction over a short time frame.
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Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the
Portfolios intend to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist for
any particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Portfolio is also subject to the Adviser's
ability to predict correctly movements in the direction of the market. For
example, if a particular Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Portfolio will lose part or all of the benefit to
the increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may be, but will
not necessarily be, at increased prices which reflect the rising market. A
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin
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deposits required, and the extremely high degree of leverage involved in futures
pricing. As a result, a relatively small price movement in a futures contract
may result in immediate and substantial loss (as well as gain) to the investor.
For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit,
before any deduction for the transaction costs, if the contract were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount invested in the contract.
VI. Options on Futures Contracts
A Portfolio may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Portfolio will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin deposits.
As an example, in anticipation of a decline in interest rates, a Portfolio may
purchase call options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Portfolio intends to purchase. Similarly, if the value of
the securities held by a Portfolio is expected to decline as a result of an
increase in interest rates, the Portfolio might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). In addition, the purchase or sale
of an option also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is
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based, or upon the price of the securities or currencies being hedged, an option
may or may not be less risky than ownership of the futures contract or such
securities or currencies. In general, the market prices of options can be
expected to be more volatile than the market prices on the underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to a Portfolio because the maximum amount at risk is the premium
paid for the options (plus transaction costs). The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
VII. Other Matters
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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COMPASS CAPITAL FUNDSSM
(FORMERLY, THE PNC(R) FUND)
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Incorporated by reference into Part A of the Registration
Statement are the following tables (as filed in Post-Effective
Amendment No. 24):
(i) Audited Financial Highlights for the Money Market, U.S.
Treasury Money Market, Municipal Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money
Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market, Large Cap Value Equity, Large Cap
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 or periods ended September 30, 1996,
September 30, 1995, September 30, 1994, September 30,
1993, September 30, 1992, September 30, 1991 and
September 30, 1990.
(ii) Audited Financial Highlights for the International Bond,
New Jersey Tax-Free Income and New Jersey Municipal Money
Market Portfolios for the periods ended September 30,
1996 and January 31, 1996, and for the fiscal years ended
February 28, 1995, February 28, 1994, February 28, 1993
and February 29, 1992.
(iii) Audited Financial Highlights for the Low Duration Bond
(formerly the Short Government Bond) and Core Bond
Portfolios for the periods ended September 30, 1996 and
March 31, 1996, and for the fiscal years ended June 30,
1995, June 30, 1994 and June 30, 1993.
(2) Incorporated by reference into Part B of the Registration
Statement are the following audited financial statements (as
filed in Post-Effective Amendment No. 24):
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(i) With respect to the Money Market, U.S. Treasury Money
Market, Municipal Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, New Jersey Municipal
Money Market and Virginia Municipal Money Market
Portfolios:
Report of Independent Accountants for the period
ended September 30, 1996;
Statements of Net Assets - September 30, 1996;
Statements of Operations for the year or period
ended September 30, 1996;
Statements of Changes in Net Assets for the year or
period ended September 30, 1996;
Financial Highlights;
Notes to Financial Statements.
(ii) With respect to the Large Cap Value Equity, Large Cap
Growth Equity, Small Cap Growth Equity, Select Equity,
Index Equity, Small Cap Value Equity, International
Equity, International Emerging Markets and Balanced
Portfolios:
Report of Independent Accountants for the fiscal
year ended September 30, 1996;
Statements of Net Assets (all Portfolios except the
International Equity Portfolio) - September 30,
1996;
Schedule of Investments with respect to the
International Equity Portfolio - September 30, 1996;
Statements of Operations for the year ended
September 30, 1996;
Statements of Changes in Net Assets for the year
ended September 30, 1996;
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<PAGE>
Financial Highlights;
Notes to Financial Statements.
(iii) With respect to the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Intermediate Bond,
Government Income, Low Duration Bond (formerly the Short
Government Bond), Core Bond, New Jersey Tax- Free Income
and International Bond Portfolios:
Report of Independent Accountants (Coopers & Lybrand
L.L.P.) for the fiscal year or period ended
September 30, 1996;
Schedules of Investments and Statements of Assets
and Liabilities (all Portfolios except Pennsylvania
Tax-Free Income and Ohio Tax-Free Income Portfolios)
- September 30, 1996;
Statements of Net Assets with respect to the
Pennsylvania Tax-Free Income and Ohio Tax-Free
Income Portfolios - September 30, 1996;
Statements of Operations for the year or period
ended September 30, 1996;
Statements of Changes in Net Assets for the years or
periods ended September 30, 1996 and 1995 and for
the period ended March 31, 1996 for the Low Duration
Bond (formerly the Short Government Bond) Portfolio
and the Core Bond Portfolio;
Financial highlights for all periods presented
except for the periods ended June 30, 1995 and prior
periods for the Low Duration Bond (formerly the
Short Government Bond) and Core Bond Portfolios;
Notes to Financial Statements.
