<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1998
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. 33
[X]
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
[X]
AMENDMENT NO. 35
[X]
----------------
COMPASS CAPITAL FUND/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, 28th Floor Simpson Thacher & Bartlett
Wilmington, Delaware 19809 Philadelphia, PA 19103 425 Lexington Avenue
(Address of Principal (Name and Address of New York, New York 10017
Executive Offices) Agent for Service)
Registrant's Telephone
Number (302) 792-2555
</TABLE>
----------------
It is proposed that this filing will become effective (check appropriate box)
[_]immediately upon filing pursuant to paragraph (b)
[X]on January 28, 1998 pursuant to paragraph (b)
[_]60 days after filing pursuant to paragraph (a)(i)
[_]on (date) pursuant to paragraph (a)(i)
[_]75 days after filing pursuant to paragraph (a)(ii)
[_]on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[_]this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously registered an indefinite number of shares of
beneficial interest under the Securities Act of 1933, as amended, pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. Registrant's
24f-2 Notice for the fiscal year ended September 30, 1997 for all investment
portfolios was filed on December 9, 1997.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
COMPASS CAPITAL FUNDS/SM/
EQUITY, BOND AND MONEY MARKET PORTFOLIOS
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 Expenses
Portfolios?
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 Investment Policies;
Portfolios?; What Additional Additional Information
Investment Policies And Risks Concerning Shares
Apply?; What Are The Portfolios'
Fundamental Investment
Limitations?; How Is The Fund
Organized?
4(c) What Are The Portfolios?; What Investment Policies
Additional 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 Shareholder and Trustee
Of The Fund?; How Frequently Are Liability of the Fund;
Dividends And Distributions Made Additional Information
To Investors?; How Is The Fund Concerning Shares;
Organized? 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 Purchase And Redemption
Shares Purchased And Redeemed? Information
7(b) How Is Net Asset Value Purchase And Redemption
Calculated?; What Is The Schedule Information
Of Sales Charges And Exemptions?
7(c) What Is The Schedule Of Sales
Charges And Exemptions?
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER
FORM N-1A, PROSPECTUS STATEMENT OF ADDITIONAL
PART A CAPTION INFORMATION CAPTION
----------- ---------- -----------------------
<S> <C> <C>
7(g) What Is The Schedule Of Sales
Charges And Exemptions?
8(a),(b),(c),(d) How Are Shares Redeemed?; How Purchase And Redemption
Are Shares Purchased And Information
Redeemed?
9 Not Applicable
10 Cover Page
11 Table of Contents
12 Miscellaneous
13(a),(b),(c) What Additional Investment Investment Policies
Policies And Risks Apply?
13(d) Portfolio Transactions
14(a) Trustees And Officers
14(b) Trustees And Officers
14(c) Trustees And Officers
15(a) How Is The Fund Organized? Miscellaneous
15(b) Miscellaneous
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) Portfolio Transactions
18(a) What Are The Shareholder Additional Information
Features Of The Fund?; How Concerning Shares
Frequently Are Dividends And
Distributions Made To
Investors?; How Is The Fund
Organized?
18(b) Not Applicable
19(a) How Are Shares Purchased?; How Purchase and Redemption
Are Shares Redeemed?; How Are Information
Shares Purchased And
Redeemed?; What Are The
Shareholder Features Of The
Fund?
19(b) How Is Net Asset Value Valuation Of Portfolio
Calculated Securities
19(c) Purchase And Redemption
Information
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER
FORM N-1A, PROSPECTUS STATEMENT OF ADDITIONAL
PART A CAPTION INFORMATION CAPTION
----------- ---------- -----------------------
<S> <C> <C>
20 How Are Fund Distributions Taxed? Taxes
21(a) Who Manages The Fund? Investment Advisory,
Administration, Distribution
And Servicing Arrangements
21(b) Not Applicable
21(c) Not Applicable
22(a) Performance Information
22(b) How Is Performance Calculated? Performance Information
23 Financial Statements
</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>
January 28, 1998
- --------------------------------------------------------------------------------
THE EQUITY PORTFOLIOS INVESTOR SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 4
What Are The Portfolios' Financial Highlights?............... 9
What Are The Portfolios?..................................... 22
What Are The Differences Among The Portfolios?............... 23
What Additional Investment Policies And Risks Apply?......... 25
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 34
Who Manages The Fund?........................................ 35
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?................................... 56
How Is Performance Calculated?............................... 59
Other Information On The Performance Of PNC Equity Advisors
Company..................................................... 60
How Can I Get More Information?.............................. 62
</TABLE>
ASKING THE KEY
QUESTIONS
This Prospectus sets forth concisely information about the Black-
Rock Funds SM (the "Fund") equity Portfolios that a prospective
investor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated Janu-
ary 28, 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 the Fund by calling (800) 441-
7762. The Statement of Additional Information, as supplemented
from time to time, is incorporated by reference into this Pro-
spectus. The SEC maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incor-
porated by reference and other information regarding the Fund
that has been filed with the SEC.
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.
The Index Equity Portfolio seeks to achieve its investment objec-
tive by investing all of its investable assets in a series of
shares (the "Index Master Portfolio") of The DFA Investment Trust
Company, another open-end management investment company, rather
than through a portfolio of various securities. The investment
experience of the Index Equity Portfolio corresponds directly
with the investment experience of the Index Master Portfolio. The
Index Master Portfolio has substantially the same investment ob-
jective, policies and limitations as the Index Equity Portfolio
and, except as specifically noted, is also referred to as a
"Portfolio" in this Prospectus. For additional information, see
"How Is The Fund Organized?"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE EQUITY PORTFOLIOS OF BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital FundsSM to BlackRock FundsSM.
The Equity Portfolios of BLACKROCK FUNDS consist of thirteen
diversified investment portfolios that provide investors 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 twelve* of these Portfolios (the "Port-
folios") begins on page 22 and a summary of each Performance
Benchmark is contained in the Appendix.
<TABLE>
<CAPTION>
BLACKROCK PORTFOLIO PERFORMANCE BENCHMARK LIPPER PEER GROUP
<S> <C> <C>
LARGE CAP VALUE
EQUITY Russell 1000 Value Index Growth and Income
LARGE CAP GROWTH Russell 1000 Growth
EQUITY Index Growth
MID-CAP VALUE EQUITY Russell Midcap Value Midcap
Index
MID-CAP GROWTH EQUITY Russell Midcap Growth Midcap
Index
SMALL CAP VALUE Russell 2000 Value Index-Small Company Growth
EQUITY
SMALL CAP GROWTH Russell 2000 Growth Small Company Growth
EQUITY Index
INTERNATIONAL EQUITY EAFE Index International
INTERNATIONAL
EMERGING MSCI Emerging Markets
Emerging Markets Free
MARKETS Index
INTERNATIONAL SMALL Salomon Brothers International Small Cap
CAP EQUITY Extended Markets World
Ex-U.S. Index
SELECT EQUITY S&P 500 Index Growth and Income
INDEX EQUITY S&P 500 Index S&P 500 Index
BALANCED S&P 500 Index and Balanced
Salomon Broad Investment
Grade Index
</TABLE>
* A copy of the Micro-Cap Equity Prospectus can be obtained by
calling 1-888-8BLACKROCK.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
EQUITY different directions in equity investing.
PORTFOLIOS
CONSIDERING
THE RISKS IN There can be no assurance that any mutual fund will achieve its
EQUITY investment objective. The Portfolios will hold equity securi-
INVESTING ties, and some or all of the Portfolios may acquire warrants,
foreign securities, securities of smaller capitalized foreign
and domestic issuers and illiquid securities; enter into repur-
chase and reverse repurchase agreements; lend portfolio securi-
ties to third parties; and enter into futures contracts and op-
tions and forward currency exchange contracts. These and the
other investment practices set forth below, and their associ-
ated risks, deserve careful consideration. Certain risks asso-
ciated with international investments are heightened because of
currency fluctuations and investments in emerging markets. 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 "How Are Shares
THE Redeemed?"
BLACKROCK
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses and shareholder transaction
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 fig-
ures shown for the Large Cap Value Equity, Large Cap Growth Equity, Small Cap
Value Equity, Small Cap Growth Equity, Select Equity and Balanced Portfolios
have been restated to reflect current expenses and fee waivers. The figures
shown for the share classes of the Mid-Cap Value Equity, Mid-Cap Growth Equity
and International Small Cap Equity Portfolios under "Other expenses" are esti-
mates for the current fiscal year. An example based on the summary is also
shown.
<TABLE>
<CAPTION>
LARGE CAP LARGE CAP MID-CAP
VALUE EQUITY GROWTH EQUITY VALUE EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-End
Sales Charge(/1/)
(as a percentage of
offering price) 4.5% None None 4.5% None None 4.5% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after
fee waivers)(/3/) .48% .48% .48% .52% .52% .52% .79% .79% .79%
12b-1 fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses
(after fee waivers)
(/3/) .78 .78 .78 .74 .74 .74 .82 .82 .82
---- ---- ---- ---- ---- ---- ---- ---- ----
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 .38 .38 .38 .34 .34 .34 .42 .42 .42
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.26% 2.01% 2.01% 1.26% 2.01% 2.01% 1.61% 2.36% 2.36%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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 .54%, .55% and .80% for each
class of the Large Cap Value Equity, Large Cap Growth Equity and Mid-Cap
Value Equity Portfolios, respectively, and administration fees would be
.21%, .22% and .23% for each class of the Large Cap Value Equity, Large Cap
Growth Equity and Mid-Cap Value Equity Portfolios, respectively. BlackRock,
Inc. and the Portfolios' administrators are under no obligation to waive or
continue waiving their fees, but have informed the Fund that they expect to
waive fees as necessary to maintain the Portfolios' total operating ex-
penses during the remainder of the current fiscal year at the levels set
forth in the table. Without waivers, "Other operating expenses" would be:
(i) .79%, .79% and .84%, respectively, for Investor A Shares; and (ii)
.79%, .79% and .84%, respectively, for Investor B Shares and Investor C
Shares, and "Total Portfolio operating expenses" would be: (iii) 1.33%,
1.34% and 1.64%, respectively, for Investor A Shares; and (iv) 2.08%, 2.09%
and 2.39%, respectively, for Investor B Shares and Investor C Shares. The
Portfolios do not expect to incur 12b-1 fees in excess of .005% with re-
spect 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 National Association of Securities Dealers, Inc. ("NASD").
4.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS? (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MID-CAP SMALL CAP SMALL CAP
GROWTH VALUE GROWTH
EQUITY EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-End
Sales Charge(/1/)
(as a percentage of
offering price) 4.5% None None 4.5% None None 4.5% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after
fee waivers)(/3/) .79% .79% .79% .55 .55 .55 .54 .54 .54
12b-1 fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses
(after fee
waivers)(/3/) .82 .82 .82 .79 .79 .79 .80 .80 .80
---- ---- ---- ---- ---- ---- ---- ---- ----
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 .42 .42 .42 .39 .39 .39 .40 .40 .40
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.61% 2.36% 2.36% 1.34% 2.09% 2.09% 1.34% 2.09% 2.09%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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 .80% for each class of the
Mid-Cap Growth Equity Portfolio and .55% for each class of each other Port-
folio and administration fees would be .23% for each class of each Portfo-
lio. BlackRock, Inc. and the Portfolios' administrators are under no obli-
gation to waive or continue waiving their fees, but have informed the Fund
that they expect to waive fees as necessary to maintain the Portfolios' to-
tal operating expenses during the remainder of the current fiscal year at
the levels set forth in the table. Without waivers, "Other operating ex-
penses" would be: (i) .83%, .80% and .79%, respectively, for Investor A
Shares; and (ii) .83%, .80% and .79%, respectively, for Investor B Shares
and Investor C Shares, and "Total Portfolio operating expenses" would be:
(iii) 1.63%, 1.35% and 1.34%, respectively, for Investor A Shares; and (iv)
2.38%, 2.10% and 2.09%, respectively, 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.
5.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS? (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL
INTERNATIONAL INTERNATIONAL EMERGING
EQUITY SMALL CAP EQUITY MARKETS
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>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-End
Sales Charge(/1/)
(as a percentage of
offering price) 5.0% None None 5.0% None None 5.0% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% 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/) .66% .66% .66% .80% .80% .80% 1.16% 1.16% 1.16%
12b-1 fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after fee
waivers)(/3/) .87 .87 .87 1.00 1.00 1.00 1.09 1.09 1.09
---- ---- ---- ---- ---- ---- ---- ---- ----
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 .47 .47 .47 .60 .60 .60 .69 .69 .69
--- --- --- --- --- --- --- --- ---
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.53% 2.28% 2.28% 1.80% 2.55% 2.55% 2.25% 3.00% 3.00%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and 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 .75%, 1.00% and 1.25% for the
International Equity, International Small Cap Equity and International
Emerging Markets Portfolios, respectively, and administration fees would be
.28% for each class of the International Emerging Markets Portfolio and
.23% for each class of each other Portfolio. BlackRock, Inc. and the Port-
folios' administrators are under no obligation to waive or continue waiving
their fees, but have informed the Fund that they expect to waive fees as
necessary to maintain the Portfolios' total operating expenses during the
remainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be: (i) .88%, .52% and
1.09%, respectively, for Investor A Shares; and (ii) .88%, .52% and 1.09%,
respectively, for Investor B Shares and Investor C Shares and "Total Port-
folio operating expenses" would be: (iii) 1.63%, 1.52% and 2.34%, respec-
tively, for Investor A Shares; and (iv) 2.38%, 2.27% and 3.09%, respective-
ly, for Investor B Shares and Investor C Shares. The Portfolios do not ex-
pect 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>
SELECT EQUITY INDEX EQUITY BALANCED
PORTFOLIO PORTFOLIO+ PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES
Maximum Front-End
Sales Charge(/1/)
(as a percentage of
offering price) 4.5% None None 3.0% None None 4.5% None None
Maximum Deferred
Sales
Charge(/1/)(/2/)
(as a percentage of
offering price) None 4.5% 1.0% None 4.5% 1.0% None 4.5% 1.0%
Sales Charge on
Reinvested
Dividends None None None None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after
fee
waivers)(/3/)(/4/) .52 .52 .52 .025% .025% .025% .52 .52 .52
12b-1 fees(/3/)(/5/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses
(after fee
waivers)(/3/) .74 .74 .74 .625 .625 .625 .79 .79 .79
---- ---- ---- ---- ---- ---- ---- ---- ----
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .34 .34 .34 .225 .225 .225 .39 .39 .39
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Portfolio
operating expenses
(after fee
waivers)(/3/) 1.26% 2.01% 2.01% .65% 1.40% 1.40% 1.31% 2.06% 2.06%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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% for each class of each
Portfolio and administration fees would be .23% for each class of each
Portfolio. BlackRock, Inc. and the Portfolios' administrators are under no
obligation to waive or continue waiving their fees, but have informed the
Fund that they expect to waive fees as necessary to maintain the Portfo-
lio's total operating expenses during the remainder of the current fiscal
year at the levels set forth in the table. Without waivers, "Other operat-
ing expenses" would be: (i) .79%, .65% and .75%, respectively, for Investor
A Shares; and (ii) .79%, .65% and .75%, respectively, for Investor B Shares
and Investor C Shares, and "Total Portfolio operating expenses" would be:
(iii) 1.34%, .85% and 1.30%, respectively, for Investor A Shares; and (iv)
2.09%, 1.60% and 2.05%, respectively, for Investor B Shares and Investor C
Shares. The Portfolios do not expect to incur 121b-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) Advisory fees with respect to the Index Equity Portfolio represent advisory
fees of the Index Master Portfolio.
(5) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selection A Pricing Op-
tion?" 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.
+ Includes the operating expenses of the Index Master Portfolio that are allo-
cable to the Index Equity Portfolio.
7.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) a 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>
Large Cap Value Equity Portfolio
A Shares* $57 $ 83 $111 $190
B Shares (Redemption)** 65 100 131 214***
B Shares (No Redemption) 20 63 108 214***
C Shares 20 63 108 234
Large Cap Growth Equity Portfolio
A Shares* 57 83 111 190
B Shares (Redemption)** 65 100 131 214***
B Shares (No Redemption) 20 63 108 214***
C Shares 20 63 108 234
Mid-Cap Value Equity Portfolio
A Shares* 61 94 N/A N/A
B Shares (Redemption)** 69 111 N/A N/A
B Shares (No Redemption) 24 74 N/A N/A
C Shares 24 74 N/A N/A
Mid-Cap Growth Equity Portfolio
A Shares* 60 94 N/A N/A
B Shares (Redemption)** 69 111 N/A N/A
B Shares (No Redemption) 24 74 N/A N/A
C Shares 24 74 N/A N/A
Small Cap Value Equity Portfolio
A Shares* 58 86 115 199
B Shares (Redemption)** 66 103 135 223***
B Shares (No Redemption) 21 65 112 223***
C Shares 21 65 112 242
Small Cap Growth Equity Portfolio
A Shares* 58 86 115 199
B Shares (Redemption)** 66 103 135 223***
B Shares (No Redemption) 21 65 112 223***
C Shares 21 65 112 242
International Equity Portfolio
A Shares* 65 96 129 223
B Shares (Redemption)** 68 108 144 242***
B Shares (No Redemption) 23 71 122 242***
C Shares 23 71 122 262
International Small Cap Equity
Portfolio
A Shares* 62 99 N/A N/A
B Shares (Redemption)** 71 116 N/A N/A
B Shares (No Redemption) 26 79 N/A N/A
C Shares 26 79 N/A N/A
International Emerging Markets
Portfolio
A Shares* 72 117 164 296
B Shares (Redemption)** 75 129 179 314***
B Shares (No Redemption) 30 93 158 314***
C Shares 30 93 158 332
Select Equity Portfolio
A Shares* 57 83 111 190
B Shares (Redemption)** 65 100 131 214***
B Shares (No Redemption) 20 63 108 214***
C Shares 20 63 108 234
Index Equity Portfolio
A Shares* 36 50 65 109
B Shares (Redemption)** 59 82 100 147***
B Shares (No Redemption) 14 44 77 147***
C Shares 14 44 77 168
Balanced Portfolio
A Shares* 58 85 114 196
B Shares (Redemption)** 66 102 133 219***
B Shares (No Redemption) 21 65 111 219***
C Shares 21 65 111 239
</TABLE>
* Reflects the imposition of the maximum front-end sales charge at the begin-
ning of the period.
** Reflects the deduction of the deferred sales charge.
*** Based on the conversion of the Investor B Shares to Investor A Shares after
eight years.