(iv) With respect to the Low Duration Bond Portfolio (formerly
the Short Government Bond Portfolio) and Core Bond
Portfolio:
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<PAGE>
Report of Independent Accountants (Deloitte & Touche
L.L.P.) for the fiscal year ended June 30, 1995 as
it relates to the Statement of Changes in Net Assets
for the year ended June 30, 1995 and the Financial
Highlights for the years or periods ended June 30,
1995, 1994 and 1993.
(v) With respect to The U.S. Large Company Series of The DFA
Investment Trust Company:
Report of Independent Accountants (Coopers & Lybrand
L.L.P.) for the fiscal year ended November 30, 1996;
Statement of Net Assets - November 30, 1996;
Statement of Operations for the year ended November
30, 1996;
Statement of Changes in Net Assets for the year
ended November 30, 1996;
Financial Highlights;
Notes to Financial Statements.
(3) Incorporated by reference into Part B of the Registration
Statement are the following unaudited financial statements as
contained in Registrant's Semi-Annual Report to Shareholders (as
filed in Registrant's Form N-SAR on May 30, 1997):
(i) With respect to the Money Market, U.S. Treasury Money
Market, Municipal Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, New Jersey Municipal
Money Market and Virginia Municipal Money Market
Portfolios:
Statements of Net Assets - March 31, 1997;
Statements of Operations for the six months ended
March 31, 1997;
Statements of Changes in Net Assets for the six
months ended March 31, 1997;
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<PAGE>
Financial Highlights;
Notes to Financial Statements.
(ii) With respect to the Large Cap Value Equity, Large Cap
Growth Equity, Small Cap Growth Equity, Select Equity,
Index Equity, Small Cap Value Equity, International
Equity, International Emerging Markets, Balanced, Mid-Cap
Value Equity and Mid-Cap Growth Equity Portfolios:
Statements of Net Assets (all Portfolios except the
International Equity Portfolio) - March 31, 1997;
Schedule of Investments with respect to the
International Equity Portfolio - March 31, 1997;
Statement of Assets and Liabilities with respect to
the International Equity Portfolio - March 31, 1997;
Statements of Operations for the six months ended
March 31, 1997;
Statements of Changes in Net Assets for the six
months ended March 31, 1997;
Financial Highlights;
Notes to Financial Statements.
(iii) With respect to the Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Intermediate Bond,
Government Income, Low Duration Bond (formerly the Short
Government Bond), Core Bond, New Jersey Tax-Free Income
and International Bond Portfolios:
Schedules of Investments and Statements of Assets
and Liabilities (Core Bond, International Bond and
Tax-Free Income Portfolios) - March 31, 1997;
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<PAGE>
Statements of Net Assets (all Portfolios except the
Core Bond, International Bond and Tax-Free Income
Portfolios) - March 31, 1997;
Statements of Operations for the six months ended
March 31, 1997;
Statements of Changes in Net Assets for the six
months ended March 31, 1997;
Financial Highlights;
Notes to Financial Statements.
(iv) With respect to The U.S. Large Company Series of The DFA
Investment Trust Company:
Statements of Net Assets - March 31, 1997;
Statements of Operations for the four months ended
March 31, 1997;
Statements of Changes in Net Assets for the four
months ended March 31, 1997;
Financial Highlights;
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
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<PAGE>
to Registrant's Registration Statement on Form N-1A filed on
July 8, 1994.
(d) Amendment No. 3 to the Declaration of Trust dated January 5,
1996 is incorporated by reference to Exhibit 1(d) of
Post-Effective Amendment No. 23 to Registrant's Registration
Statement on Form N-1A (No. 33-26305) filed on October 18,
1996 ("Post-Effective Amendment No. 23").
(2) Registrant's Code of Regulations is incorporated herein by
reference to Exhibit (2) of Registrant's Registration Statement
on Form N-1A, filed on December 23, 1988.
(3) None.
(4) Sections V, VIII and IX of Registrant's Declaration of Trust
dated December 22, 1988 is incorporated herein by reference to
Exhibit (1) of Registrant's Registration Statement on Form N-1A
filed on December 23, 1988; Article II of Registrant's Code of
Regulations is incorporated herein by reference to Exhibit (2) of
Registrant's Registration Statement on Form N-1A filed on
December 23, 1988.
(5) (a) Investment Advisory Agreement between Registrant and PNC
Asset Management Group, Inc. relating to all Portfolios
except the Multi-Sector Mortgage Securities Portfolio III
and Index Equity Portfolio is incorporated herein by
reference to Exhibit (5)(a) of Post-Effective Amendment No.
21 to Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(b) Investment Advisory Agreement between Registrant and
BlackRock Financial Management, Inc. with respect to the
Multi-Sector Mortgage Securities Portfolio III is
incorporated herein by reference to Exhibit (5)(b) of
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.
(c) Addendum No. 1 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect
to the Mid-Cap Value Equity and Mid- Cap Growth Equity
Portfolios is incorporated
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<PAGE>
herein by reference to Exhibit 5(c) of Post-Effective
Amendment No. 27 to Registrant's Registration Statement on
Form N-1A filed on January 28, 1997.
(d) Form of Amendment No. 1 to Investment Advisory Agreement
between Registrant and BlackRock Financial Management, Inc.
with respect to BlackRock Non- Dollar Portfolio I and
BlackRock Non-Dollar Portfolio II is incorporated herein by
reference to Exhibit 5(d) of Post-Effective Amendment No. 26
to Registrant's Registration Statement on Form N-1A filed on
December 18, 1996.
(e) Form of Addendum No. 2 to Investment Advisory Agreement
between Registrant and PNC Asset Management Group, Inc. with
respect to the International Small Cap Equity Portfolio is
incorporated herein by reference to Exhibit 5(e) of
Post-Effective Amendment No. 30 to Registrant's Registration
Statement on Form N-1A filed on August 19, 1997.
(f) Form of Addendum No. 3 to Investment Advisory Agreement
between Registrant and PNC Asset Management Group, Inc. with
respect to the High Yield Portfolio and the Micro-Cap Equity
Portfolio.*
(g) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and BlackRock Financial Management, Inc. with respect
to the Managed Income, Tax-Free Income, Intermediate
Government Bond, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Low Duration Bond, Intermediate Bond, Government
Income, New Jersey Tax-Free Income and Core Bond Portfolios
is incorporated herein by reference to Exhibit (5)(c) of
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.
(h) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and Provident Capital Management, Inc. with respect to
the Large Cap Value Equity, Small Cap Value Equity and
Select Equity Portfolios is incorporated herein by reference
to Exhibit
- --------
* To be filed by amendment.
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<PAGE>
(5)(c) of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(i) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and PNC Equity Advisors Company with respect to the
Large Cap Growth Equity and Small Cap Growth Equity
Portfolios is incorporated herein by reference to Exhibit
(5)(c) of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(j) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and PNC Institutional Management Corporation with
respect to the Money Market, U.S. Treasury Money Market,
Municipal Money Market, Pennsylvania Municipal Money Market,
Ohio Municipal Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market and New Jersey
Municipal Money Market Portfolios is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment No.
21 to Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(k) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and CastleInternational Asset Management Limited with
respect to the International Equity and International
Emerging Markets Portfolios is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment No.
21 to Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(l) Sub-Advisory Agreement among PNC Asset Management Group,
Inc., Provident Capital Management, Inc. and BlackRock
Financial Management, Inc. with respect to the Balanced
Portfolio is incorporated herein by reference to Exhibit
(5)(c) of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(m) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and Provident Capital
C-9
<PAGE>
Management, Inc. with respect to the Mid-Cap Value Equity
Portfolio is incorporated herein by reference to Exhibit
5(k) of Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January 28,
1997.
(n) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and PNC Equity Advisors Company with respect to the
Mid-Cap Growth Equity Portfolio is incorporated herein by
reference to Exhibit 5(l) of Post-Effective Amendment No. 27
to Registrant's Registration Statement on Form N-1A filed on
January 28, 1997.
(o) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and BlackRock Financial Management, Inc. with respect
to the International Bond Portfolio is incorporated herein
by reference to Exhibit 5(m) of Post-Effective Amendment No.
27 to Registrant's Registration Statement on Form N-1A filed
on January 28, 1997.
(p) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and CastleInternational Asset Management Limited
with respect to the International Small Cap Equity Portfolio
is incorporated herein by reference to Exhibit 5(o) of
Post-Effective Amendment No. 30 to Registrant's Registration
Statement on Form N-1A filed on August 19, 1997.