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 "Who Manages The Fund?--Distribu-
tion and Service Plan" in the Prospectus and "Investment Advisory, Administra-
tion, Distribution and Servicing Arrangements" in the Statement of Additional
Information.
The foregoing Tables and Example are intended to assist investors in under-
standing the costs and expenses (including the Index Equity Portfolio's pro
rata share of the Index Master Portfolio's advisory fees and operating ex-
penses) an investor will bear either directly or indirectly. They do not re-
flect any charges that may be imposed by brokers or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
For a detailed description of the expenses, see "Who Manages The Fund?"
The Board of Trustees of the Fund believes that the aggregate per share ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are approximately equal to the
expenses which the Index Equity Portfolio would incur if the Fund retained the
services of an investment adviser for the Index Equity Portfolio and the assets
of the Index Equity Portfolio were invested directly in the type of securities
held by the Index Master Portfolio.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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. 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. Information concerning the historical invest-
ment results of Investor A Shares of the Index Equity Portfolio
reflects the financial experience of that Portfolio prior to
its conversion on June 2, 1996 to a feeder portfolio of the In-
dex Master Portfolio.
9.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP VALUE EQUITY PORTFOLIO
(FORMERLY THE VALUE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR YEAR 5/02/92/1/ YEAR 1/18/96/1/
ENDED ENDED ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/97 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
AT BEGINNING
OF PERIOD $ 15.35 $ 13.92 $ 11.62 $ 11.69 $ 9.78 $10.00 $ 15.32 $ 13.56
------- ------- ------- ------- ------ ------ ------- -------
Income from
investment
operations
Net investment
income 0.23 0.28 0.27 0.23 0.22 0.12 0.14 0.13
Net gain (loss)
on investments
(both realized
and unrealized) 4.69 2.41 2.56 0.15 1.91 (0.24) 4.64 1.80
------- ------- ------- ------- ------ ------ ------- -------
Total from
investment
operations 4.92 2.69 2.83 0.38 2.13 (0.12) 4.78 1.93
------- ------- ------- ------- ------ ------ ------- -------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.23) (0.29) (0.28) (0.23) (0.22) (0.10) (0.14) (0.17)
Distributions
from net
realized
capital gains (2.52) (0.97) (0.25) (0.22) - - - - (2.52) - -
------- ------- ------- ------- ------ ------ ------- -------
Total
distributions (2.75) (1.26) (0.53) (0.45) (0.22) (0.10) (2.66) (0.17)
------- ------- ------- ------- ------ ------ ------- -------
NET ASSET VALUE
AT END OF PERIOD $ 17.52 $ 15.35 $ 13.92 $ 11.62 $11.69 $ 9.78 $ 17.44 $ 15.32
======= ======= ======= ======= ====== ====== ======= =======
Total return 37.01%/3/ 20.52%/3/ 25.22%/3/ 3.32%/3/ 21.95%/3/ (1.19)%/3/ 36.40%/3/ 14.26%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $47,131 $26,190 $16,910 $10,412 $4,865 $ 16 $19,773 $ 3,152
Ratios of
expenses to
average
net assets
After
advisory/administration
fee waivers 1.26% 1.22% 1.11% 1.05% 0.92% 0.85%/2/ 2.00% 1.92%/2/
Before
advisory/administration
fee waivers 1.33% 1.31% 1.25% 1.21% 0.95% 0.85%/2/ 2.07% 2.00%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers 1.44% 1.93% 2.24% 2.08% 1.96% 2.62%/2/ 0.64% 1.34%/2/
Before
advisory/administration
fee waivers 1.37% 1.84% 2.10% 1.92% 1.93% 2.62%/2/ 0.57% 1.25%/2/
PORTFOLIO
TURNOVER RATE 37% 60% 12% 11% 11% 13% 37% 60%
AVERAGE
COMMISSION
RATE/4/ $0.0580 $0.0556 N/A N/A N/A N/A $0.0580 $0.0556
<CAPTION>
INVESTOR C SHARES
FOR THE
PERIOD
YEAR 8/16/96/1/
ENDED THROUGH
9/30/97 9/30/96
<S> <C> <C>
NET ASSET VALUE
AT BEGINNING
OF PERIOD $ 15.32 $ 14.91
----------- -------------
Income from
investment
operations
Net investment
income 0.15 0.02
Net gain (loss)
on investments
(both realized
and unrealized) 4.63 0.45
----------- -------------
Total from
investment
operations 4.78 0.47
----------- -------------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.14) (0.06)
Distributions
from net
realized
capital gains (2.52) - -
----------- -------------
Total
distributions (2.66) (0.06)
----------- -------------
NET ASSET VALUE
AT END OF PERIOD $ 17.44 $ 15.32
=========== =============
Total return 35.99%/3/ 3.16%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $ 1,428 $ 205
Ratios of
expenses to
average
net assets
After
advisory/administration
fee waivers 2.01% 1.80%/2/
Before
advisory/administration
fee waivers 2.08% 1.88%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers 0.61% 1.29%/2/
Before
advisory/administration
fee waivers 0.54% 1.20%/2/
PORTFOLIO
TURNOVER RATE 37% 60%
AVERAGE
COMMISSION
RATE/4/ $0.0580 $0.0556
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP GROWTH EQUITY PORTFOLIO
(FORMERLY THE GROWTH EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES B SHARES
FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR YEAR 5/02/92/1/ YEAR 1/24/96/1/
ENDED ENDED ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/97 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 14.94 $ 13.01 $ 10.16 $ 11.57 $ 9.92 $10.09 $ 14.86 $ 13.08
------- ------- ------- ------- ------ ------ ------- -------
Income from investment
operations
Net investment income 0.01 0.02 0.08 0.02 0.02 0.08 (0.07) (0.02)
Net gain (loss) on
investments
(both realized
and unrealized) 4.72 2.29 2.87 (1.33) 2.10 (0.10) 4.64 1.80
------- ------- ------- ------- ------ ------ ------- -------
Total from investment
operations 4.73 2.31 2.95 (1.31) 2.12 (0.02) 4.57 1.78
------- ------- ------- ------- ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.02) - - (0.10) - - (0.07) (0.15) - - - -
Distributions from
capital - - - - - - (0.01) - - - - - -
Distributions from net
realized capital gains (0.74) 0.38 - - (0.10) (0.39) - - (0.74) - -
------- ------- ------- ------- ------ ------ ------- -------
Total distributions (0.76) 0.38 (0.10) (0.10) (0.47) (0.15) (0.74) - -
------- ------- ------- ------- ------ ------ ------- -------
NET ASSET VALUE AT END
OF PERIOD $ 18.91 $ 14.94 $ 13.01 $ 10.16 $11.57 $ 9.92 $ 18.69 $ 14.86
======= ======= ======= ======= ====== ====== ======= =======
Total return 33.18%/3/ 18.18%/3/ 29.26%/3/ (11.38)%/3/ 22.08%/3/ (0.17)%/3/ 32.18%/3/ 13.61%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $25,575 $16,579 $10,034 $ 5,049 $2,362 $ 239 $ 7,919 $ 2,364
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.27% 1.22% 1.11% 1.05% 0.91% 0.85%/2/ 2.01% 1.93%/2/
Before
advisory/administration
fee waivers 1.34% 1.34% 1.29% 1.29% 0.97% 0.86%/2/ 2.08% 2.05%/2/
Ratios of net
investment income to
average net assets
After
advisory/administration
fee waivers 0.07% 0.15% 0.76% 0.29% 0.18% 2.07%/2/ (0.66)% (0.47)%/2/
Before
advisory/administration
fee waivers 0% 0.04% 0.58% 0.05% 0.12% 2.06%/2/ (0.73)% (0.58)%/2/
PORTFOLIO TURNOVER RATE 81% 58% 55% 212% 175% 162% 81% 58%
AVERAGE COMMISSION
RATE/4/ $0.0594 $0.0598 N/A N/A N/A N/A $0.0594 $0.0598
<CAPTION>
INVESTOR
C SHARES
FOR THE
PERIOD
1/24/97/1/
THROUGH
9/30/97
<S> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 15.23
--------------
Income from investment
operations
Net investment income (0.03)
Net gain (loss) on
investments
(both realized
and unrealized) 3.49
--------------
Total from investment
operations 3.46
--------------
LESS DISTRIBUTIONS
Distributions from net
investment income - -
Distributions from
capital - -
Distributions from net
realized capital gains - -
--------------
Total distributions - -
--------------
NET ASSET VALUE AT END
OF PERIOD $ 18.69
==============
Total return 22.78%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 207
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 2.02%/2/
Before
advisory/administration
fee waivers 2.09%/2/
Ratios of net
investment income to
average net assets
After
advisory/administration
fee waivers (0.66)%/2/
Before
advisory/administration
fee waivers (0.73)%/2/
PORTFOLIO TURNOVER RATE 81%
AVERAGE COMMISSION
RATE/4/ $0.0594
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
11.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MID-CAP VALUE EQUITY PORTFOLIO [/R]
<TABLE>
<CAPTION>
INVESTOR INVESTOR INVESTOR
A SHARES B SHARES C SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
12/27/96/1/ 12/27/96/1/ 12/27/96/1/
THROUGH THROUGH THROUGH
9/30/97 9/30/97 9/30/97
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 10.00 $ 10.00 $ 10.00
------- ------- -------
Income from investment operations
Net investment income 0.07 0.03 0.02
Net gain (loss) on investments
(both realized and unrealized) 2.78 2.79 2.80
------- ------- -------
Total from investment operations 2.85 2.82 2.82
------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.08) (0.04) (0.04)
Distributions from capital - - - - - -
Distributions from net realized
capital gains - - - - - -
------- ------- -------
Total distributions (0.08) (0.04) (0.04)
------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 12.77 $ 12.78 $ 12.78
======= ======= =======
Total return 28.51%/3/ 28.23%/3/ 28.23%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 2,315 $ 2,911 $ 21
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.61%/2/ 2.32%/2/ 2.33%/2/
Before advisory/administration fee
waivers 1.64%/2/ 2.36%/2/ 2.37%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 0.77%/2/ 0.04%/2/ 0.13%/2/
Before advisory/administration fee
waivers 0.73%/2/ 0.00%/2/ 0.09%/2/
PORTFOLIO TURNOVER RATE 36% 36% 36%
AVERAGE COMMISSION RATE/4/ $0.0528 $0.0528 $0.0528
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
12.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MID-CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR INVESTOR INVESTOR
A SHARES B SHARES C SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
12/27/96/1/ 12/27/96/1/ 12/27/96/1/
THROUGH THROUGH THROUGH
9/30/97 9/30/97 9/30/97
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 10.00 $ 10.00 $ 10.00
------- ------- -------
Income from investment operations
Net investment income (0.03) (0.05) (0.07)
Net gain (loss) on investments
(both realized and unrealized) 2.17 2.16 2.18
------- ------- -------
Total from investment operations 2.14 2.11 2.11
------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income - - - - - -
Distributions from capital - - - - - -
Distributions from net realized
capital gains - - - - - -
------- ------- -------
Total distributions - - - - - -
------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 12.14 $ 12.11 $ 12.11
======= ======= =======
Total return 21.40%/3/ 21.10%/3/ 21.10%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 2,650 $ 2,691 $ 85
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.59%/2/ 2.32%/2/ 2.35%/2/
Before advisory/administration
fee waivers 1.63%/2/ 2.36%/2/ 2.39%/2/
Ratios of net investment income
to average net assets
After advisory/administration fee
waivers (0.73)%/2/ (1.50)%/2/ (1.49)%/2/
Before advisory/administration
fee waivers (0.77)%/2/ (1.54)%/2/ (1.53)%/2/
PORTFOLIO TURNOVER RATE 64% 64% 64%
AVERAGE COMMISSION RATE/4/ $0.0576 $0.0576 $0.0576
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
13.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 6/02/92/1/
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 $ 15.97 $ 15.14 $ 13.58 $ 13.07 $10.14 $10.06
------- ------- ------- ------- ------ ------
Income from
investment
operations
Net investment
income 0.10 0.03 - - (0.01) 0.03 0.02
Net gain (loss)
on investments
(both realized
and unrealized) 6.40 1.69 2.17 0.77 3.02 0.07
------- ------- ------- ------- ------ ------
Total from
investment
operations 6.50 1.72 2.17 0.76 3.05 0.09
------- ------- ------- ------- ------ ------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.10) (0.02) - - - - (0.04) (0.01)
Distributions
from net
realized
capital gains (2.17) (0.87) (0.61) (0.25) (0.08) - -
------- ------- ------- ------- ------ ------
Total
distributions (2.27) (0.89) (0.61) (0.25) (0.12) (0.01)
------- ------- ------- ------- ------ ------
NET ASSET VALUE
AT END OF PERIOD $ 20.20 $ 15.97 $ 15.14 $ 13.58 $13.07 $10.14
======= ======= ======= ======= ====== ======
Total return 46.85%/3/ 12.06%/3/ 16.96%/3/ 5.93%/3/ 30.36%/3/ 0.89%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $34,031 $24,605 $21,563 $16,884 $9,084 $ 62
Ratios of
expenses to
average net
assets
After
advisory/administration
fee waivers 1.34% 1.32% 1.18% 1.13% 0.94% 0.85%/2/
Before
advisory/administration
fee waivers 1.35% 1.33% 1.28% 1.25% 0.98% 0.89%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers 0.63% 0.20% 0.00% (0.11)% 0.19% 0.51%/2/
Before
advisory/administration
fee waivers 0.62% 0.19% (0.09)% (0.23)% 0.15% 0.47%/2/
PORTFOLIO
TURNOVER RATE 66% 50% 31% 18% 41% 17%
AVERAGE
COMMISSION
RATE/4/ $0.0504 $0.0580 N/A N/A N/A N/A
<CAPTION>
INVESTOR B INVESTOR C
SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 10/03/94/1/ 10/01/96/1/
ENDED ENDED THROUGH THROUGH
9/30/97 9/30/96 9/30/95 9/30/97
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
AT BEGINNING OF
PERIOD $ 15.80 $ 15.06 $ 13.51 $ 15.76
----------- ----------- -------------- --------------
Income from
investment
operations
Net investment
income 0.08 (0.04) (0.05) 0.02
Net gain (loss)
on investments
(both realized
and unrealized) 6.19 1.65 2.21 6.29
----------- ----------- -------------- --------------
Total from
investment
operations 6.27 1.61 2.16 6.31
----------- ----------- -------------- --------------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.04) - - - - (0.04)
Distributions
from net
realized
capital gains (2.17) (0.87) (0.61) (2.17)
----------- ----------- -------------- --------------
Total
distributions (2.21) (0.87) (0.61) (2.21)
----------- ----------- -------------- --------------
NET ASSET VALUE
AT END OF PERIOD $ 19.86 $ 15.80 $ 15.06 $ 19.86
=========== =========== ============== ==============
Total return 45.67%/3/ 11.34%/3/ 16.95%/3/ 46.04%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $11,001 $ 2,357 $ 1,477 $ 2,109
Ratios of
expenses to
average net
assets
After
advisory/administration
fee waivers 2.07% 2.04% 1.80%/2/ 2.04%/2/
Before
advisory/administration
fee waivers 2.08% 2.05% 1.89%/2/ 2.05%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers (0.15)% (0.50)% (0.61)%/2/ (0.18)%/2/
Before
advisory/administration
fee waivers (0.16)% (0.51)% (0.70)%/2/ (0.19)%/2/
PORTFOLIO
TURNOVER RATE 66% 50% 31% 66%
AVERAGE
COMMISSION
RATE/4/ $0.0504 $0.0580 N/A $0.0504
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
14.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 9/15/93/1/ YEAR 1/18/96/1/
ENDED ENDED ENDED ENDED THROUGH ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/97 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 21.69 $ 14.98 $10.12 $10.47 $ 9.96 $ 21.53 $ 14.87
------- ------- ------ ------ ------ ------- -------
Income from investment
operations
Net investment income (0.04) (0.06) (0.02) - - - - (0.07) (0.07)
Net gain (loss) on
investments
(both realized and
unrealized) 3.09 6.77 4.88 (0.35) 0.51 2.92 6.73
------- ------- ------ ------ ------ ------- -------
Total from investment
operations 3.05 6.71 4.86 (0.35) 0.51 2.85 6.66
------- ------- ------ ------ ------ ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income - - - - - - - - - - - - - -
Distributions from net
realized capital gains (1.49) - - - - - - - - (1.49) - -
------- ------- ------ ------ ------ ------- -------
Total distributions (1.49) - - - - - - - - (1.49) - -
------- ------- ------ ------ ------ ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 23.25 $ 21.69 $14.98 $10.12 $10.47 $ 22.89 $ 21.53
======= ======= ====== ====== ====== ======= =======
Total return 15.28%/3/ 44.79%/3/ 48.02%/3/ (3.33)%/3/ 5.12%/3/ 14.47%/3/ 38.27%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $57,323 $27,954 $7,348 $1,620 $ 41 $40,270 $ 6,520
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.34% 1.33% 1.20% 0.86% 1.13%/2/ 2.07% 2.06%/2/
Before
advisory/administration
fee waivers 1.34% 1.35% 1.33% 1.42% 1.82%/2/ 2.07% 2.08%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers (0.46)% (0.55)% (0.24)% 0.07% (0.48)%/2/ (1.23)% (1.34)%/2/
Before
advisory/administration
fee waivers (0.46)% (0.57)% (0.36)% (0.49)% (1.17)%/2/ (1.23)% (1.36)%/2/
PORTFOLIO TURNOVER RATE 82% 89% 74% 89% 9% 82% 89%
AVERAGE COMMISSION
RATE/4/ $0.0572 $0.0569 N/A N/A N/A $0.0572 $0.0569
<CAPTION>
INVESTOR C
SHARES
FOR THE
PERIOD
YEAR 9/6/96/1/
ENDED THROUGH
9/30/97 9/30/96
<S> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 21.53 $ 19.66
----------- -------------
Income from investment
operations
Net investment income (0.11) (0.01)
Net gain (loss) on
investments
(both realized and
unrealized) 2.96 1.88
----------- -------------
Total from investment
operations 2.85 1.87
----------- -------------
LESS DISTRIBUTIONS
Distributions from net
investment income - - - -
Distributions from net
realized capital gains (1.49) - -
----------- -------------
Total distributions (1.49) - -
----------- -------------
NET ASSET VALUE AT END OF
PERIOD $ 22.89 $ 21.53