(q) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and BlackRock Financial Management, Inc. with
respect to the High Yield Portfolio.*
(r) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Equity Advisors Company with respect to
the Micro-Cap Equity Portfolio.*/
(6) (a) Distribution Agreement between Registrant and Provident
Distributors, Inc. dated January 31, 1994 is
incorporated herein by reference to Exhibit (6)(a) of
- --------
* To be filed by amendment.
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<PAGE>
Post-Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A filed on July 8,
1994.
(b) Form of Appendix A to Distribution Agreement between
Registrant and Compass 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,
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
- --------
* To be filed by amendment.
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<PAGE>
Registrant's Registration Statement on Form N-1A filed
on November 10, 1993.
(d) Form of Appendix B to Custodian Agreement 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, National
Association dated November 21, 1989 is incorporated
herein by reference to Exhibit (8)(g) of Post-Effective
Amendment No. 14 to Registrant's Registration Statement
on Form N-1A filed on January 18, 1995.
(i) Subcustodial Services Agreement dated January 10, 1996
between PNC Bank, National Association and Citibank,
N.A. is incorporated herein by reference to Exhibit
8(j) of Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January
28, 1997.
- --------
* To be filed by amendment.
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<PAGE>
(j) Letter Agreement between Registrant and PNC Bank,
National Association relating to custodian services
with respect to the Tax-Free Income Portfolio is
incorporated herein by reference to Exhibit 8(d) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A filed on December
1, 1992.
(k) Letter Agreement between Registrant and PNC Bank,
National Association relating to custodian services
with respect to the Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania Tax-
Free Income, Large Cap Value Equity, Index Equity and
Small Cap Value Equity Portfolios is incorporated
herein by reference to Exhibit (8)(e) of Post-Effective
Amendment No. 7 to Registrant's Registration Statement
on Form N-1A filed on December 1, 1992.
(l) Letter Agreement dated March 1, 1993 between Registrant
and PNC Bank, National Association relating to
custodian services with respect to the North Carolina
Municipal Money Market, Short-Term Bond,
Intermediate-Term Bond, Small Cap Growth Equity and
Core Equity Portfolios is incorporated herein by
reference to Exhibit (8)(h) of Post-Effective Amendment
No. 10 to Registrant's Registration Statement on Form
N-1A filed on November 10, 1993.
(9) (a) Administration Agreement among Registrant, Compass
Distributors, Inc. and PFPC Inc. is incorporated herein
by reference to Exhibit (9)(a) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement
on Form N-1A filed on May 30, 1996.
(b) Form of Amended and Restated Administration Agreement
among Registrant, Compass Distributors, Inc. and PFPC
Inc. is incorporated herein by reference to Exhibit
9(d) of Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January
28, 1997.
C-13
<PAGE>
(c) Forms of Appendix A and Appendix B to Amended and
Restated Administration Agreement between Registrant,
Compass Distributors, Inc. and PFPC Inc.*/
(d) Co-Administration Agreement between Registrant and
Compass Capital Group, Inc. is incorporated herein by
reference to Exhibit (9)(b) of Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A filed on May 30, 1996.
(e) Form of Appendix A to Co-Administration Agreement
between Registrant and Compass Capital Group, Inc. *
(f) 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.
(g) 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.
(h) 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,
Large Cap 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.
(i) 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
- --------
* To be filed by amendment.
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<PAGE>
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.
(j) 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, Large Cap Value Equity, Large Cap Growth
Equity, Index Equity, Small Cap Value Equity,
Intermediate-Term Bond, Small Cap Growth Equity, Core
Equity, International Fixed Income, Government Income,
International Emerging Markets, International Equity
and Balanced Portfolios is incorporated herein by
reference to Exhibit (9)(i) of Post-Effective Amendment
No. 14 to Registrant's Registration Statement on Form
N-1A filed on January 18, 1995.
(k) Form of Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc. *
(l) License Agreement dated as of December 1, 1995 between
the Registrant and Compass Capital Group, Inc. is
incorporated herein by reference to Exhibit 9(q) of
Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January
28, 1997.
(10) None.
(11) Consent of Coopers & Lybrand L.L.P.
(12) None.
(13) (a) Purchase Agreement between Registrant and Shearson
Lehman Hutton Inc. ("Shearson") relating to Classes A-
1, B-1, C-1, D-2, E-2, F-2 and G-2 is incorporated
herein by reference to Exhibit 13(a) of Post-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-1A filed on December 29, 1989.
--------
* To be filed by amendment.
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<PAGE>
(b) Purchase Agreement between Registrant and Shearson
relating to shares of Class H-2 is incorporated herein
by reference to Exhibit 13(b) of Post-Effective
Amendment No. 2 to Registrant's Registration Statement
on Form N-1A filed on April 30, 1990.
(c) Purchase Agreement between Registrant and Shearson
relating to shares of Class I-1, Class I-2, Class J-1,
Class J-2, Class K-2, Class L-2, Class M-2, Class N-2,
Class O-2 and Class P-2 is incorporated herein by
reference to Exhibit 13(c) of Post-Effective Amendment
No. 4 to Registrant's Registration Statement on Form
N-1A filed on December 13, 1991.
(d) Purchase Agreement between Registrant and Shearson
relating to shares of Class D-1, Class E-1, Class F-1,
Class G-1, Class H-1, Class K-1, Class L-1, Class M-1,
Class N-1, Class O-1, Class P-1, Class A-2, Class B-2,
Class C-2, Class I-2, Class J-2, Class A-3, Class B-3,
Class C-3, Class D-3, Class E-3, Class F-3, Class G-3,
Class H-3, Class I-3, Class J-3, Class K-3, Class L-3,
Class M-3, Class N-3, Class O-3 and Class P-3 is
incorporated herein by reference to Exhibit (13)(d) of
Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A filed on December
1, 1992.
(e) Purchase Agreement between the Registrant and
Pennsylvania Merchant Group Ltd relating to shares of
Class Q-1, Class Q-2, Class Q-3, Class R-1, Class R-2,
Class R-3, Class S-1, Class S-2, Class S-3, Class T-1,
Class T-2, Class T-3, Class U-1, Class U-2 and Class
U-3 is incorporated herein by reference to Exhibit
(13)(e) of Post-Effective No. 10 to Registrant's
Registration Statement on Form N-1A as filed on
November 10, 1993.
(f) Purchase Agreement dated September 30, 1994 between the
Registrant and Provident Distributors, Inc. relating to
shares of Class A-4, Class D-4, Class E-4, Class F-4,
Class G-4, Class H-4, Class K-4, Class L-4, Class M-4,
Class N-4, Class O-4, Class P-4, Class R-4, Class S-4,
Class T-4, Class U-4, Class W-4, Class X-4, Class Y-4
is incorporated herein by reference to Exhibit (13)(f)
of Post-Effective Amendment No. 14 to Registrant's
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<PAGE>
Registration Statement on Form N-1A filed on January
18, 1995.
(g) Purchase Agreement dated February 1, 1994 between the
Registrant and Provident Distributors, Inc. relating to
shares of Class V-1, Class V-2, Class V-3, Class W- 1,
Class W-2, Class W-3, Class X-1, Class X-2, Class X-3,
Class Y-1, Class Y-2 and Class Y-3 is incorporated
herein by reference to Exhibit (13)(g) of
Post-Effective Amendment No. 15 to Registrant's
Registration Statement on Form N-1A filed on May 11,
1995.
(h) Purchase Agreement dated August 1, 1995 between
Registrant and Provident Distributors, Inc. relating to
shares of Class Z-1, Class Z-2 and Class Z-3 is
incorporated herein by reference to Exhibit (13)(h) of
Post-Effective Amendment No. 15 to Registrant's
Registration Statement on Form N-1A filed on May 11,
1995.
(i) Purchase Agreement between Registrant and Provident
Distributors, Inc. relating to shares of Class AA-1,
Class AA-2, Class AA-3, Class AA-4 and Class AA-5;
Class BB-1, Class BB-2, Class BB-3, Class BB-4 and
Class BB-5; Class CC-3; Class A-5, Class B-4, Class
B-5, Class C-4, Class C-5, Class I-4, Class I-5, Class
J-4, Class J-5, Class Q-4, Class Q- 5, Class V-4, Class
V-5, Class Z-4 and Class Z-5; Class X-1 and Class X-3;
and Class D-5, E-5, F-5, G-5, H-5, K-5, L-5, M-5, N-5,
O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-5 and Y-5 is
incorporated by reference to Exhibit 13(i) of
Post-Effective Amendment No. 23.
(j) Purchase Agreement between Registrant and Compass
Distributors, Inc. relating to shares of Class DD-1,
Class DD-2, Class DD-3, Class DD-4 and DD-5; and Class
EE-1, Class EE-2, Class EE-3, Class EE-4 and Class EE-5
is incorporated herein by reference to Exhibit 13(j) of
Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January
28, 1997.
(k) Form of Purchase Agreement between Registrant and
Compass Distributors, Inc. relating to shares of Class
R-
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<PAGE>
6, Class BB-6, Class FF-3 and Class GG-3 is
incorporated herein by reference to Exhibit 13(k) of
Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January
28, 1997.