=========== =============
Total return 14.47%/3/ 9.51%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $14,106 $ 329
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 2.07% 1.74%/2/
Before
advisory/administration
fee waivers 2.07% 1.76%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers (1.25)% (0.93)%/2/
Before
advisory/administration
fee waivers (1.25)% (0.95)%/2/
PORTFOLIO TURNOVER RATE 82% 89%
AVERAGE COMMISSION
RATE/4/ $0.0572 $0.0569
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
15.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 6/02/92/1/
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 $ 13.36 $ 13.24 $ 13.40 $ 12.47 $ 9.87 $10.68
------- ------- ------- ------- ------ ------
Income from
investment
operations
Net investment
income 0.07 0.14 0.11 0.12 0.12 0.09
Net gain (loss)
on investments
(both realized
and unrealized) 1.77 0.81 0.13 1.15 2.59 (0.83)
------- ------- ------- ------- ------ ------
Total from
investment
operations 1.84 0.95 0.24 1.27 2.71 (0.74)
------- ------- ------- ------- ------ ------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.22) (0.16) (0.04) (0.09) (0.11) (0.07)
Distributions
from net
realized
capital gains (0.41) (0.67) (0.36) (0.25) - - - -
------- ------- ------- ------- ------ ------
Total
distributions (0.63) (0.83) (0.40) (0.34) (0.11) (0.07)
------- ------- ------- ------- ------ ------
NET ASSET VALUE
AT END OF PERIOD $ 14.57 $ 13.36 $ 13.24 $ 13.40 $12.47 $ 9.87
======= ======= ======= ======= ====== ======
Total return 14.36%/3/ 7.58%/3/ 2.00%/3/ 10.24%/3/ 27.72%/3/ (6.94)%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $22,335 $19,842 $17,721 $14,433 $3,669 $ 58
Ratios of
expenses to
average net
assets
After
advisory/administration
fee waivers 1.53% 1.53% 1.40% 1.35% 1.25% 1.20%/2/
Before
advisory/administration
fee waivers 1.63% 1.64% 1.58% 1.54% 1.31% 1.21%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers 0.50% 0.45% 0.97% 0.96% 1.27% 2.59%/2/
Before
advisory/administration
fee waivers 0.40% 0.34% 0.80% 0.77% 1.21% 2.58%/2/
PORTFOLIO
TURNOVER RATE 62% 70% 105% 37% 31% 16%
AVERAGE
COMMISSION
RATE/4/ $0.0166 $0.0158 N/A N/A N/A N/A
<CAPTION>
INVESTOR B INVESTOR C
SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 10/03/94/1/ 12/05/96/1/
ENDED ENDED THROUGH THROUGH
9/30/97 9/30/96 9/30/95 9/30/97
<S> <C> <C> <C> <C>
NET ASSET VALUE
AT BEGINNING OF
PERIOD $ 13.23 $ 13.20 $ 13.35 $ 13.21
----------- ----------- ------------- --------------
Income from
investment
operations
Net investment
income 0.07 0.08 0.05 0.15
Net gain (loss)
on investments
(both realized
and unrealized) 1.66 0.77 0.16 1.19
----------- ----------- ------------- --------------
Total from
investment
operations 1.73 0.85 0.21 1.34
----------- ----------- ------------- --------------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.17) (0.15) - - (0.17)
Distributions
from net
realized
capital gains (0.41) (0.67) (0.36) - -
----------- ----------- ------------- --------------
Total
distributions (0.58) (0.82) (0.36) (0.17)
----------- ----------- ------------- --------------
NET ASSET VALUE
AT END OF PERIOD $ 14.38 $ 13.23 $ 13.20 $ 14.38
=========== =========== ============= ==============
Total return 13.63%/3/ 6.81%/3/ 1.77%/3/ 10.33%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $ 5,850 $ 2,692 $ 1,071 $ 155
Ratios of
expenses to
average net
assets
After
advisory/administration
fee waivers 2.27% 2.23% 2.06%/2/ 2.28%/2/
Before
advisory/administration
fee waivers 2.37% 2.34% 2.23%/2/ 2.38%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers (0.22)% (0.18)% 0.59%/2/ (0.48)%/2/
Before
advisory/administration
fee waivers (0.32)% (0.29)% 0.41%/2/ (0.58)%/2/
PORTFOLIO
TURNOVER RATE 62% 70% 105% 62%
AVERAGE
COMMISSION
RATE/4/ $0.0166 $0.0158 N/A $0.0166
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
16.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL SMALL CAP EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A INVESTOR B INVESTOR C
SHARES SHARES SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
9/26/97/1/ 9/26/97/1/ 9/26/97/1/
THROUGH THROUGH THROUGH
9/30/97 9/30/97 9/30/97
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 10.00 $ 10.00 $ 10.00
------- ------- -------
Income from investment operations
Net investment income - - - - - -
Net gain (loss) on investments
(both realized and unrealized) (0.06) (0.06) (0.06)
------- ------- -------
Total from investment operations (0.06) (0.06) (0.06)
------- ------- -------
LESS DISTRIBUTIONS
Distributions from net investment
income - - - - - -
Distributions from net realized
capital gains - - - - - -
------- ------- -------
Total distributions - - - - - -
------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 9.94 $ 9.94 $ 9.94
======= ======= =======
Total return (0.30)%/3/ (0.30)%/3/ (0.30)%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 326 $ 711 $ 182
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.30%/2/ 1.30%/2/ 1.30%/2/
Before advisory/administration
fee waivers 1.52%/2/ 1.52%/2/ 1.52%/2/
Ratios of net investment income
to average net assets
After advisory/administration fee
waivers 1.44%/2/ 1.58%/2/ 1.44%/2/
Before advisory/administration
fee waivers 1.22%/2/ 1.35%/2/ 1.22%/2/
PORTFOLIO TURNOVER RATE 0% 0% 0%
AVERAGE COMMISSION RATE/4/ $0.0268 $0.0268 $0.0268
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
17.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES INVESTOR B SHARES C SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR YEAR 6/17/94/1/ YEAR 7/2/96/1/ 3/21/97/1/
ENDED ENDED ENDED ENDED ENDED THROUGH THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/97 9/30/96 9/30/97
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 8.71 $ 8.18 $10.54 $10.00 $ 8.69 $ 8.85 $ 9.70
------- ------- ------ ------ ------- ------- -------
Income from investment
operations
Net investment income (0.06) 0.02 0.03 0.02 (0.04) - - (0.01)
Net gain (loss) on
investments (both
realized and
unrealized) .98 0.52 (2.14) 0.52 .89 (0.16) (0.15)
------- ------- ------ ------ ------- ------- -------
Total from investment
operations .92 0.54 (2.11) 0.54 .85 (0.16) (0.16)
------- ------- ------ ------ ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.03) - - (0.05) - - - - - - - -
Distribution from
capital - - - - (0.01) - - - - - - - -
Distributions from net
realized capital gains - - (0.01) (0.19) - - - - - - - -
------- ------- ------ ------ ------- ------- -------
Total distributions (0.03) (0.01) (0.25) - - - - - - - -
------- ------- ------ ------ ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 9.60 $ 8.71 $ 8.18 $10.54 $ 9.54 $ 8.69 $ 9.54
======= ======= ====== ====== ======= ======= =======
Total return 10.51%/3/ 6.49%/3/ (20.12)%/3/ 5.40%/3/ 9.78%/3/ (1.81)%/3/ (3.08)%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 4,454 $ 2,996 $2,563 $2,857 $ 1,836 $ 216 $ 88
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 2.25% 2.26% 2.20% 2.15%/2/ 2.98% 2.90%/2/ 2.58%/2/
Before
advisory/administration
fee waivers 2.34% 2.35% 2.44% 3.13%/2/ 3.07% 3.00%/2/ 2.67%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers (0.08)% 0.45% 1.54% 0.74%/2/ (0.80)% 0.17%/2/ (0.27)%/2/
Before
advisory/administration
fee waivers (0.18)% 0.35% 1.30% (0.24)%/2/ (0.90)% 0.07%/2/ (0.37)%/2/
PORTFOLIO TURNOVER RATE 33% 44% 75% 4% 33% 44% 33%
AVERAGE COMMISSION
RATE/4/ $0.0016 $0.0018 N/A N/A $0.0016 $0.0018 $0.0016
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
18.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B INVESTOR C
INVESTOR A SHARES SHARES SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR YEAR 10/13/93/1/ YEAR 3/27/96/1/ YEAR 9/27/96/1/
ENDED ENDED ENDED THROUGH ENDED THROUGH ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/97 9/30/96 9/30/97 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 13.56 $ 11.88 $ 9.92 $ 9.96 $ 13.54 $ 12.83 $ 13.54 $ 13.52
------- ------- ------ ------ ------- ------- ------- -------
Income from investment
operations
Net investment income 0.11 0.15 0.20 0.18 0.05 0.04 0.04 - -
Net gain (loss) on
investments (both
realized and
unrealized) 5.16 2.07 2.06 (0.03) 5.07 0.73 5.08 0.02
------- ------- ------ ------ ------- ------- ------- -------
Total from investment
operations 5.27 2.22 2.26 0.15 5.12 0.77 5.12 0.02
------- ------- ------ ------ ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.12) (0.15) (0.18) (0.19) (0.05) (0.06) (0.05) - -
Distributions from net
realized capital gains (1.21) (0.39) (0.12) - - (1.21) - - (1.21) - -
------- ------- ------ ------ ------- ------- ------- -------
Total distributions (1.33) (0.54) (0.30) (0.19) (1.26) (0.06) (1.26) - -
------- ------- ------ ------ ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 17.50 $ 13.56 $11.88 $ 9.92 $ 17.40 $ 13.54 $ 17.40 $ 13.54
======= ======= ====== ====== ======= ======= ======= =======
Total return 41.95%/3/ 19.23%/3/ 23.29%/3/ 1.54%/3/ 40.70%/3/ 6.58%/3/ 40.70%/3/ 0.15%/3/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $18,949 $ 6,228 $3,808 $ 601 $18,345 $ 1,196 $ 377 $ 50
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.27% 1.21% 1.12% 1.05%/2/ 2.01% 1.92%/2/ 2.01% 0.00%/2/
Before
advisory/administration
fee waivers 1.34% 1.34% 1.30% 1.34%/2/ 2.08% 2.04%/2/ 2.08% 0.00%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.75% 1.24% 1.91% 1.89%/2/ (0.02)% 0.59%/2/ (0.12)% 0.00%/2/
Before
advisory/administration
fee waivers 0.68% 1.11% 1.73% 1.60%/2/ (0.09)% 0.46%/2/ (0.19)% 0.00%/2/
PORTFOLIO TURNOVER RATE 29% 55% 51% 88% 29% 55% 29% 55%
AVERAGE COMMISSION
RATE/4/ $0.0547 $0.0487 N/A N/A $0.0547 $0.0487 $0.0547 $0.0487
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
19.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 7/29/92/1/
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 $ 13.96 $ 13.58 $10.93 $11.02 $10.06 $10.07
------- ------- ------ ------ ------ ------
Income from
investment
operations
Net investment
income 0.21 0.27 0.34 0.25 0.27 0.10
Net gain (loss)
on investments
(both realized
and unrealized) 5.02 2.09 2.73 0.04 0.96 (0.01)
------- ------- ------ ------ ------ ------
Total from
investment
operations 5.23 2.36 3.07 0.29 1.23 0.09
------- ------- ------ ------ ------ ------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.19) (0.28) (0.30) (0.27) (0.27) (0.10)
Distributions
from net
realized
capital gains (0.68) (1.70) (0.12) (0.11) - - - -
------- ------- ------ ------ ------ ------
Total
distributions (0.87) (1.98) (0.42) (0.38) (0.27) (0.10)
------- ------- ------ ------ ------ ------
NET ASSET VALUE
AT END OF PERIOD $ 18.32 $ 13.96 $13.58 $10.93 $11.02 $10.06
======= ======= ====== ====== ====== ======
Total return 39.49%/3/ 19.31%/3/ 28.77%/3/ 2.66%/3/ 12.33%/3/ 0.91%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $33,934 $12,752 $6,501 $2,632 $1,263 $ 56
Ratios of
expenses to
average net
assets
After
advisory/administration
fee waivers 0.65% 0.65%/4/ 0.61% 0.55% 0.49% 0.45%/2/
Before
advisory/administration
fee waivers 0.85%/4/ 0.97% 0.95% 0.92% 0.61% 0.64%/2/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers 1.23% 1.81% 2.44% 2.35% 2.48% 2.85%/2/
Before
advisory/administration
fee waivers 1.03% 1.49% 2.10% 1.98% 2.36% 2.66%/2/
PORTFOLIO
TURNOVER RATE - -/6/ 18%/5/,/6/ 18% 17% 8% 23%
AVERAGE
COMMISSION RATE - -/6/ $0.0319/5/,/6/ N/A N/A N/A N/A
<CAPTION>
INVESTOR B SHARES INVESTOR C SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR 2/7/96/1/ YEAR 8/14/96/1/
ENDED THROUGH ENDED THROUGH
9/30/97 9/30/96 9/30/97 9/30/96
<S> <C> <C> <C> <C>
NET ASSET VALUE
AT BEGINNING OF
PERIOD $ 13.93 $ 13.20 $ 13.93 $ 13.47
----------- ---------------- ----------- -----------------
Income from
investment
operations
Net investment
income 0.13 0.08 0.13 0.02
Net gain (loss)
on investments
(both realized
and unrealized) 4.94 0.77 4.94 0.50
----------- ---------------- ----------- -----------------
Total from
investment
operations 5.07 0.85 5.07 0.52
----------- ---------------- ----------- -----------------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.10) (0.12) (0.10) (0.06)
Distributions
from net
realized
capital gains (0.68) - - (0.68) - -
----------- ---------------- ----------- -----------------
Total
distributions (0.78) (0.12) (0.78) (0.06)
----------- ---------------- ----------- -----------------
NET ASSET VALUE
AT END OF PERIOD $ 18.22 $ 13.93 $ 18.22 $ 13.93
=========== ================ =========== =================
Total return 38.31%/3/ 6.50%/3/ 38.31%/3/ 3.90%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $38,271 $ 2,904 $19,668 $ 432
Ratios of
expenses to
average net
assets
After
advisory/administration
fee waivers 1.38% 1.38%/2/ 1.38% 1.25%/2/
Before
advisory/administration
fee waivers 1.58%/4/ 1.60%/2/,/4/ 1.58%/4/ 1.43%/2/,/4/
Ratios of net
investment
income to
average net
assets
After
advisory/administration
fee waivers 0.45% 0.93%/2/ 0.45% 0.71%/2/
Before
advisory/administration
fee waivers 0.25% 0.71%/2/ 0.25% 0.53%/2/
PORTFOLIO
TURNOVER RATE - -/6/ 18%/5/,/6/ - -/6/ 18%/5/,/6/
AVERAGE
COMMISSION RATE - -/6/ $0.0319/5/,/6/ - -/6/ $0.0319/5/,/6/
</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 expenses allocated from The U.S. Large Company Series of The DFA
Investment Trust Company of 0.13%.
/5/For the period from October 1, 1995 through May 31, 1996.
/6See/footnotes to the financial statements of The DFA Investment Trust Company
for the year ended November 30, 1996 and the period ended September 30, 1997.
20.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A 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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
AT BEGINNING
OF PERIOD $ 15.10 $ 13.73 $ 11.98 $ 12.42 $ 11.53 $10.82 $ 9.13 $10.00
------- ------- ------- ------- ------- ------ ------ ------
Income from
investment
operations
Net investment
income 0.39 0.40 0.43 0.32 0.30 0.34 0.38 0.12
Net realized
gain (loss) on
investments 3.68 1.49 1.88 (0.38) 1.14 1.22 1.77 (0.88)
------- ------- ------- ------- ------- ------ ------ ------
Total from
investment
operations 4.07 1.89 2.31 (0.06) 1.44 1.56 2.15 (0.76)
------- ------- ------- ------- ------- ------ ------ ------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.43) (0.39) (0.42) (0.32) (0.29) (0.39) (0.34) (0.11)
Distributions
from net
realized
capital gains (0.52) (0.13) (0.14) (0.06) (0.26) (0.46) (0.12) - -
------- ------- ------- ------- ------- ------ ------ ------
Total
distributions (0.95) (0.52) (0.56) (0.38) (0.55) (0.85) (0.46) (0.11)
------- ------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE
AT END OF PERIOD $ 18.22 $ 15.10 $ 13.73 $ 11.98 $ 12.42 $11.53 $10.82 $ 9.13
======= ======= ======= ======= ======= ====== ====== ======
Total return 27.93%/3/ 13.98%/3/ 19.86%/3/ (0.50)%/3/ 12.80%/3/ 15.17%/3/ 24.04%/3/ (7.64)%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $87,202 $71,899 $67,892 $62,307 $39,529 $8,481 $4,265 $3,960
Ratios of
expenses to
average
net assets
After
advisory/administration
fee waivers 1.24% 1.19% 1.07% 1.05% 0.91% 0.95% 1.15% 1.15%/2/
Before
advisory/administration
fee waivers 1.30% 1.30% 1.28% 1.31% 1.09% 1.51% 1.86% 1.90%/2/
Ratios of net
investment
income
to average net
assets
After
advisory/administration
fee waivers 2.58% 2.75% 3.38% 2.77% 2.79% 3.28% 3.70% 3.07%/2/
Before
advisory/administration
fee waivers 2.52% 2.65% 3.16% 2.51% 2.61% 2.72% 2.99% 2.32%/2/
PORTFOLIO
TURNOVER RATE 173% 275% 154% 54% 32% 36% 45% 37%
AVERAGE
COMMISSION
RATE/4/ $0.0364 $0.0599 N/A N/A N/A N/A N/A N/A
<CAPTION>
INVESTOR B INVESTOR C
SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 10/03/94/1/ 12/20/96/1/
ENDED ENDED THROUGH THROUGH
9/30/97 9/30/96 9/30/95 9/30/97
<S> <C> <C> <C> <C>
NET ASSET VALUE
AT BEGINNING
OF PERIOD $ 15.04 $ 13.69 $11.95 $ 15.62
----------- ----------- ------------- -------------
Income from
investment
operations
Net investment
income 0.31 0.31 0.33 0.28
Net realized
gain (loss) on
investments 3.61 1.47 1.93 2.54
----------- ----------- ------------- -------------
Total from
investment
operations 3.92 1.78 2.26 2.82
----------- ----------- ------------- -------------
LESS
DISTRIBUTIONS
Distributions
from net
investment
income (0.31) (0.30) (0.38) (0.31)
Distributions
from net
realized
capital gains (0.52) (0.13) (0.14) - -
----------- ----------- ------------- -------------
Total
distributions (0.83) (0.43) (0.52) (0.31)
----------- ----------- ------------- -------------
NET ASSET VALUE
AT END OF PERIOD $ 18.13 $ 15.04 $13.69 $ 18.13
=========== =========== ============= =============
Total return 26.95%/3/ 13.14%/3/ 19.38%/3/ 23.95%/3/
RATIOS/SUPPLEMENTAL
DATA
Net assets at
end of period
(in thousands) $23,455 $ 7,333 $3,124 $ 87
Ratios of
expenses to
average
net assets
After
advisory/administration
fee waivers 2.05% 1.98% 1.72%/2/ 2.03%/2/
Before
advisory/administration
fee waivers 2.11% 2.09% 1.94%/2/ 2.09%/2/
Ratios of net
investment
income
to average net
assets
After
advisory/administration
fee waivers 1.78% 1.99% 2.71%/2/ 1.90%/2/
Before
advisory/administration
fee waivers 1.72% 1.88% 2.49%/2/ 1.84%/2/
PORTFOLIO
TURNOVER RATE 173% 275% 154% 173%
AVERAGE
COMMISSION
RATE/4/ $0.0364 $0.0599 N/A $0.0364
</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/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
21.