(l) Form of Purchase Agreement between Registrant and
Compass Distributors, Inc. relating to shares of Class
HH-1, Class HH-2, Class HH-3, Class HH-4 and Class HH-5
is incorporated herein by reference to Exhibit 13(l) of
Post-Effective Amendment No. 30 to Registrant's
Registration Statement on Form N-1A filed on August 19,
1997.
(m) Form of Purchase Agreement between Registrant and
Compass Distributors, Inc. relating to shares of Class
II- 1, Class II-2, Class II-3, Class II-4 and Class
II-5, Class JJ-1, Class JJ-2, Class JJ-3, Class JJ-4
and Class JJ-5, and Class S-6. *
(14) None.
(15) (a) Amended and Restated Distribution and Service Plan for
Service, Series A Investor, Series B Investor, Series C
Investor, Institutional and BlackRock Shares is
incorporated herein by reference to Exhibit (15) of
Post- Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30,
1996.
(b) Form of Appendix A to Amended and Restated Distribution
and Service Plan.*/
(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
--------
* To be filed by amendment.
C-18
<PAGE>
Registrant's Registration Statement on Form N-1A filed on
May 30, 1996.
(24) (a) Registrant's Annual Report dated September 30, 1996 is
incorporated herein by reference to Registrant's filing
including such Annual Report and filed on December 4,
1996 (Accession Nos. 0000935069-96-000160,
0000935069-96-000163 and 0000935069-96-000157).
(b) Annual Report for The DFA Investment Trust Company
("DFA") (File No. 811-7436) dated November 30, 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 February 4,
1997 (Accession No. 0000950116-97-000186).
(c) Registrant's Semi-Annual Report dated March 31, 1997 is
incorporated herein by reference to Registrant's filing
including such Semi-Annual Report and filed on May 30,
1997 (Accession Nos. 0000935069-97-000095,
0000935069-97-000098 and 0000935069-97-000100).
(99) (a) Power of Attorney of David R. Wilmerding dated March 5,
1996 appointing David R. Wilmerding, Raymond J. Clark
and Karen H. Sabath as attorneys and agents is
incorporated herein by reference to such Power of
Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed
on February 18, 1997.
(b) Power of Attorney of William O. Albertini dated March
5, 1996 appointing David R. Wilmerding, Raymond J.
Clark and Karen H. Sabath as attorneys and agents is
incorporated herein by reference to such Power of
Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed
on February 18, 1997.
(c) Power of Attorney of Raymond J. Clark dated March 5,
1996 appointing David R. Wilmerding, Raymond J. Clark
and Karen H. Sabath as attorneys and agents is
incorporated herein by reference to such Power of
Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed
on February 18, 1997.
C-19
<PAGE>
(d) Power of Attorney of Robert M. Hernandez dated March 5,
1996 appointing David R. Wilmerding, Raymond J. Clark
and Karen H. Sabath as attorneys and agents is
incorporated herein by reference to such Power of
Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed
on February 18, 1997.
(e) Power of Attorney of Anthony M. Santomero dated March
5, 1996 appointing David R. Wilmerding, Raymond J.
Clark and Karen H. Sabath as attorneys and agents is
incorporated herein by reference to such Power of
Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed
on February 18, 1997.