<PAGE>
- -------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- -------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 portfolios and has
been structured to include many different investment styles
so that investors may participate across multiple disci-
plines in order to seek their long-term financial goals.
The Equity Portfolios of BLACKROCK FUNDS consist of thirteen
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the equity sec-
tor. 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 var-
ious product options in the way that most closely fits the
investor's investment goals and sentiments.
INVESTMENT
OBJECTIVES Each of the twelve BlackRock Equity Portfolios described
herein seeks to provide long-term Capital Appreciation.
The Select Equity, Large Cap Value Equity and Mid-Cap Value
Equity Portfolios pursue a secondary objective of Current
Income from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described on the following two
pages. No assurance can be given that a Portfolio will
achieve its investment objective.
22.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERFORMANCE
BLACKROCK FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
Large Cap Value Pursues equity Stocks with Russell 1000
Equity securities (defined as price/earnings and Value Index
common stocks or price/book ratios at time
securities convertible of purchase below average
into common stocks) for benchmark and
which the sub-adviser capitalization in excess
believes are of $5 billion.
undervalued. A
security's earnings
trend and its dividend
growth rate will also be
factors considered in
security selection.
Large Cap Growth Pursues stocks with Stocks with growth rate Russell 1000
Equity earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization in excess
adviser considers to of $5 billion.
have favorable and
above-average earnings
growth prospects.
Mid-Cap Pursues mid cap stocks Stocks with low Russell Midcap
Value Equity and sectors which the price/earnings, Value Index
sub-adviser believes are price/book, price/cash
undervalued. A flow or price/sales
security's earnings ratios at the time of
trend and its dividend purchase relative to
growth rate will also be their respective sectors
factors considered in or the benchmark and
security selection. capitalization generally
between $1 billion and $5
billion.
Mid-Cap Growth Pursues mid cap stocks Stocks with growth rate Russell Midcap
Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization generally
adviser considers to between $1 billion and $5
have favorable and billion.
above-average earnings
growth prospects.
Small Cap Value Pursues small cap stocks Stocks with Russell 2000
Equity which the sub-adviser price/earnings and Value Index
believes are price/book ratios at time
undervalued. A of purchase below average
security's earnings for benchmark and
trend and its dividend capitalization below $1
growth rate will also be billion.
factors considered in
security selection.
Small Cap Growth Pursues small cap stocks Stocks with growth rate Russell 2000
Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
small cap stocks which capitalization below $1
the sub-adviser billion.
considers to have
favorable and above-
average earnings growth
prospects.
International Pursues non-dollar Portfolio assets are EAFE Index
Equity denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with
International Europe, price/earnings ratios
Australia and the Far below average for a
East Index ("EAFE"). security's home market or
Within this universe, a stock exchange.
value style of investing
is employed to select Diversification across
stocks which the sub- countries, industry
adviser believes are groups and companies with
undervalued. A investment at all times
security's earnings in at least three foreign
trend and its price countries.
momentum will also be
factors considered in
security selection. The
sub-adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
government policies
influencing business
conditions and the
outlook for currency
relationships.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
23.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERFORMANCE
BLACKROCK FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
International Pursues non-dollar Portfolio assets are MSCI Emerging
Emerging Markets denominated stocks of primarily invested in Markets Free
issuers in emerging stocks of emerging market Index
country markets issuers.
(generally any country
considered to be Stocks with
emerging or developing price/earnings ratios
by the World Bank, the below average for a
International Finance security's home market or
Corporation or the stock exchange.
United Nations). Within
this universe, a value Ordinarily, stocks of
style of investing is issuers in at least three
employed to select emerging markets will be
stocks which the sub- held.
adviser believes are
undervalued. The sub-
adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
government policies
influencing business
conditions and the
outlook for currency
relationships.
International Pursues non-dollar Invests primarily in Salomon Brothers
Small Cap Equity denominated stocks of international stocks with Extended Markets
small cap issuers in a capitalization below $1 World Ex-U.S. Index
countries included in billion. Emphasizes
the Salomon Brothers primarily stocks with
Extended Markets World price/earnings ratios
Ex-U.S. Index which the below average for such
sub-adviser expects to security's home market or
appreciate. In addition, stock exchange. Seeks
there may also be up to diversification across
20% exposure to stocks countries, industry
of issuers in emerging groups and companies with
market countries. Within investment at all times
this universe, a value in at least three foreign
style of investing is developed countries.
employed to select
stocks which the sub-
adviser believes are
undervalued, taking into
account the company's
earnings trend and its
price momentum. The sub-
adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
governmental policies
influencing business
conditions and the
outlook for currency
relationships.
Select Equity Combines value and Similar sector weightings S&P 500 Index
growth style as sub- as benchmark, with over-
adviser identifies or under-weighting in
market opportunity. particular securities
within those sectors.
Index Equity Invests all of its The Index Master S&P 500 Index
assets indirectly, Portfolio holds
through the U.S. Large substantially all the
Company Series (the stocks of the S&P 500
"Index Master Index in approximately
Portfolio") of The DFA the same proportions as
Investment Trust they are represented in
Company, in the stocks the Index.
of the S&P 500 Index
using a passive
investment style that
pursues the replication
of the S&P 500 Index
return.
Balanced Holds a blend of equity Maintains a minimum 25% S&P 500 and
and fixed income investment in fixed Salomon Broad
securities to deliver income senior securities. Investment
total return through Grade Index
capital appreciation and
current income.
Equity Portion: Combines Equity Portion:
value and growth style Similar sector weightings
as sub-adviser as benchmark, with over-
identifies market or under- weighting in
opportunity. particular securities
within those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation Dollar-denominated
and security selection investment grade bonds,
across a broad universe including U.S.
of fixed income Government, mortgage-
securities. backed, asset-backed and
corporate debt
securities.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
24.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
EQUITY SECURITIES. During normal market conditions each Portfolio, except the
Balanced Portfolio, will normally invest at least 80% of the value of its total
assets in equity securities. The Portfolios will invest primarily in equity se-
curities of U.S. issuers, except the International Equity, International Emerg-
ing Markets and International Small Cap Equity Portfolios, which will invest
primarily in foreign issuers. Equity securities include common stock and pre-
ferred stock (including convertible preferred stock); bonds, notes and deben-
tures convertible into common or preferred stock; stock purchase warrants and
rights; equity interests in trusts and partnerships; and depositary receipts.
ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may
invest in both sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar global instruments. ADRs typically are issued by an American bank
or trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR
and GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information con-
cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs,
and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if
such instruments were sponsored by the issuer. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write (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 Equity, Interna-
tional Emerging Markets and International Small Cap Equity Portfolios, 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) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular securi-
ties, securities indices, or the yield differential between two securities, or,
in the case of the International Equity, International Emerging Markets and In-
ternational Small Cap Equity Portfolios, foreign currencies, and may or may not
be listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. A Portfolio will not purchase put and call options when
the aggregate premiums on outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections af-
forded purchasers of listed options issued by the Options Clearing Corporation,
which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes is 5% or less of its net assets.
25.
<PAGE>
- -------------------------------------------------------------------------------
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset
an expected decrease in the value of its portfolio positions that might other-
wise result from a market decline or currency exchange fluctuation. A 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, 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)
a 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."
LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de-
termines that market conditions warrant, each Portfolio other than the Index
Master Portfolio may invest without limitation in high quality money market
instruments. The Portfolios may also invest in high quality money market in-
struments pending investment or to meet anticipated redemption requests. The
Balanced Portfolio may also invest in these securities in furtherance of its
investment objective. The Index Master Portfolio may invest a portion of its
assets, normally not more than 5% of its net assets, in certain short-term
fixed income obligations in order to maintain liquidity or to invest temporar-
ily uncommitted cash balances.
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, a 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 a Portfolio to possible loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the
Index Master Portfolio) may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These trans-
actions involve a commitment by a Portfolio to purchase or sell particular se-
curities with payment and delivery taking place at a future date (perhaps one
or two months later), and permit a Portfolio to lock in a price or yield on a
security it owns or intends to purchase, regardless of future changes in in-
terest 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
26.
<PAGE>
- --------------------------------------------------------------------------------
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.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from fi-
nancial 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
by each Portfolio through reverse repurchase agreements under which the Portfo-
lio sells portfolio securities to financial institutions such as banks and bro-
ker-dealers and agrees to repurchase them at a particular date and price. A
Portfolio may use the proceeds of reverse repurchase agreements to purchase
other securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase agree-
ment. The Index Master Portfolio does not intend to invest in reverse repur-
chase agreements. The Balanced Portfolio may utilize reverse repurchase agree-
ments when it is anticipated that the interest income to be earned from the in-
vestment of the proceeds of the transaction is greater than the interest ex-
pense of the transaction. This use of reverse repurchase agreements may be re-
garded as leveraging and, therefore, speculative. Reverse repurchase agreements
involve the risks that the interest income earned in the investment of the pro-
ceeds will be less than the interest expense, that the market value of the se-
curities sold by a Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase and that the securities may not be re-
turned to the Portfolio. During the time a reverse repurchase agreement is out-
standing, a Portfolio will maintain a segregated account with the Fund's custo-
dian containing cash, U.S. Government or other appropriate liquid securities
having a value at least equal to the repurchase price. A Portfolio's reverse
repurchase agreements, together with any other borrowings, will not exceed, in
the aggregate, 33 1/3% of the value of its total assets (33% in the case of the
Index Master Portfolio). In addition, the Balanced Portfolio may borrow up to
an additional 5% of its total assets for temporary purposes. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolios (other than
the Index Master Portfolio and the Balanced Portfolio) will not make any in-
vestments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) may invest in
securities issued by other investment companies which invest in short-term debt
securities and which seek to maintain a $1.00 net asset value per share. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (SPDRs) and shares of other investment
companies that are structured to seek a similar correlation to the performance
of the S&P 500 Index. Securities of other investment companies will be acquired
within limits prescribed by the Investment Company Act of 1940 (the "1940
Act"). As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained on a current basis equal in value to at least the market value of the
loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of
the value of its total assets. Securities loans involve risks of delay in re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly loss of rights in the collateral if the borrower of the securities becomes
insolvent.
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ILLIQUID SECURITIES. No Portfolio will invest more than 15% (10% with respect
to the Index Master Portfolio) of the value of its net assets in securities
that are illiquid. Variable and floating rate instruments that cannot be dis-
posed of within seven days, and repurchase agreements and time deposits that do
not provide for payment within seven days after notice, without taking a re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties which are not registered under the Securities Act of 1933 (the "1933 Act")
but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser that an adequate
trading market exists for the securities. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap
Growth Equity Portfolio, the Small Cap Value Equity Portfolio and the Interna-
tional Small Cap Equity Portfolio will invest at least 90% (and in any event at
least 65%) of their respective total assets in equity securities of smaller-
capitalized organizations (less than $1 billion at the time of purchase or,
with respect to the International Small Cap Equity Portfolio, $1.5 billion for
Japanese issuers). Similarly, the Mid-Cap Value Equity Portfolio and Mid-Cap
Growth Equity Portfolio will invest, under normal market conditions, at least
90% (and in any event at least 65%) of their respective total assets in equity
securities of medium-capitalized organizations (between $1 billion and $5 bil-
lion at the time of purchase). These organizations will normally have more lim-
ited product lines, markets and financial resources and will be dependent upon
a more limited management group than larger capitalized companies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Index Master Portfolio operates
as an index portfolio and, therefore, is not actively managed (through the use
of economic, financial or market analysis), and adverse performance will ordi-
narily not result in the elimination of a stock from the Portfolio. The Portfo-
lio will remain fully invested in common stocks even when stock prices are gen-
erally falling. Ordinarily, portfolio securities will not be sold except to re-
flect additions or deletions of the stocks that comprise the S&P 500 Index, in-
cluding mergers, reorganizations and similar transactions and, to the extent
necessary, to provide cash to pay redemptions of the Portfolio's shares. The
investment performance of the Index Master Portfolio and the Index Equity Port-
folio is expected to approximate the investment performance of the S&P 500 In-
dex, which tends to be cyclical in nature, reflecting periods when stock prices
generally rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio or the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash. S&P has no obligation or liability in connection with the ad-
ministration, marketing or trading of the Index Equity Portfolio or Index Mas-
ter Portfolio.
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* "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund and The DFA Investment Trust Company.
28.
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S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio, the International Emerging Markets Portfolio and the Interna-
tional Small Cap Equity Portfolio (the "International Portfolios") will invest
at least 90% (and in any event at least 65%) of their total assets in equity
securities of foreign issuers. Investing in foreign securities involves consid-
erations not typically associated with investing in securities of companies or-
ganized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a Portfolio that invests in foreign securities as measured in U.S. dollars
will be affected favorably or unfavorably by changes in exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitation on the removal of funds or as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations.
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Portfolios can be expected to be higher
than those of Portfolios investing primarily in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such
as the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign mar-
kets and additional costs arising from delays in settlements of transactions
involving foreign securities.
As stated, the International Emerging Markets Portfolio will invest its assets
in countries with emerging economies or securities markets. These countries may
include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub-
lic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malay-
sia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Af-
rica, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and
Zimbabwe. Political and economic structures in many of these countries may be
undergoing significant evolution and rapid development, and these countries may
lack the social, political and economic stability characteristic of more devel-
oped countries. Some of these countries may have in the past failed to recog-
nize private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value
of investments in these countries and the availability to a Portfolio of addi-
tional investments in emerging market countries. The small size and inexperi-
ence of the securities markets in certain of these countries and the limited
volume of trading in securities in these countries may make investments in the
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countries illiquid and more volatile than investments in Japan or most Western
European countries. There may be little financial or accounting information
available with respect to issuers located in certain emerging market countries,
and it may be difficult to assess the value or prospects of an investment in
such issuers.
The International Equity Portfolio invests primarily in equity securities of
issuers located in countries included in EAFE. Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United
Kingdom are currently included in EAFE. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Small Cap Equity Portfolio invests primarily in equity secu-
rities of issuers located in countries included in the Salomon Brothers Ex-
tended Markets World Ex-U.S. Index. Australia, Austria, Belgium, Canada, Den-
mark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Netherlands,
New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the
United Kingdom currently comprise the Salomon Index. From time to time the
Portfolio may invest more than 25% of its total assets in the securities of is-
suers located in Japan or the United Kingdom. As discussed above, Investments
of 25% or more of the International Small Cap Equity Portfolio's total assets
in Japan, the United Kingdom or any other country would 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 is-
suers in different countries.
The International Small Cap Equity Portfolio may also invest up to 20% of its
assets in countries with emerging economies or securities markets which, as
stated above, involves certain risks. These countries may include Argentina,
Brazil, Bulgaria, Chile, China, Colombia, The Czech Republic, Ecuador, Egypt,
Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia, Mexico, Morocco,
Peru, The Philippines, Poland, Romania, Russia, South Africa, South Korea, Tai-
wan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and Zimbabwe.
The International Portfolios may (but are not required to) use forward foreign
currency exchange contracts to hedge against movements in the value of foreign
currencies (including the European Currency Unit) relative to the U.S. dollar
in connection with specific portfolio transactions or with respect to portfolio
positions. 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 a Portfolio
to establish a rate of exchange for a future point in time.
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guaranteed investment contracts (GICs), ob-
ligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities and state and local municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups as-
signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-
ings Group ("S&P") or another nationally recognized statistical rating organi-
zation. If unrated, the securities will be determined at the time of purchase
to be of comparable quality by the sub-adviser. Securities rated "Baa" by
Moody's or "BBB" by S&P, respectively, are generally considered to be invest-
ment grade although they have speculative characteristics. If a fixed income
security is reduced below Baa by Moody's or BBB by S&P, the Portfolio's sub-
adviser will dispose of the security in an orderly fashion as soon as practica-
ble. Investments in securities of foreign issuers, which present additional in-
vestment considerations as described above under "International Portfolios,"
will be limited to 5% of the Portfolio's total assets.
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The Balanced Portfolio may make significant investments in residential and com-
mercial mortgage-related and other asset-backed securities (i.e., securities
backed by home equity loans, installment sale contracts, credit card receiv-
ables or other assets) issued by governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, including guaranteed mortgage pass-through certificates, which provide
the holder with a pro rata interest in the underlying mortgages, adjustable
rate mortgage-related securities ("ARMs") and collateralized mortgage obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers of CMOs frequently elect to be taxed as a pass-through entity known as
real estate mortgage investment conduits, or REMICs. CMOs are issued in multi-
ple classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in many ways. In most cases, however, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest at a specified rate until other specified classes have been retired and
are converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws which give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may be prepaid at any time be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
The average life of a mortgage-related instrument, in particular, is likely to
be substantially less than the original maturity of the mortgage pools under-
lying the securities as the result of scheduled principal payments and mortgage
prepayments. In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans and is less likely to ex-
perience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally be at lower rates than the rates that were carried by the obligations that
have been prepaid. Because of these and other reasons, an asset-backed
security's total return and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if
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PNC Mortgage Securities Corp. succeeded to rights and duties of Sears Mort-
gage) or mortgage-related securities containing loans or mortgages originated
by PNC Bank, National Association ("PNC Bank") or its affiliates. It is possi-
ble that, under some circumstances, PNC Mortgage Securities Corp. or its af-
filiates 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.
The Balanced Fund may also purchase obligations issued or guaranteed by the
U.S. Government and U.S. Government agencies and instrumentalities. Obliga-
tions of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury. Others are sup-
ported by the right of the issuer to borrow from the U.S. Treasury; and still
others are supported only by the credit of the agency or instrumentality issu-
ing the obligation. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. Certain U.S. Treasury and agency securities
may be held by trusts that issue participation certificates (such as Treasury
income growth receipts ("TIGRs") and certificates of accrual on Treasury cer-
tificates ("CATs")). The Balanced Portfolio may purchase these certificates,
as well as Treasury receipts and other stripped securities, which represent
beneficial ownership interests in either future interest payments or the fu-
ture principal payments on U.S. Government obligations. These instruments are
issued at a discount to their "face value" and may (particularly in the case
of stripped mortgage-backed securities) exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount
debt obligations that do not make periodic interest payments) and state and
local government obligations. Zero-coupon bonds are subject to greater market
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. Municipal obligations
may be purchased when the Portfolio's sub-adviser believes that their return,
on a pre-tax basis, will be comparable to the returns of other permitted in-
vestments. Dividends paid by the Portfolio that are derived from interest on
municipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to
enhance current income, the Balanced 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 Port-
folio 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, the Portfolio will not be en-
titled to receive interest and principal payments on the securities sold. Pro-
ceeds of the sale will be invested in additional instruments for the Portfo-
lio, and the income from these investments will generate income for the Port-
folio. 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 per-
formance of the Portfolio compared with what the performance would have been
without the use of dollar rolls. At the time that the Portfolio enters into a
dollar roll transaction, it will place in a segregated account maintained with
its custodian cash, U.S. Government securities or other liquid securities hav-
ing a value equal to the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure that its value is maintained.
The Portfolio's dollar rolls, together with its reverse repurchase agreements
and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value
of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to correctly predict interest
rates and prepayments. There is no assurance that dollar rolls can be success-
fully employed.
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The Balanced Portfolio may enter into interest rate swaps and may purchase or
sell interest rate caps and floors. The Portfolio may enter into these transac-
tions primarily to preserve a return or spread on a particular investment or
portion of its holdings, as a duration management technique or to protect
against an increase in the price of securities the Portfolio anticipates pur-
chasing at a later date. The Portfolio intends to use these transactions as a
hedge and not as a speculative investment.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. 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.
The Balanced Portfolio 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. Although the Portfolio does not
currently intend to do so under current market conditions, the Portfolio may
invest up to 10% of its total assets in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate of an inverse floater re-
sets in the opposite direction from the market rate of interest to which it is
indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in their market values.
Unrated variable and floating rate instruments will be comparable in quality to
investment grade securities as determined by the Portfolio's sub-advisers. The
absence of an active secondary market with respect to particular variable and
floating rate instruments, however, could make it difficult for the Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
The Portfolio may only make short sales of securities "against-the-box." A
short sale is a transaction in which the Portfolio sells a security it does not
own in anticipation that the market price of that security will decline. The
Portfolio 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 port-
folio 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,"
the Portfolio forgoes an opportunity for capital appreciation in the security.
The market value of the Balanced Portfolio's investments in fixed income secu-
rities will change in response to changes in interest rates and the relative
financial strength of each issuer. During periods of falling interest rates,
the values of long-term fixed income securities generally rise. Conversely,
during periods of rising interest rates the values of such securities generally
decline. Changes in the financial strength of an issuer or changes in the rat-
ings of any particular security may also affect the value of these investments.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the International Small Cap Equity Port-
folio will not exceed 100%. The past portfolio turnover rates of the other
Portfolios are set forth above under "What Are The Portfolios' Financial High-
lights?" A Portfolio's annual portfolio turnover rate will not be a factor pre-
venting a sale or purchase when the adviser or sub-adviser believes investment
considerations warrant such sale or purchase. Portfolio turnover may vary
greatly from year to year as well as within a particular year. High portfolio
turnover rates (i.e. 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.
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WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
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A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
change to a Portfolio's investment objective. The investment objective of the
Index Master Portfolio may not be changed without the approval of shareholders
of that Portfolio. No assurance can be provided that a Portfolio will achieve
its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of a Portfolio's total assets may be invested without regard
to this 5% limitation;
(2) subject to the foregoing 25% exception (other than with respect to the In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets
(33% of net assets in the case of the Index Master Portfolio) at the time
of such borrowing.
These investment limitations are applied at the time investment securities are
purchased. Notwithstanding the investment limitations, the Index Equity Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions as that Portfolio.
34.
<PAGE>
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of the Fund and of The DFA Investment
Trust Company (in which the assets of the Fund's Index Equity
Portfolio are invested) are managed under the direction of
their separate Boards of Trustees. The following persons cur-
rently serve as trustees of BlackRock Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Global Wireless.
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 both the Fund
and The DFA Investment Trust Company.
ADVISER AND
SUB-ADVISERS The Adviser to BlackRock Funds is BlackRock, Inc., except with
respect to the Index Equity Portfolio. Each of the Portfolios
within the BlackRock Fund family (except the Index Equity Port-
folio) is managed by a specialized portfolio manager who is a
member of one of BlackRock, Inc.'s portfolio management affili-
ates.
As adviser, BlackRock, Inc. is responsible for the overall in-
vestment management of the Portfolios. The sub-advisers are re-
sponsible for the day-to-day management of the Portfolios, and
generally make all purchase and sale investment decisions for
the Portfolios. The sub-advisers also provide research and
credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-dollar
fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
Provident Capital Management, Inc. ("PCM"), which has its pri-
mary offices at 1600 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103, acts as sub-adviser to the Large Cap Value
Equity, Mid-Cap Value Equity, Small Cap Value Equity and Select
Equity Portfolios. PNC Equity Advisors Company ("PEAC"), which
has its primary offices at 1600 Market Street, 27th Floor,
Philadelphia, Pennsylvania 19103, acts as sub-adviser to the
Large Cap Growth Equity, Mid-Cap Growth Equity and Small Cap
Growth Equity Portfolios. CastleInternational Asset Management
Limited, which has its primary offices at 7 Castle Street, Ed-
inburgh, Scotland, EH2 3AH, acts as sub-adviser to the Interna-
tional Equity, International Emerging Markets and International
Small Cap Equity Portfolios. BlackRock Financial Management,
Inc. ("BlackRock"), which has its primary offices at 345 Park
Avenue, New York, New York 10154, and PCM act as sub-advisers
to the Balanced Portfolio.
35.
<PAGE>
- --------------------------------------------------------------------------------
The Portfolios (other than the Index Equity Portfolio) and
their portfolio managers are as follows:
<TABLE>
<CAPTION>
BLACKROCK PORTFOLIO PORTFOLIO MANAGER
------------------- -----------------
<C> <S>
Large Cap Value Equity Daniel B. Eagan; portfolio manager with sub-adviser since
1995; director of investment strategy at BlackRock, Inc.
during 1994 and 1995; prior to 1994, served as senior
research consultant for Mercer Investment Consulting;
Portfolio Manager since January 1997.
Large Cap Growth Equity R. Andrew Damm; investment manager with sub-adviser since
1997; senior investment strategist with BlackRock, Inc.
since 1995; portfolio manager with PNC Bank from 1988 to
1995; Mr. Damm has participated in the management of the
Portfolio since 1996 and has been designated Portfolio
manager since September 1997.
Mid-Cap Value Equity Christian K. Stadlinger; Vice President of sub-adviser since
July 1996; prior to joining sub-adviser, Portfolio Manager
and Research Analyst with Morgan Stanley Asset Management;
Portfolio co-manager since inception.
Daniel B. Eagan (see above).
Portfolio co-manager since its inception.
Mid-Cap Growth Equity William C. McVail; investment manager with sub-adviser since
1994; prior to joining sub-adviser, equity and fixed income
analyst with PNC Bank; Portfolio co-manager since its
inception.
William J. Wykle; investment manager with sub-adviser since
1995; investment manager with PNC Bank, National Association
since 1986; Portfolio co-manager since its inception.
Small Cap Value Equity Christian K. Stadlinger; Vice President of sub-adviser since
July 1996; prior to joining sub-adviser, Portfolio Manager
and Research Analyst with Morgan Stanley Asset Management;
Portfolio manager since July 1996.
Small Cap Growth Equity William J. Wykle (see above); Portfolio co-manager since its
inception.
William C. McVail; (see above); Portfolio co-manager since
inception.
International Equity Gordon Anderson; Managing and Investment Director with sub-
adviser since 1996; prior to joining sub-adviser, Investment
Director of Dunedin Fund Managers Ltd.; Portfolio manager
since 1996.
International Emerging Euan Rae; Senior Investment Manager with sub-adviser since
Markets 1996; prior to joining sub-adviser, Head of Emerging Markets
at Dunedin Fund Managers Ltd. and Investment Manager with
Edinburgh Fund Managers; Portfolio manager since 1996.
International Small Cap Equity Peter J. Tait; Director and Global Strategist of sub-adviser
since 1996. Director and Head of Continental European desk
and Dunedin Fund Managers Ltd. from 1990 to 1996. Portfolio
manager since its inception.
Select Equity Daniel B. Eagan (see above); Portfolio manager since 1995.
Balanced R. Andrew Damm; senior investment strategist with BlackRock,
Inc. since 1995; portfolio manager with PNC Bank from 1988
to 1995; Portfolio co-manager since 1996.
Robert S. Kapito; Vice Chairman of BlackRock since 1988;
Portfolio co-manager since 1995.
Keith T. Anderson; Managing Director and co-chair of
Portfolio Management Group and Investment Strategy Committee
of BlackRock since 1988; Portfolio co-manager since 1995.
</TABLE>
36.
<PAGE>
- --------------------------------------------------------------------------------
BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) 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. BlackRock, Inc.
is an indirect wholly-owned subsidiary of PNC Bank Corp., a
multi-bank holding company.
For their investment advisory and sub-advisory services, Black-
Rock, Inc. and the Portfolios' sub-advisers are entitled to
fees, computed daily on a portfolio-by-portfolio basis and pay-
able monthly, at the maximum annual rates set forth below. As
stated under "What Are the Expenses of the Portfolios?", with
respect to certain Portfolios, BlackRock, Inc. and the sub-ad-
visers intend to waive a portion of their fees during the cur-
rent fiscal year. All sub-advisory fees are paid by BlackRock,
Inc. and do not represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO EXCEPT
THE INDEX EQUITY, MID-CAP VALUE EQUITY, MID-CAP GROWTH EQUITY
AND THE INTERNATIONAL PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .550% .400%
$1 billion -- $2 billion .500 .350
$2 billion -- $3 billion .475 .325
greater than $3 billion .450 .300
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP VALUE
EQUITY AND
MID-CAP GROWTH EQUITY PORTFOLIOS (BEFORE WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .800% .650%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .500
greater than $3 billion .625 .475
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL EQUITY PORTFOLIO (BEFORE WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .750% .600%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .525
greater than $3 billion .650 .500
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE
INTERNATIONAL EMERGING MARKETS PORTFOLIO (BEFORE WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 .950
</TABLE>
37.
<PAGE>
- --------------------------------------------------------------------------------
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
SMALL CAP EQUITY PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion 1.00% .85%
$1 billion -- $2 billion .95 .80
$2 billion -- $3 billion .90 .75
greater than $3 billion .85 .70
</TABLE>
Although the advisory fee rates payable by the International
Emerging Markets and International Small Cap Equity Portfo-
lios are higher than the rates payable by mutual funds in-
vesting in domestic securities, the Fund believes they are
comparable to the rates paid by many other funds with similar
investment objectives and policies and is appropriate for the
Portfolio in light of its investment objective and policies.
For their last fiscal year the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a
percentage of average daily net assets) after voluntary fee
waivers: Large Cap Value Equity Portfolio, 48%; Large Cap
Growth Equity Portfolio, .52%; Mid-Cap Value Equity Portfo-
lio, .79%; Mid-Cap Growth Equity Portfolio, .79%; Small Cap
Value Equity Portfolio, .55%; Small Cap Growth Equity Portfo-
lio, .54%; International Equity Portfolio, .66%; Interna-
tional Emerging Markets Portfolio, 1.16%; Select Equity Port-
folio, .52%; and Balanced Portfolio, .52%.
The Portfolios' sub-advisers strive to achieve best execution
on all transactions. Infrequently, brokerage transactions for
the Portfolios may be directed to registered broker/dealers
who have entered into dealer agreements with the Fund's dis-
tributor.
ADVISER TO Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX MASTER Avenue, 11th Floor, Santa Monica, CA 90401, serves as invest-
PORTFOLIO ment adviser to the Index Master Portfolio.
DFA was organized in May 1981 and is engaged in the business
of providing investment management services to institutional
investors. DFA's assets under management totalled approxi-
mately $27 billion at November 30, 1997. David G. Booth and
Rex A. Sinquefield, both of whom are trustees and officers of
The DFA Investment Trust Company and directors, officers and
shareholders of DFA, may be deemed controlling persons of
DFA.
Investment decisions for the Index Master Portfolio are made
by the Investment Committee of DFA, which meets on a regular
basis and also as needed to consider investment issues. The
Investment Committee is composed of certain officers and di-
rectors of DFA who are elected annually. DFA provides the In-
dex Master Portfolio with a trading department and selects
brokers and dealers to effect securities transactions.
For the investment advisory services provided to the Index
Master Portfolio under the advisory agreement, DFA is enti-
tled to receive a fee at the annual rate of .025% of the In-
dex Master Portfolio's average daily net assets. For the In-
dex Master Portfolio's fiscal year ended November 30, 1997,
DFA received a monthly fee for its investment advisory serv-
ices which, on an annual basis, equaled .025% of the Index
Master Portfolio's net assets.
38.
<PAGE>
- --------------------------------------------------------------------------------
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors,
Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad-
ministrators. BlackRock, Inc. and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub-
sidiary 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. 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 BDI 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 av-
erage daily net assets of each Portfolio in excess of $1 bil-
lion 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 al-
located 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 Portfo-
lio. PFPC serves as the administrative services, dividend dis-
bursing and transfer agent to the Index Master Portfolio, for
which PFPC is entitled to compensation at the annual rate of
.015% of the Index Master Portfolio's net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER
AGENT, PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING lios' custodian and PFPC, whose principal offices are located
AGENT AND at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN their transfer agent and dividend disbursing agent.
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"),
PLAN Investor Shares of the Portfolios bear the expense of payments
("distribution fees") made to BDI, 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 asset value of each Portfolio's outstand-
ing Investor B and Investor C Shares. Payments under the Plan
are not tied directly to out-of-pocket expenses and therefore
may be used by the recipients as they choose (for example, to
defray their overhead expenses). The Plan also permits the Dis-
tributor, 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. For further information, see "In-
vestment Advisory, Administration, Distribution and Servicing
Arrangements" in the Statement of Additional Information.
39.
<PAGE>
- --------------------------------------------------------------------------------
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 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 Portfo-
lios 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 informa-
tion to existing shareholders, expenses relating to share-
holder reports, shareholder meetings and proxy solicitations,
insurance premiums, the expense of independent pricing serv-
ices, and other expenses which are not expressly assumed by
BlackRock, Inc. or the Fund's service providers under their
agreements with the Fund. Any general expenses of the Fund
that do not belong to a particular investment portfolio will
be allocated among all investment portfolios by or under the
direction of the Board of Trustees in a manner the Board de-
termines to be fair and equitable.
40.
<PAGE>
- --------------------------------------------------------------------------------
WHAT PRICING OPTIONS ARE AVAILABLE TO INVESTORS?
- --------------------------------------------------------------------------------
The Equity Portfolios of BlackRock Funds offer different pric-
ing options to investors in the form of different share clas-
ses. 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 BlackRock Funds fam-
ily
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 BlackRock Funds fam-
ily
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 BlackRock Funds fam-
ily
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:
LARGE CAP VALUE EQUITY , LARGE CAP GROWTH EQUITY, SMALL CAP VALUE EQUITY,
SMALL CAP GROWTH EQUITY, MID-CAP VALUE EQUITY, MID-CAP GROWTH EQUITY, SELECT
EQUITY AND BALANCED PORTFOLIOS:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 4.50% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
INTERNATIONAL EQUITY, INTERNATIONAL EMERGING MARKETS AND INTERNATIONAL SMALL
CAP EQUITY PORTFOLIOS:
<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)
INDEX EQUITY PORTFOLIO
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 3.00% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within 12
shares are redeemed) months of purchase)
</TABLE>
* The Portfolios do not expect to incur 12b-1 fees in excess of .005% with
respect to Investor A Shares during the current fiscal year.
Investors wishing to purchase shares of the Portfolios of the Fund 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 Pur-
chased?"
42.
<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 a Port-
folio's Investor B Shares and Investor C Shares will exceed the expense of the
maximum initial sales charge on Investor A Shares. For example, if net asset
value remains constant, the Investor B Shares' and Investor C Shares' aggregate
distribution fees would be equal to the Investor A Shares' initial maximum
sales charge from four to seven years after purchase (depending on the Portfo-
lio). Thereafter, Investor B Shares and Investor C Shares would bear higher ag-
gregate expenses. Investor B and Investor C shareholders, however, enjoy the
benefit of permitting all their dollars to work from the time the investments
are made. Any positive investment return on the additional invested amount
would partially or wholly offset the higher annual expenses borne by Investor B
Shares and Investor C Shares.
Because the Portfolios' future returns cannot be predicted, however, there can
be no assurance that such a positive return will be achieved.
At the end of eight years after the date of purchase, Investor B Shares will
convert automatically to Investor A Shares, based on the relative net asset
values of shares of each class. Investor B Shares acquired through reinvestment
of dividends or distributions are also converted at the earlier of these
dates--eight years after the reinvestment date or the date of conversion of the
most recently purchased Investor B Shares that were not acquired through rein-
vestment. Investor C Shares have no conversion feature.
Unless a sales charge waiver applies, Investor B shareholders pay a contingent
deferred sales charge if they redeem during the first six years after purchase,
and Investor C shareholders pay a contingent deferred sales charge if they re-
deem during the first twelve months after purchase. Investors expecting to re-
deem during these periods should consider the cost of the applicable contingent
deferred sales charge in addition to the aggregate annual Investor B or In-
vestor C distribution fees, as compared with the cost of the initial sales
charges applicable to the Investor A Shares.