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
With regard to the classes of shares of the Registrant, the following
information is as of October 31, 1997:
<TABLE>
<CAPTION>
Portfolio Institutional Service Investor A Investor B Investor C
- --------- ------------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Money Market 17 225 834 27 0
US Treasury Money Market 3 254 85 0 0
Municipal Money Market 2 115 8 0 2
Ohio Municipal Money Market 7 3 4 0 0
Pennsylvania Municipal Money Market 26 18 46 0 0
North Carolina Municipal 14 7 8 0 0
Money Market
New Jersey Municipal Money Market 8 2 21 0 0
Virginia Municipal Money Market 19 10 3 0 0
Managed Income 27 10 265 41 0
Tax-Free Income 6 5 142 49 2
Ohio Tax-Free Income 4 2 25 21 0
Pennsylvania Tax-Free Income 1 3 345 394 0
New Jersey Tax-Free Income 0 4 18 22 0
</TABLE>
C-20
<PAGE>
<TABLE>
<CAPTION>
Portfolio Institutional Service Investor A Investor B Investor C
- --------- ------------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Low Duration Bond 13 5 53 5 3
Low Duration Bond/BlackRock Class 5 N/A N/A N/A N/A
Intermediate Bond 9 3 43 0 0
Core Bond 8 3 36 450 6
Core Bond/BlackRock Class 3 N/A N/A N/A N/A
Intermediate Government 11 3 159 4 1
Government Income 0 0 65 888 7
International Bond 3 6 49 82 24
International Emerging Markets 15 12 168 409 5
Large Cap Growth Equity 28 13 559 926 4
Index Equity 14 5 681 2,144 506
Small Cap Value Equity 52 12 784 1,365 45
International Equity 30 14 619 1,115 3
International Small Cap Equity 2 2 16 92 4
Balanced 58 2 1,704 2,250 5
Large Cap Value Equity 48 15 750 2,296 20
Small Cap Growth Equity 133 19 1,340 4,009 366
Select Equity 31 9 232 2,225 9
Mid-Cap Value Equity 14 7 55 645 5
Mid-Cap Growth Equity 12 7 29 510 8
Multi-Sector Mortgage 2 N/A N/A N/A N/A
Securities III
BlackRock Strategic I 12 N/A N/A N/A N/A
BlackRock Strategic II 0 N/A N/A N/A N/A
===================================================================================================================
</TABLE>
Item 27. Indemnification
Indemnification of Registrant's principal underwriter against certain
losses is provided for in Section 7 of the Distribution Agreement incorporated
by reference herein as Exhibit (6)(a). Indemnification of PFPC Inc. and Compass
Distributors, Inc. in their capacity as co-administrators is provided for in
Section 7 of the Administration Agreement incorporated by reference herein as
Exhibit 9(a). Indemnification of Registrant's Custodian and Transfer Agent is
provided for, respectively, in Section 22 of the Custodian Agreement
incorporated by reference herein as Exhibit 8(a) and Section 17 of the Transfer
Agency Agreement incorporated by reference herein as Exhibit 9(i).
Indemnification of Compass Capital Group, Inc. in its capacity as
co-administrator as provided for in Section 7 of the Co- Administration
Agreement incorporated by reference herein as Exhibit 9(e). Registrant
C-21
<PAGE>
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
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.
C-22
<PAGE>
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
(a) PNC Asset Management Group, Inc. ("PAMG") is an indirect wholly-owned
subsidiary for PNC Bank Corp. PAMG was organized in 1994 for the purpose of
providing advisory services to investment companies. The list required by this
Item 28 of officers and directors of PAMG, together with information as to any
other business, profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two years, is
incorporated by reference to Schedules A and D of Form ADV, filed by PAMG
pursuant to the Investment Advisers Act of 1940 (SEC File No. 801-47710).
(b) PNC Institutional Management Corporation ("PIMC") is an indirect
wholly-owned subsidiary of PNC Bank Corp. The list required by this Item 28 of
officers and directors of PIMC, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of Form ADV, filed by PIMC pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-13304).
(c) Provident Capital Management, Inc. ("PCM") is an indirect wholly-owned
subsidiary of PNC Bank Corp. PCM currently offers investment advisory services
to institutional investors such as pension and profit-sharing plans or trusts,
insurance companies and banks. The list required by this Item 28 of officers and
directors of PMC, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by PMC pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-1438).
(d) BlackRock Financial Management, Inc. ("BlackRock") is an indirect
wholly-owned subsidiary of PNC Bank Corp. BlackRock currently offers investment
advisory
C-23
<PAGE>
services to institutional investors such as pension and profit-sharing plans or
trusts, insurance companies and banks. The list required by this Item 28 of
officers and directors of BlackRock, together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of Form ADV, filed by BlackRock pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-48433).
(e) PNC Equity Advisors Company ("PEAC") is an indirect wholly-owned
subsidiary of PNC Bank Corp. PEAC currently offers investment advisory services
to institutional investors such as pension and profit-sharing plans or trusts,
insurance companies and banks. The list required by this Item 28 of officers and
directors of PEAC, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of Form ADV, filed by PEAC pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-47711).
(f) CastleInternational Asset Management Limited ("CastleInternational") is
an indirect wholly-owned subsidiary of PNC Bank Corp. The list required by this
Item 28 of officers and directors of CastleInternational, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors during the past two
years, is incorporated by reference to Schedules A and D of Form ADV, filed by
CastleInternational pursuant to the Investment Advisers Act of 1940 (SEC File
No. 801-51087).
Item 29. Principal Underwriter
(a) Not applicable.
(b) The information required by this Item 29 with respect to each director,
officer or partner of Compass Distributors, Inc. is incorporated by reference to
Schedule A of FORM BD filed by Compass Distributors, Inc. with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934 (File
No. 8-48775).