Investor B Shares of the Portfolios purchased on or before January 12, 1996 are
subject to a CDSC of 4.50% of the lesser of the original purchase price or the
net asset value of Investor B Shares at the time of redemption. This deferred
sales charge is reduced for shares held more than one year. Investor B Shares
of a Portfolio purchased on or before January 12, 1996 convert to Investor A
Shares of the Portfolio at the end of six years after purchase. For more infor-
mation about Investor B Shares purchased on or before January 12, 1996 and the
deferred sales charge payable on their redemption, call PFPC at (800) 441-7762.
REDUCED SALES CHARGES. Because of reductions in the front-end sales charge for
purchases of Investor A Shares aggregating $25,000 or more, it may be advanta-
geous for investors 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>
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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-advisers, 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 may be purchased through brokers which have
entered into dealer agreements with the Distributor. Purchase orders received
by a broker and transmitted to the transfer agent before the close of regular
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on a
Business Day will be effected at the net asset value determined that day, plus
any applicable sales charge. Payment for an order may be made by the broker in
Federal funds or other funds immediately available to the Portfolios' custodian
no later than 4:00 p.m. (Eastern time) on the third Business Day following re-
ceipt of the purchase order.
It is the responsibility of brokers to transmit purchase orders and payment on
a timely basis. If payment is not received within the period described above,
the order will be canceled, notice thereof will be given, and the broker and
its customers will be responsible for any loss to the Fund or its shareholders.
Orders of less than $500 may be mailed by a broker to the transfer agent.
PURCHASES THROUGH THE TRANSFER AGENT. Investors may also purchase Investor
Shares by completing and signing the Account Application Form and mailing it to
the transfer agent, together with a check in at least the minimum initial pur-
chase amount payable to BlackRock Funds. The Fund does not accept third party
checks for initial or subsequent investments. 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 of the Fund are sold on a
continuous basis by BDI as the Distributor. BDI 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 Port-
folio may, in the discretion of the Fund's investment adviser, be made in the
form of securities that are permissible investments for that Portfolio. The
Fund reserves 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 any Portfolio at any time.
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 BlackRock Funds
c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the con-
tingent deferred sales charge, if applicable, there is no charge for a redemp-
tion. Shareholders may also place redemption requests through a broker or other
institution, which may charge a fee for this service.
WHEN REDEEMING INVESTOR SHARES IN THE PORTFOLIOS, SHAREHOLDERS SHOULD INDICATE
WHETHER THEY ARE REDEEMING INVESTOR A SHARES, INVESTOR B SHARES OR INVESTOR C
SHARES. If a redeeming shareholder owns both Investor A Shares and Investor B
Shares or Investor C Shares in the same Portfolio, the Investor A Shares will
be redeemed first unless the shareholder indicates otherwise. If a redeeming
shareholder owns both Investor B Shares and Investor C Shares in the same Port-
folio, the redemption order will be processed to minimize the amount of the
contingent deferred sales charge that will be charged unless the shareholder
indicates otherwise.
Except as noted below, a request for redemption must be signed by all persons
in whose names the shares are registered. Signatures must conform exactly to
the account registration. If the proceeds of the redemption would exceed
$25,000, or if the proceeds are not to be paid to the record owner at the rec-
ord address, or if the shareholder is a corporation, partnership, trust or fi-
duciary, signature(s) must be guaranteed by any eligible guarantor institution.
Eligible guarantor institutions generally include banks, broker/dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding Investor A Share certificates
must send their certificates with the redemption request. Additional documen-
tary evidence of authority is required by PFPC in the event redemption is re-
quested by a corporation, partnership, trust, fiduciary, executor or adminis-
trator.
EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited
redemption, shares can be redeemed by telephone and the proceeds sent by check
to the shareholder or by Federal wire transfer to a single previously desig-
nated bank account. Once authorization is on file, PFPC will honor requests by
any person by telephone at (800) 441-7762 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 BlackRock 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
45.
<PAGE>
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loss, liability, cost or expense for acting upon telephone instructions rea-
sonably 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 any Portfolio at any time the net asset value of the account
in such Portfolio falls below the required minimum initial investment as the
result of a redemption or an exchange request. A shareholder will be notified
in writing that the value of the shareholder's account in a Portfolio is less
than the required amount and will be allowed 30 days to make additional in-
vestments 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 BlackRock Funds c/o PFPC, P.O. Box 8907, Wilmington,
Delaware 19899-8907. Proceeds from the redemption of shares will be reduced by
the amount of any applicable contingent deferred sales charge. Unless another
payment option is used as described above, payment for redeemed shares is nor-
mally made by check mailed within seven days after acceptance by PFPC of the
request and any other necessary documents in proper order. Payment may, howev-
er, be postponed or the right of redemption suspended as provided by the rules
of the SEC. If the shares to be redeemed have been recently purchased by
check, the Fund's transfer agent may delay the payment of redemption proceeds,
which may be a period of up to 15 days after the purchase date, pending a de-
termination that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Fund's responsi-
bilities under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
46.
<PAGE>
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WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
- --------------------------------------------------------------------------------
BLACKROCK FUNDS offers shareholders many special features which enable an in-
vestor to have greater investment flexibility as well as greater access to in-
formation 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 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 request
the exchange. During periods of substantial economic or market change, tele-
phone exchanges may be difficult to complete and shareholders may have to sub-
mit 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>
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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>
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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:
ALL PORTFOLIOS EXCEPT INTERNATIONAL PORTFOLIOS AND INDEX EQUITY
PORTFOLIO
<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 4.50% 4.71% 4.00%
$25,000 but less than
$50,000 4.25 4.44 3.75
$50,000 but less than
$100,000 4.00 4.17 3.50
$100,000 but less than
$250,000 3.50 3.63 3.00
$250,000 but less than
$500,000 2.50 2.56 2.00
$500,000 but less than
$1,000,000 1.50 1.52 1.25
$1 - 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
INTERNATIONAL EQUITY, INTERNATIONAL EMERGING MARKETS AND
INTERNATIONAL SMALL CAP EQUITY PORTFOLIOS
<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 - 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>
49.
<PAGE>
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INDEX EQUITY PORTFOLIO
<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 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 - 2 million 0.00 0.00 0.50
$2 - 3 million 0.00 0.00 0.45
$3 - 5 million 0.00 0.00 0.37
$5 - 10 million 0.00 0.00 0.31
$10 - 15 million 0.00 0.00 0.29
$15 - 20 million 0.00 0.00 0.28
$20 - 40 million 0.00 0.00 0.27
</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 as shown 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, BlackRock, Inc. 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 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 "Investment Advisory, Administration, Distribution and Servicing Arrange-
ments" 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 501(c)(3) of the Internal Revenue Code; (c) regis-
tered investment advisers, trust companies and bank trust departments exercis-
ing discretionary investment authority with respect to amounts to be invested
in a 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 bro-
ker-dealer or other financial institution. Investors who qualify for any of
these exemptions from the sales charge must purchase Investor A Shares.
50.
<PAGE>
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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 Portfolios aggregating less than $500,000 will be 1.00%. No sales charge
will apply to purchases by such Qualified Plans of Investor A Shares aggregat-
ing $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% (1.50% with respect
to the Index Equity 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 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 any of the Portfolios that are subject
to a front-end sales charge or the total amount of an investor's initial in-
vestment in such shares, less redemptions (whichever is greater) may be com-
bined with the amount of the investor's current purchase in determining the ap-
plicable sales charge. In order to receive the cumulative quantity reduction,
previous purchases of Investor A Shares must be called to the attention of PFPC
by the investor at the time of the current purchase.
REINVESTMENT PRIVILEGE. Upon redemption of Investor A Shares of a Portfolio (or
Investor A Shares of another non-money market portfolio of the Fund), a share-
holder has a one-time right, to be exercised within 60 days, to reinvest the
redemption proceeds without any sales charges. PFPC must be notified of the re-
investment in writing by the purchaser, or by his or her broker, at the time
purchase is made in order to eliminate a sales charge. An investor should con-
sult a tax adviser concerning the tax consequences of use of the reinvestment
privilege.
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
51.
<PAGE>
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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, BlackRock,
Inc. 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 In-
vestor 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, BlackRock, Inc. 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 purchase
date and the date the Investor B Shares are redeemed as set forth in the fol-
lowing chart:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
<S> <C>
Less than one 4.50%
More than one, but less than two 4.00
More than two, but less than three 3.50
More than three, but less than four 3.00
More than four, but less than five 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
More than seven, but less than eight 0.00
</TABLE>
PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the offering price or the net as-
set value of the Investor C Shares on the redemption date if redeemed within
twelve months after purchase. Dealers will 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, BlackRock,
Inc. 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 In-
vestor 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, BlackRock, Inc. and/or their affiliates may
provide to dealers in connection with the sale of shares.
52.
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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,
BlackRock, Inc. or its affiliates; (4) redemptions in connection with a share-
holder's death or disability (as defined in the Internal Revenue Code) subse-
quent to the purchase of Investor B Shares or Investor C Shares; (5) involun-
tary redemptions of Investor 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 Systematic Withdrawal Plan, subject to the limitations set
forth above under "What Are The Shareholder Features Of The Fund?--Systematic
Withdrawal Plan." In addition, no contingent deferred sales charge is charged
on Investor B Shares or Investor C Shares acquired through the reinvestment of
dividends or distributions. The Fund also waives the contingent deferred sales
charge on redemptions of Investor B Shares of the Portfolio purchased through
certain Qualified Plans participating in programs whose sponsors or administra-
tors have entered into arrangements with the Fund. For further information, see
"Purchase and Redemption Information" in the Statement of Additional Informa-
tion.
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.
53.
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HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for each class of Investor Shares of
each Portfolio as of the close of regular trading hours on the NYSE (currently
4:00 p.m. Eastern Time) on each Business Day by dividing the value of all secu-
rities and other assets owned by a Portfolio (including, for the Index Equity
Portfolio, all of its shares in the Index Master Portfolio) that are allocated
to a particular class of shares, less the liabilities charged to that class, by
the number of shares of the class that are outstanding. The net asset value per
share of the Index Master Portfolio is calculated as of the close of the NYSE
by dividing the total market value of its investments and other assets, less
any liabilities, by the total outstanding shares of the Index Master Portfolio.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees or, in the case of the Index Master Portfolio,
The DFA Investment Trust Company's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless a Portfolio's sub-adviser under the super-
vision of the Board of Trustees determines such method does not represent fair
value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Each Portfolio of the Fund will distribute substantially all of its net invest-
ment income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to in-
vestors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid not later than ten days after the
end of each quarter. Any net realized capital gains (including net short-term
capital gains) will be distributed by each Portfolio of the Fund at least annu-
ally. The period for which dividends are payable and the time for payment are
subject to change by the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional shares of the same class on which the distributions are paid, unless a
shareholder elects to receive distributions in cash. This election, or any rev-
ocation thereof, must be made in writing to PFPC, and will become effective
with respect to distributions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses of
the Index Master Portfolio. This net income, less the Index Equity Portfolio's
expenses incurred in operations, is the Index Equity Portfolio's net investment
income from which dividends are distributed as described above. The Index Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
54.
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HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
Each Portfolio of the Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). If a Portfolio qualifies, it generally will be relieved of Federal in-
come tax on amounts distributed to shareholders, but shareholders, unless oth-
erwise exempt, will pay income or capital gains taxes on distributions (except
distributions that are treated as a return of capital), whether the distribu-
tions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends received
deduction allowed to certain corporations only to the extent of the total qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum tax purposes. The dividends received deduction is not avail-
able for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange. Generally, shareholders may
include sales charges paid on the purchase of shares in their tax basis for the
purposes of determining gain or loss on a redemption, transfer or exchange of
such shares. However, if a shareholder exchanges the shares for shares of an-
other Portfolio within 90 days of purchase and is able to reduce the sales
charges applicable to the new shares (by virtue of the Fund's exchange privi-
lege), the amount equal to such reduction may not be included in the tax basis
of the shareholder's exchanged shares for the purpose of determining gain or
loss but may be included (subject to the same limitation) in the tax basis of
the new shares.
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities may be subject to foreign withholding taxes or other taxes. So long as
more than 50% of the value of a Portfolio's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Port-
folio may elect, for U.S. Federal income tax purposes, to treat certain foreign
taxes paid by it, including generally any withholding taxes and other foreign
income taxes, as paid by its shareholders. It is possible that the Interna-
tional Equity and International Emerging Markets Portfolios will make this
election in certain years. If a Portfolio makes the election, the amount of
such foreign taxes paid by the Portfolio will be included in its shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and subject to applicable limitations in the Code, each shareholder will
be entitled either (a) to credit a proportionate amount of such taxes against a
shareholder's U.S. Federal income tax liabilities, or (b) if a shareholder
itemizes deductions, to deduct such proportionate amounts from U.S. Federal
taxable income.
The Index Master Portfolio is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. The application of state and local income taxes to investments in
the Portfolios may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
55.
<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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight investment portfolios. Each Equity Portfolio of-
fers five separate classes of shares--Institutional Shares, Service Shares, In-
vestor A Shares, Investor B Shares and Investor C Shares. This prospectus re-
lates to Investor A Shares, Investor B Shares and Investor C Shares of the
twelve 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 a Portfo-
lio's Institutional Shares is expected to be higher than the performance of the
Portfolio's Service Shares, and the performance of both the Institutional
Shares and Service Shares of a Portfolio is expected to be higher than the per-
formance of the Portfolio's three classes of Investor Shares. The performance
of each class of Investor Shares may be different. The Fund offers various
services and privileges in connection with its Investor Shares that are not
generally offered in connection with its Institutional and Service Shares, in-
cluding an automatic investment plan and an automatic withdrawal plan. For fur-
ther 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of institutional and individual in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
MASTER-FEEDER STRUCTURE. The Index Equity Portfolio, unlike many other invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The Index Equity Portfolio
purchases shares of the Index Master Portfolio at net asset value. The net as-
set value of the Index Equity Portfolio responds to increases and decreases in
the value of the Index Master Portfolio's securities and to the expenses of the
Index Master Portfolio allocable to the Index Equity Portfolio (as well as its
own expenses). The Index Equity Portfolio may withdraw its investment in the
Index Master Portfolio at any time upon 30 days notice to the Index Master
Portfolio if the Board of Trustees of the Fund determines that it is in the
best interests of the Index Equity Portfolio to do so. Upon withdrawal, the
Board of Trustees would consider what action might be taken, including the in-
vestment of all of the assets of the Index Equity Portfolio in another pooled
investment entity having the same investment objective as the Index Equity
Portfolio or the hiring of an investment adviser to manage the Index Equity
Portfolio's assets in accordance with the investment policies described above
with respect to the Index Equity Portfolio.
56.
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The Index Master Portfolio is a separate series of The DFA Investment Trust
Company (the "Trust"), which is a business trust created under the laws of the
State of Delaware. The Index Equity Portfolio and other institutional investors
that may invest in the Index Master Portfolio from time to time (e.g. other in-
vestment companies) will each bear a share of all liabilities of the Index Mas-
ter Portfolio. Under the Delaware Business Trust Act, shareholders of the Index
Master Portfolio have the same limitation of personal liability as shareholders
of a Delaware corporation. Accordingly, Fund management believes that neither
the Index Equity Portfolio nor its shareholders will be adversely affected by
reason of the Index Equity Portfolio's investing in the Index Master Portfolio.
The shares of the Index Master Portfolio are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns may differ from those of the Index Equity Portfolio. While investment in
the Index Master Portfolio by other institutional investors offers potential
benefits to the Index Master Portfolio (and, indirectly, to the Index Equity
Portfolio), economies of scale and related expense reductions might not be
achieved. Also, if an institutional investor were to redeem its interest in the
Index Master Portfolio, the remaining investors in the Index Master Portfolio
could experience higher pro rata operating expenses and correspondingly lower
returns. In addition, institutional investors that have a greater pro rata own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act and (iii) on such other matters as the trustees of
the Trust may consider necessary or desirable. In addition, approval of the
shareholders of the Trust is required to adopt any amendments to the Agreement
and Declaration of Trust of the Trust which would adversely affect to a mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master Portfolio's
shareholders will also be asked to vote on any proposal to change a fundamental
investment policy (i.e. a policy that may be changed only with the approval of
shareholders) of the Index Master Portfolio. If a shareholder of the Index Mas-
ter Portfolio redeems its entire interest in the Portfolio or becomes bankrupt,
a majority in interest of the remaining shareholders in the Portfolio must vote
within 120 days to approve the continuing existence of the Index Master Portfo-
lio or the Portfolio will be liquidated.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity Portfolio would hold a meeting of its shareholders and would cast its
votes proportionately as instructed by Index Equity Portfolio shareholders.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees fails to approve a similar change in the investment objective of the Index
Equity Portfolio, the Index Equity Portfolio would be forced to withdraw its
investment in the Index Master Portfolio and either seek to invest its assets
in another registered investment company with the same investment objective as
the Index Equity Portfolio, which might not be possible, or retain an invest-
ment adviser to manage the Index Equity Portfolio's assets in accordance with
its own investment objective, possibly at increased cost. A withdrawal by the
Index Equity Portfolio of its investment in the Index Master Portfolio could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Index Equity Portfolio. Should such a distribution occur,
the Index Equity Portfolio could incur brokerage fees or other
57.
<PAGE>
- --------------------------------------------------------------------------------
transaction costs in converting such securities to cash in order to pay redemp-
tions. In addition, a distribution in kind to the Index Equity Portfolio could
result in a less diversified portfolio of investments and could adversely af-
fect the liquidity of the Portfolio.
The conversion of the Index Equity Portfolio into a feeder fund of the Index
Master Portfolio was approved by shareholders of the Index Equity Portfolio at
a meeting held on November 30, 1995. The policy of the Index Equity Portfolio,
and other similar investment companies, to invest their investable assets in
funds such as the Index Master Portfolio is a relatively recent development in
the mutual fund industry and, consequently, there is a lack of substantial ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Index Master Portfolio, please
contact DFA at (310) 395-8005.
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 of the Balanced Portfolio is computed by divid-
ing the net income allocated to that class during a 30-day (or one month) pe-
riod by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis.
The performance of a share class may be compared to the performance of other
mutual funds with similar investment objectives and to relevant indices, as
well as to ratings or rankings prepared by independent services or other finan-
cial or industry publications that monitor the performance of mutual funds. For
example, the performance of a class of shares may be compared to data prepared
by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. and Wei-
senberger Investment Company Service, and to the performance of the Dow Jones
Industrial Average, the "stocks, bonds and inflation Index" published annually
by Ibbotson Associates, the Lipper International Fund Index, the Lipper Small
Cap International Fund Index, the Lehman Government Corporate Bond Index and
the Financial Times World Stock Index, as well as the benchmarks attached to
this Prospectus. Performance information may also include evaluations of the
Portfolios and their share classes published by nationally recognized ranking
services, and information as reported in financial publications such as Busi-
ness 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.
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OTHER INFORMATION ON THE PERFORMANCE OF PNC EQUITY ADVISORS COMPANY
The tables below set forth performance information relating to the Small Cap
Growth Equity Portfolio and a small cap growth equity account (the "Small Cap
Account") that is also managed by PEAC for certain trust accounts and which has
investment objectives, policies, strategies and risks substantially similar to
those of the Small Cap Growth Equity Portfolio. The performance of the Small
Cap Account has been restated to reflect certain expenses as set forth in foot-
notes 2 and 3 to the table, but does not reflect the deduction of the sales
charges applicable to Investor Shares. These sales charges, if reflected, would
result in lower performance figures.
The performance data for the Small Cap Account is included to provide investors
with a longer performance record for PEAC in managing an account substantially
similar to the Small Cap Growth Equity Portfolio as measured against the Rus-
sell 2000 Growth Index. The Small Cap Account performance data does not repre-
sent the past, present or future performance of the Small Cap Growth Equity
Portfolio. Past performance is no guarantee of future results; investors should
not consider this performance data as an indication of future performance of
the Small Cap Growth Equity Portfolio or of PEAC. 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 either the Small Cap Growth Equity Portfolio or the Small Cap
Account may be worth more or less than their original cost at the time of re-
demption. The performance presentation is not audited.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
losses. All returns also reflect the brokerage costs borne by the Small Cap
Growth Equity Portfolio and the Small Cap Account for all periods presented.
The use of a different methodology to calculate performance could result in
different performance data.
The Small Cap Account was not subject to the same types of expenses and liquid-
ity requirements to which the Small Cap Growth Equity Portfolio is subject nor
to the diversification requirements, specific tax restrictions and investment
limitations imposed on the Small Cap Growth Equity Portfolio by the 1940 Act or
Subchapter M of the Internal Revenue Code. Consequently, the performance re-
sults for the Small Cap Account could have been adversely affected if the Small
Cap Account had been regulated as an investment company under the federal secu-
rities laws.
PEAC'S SMALL CAP GROWTH EQUITY PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
SMALL CAP GROWTH SMALL CAP GROWTH
EQUITY PORTFOLIO EQUITY PORTFOLIO
INVESTOR A INVESTOR A
YEAR OR PERIODS SHARES (LOAD SHARES (NO SMALL CAP RUSSELL 2000
ENDED 12/31/97 ADJUSTED)(/1/) LOAD)(/1/) ACCOUNT(/2/) GROWTH INDEX(3)
--------------- ---------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C>
One Year................ 3.75% 8.64% 6.77% 12.95%
Three Years............. 25.80% 27.76% 27.80% 18.09%
Five Years.............. N/A N/A 20.81% 12.74%
Ten Years............... N/A N/A 22.70% 13.49%
From Inception(/4/)..... 19.84% 21.13% 20.21% N/A
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP GROWTH
EQUITY PORTFOLIO SMALL CAP GROWTH
INVESTOR B SHARES EQUITY PORTFOLIO
YEAR OR PERIODS (LOAD INVESTOR B SHARES SMALL CAP RUSSELL 2000
ENDED 12/31/97 ADJUSTED)(/1/) (NO LOAD)(/1/) ACCOUNT(/5/) GROWTH INDEX(3)
--------------- ----------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
One Year................ 3.15% 8.01% 5.96% 12.95%
Three Years............. 25.61% 27.11% 26.82% 18.09%
Five Years.............. N/A N/A 19.88% 12.74%
Ten Years............... N/A N/A 21.76% 13.49%
From Inception(/4/)..... 19.85% 20.70% 19.28% N/A
</TABLE>
60.
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<TABLE>
<CAPTION>
SMALL CAP GROWTH SMALL CAP GROWTH
EQUITY PORTFOLIO EQUITY PORTFOLIO
INVESTOR C INVESTOR C
YEAR OR PERIODS SHARES (LOAD SHARES (NO SMALL CAP RUSSELL 2000
ENDED 12/31/97 ADJUSTED)(/1/) LOAD)(/1/) ACCOUNT(/5/) GROWTH INDEX(3)
--------------- ---------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C>
One Year................ 3.15% 8.01% 5.96% 12.95%
Three Years............. 25.61% 27.11% 26.82% 18.09%
Five Years.............. N/A N/A 19.88% 12.74%
Ten Years............... N/A N/A 21.76% 13.49%
From Inception(/4/)..... 19.85% 20.70% 19.28% N/A
</TABLE>
- ------
(1) Total return reflects the performance of Investor A, B and C Shares of the
Small Cap Growth Equity Portfolio since the commencement of operations of
the Portfolio rather than the dates Investor A, B and C Shares in the Port-
folio were introduced. Performance information for the Portfolio's Investor
A, B and C Shares prior to their introduction dates on 9/15/93, 1/18/96 and
9/6/96, respectively, does not reflect distribution, shareholder servicing,
shareholder processing and certain other expenses borne by Investor A, B
and C Shares which, if reflected, would reduce the performance quoted for
such periods. Performance information presented for Investor A, B and C
Shares of the Portfolio prior to their introduction is based upon histori-
cal expenses of predecessor classes of shares in the Portfolio which do not
reflect the actual expenses that an investor would have incurred as a
holder of Investor A, B or C Shares of the Portfolio. This performance in-
formation has been restated to reflect the current maximum front-end sales
charge (in the case of Investor A Shares) or the maximum contingent de-
ferred sales charge (in the case of Investor B and C Shares) when presented
inclusive of sales charges. Additional performance information is presented
which does not reflect the deduction of sales charges. The performance
quoted reflects fee waivers by the Portfolio's service providers. The Port-
folio's performance would have been lower in the absence of such waivers.
(2) The performance has been restated to reflect a total expense ratio of
1.34%, which is the total expense ratio that Investor A Shares of the Small
Cap Growth Equity Portfolio are expected to incur during the current fiscal
year and which reflects an advisory fee of .54% of its average daily net
assets. This expense ratio reflects voluntary fee waivers by the Portfo-
lio's service providers which may be modified or terminated at any time. In
restating the total returns of the Small Cap Account, these expenses were
calculated on a quarterly basis for the periods presented. The calculation
of these expenses on a more frequent basis would result in lower perfor-
mance figures.
(3) Total return data is presented for each period. The Russell 2000 Growth In-
dex reflects the investment of income dividends and capital gain distribu-
tions, if any, but does not reflect fees, brokerage commissions or other
expenses of investing. The Russell 2000 Growth Index is an unmanaged secu-
rities index, and an investment cannot be made directly in the Russell 2000
Growth Index. For more information on the Russell 2000 Growth Index, see
the Appendix to this Prospectus.
(4) The Small Cap Growth Equity Portfolio and the Small Cap Account commenced
investment operations on 9/14/93 and 8/1/87, respectively.
(5) The performance has been restated to reflect a total expense ratio of
2.09%, which is the total expense ratio that Investor B and C Shares of the
Small Cap Growth Equity Portfolio are expected to incur during the current
fiscal year and which reflects an advisory fee of .54% of its average daily
net assets. This expense ratio reflects voluntary fee waivers by the Port-
folio's service providers which may be modified or terminated at any time.
In restating the total returns of the Small Cap Account, these expenses
were calculated on a quarterly basis for the periods presented. The calcu-
lation of these expenses on a more frequent basis would result in lower
performance figures.
61.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7762
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock 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
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Large Cap Value Equity Russell 1000 An index composed of those Russell 1000 securities
Value Index with less-than-average growth orientation.
Securities in this index generally have low price-
to-book and price-earnings ratios, higher dividend
yields and lower forecasted growth values than more
growth-oriented securities in the Russell 1000
Growth Index.
Large Cap Growth Equity Russell 1000 The Russell 1000 Growth Index contains those Russell
Growth Index 1000 securities with a greater-than-average growth
orientation. Companies in this index tend to exhibit
higher price-to-book and price-earnings ratios,
lower dividend yields and higher forecasted growth
values than the Russell 1000 Value Index.
Mid-Cap Value Equity Russell Midcap The Russell Midcap Value Index consists of the
Value Index bottom 800 securities of the Russell 1000 Index with
less-than-average growth orientation as ranked by
total market capitalization.
Mid-Cap Growth Equity Russell Midcap The Russell Midcap Growth Index consists of the
Growth Index bottom 800 securities of the Russell 1000 Index with
greater-than-average growth orientation as ranked by
total market capitalization.
Small Cap Value Equity Russell 2000 The Russell 2000 Value Index contains those Russell
Value Index 2000 securities with a less-than-average growth
orientation. Securities in this index generally have
lower price-to-book and price-earnings ratios than
those in the Russell 2000 Growth Index.
Small Cap Growth Equity Russell 2000 An index composed of those Russell 2000 securities
Growth Index with a greater-than-average growth orientation.
Securities in this index generally have higher
price-to-book and price-earnings ratios than those
in the Russell 2000 Value Index.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of 20
European and Pacific Basin countries. The Index is a
market value-weighted average of the performance of
over 900 securities listed on the stock exchanges of
such countries.
International Small Cap Salomon Brothers Small stock index which represents the bottom 20% of
Equity Extended the Salomon Brothers Broad Market Index ("BMI"). The
Markets World BMI is an available equity capital weighted index
Ex-U.S. Index representative of the market structure of 20
international developed countries. It contains
companies with an available market capitalization
greater than $100 million.
International Emerging MSCI Emerging The Morgan Stanley Capital International (MSCI)
Markets Markets Free Emerging Markets Free Index (EMF) is a market
Index capitalization weighted index composed of companies
representative of the market structure of 22
Emerging Market countries in Europe, Latin America,
Africa and the Pacific Basin. The MSCI EMF Index
excludes closed markets and those shares in
otherwise free markets which are not purchasable by
foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Balanced S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad An unmanaged index of 3500 bonds. The Broad
Investment Investment Grade Index is market capitalization
Grade Index weighted and includes Treasury, Government sponsored
mortgages and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
63.
<PAGE>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Mid-Cap Growth Equity Micro-Cap Equity
International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity International Small Cap Equity
Index Equity
Small Cap Value Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- --------------------------------------------------------------------------------
THE EQUITY PORTFOLIOS INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASKING THE KEY
QUESTIONS
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 4
What Are The Portfolios' Financial Highlights?............... 6
What Are The Portfolios?..................................... 18
What Are The Differences Among The Portfolios?............... 19
What Additional Investment Policies And Risks Apply?......... 21
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 30
Who Manages The Fund?........................................ 31
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?................................... 40
How Is Performance Calculated?............................... 43
Other Information On The Performance Of PNC Equity Advisors
Company..................................................... 44
How Can I Get More Information?.............................. 46
</TABLE>
This Prospectus sets forth concisely information about the Black-
Rock Funds SM (the "Fund") equity Portfolios that a prospective
investor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated Janu-
ary 28, 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 the Fund by calling (800) 441-
7764. The Statement of Additional Information, as supplemented
from time to time, is incorporated by reference into this Pro-
spectus. The SEC maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incor-
porated by reference and other information regarding the Fund
that has been filed with the SEC.
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.
The Index Equity Portfolio seeks to achieve its investment objec-
tive by investing all of its investable assets in a series of
shares (the "Index Master Portfolio") of The DFA Investment Trust
Company, another open-end management investment company, rather
than through a portfolio of various securities. The investment
experience of the Index Equity Portfolio corresponds directly
with the investment experience of the Index Master Portfolio. The
Index Master Portfolio has substantially the same investment ob-
jective, policies and limitations as the Index Equity Portfolio
and, except as specifically noted, is also referred to as a
"Portfolio" in this Prospectus. For additional information, see
"How Is The Fund Organized?"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE EQUITY PORTFOLIOS OF BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Equity Portfolios of BLACKROCK FUNDS consist of thirteen
diversified investment portfolios that provide investors 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 twelve* of these Portfolios (the "Port-
folios") begins on page 18 and a summary of each Performance
Benchmark is contained in the Appendix.
BLACKROCK PERFORMANCE LIPPER PEER GROUP
PORTFOLIO BENCHMARK
LARGE CAP Russell 1000 Growth and Income
VALUE EQUITY Value Index
LARGE CAP Russell 1000 Growth
GROWTH EQUITY Growth Index
MID-CAP VALUE Russell Midcap Midcap
EQUITY Value Index
MID-CAP GROWTH Russell Midcap Midcap
EQUITY Growth Index
SMALL CAP Russell 2000 Small Company Growth
VALUE EQUITY Value Index
SMALL CAP Russell 2000 Small Company Growth
GROWTH EQUITY Growth Index
INTERNATIONAL EAFE Index International
EQUITY
INTERNATIONAL Salomon International Small Cap
SMALL CAP Brothers
EQUITY Extended
Markets World
Ex-U.S. Index
INTERNATIONAL MSCI Emerging Emerging Markets
EMERGING Markets Free
MARKETS Index
SELECT EQUITY S&P 500 Index Growth and Income
INDEX EQUITY S&P 500 Index S&P 500 Index
BALANCED S&P 500 Index Balanced
and Salomon
Broad
Investment
Grade Index
* A copy of the Micro-Cap Equity Prospectus can be obtained by
calling 1-888-8BLACKROCK.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
EQUITY different directions in equity investing.
PORTFOLIOS
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS IN investment objective. The Portfolios will hold equity securi-
EQUITY ties, and some or all of the Portfolios may acquire warrants,
INVESTING foreign securities, securities of smaller capitalized foreign
and domestic issuers and illiquid securities; enter into repur-
chase and reverse repurchase agreements; lend portfolio securi-
ties to third parties; and enter into futures contracts and op-
tions and forward currency exchange contracts. These and the
other investment practices set forth below, and their associ-
ated risks, deserve careful consideration. Certain risks asso-
ciated with international investments are heightened because of
currency fluctuations and investments in emerging markets. See
"What Additional Investment Policies And Risks Apply?"
INVESTING IN For information on how to purchase and redeem shares of the
THE Portfolios, see "How Are Shares Purchased And Redeemed?"
BLACKROCK
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Institutional
Shares of the Portfolios for the fiscal year ended September 30, 1997 as a per-
centage of average daily net assets. The figures shown for the Large Cap Value
Equity, Large Cap Growth Equity, Small Cap Growth Equity, Small Cap Value Equi-
ty, Select Equity and Balanced Portfolios have been restated to reflect current
expenses and fee waivers. Because the Mid-Cap Value Equity Portfolio, Mid-Cap
Growth Equity Portfolio and International Small Cap Equity Portfolio are new,
the figures shown for these Portfolios under "Other expenses" are estimates for
the current fiscal year. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LARGE CAP LARGE CAP MID-CAP SMALL CAP SMALL CAP
VALUE GROWTH MID-CAP GROWTH VALUE GROWTH
EQUITY EQUITY VALUE EQUITY EQUITY EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .48% .52% .79% .79% .55% .54%
Other operating expenses .31 .27 .35 .35 .32 .33
--- --- --- --- --- ---
Administration fees
(after fee
waivers)(/1/) .20 .19 .20 .20 .22 .23
Other expenses .11 .08 .15 .15 .10 .10
--- --- --- --- --- ---
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .79% .79% 1.14% 1.14% .87% .87%
=== === ==== ==== === ===
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
INTERNATIONAL SMALL CAP EMERGING SELECT INDEX
EQUITY EQUITY MARKETS EQUITY EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/1/)(/2/) .66% .80% 1.16% .52% .025% .52%
Other operating expenses .40 .53 .62 .27 .155 .32
--- --- --- --- ---- ---
Administration fees
(after fee
waivers)(/1/) .21 .23 .27 .19 .033 .20
Other expenses .19 .30 .35 .08 .122 .12
--- --- --- --- ---- ---
Total Portfolio
operating expenses
(after fee
waivers)(/1/) 1.06% 1.33% 1.78% .79% .18% .84%
==== ==== ==== === === ===
</TABLE>
(1) Without waivers, advisory fees would be .54% for the Large Cap Value Equity
Portfolio, .80% for the Mid-Cap Value Equity and Mid-Cap Growth Equity
Portfolios, .75%, 1.00% and 1.25%, respectively, for the International Eq-
uity, International Small Cap Equity and International Emerging Markets
Portfolios and .55% for each of the other Portfolios and administration
fees would be .21% for the Large Cap Value Equity Portfolio, .22% for the
Large Cap Growth Equity Portfolio, .28% for the International Emerging Mar-
kets Portfolio and .23% for each other Portfolio. BlackRock, Inc. and the
Portfolios' administrators are under no obligation to waive or continue
waiving their fees, but have informed the Fund that they expect to waive
fees as necessary to maintain the Portfolios' total operating expenses dur-
ing the remainder of the current fiscal year at the levels set forth in the
table. Without waivers, "Other operating expenses" would be .31%, .31%,
.39%, .37%, .33%, .32%, .41%, .55%, .62%, .31%, .18% and .34%, respective-
ly, and "Total Portfolio operating expenses" would be .85%, .86%, 1.19%,
1.17%, .88%, .87%, 1.16%, 1.55%, 1.87%, .86%, .38% and .89%, respectively.
(2) Advisory fees with respect to the Index Equity Portfolio represent advisory
fees of the Index Master Portfolio.
+ Includes the operating expenses of the Index Master Portfolio that are allo-
cable to the Index Equity Portfolio.
4.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment assuming (1) a 5% annual return, and (2) redemption at the
end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Large Cap Value Equity Portfolio $ 8 $25 $44 $98
Large Cap Growth Equity Portfolio 8 25 44 98
Mid-Cap Value Equity Portfolio 12 36 N/A N/A
Mid-Cap Growth Equity Portfolio 12 36 N/A N/A
Small Cap Value Equity Portfolio 9 28 48 107
Small Cap Growth Equity Portfolio 9 28 48 107
International Equity Portfolio 11 34 58 129
International Small Cap Equity
Portfolio 14 42 N/A N/A
International Emerging Markets
Portfolio 18 56 96 209
Select Equity Portfolio 8 25 44 98
Index Equity Portfolio 2 6 10 23
Balanced Portfolio 9 27 47 104
</TABLE>
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 foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses (including the Index Equity Portfolio's pro rata
share of the Index Master Portfolio's advisory fees and operating expenses) an
investor will bear either directly or indirectly. They do not reflect any
charges that may be imposed by affiliates of the Portfolios' investment adviser
or other institutions directly on their customer accounts in connection with
investments in the Portfolios.