(c) Not applicable.
Item 30. Location of Accounts and Records
(1) PNC Bank, National Association, Broad and Chestnut Streets,
Philadelphia, Pennsylvania 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).
C-24
<PAGE>
(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., 1600 Market Street, 29th Floor,
Philadelphia, PA 19103 (records relating to its functions as
investment adviser).
(5) PNC Institutional Management Corporation, Bellevue Corporate Center,
103 Bellevue Parkway, Wilmington, Delaware 19809 (records relating to
its functions as investment sub-adviser).
(6) BlackRock Financial Management, Inc., 345 Park Avenue, New York, New
York 10154 (records relating to its functions as investment adviser
and sub-adviser).
(7) PNC Equity Advisors Company, 1600 Market Street, 29th Floor,
Philadelphia, Pennsylvania 19103 (records relating to its functions as
investment sub-adviser).
(8) PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 (records relating to its functions as
co-administrator, transfer agent and dividend disbursing agent).
(9) The Chase Manhattan Bank, N.A., 1285 Avenue of the Americas, New York,
New York 10019 (records relating to its function as sub-custodian).
(10) State Street Bank and Trust Company, P.O. Box 1631, Boston,
Massachusetts (records relating to its function as sub-custodian).
(11) Barclays Bank PLC, 75 Wall Street, New York, New York 10265 (records
relating to its function as sub-custodian).
(12) Compass Capital Group, Inc., 345 Park Avenue, New York, New York 10154
(records relating to its functions as co- administrator).
(13) CastleInternational Asset Management Limited, 7 Castle Street,
Edinburgh, Scotland, EH2 3AH (records relating to its functions as
investment sub-adviser).
(14) Citibank, N.A., 111 Wall Street, 23rd Floor, Zone 6, New York, NY
10043 (records relating to its functions as sub-custodian).
C-25
<PAGE>
(15) PNC Bank Corp., 1600 Market Street, 28th Floor, Philadelphia, PA 19103
(Registrant's declaration of trust, code of regulations and minute
books).
Item 31. Management Services
None.
Item 32. Undertakings
(a) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
(b) (1) Registrant undertakes to file a post-effective amendment, using
reasonably current financial statements which need not be certified,
within four to six months from the effective date of Post-Effective
Amendment No. 30 to Registrant's 1933 Act Registration Statement
relating to shares of the International Small Cap Equity Portfolio or
the initial public offering thereof, whichever is later.
(2) Registrant undertakes to file a post-effective amendment, using
reasonably current financial statements which need not be certified,
within four to six months from the effective date of this
Post-Effective Amendment No. 32 to Registrant's 1933 Act Registration
Statement relating to shares of the High Yield Portfolio, the
Micro-Cap Equity Portfolio and BlackRock Shares of the Intermediate
Bond Portfolio, or the initial public offering thereof, whichever is
later.
C-26
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 32 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 14th day of November, 1997.
COMPASS CAPITAL FUNDS
Registrant
By /s/ Raymond J. Clark
---------------------------------
Raymond J. Clark,
President and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 29 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Raymond J. Clark Trustee, President and
- ---------------------------- Treasurer November 14, 1997
(Raymond J. Clark)
/s/ David R. Wilmerding, Jr. Chairman of the Board November 14, 1997
- ----------------------------
(David R. Wilmerding, Jr.)
/s/ Anthony M. Santomero Vice-Chairman of the November 14, 1997
- ---------------------------- Board
(Anthony M. Santomero)
/s/ William O. Albertini Trustee November 14, 1997
- ----------------------------
(William O. Albertini)
/s/ Robert M. Hernandez Trustee November 14, 1997
- ----------------------------
(Robert M. Hernandez)
C-27
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
11 Consent of Coopers & Lybrand L.L.P.
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of the following reports in this
Post-Effective Amendment No. 32 under the Securities Act of 1933, as amended, to
this Registration Statement on Form N-1A (No. 33-26305) of Compass Capital
Funds:
* Our report dated November 22, 1996 for the Compass Capital Funds'
Bond Portfolios.
* Our report dated November 22, 1996 for the Compass Capital Funds'
Equity Portfolios.
* Our report dated November 15, 1996 for the Compass Capital Funds'
Money Market Portfolios.
* Our report dated November 22, 1996 for the Multi-Sector Mortgage
Securities Portfolio III.
* Our report dated January 17, 1997 for the U.S. Large Company Series
of The DFA Investment Trust Company.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 14, 1997