The Board of Trustees of the Fund believes that the aggregate per share ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are approximately equal to the
expenses which the Index Equity Portfolio would incur if the Fund retained the
services of an investment adviser for the Index Equity Portfolio and the assets
of the Index Equity Portfolio were invested directly in the type of securities
held by the Index Master Portfolio.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
5.
<PAGE>
- -------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
- -------------------------------------------------------------------------------
The following financial information has been derived from
the financial statements incorporated by reference into the
Statement of Additional Information and has been audited by
the Portfolios' independent accountant. This financial in-
formation should be read together with those financial
statements. Further information about the performance of the
Portfolios is available in the Fund's annual shareholder re-
ports. Both the Statement of Additional Information and the
annual shareholder reports may be obtained from the Fund
free of charge by calling (800) 441-7764. Information con-
cerning the historical investment results of Institutional
Shares of the Index Equity Portfolio reflects the financial
experience of that Portfolio prior to its conversion on June
2, 1996 to a feeder portfolio of the Index Master Portfolio.
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP VALUE EQUITY PORTFOLIO
(FORMERLY THE VALUE EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 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 BEGIN-
NING OF PERIOD $ 15.35 $ 13.92 $ 11.62 $ 11.68 $ 9.78 $ 10.00
-------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.31 0.35 0.34 0.27 0.22 0.12
Net gain (loss) on
investments (both
realized and
unrealized) 4.69 2.41 2.54 0.16 1.91 (0.24)
-------- -------- -------- -------- -------- --------
Total from investment
operations 5.00 2.76 2.88 0.43 2.13 (0.12)
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.30) (0.36) (0.33) (0.27) (0.23) (0.10)
Distributions from net
realized capital gains (2.52) (0.97) (0.25) (0.22) - - - -
-------- -------- -------- -------- -------- --------
Total distributions (2.82) (1.33) (0.58) (0.49) (0.23) (0.10)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 17.53 $ 15.35 $ 13.92 $ 11.62 $ 11.68 $ 9.78
======== ======== ======== ======== ======== ========
Total return 37.66% 21.01% 25.73% 3.76% 21.92% (1.19)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of pe-
riod (in thousands) $743,405 $731,024 $508,273 $577,996 $432,776 $322,806
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.78% 0.75% 0.67% 0.65% 0.80% 0.85%/2/
Before
advisory/administration
fee waivers 0.85% 0.84% 0.81% 0.81% 0.83% 0.85%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.94% 2.40% 2.68% 2.44% 2.07% 2.62%/2/
Before
advisory/administration
fee waivers 1.87% 2.32% 2.53% 2.28% 2.04% 2.62%/2/
PORTFOLIO TURNOVER RATE 37% 60% 12% 11% 11% 13%
AVERAGE COMMISSION
RATE/3/ $ 0.0580 $ 0.0556 N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total
number of shares purchased and sold during the period.
6.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP GROWTH EQUITY PORTFOLIO
(FORMERLY THE GROWTH EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 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 $ 14.96 $ 13.03 $ 10.19 $ 11.58 $ 9.92 $ 10.28 $ 9.98 $ 10.00
-------- -------- -------- ------- -------- ------- ------- -------
Income from investment
operations
Net investment income 0.09 0.08 0.13 0.06 0.06 0.21 0.24 0.31
Net gain (loss) on
investments
(both realized and
unrealized) 4.72 2.29 2.88 (1.34) 2.07 0.30 1.51 (0.26)
-------- -------- -------- ------- -------- ------- ------- -------
Total from investment
operations 4.81 2.37 3.01 (1.28) 2.13 0.51 1.75 0.05
-------- -------- -------- ------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.11) (0.06) (0.17) (0.01) (0.07) (0.37) (0.32) (0.07)
Distributions from capi-
tal - - - - - - - - (0.01) - - - - - -
Distributions from net
realized capital gains (0.74) (0.38) - - (0.10) (0.39) (0.50) (1.13) - -
-------- -------- -------- ------- -------- ------- ------- -------
Total distributions (0.85) (0.44) (0.17) (0.11) (0.47) (0.87) (1.45) (0.07)
-------- -------- -------- ------- -------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 18.92 $ 14.96 $ 13.03 $ 10.19 $ 11.58 $ 9.92 $ 10.28 $ 9.98
======== ======== ======== ======= ======== ======= ======= =======
Total return 33.69% 18.67% 29.88% (11.14)% 22.18% 4.98% 19.47% 0.40%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $482,851 $481,171 $211,543 $97,834 $100,049 $58,372 $54,912 $39,790
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.79% 0.75% 0.67% 0.65% 0.81% 0.85% 0.85% 0.85%/2/
Before
advisory/administration
fee waivers 0.86% 0.86% 0.85% 0.89% 0.87% 0.86% 0.91% 0.88%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.54% 0.63% 1.20% 0.62% 0.50% 2.07% 2.59% 2.75%/2/
Before
advisory/administration
fee waivers 0.47% 0.51% 1.01% 0.38% 0.44% 2.06% 2.53% 2.72%/2/
PORTFOLIO TURNOVER RATE 81% 58% 55% 212% 175% 162% 211% 149%
AVERAGE COMMISSION
RATE/3/ $ 0.0594 $ 0.0598 N/A N/A N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
7.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MID-CAP VALUE EQUITY PORTFOLIO [/R]
<TABLE>
<CAPTION>
FOR THE
PERIOD
12/27/96/1/
THROUGH
9/30/97
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.00
--------
Income from investment operations
Net investment income 0.10
Net gain (loss) on investments
(both realized and unrealized) 2.80
--------
Total from investment operations 2.90
--------
LESS DISTRIBUTIONS
Distributions from net investment income (0.10)
Distributions from capital - -
Distributions from net realized capital gains - -
--------
Total distributions (0.10)
--------
NET ASSET VALUE AT END OF PERIOD $ 12.80
========
Total return 29.11%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $106,886
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.15%/2/
Before advisory/administration fee waivers 1.19%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 1.33%/2/
Before advisory/administration fee waivers 1.29%/2/
PORTFOLIO TURNOVER RATE 36%
AVERAGE COMMISSION RATE/3/ $ 0.0528
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
8.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MID-CAP GROWTH EQUITY PORTFOLIO [/R]
<TABLE>
<CAPTION>
FOR THE
PERIOD
12/27/96/1/
THROUGH
9/30/97
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.00
--------
Income from investment operations
Net investment income (0.01)
Net gain (loss) on investments
(both realized and unrealized) 2.21
--------
Total from investment operations 2.20
--------
LESS DISTRIBUTIONS
Distributions from net investment income - -
Distributions from capital - -
Distributions from net realized capital gains - -
--------
Total distributions - -
--------
NET ASSET VALUE AT END OF PERIOD $ 12.20
========
Total return 22.00%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $107,709
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.13%/2/
Before advisory/administration fee waivers 1.17%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers (0.16)%/2/
Before advisory/administration fee waivers (0.20)%/2/
PORTFOLIO TURNOVER RATE 64%
AVERAGE COMMISSION RATE/3/ $ 0.0576
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
9.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 4/13/92/1/
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 BEGIN-
NING OF PERIOD $ 15.98 $ 15.16 $ 13.62 $ 13.08 $ 10.14 $ 10.00
-------- -------- -------- -------- -------- -------
Income from investment
operations
Net investment income 0.17 0.10 0.06 0.04 0.04 0.02
Net gain (loss) on
investments
(both realized and
unrealized) 6.39 1.70 2.17 0.77 3.02 0.13
-------- -------- -------- -------- -------- -------
Total from investment
operations 6.56 1.80 2.23 0.81 3.06 0.15
-------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.17) (0.11) (0.08) (0.02) (0.04) (0.01)
Distributions from net
realized capital gains (2.17) (0.87) (0.61) (0.25) (0.08) - -
-------- -------- -------- -------- -------- -------
Total distributions (2.34) (0.98) (0.69) (0.27) (0.12) (0.01)
-------- -------- -------- -------- -------- -------
NET ASSET VALUE AT END OF
PERIOD $ 20.20 $ 15.98 $ 15.16 $ 13.62 $ 13.08 $ 10.14
======== ======== ======== ======== ======== =======
Total return 47.36% 12.64% 17.43% 6.28% 30.36% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of pe-
riod (in thousands) $309,899 $214,828 $168,334 $168,360 $128,805 $75,045
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.87% 0.85% 0.75% 0.73% 0.83% 0.85%/2/
Before
advisory/administration
fee
waivers 0.88% 0.86% 0.84% 0.85% 0.87% 0.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.09% 0.68% 0.44% 0.28% 0.31% 0.51%/2/
Before
advisory/administration
fee
waivers 1.08% 0.67% 0.35% 0.16% 0.27% 0.47%/2/
PORTFOLIO TURNOVER RATE 66% 50% 31% 18% 41% 17%
AVERAGE COMMISSION
RATE/3/ $ 0.0504 $0.0580 N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 9/14/93/1/
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 $ 21.94 $ 15.06 $ 10.16 $ 10.47 $ 10.00
-------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.02 (0.01) 0.02 0.03 - -
Net gain (loss) on
investments (both
realized and
unrealized) 3.18 6.91 4.90 (0.33) 0.47
-------- -------- -------- ------- -------
Total from investment
operations 3.20 6.90 4.92 (0.30) 0.47
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.03) (0.02) (0.02) (0.01) - -
Distributions from net
realized capital gains (1.49) - - - - - - - -
-------- -------- -------- ------- -------
Total distributions (1.52) (0.02) (0.02) (0.01) - -
-------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 23.62 $ 21.94 $ 15.06 $ 10.16 $ 10.47
======== ======== ======== ======= =======
Total return 15.89% 45.87% 48.50% (2.89)% 4.70%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of pe-
riod (in thousands) $495,904 $299,563 $145,915 $65,612 $11,310
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.87% 0.86% 0.75% 0.48% 0.73%/2/
Before
advisory/administration
fee waivers 0.87% 0.88% 0.88% 1.04% 1.42%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.01% (0.07)% 0.22% 0.45% (0.11)%/2/
Before
advisory/administration
fee waivers 0.01% (0.09)% 0.09% (0.10)% (0.80)%/2/
PORTFOLIO TURNOVER RATE 82% 89% 74% 89% 9%
AVERAGE COMMISSION
RATE/3/ $ 0.0572 $ 0.0569 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
11.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 4/27/92/1/
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 $ 13.43 $ 13.27 $ 13.44 $ 12.48 $ 9.87 $ 10.00
-------- -------- -------- -------- -------- -------
Income from investment
operations
Net investment income 0.14 0.17 0.17 0.15 0.11 0.11
Net realized gain (loss)
on investments (both
realized and
unrealized) 1.77 0.84 0.13 1.17 2.61 (0.17)
-------- -------- -------- -------- -------- -------
Total from investment
operations 1.91 1.01 0.30 1.32 2.72 (0.06)
-------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.28) (0.18) (0.11) (0.11) (0.11) (0.07)
Distributions from net
realized capital gains (0.41) (0.67) (0.36) (0.25) - - - -
-------- -------- -------- -------- -------- -------
Total distributions (0.69) (0.85) (0.47) (0.36) (0.11) (0.07)
-------- -------- -------- -------- -------- -------
NET ASSET VALUE AT END OF
PERIOD $ 14.65 $ 13.43 $ 13.27 $ 13.44 $ 12.48 $ 9.87
======== ======== ======== ======== ======== =======
Total return 14.88% 8.01% 2.46% 10.71 % 27.72 % (0.61)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of pe-
riod (in thousands) $433,135 $388,588 $312,588 $284,905 $131,052 $60,357
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.06% 1.36% 1.53% 0.95 % 1.10 % 1.20%/2/
Before
advisory/administration
fee waivers 1.16% 1.46% 1.63% 1.14 % 1.16 % 1.21%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.94% 0.65% 0.50% 1.27 % 1.17 % 2.59%/2/
Before
advisory/administration
fee waivers 0.84% 0.54% 0.40% 1.08 % 1.11 % 2.58%/2/
PORTFOLIO TURNOVER RATE 62% 70% 105% 37 % 31 % 15%
AVERAGE COMMISSION
RATE/3/ $ 0.0166 $ 0.0158 N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
12.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL SMALL CAP EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
9/26/97/1/
THROUGH
9/30/97
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.00
-------
Income from investment operations
Net investment income - -
Net gain (loss) on investments (both realized
and unrealized) (0.06)
-------
Total from investment operations (0.06)
-------
LESS DISTRIBUTIONS
Distributions from net investment income - -
Distributions from net realized capital gains - -
-------
Total distributions - -
-------
NET ASSET VALUE AT END OF PERIOD $ 9.94
=======
Total return (0.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $15,415
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.33%/2/
Before advisory/administration fee waivers 1.55%/2/
Ratios of net investment income to average net
assets
After advisory/administration fee waivers 1.42%/2/
Before advisory/administration fee waivers 1.19%/2/
PORTFOLIO TURNOVER RATE 0%
AVERAGE COMMISSION RATE/3/ $0.0268
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
13.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 6/17/94/1/
ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 8.76 $ 8.19 $ 10.56 $10.00
-------- ------- ------- ------
Income from investment operations
Net investment income 0.03 0.08 0.08 0.03
Net gain (loss) on investments (both
realized and unrealized) 0.95 0.50 (2.15) 0.53
-------- ------- ------- ------
Total from investment operations 0.98 0.58 2.07 0.56
-------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.05) - - (0.10) - -
Distributions from capital - - - - (0.01) - -
Distributions from net realized cap-
ital gains - - (0.01) (0.19) - -
-------- ------- ------- ------
Total distributions (0.05) (0.01) (0.30) - -
-------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 9.69 $ 8.76 $ 8.19 $10.56
======== ======= ======= ======
Total return 11.16% 6.97% (19.72)% 5.60%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $116,107 $68,664 $29,319 $2,511
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 1.78% 1.78% 1.78% 1.75%/2/
Before advisory/administration fee
waivers 1.87% 1.88% 2.02% 2.73%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 0.37% 0.96% 1.90% 1.19%/2/
Before advisory/administration fee
waivers 0.27% 0.87% 1.66% 0.21%/2/
PORTFOLIO TURNOVER RATE 33% 44% 75% 4%
AVERAGE COMMISSION RATE/3/ $ 0.0016 $0.0018 N/A N/A
</TABLE>
/1/Commencement of operations of share classes.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
14.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 9/13/93/1/
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 BEGIN-
NING OF PERIOD $ 13.57 $ 11.88 $ 9.92 $ 9.97 $ 10.00
-------- -------- -------- ------- -------
Income from investment op-
erations
Net investment income 0.19 0.21 0.22 0.22 0.01
Net gain (loss) on
investments (both
realized and unrealized) 5.15 2.08 2.08 (0.04) (0.04)
-------- -------- -------- ------- -------
Total from investment op-
erations 5.34 2.29 2.30 0.18 (0.03)
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net in-
vestment income (0.19) (0.21) (0.22) (0.23) - -
Distributions from net re-
alized capital gains (1.21) (0.39) (0.12) - - - -
-------- -------- -------- ------- -------
Total distributions (1.40) (0.60) (0.34) (0.23) - -
-------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 17.51 $ 13.57 $ 11.88 $ 9.92 $ 9.97
======== ======== ======== ======= =======
Total return 42.50% 19.84% 23.76% 1.79% (.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of pe-
riod (in thousands) $379,687 $274,434 $238,813 $48,123 $69,268
Ratios of expenses to av-
erage net assets
After
advisory/administration
fee waivers 0.79% 0.74% 0.67% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 0.86% 0.87% 0.85% 0.93% 0.87%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.24% 1.70% 2.35% 2.11% 2.17%/2/
Before
advisory/administration
fee waivers 1.17% 1.58% 2.17% 1.82% 1.95%/2/
PORTFOLIO TURNOVER RATE 29% 55% 51% 88% 2%
AVERAGE COMMISSION RATE/3/ $ 0.0547 $ 0.0487 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
15.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 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 BEGIN-
NING OF PERIOD $ 13.97 $ 13.58 $ 10.93 $ 11.02 $ 10.06 $ 10.00
-------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.04 0.30 0.38 0.31 0.27 0.13
Net realized gain (loss)
on investments
(both realized and
unrealized) 5.02 2.13 2.73 0.03 0.97 0.03
-------- -------- -------- -------- -------- --------
Total from investment
operations 5.06 2.43 3.11 0.34 1.24 0.16
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.03) (0.34) (0.34) (0.32) (0.28) (0.10)
Distributions from net
realized capital gains (0.68) (1.70) (0.12) (0.11) - - - -
-------- -------- -------- -------- -------- --------
Total distributions (0.71) (2.04) (0.46) (0.43) (0.28) (0.10)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 18.32 $ 13.97 $ 13.58 $ 10.93 $ 11.02 $ 10.06
======== ======== ======== ======== ======== ========
Total return 39.78% 19.82% 29.30% 3.07% 12.40% 1.62%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of pe-
riod (in thousands) $166,786 $127,076 $109,433 $147,746 $186,163 $175,888
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.18% 0.18% 0.17% 0.15% 0.40% 0.45%/2/
Before
advisory/administration
fee waivers 0.38% 0.50%/3/ 0.50% 0.52% 0.52% 0.64%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.71% 2.29% 2.92% 2.72% 2.46% 2.85%/2/
Before
advisory/administration
fee waivers 1.51% 1.98% 2.59% 2.35% 2.34% 2.66%/2/
PORTFOLIO TURNOVER RATE --/5/ 18%/4/, /5/ 18% 17% 8% 23%
AVERAGE COMMISSION RATE --/5/ $ 0.0319 /4/, /5/ N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including expenses allocated from the U.S. Large Company Series of The DFA
Investment Trust Company of 0.13%.
/4/For the period from October 1, 1995 through May 31, 1996.
/5/See footnotes to the financial statements of The DFA Investment Trust Com-
pany for the year ended November 30, 1996 and the period ended September 30,
1997.
16.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR 5/1/92/1/
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 BEGIN-
NING OF PERIOD $ 15.10 $ 13.73 $ 11.98 $ 12.42 $ 11.53 $11.01
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.52 0.46 0.46 0.38 0.30 0.17
Net realized gain (loss)
on investments
(both realized and
unrealized) 3.62 1.49 1.90 (0.39) 1.15 0.51
------- ------- ------- ------- ------- ------
Total from investment
operations 4.14 1.95 2.36 (0.01) 1.45 0.68
------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.50) (0.45) (0.47) (0.37) (0.30) (0.16)
Distributions from net
realized capital gains (0.52) (0.13) (0.14) (0.06) (0.26) - -
------- ------- ------- ------- ------- ------
Total distributions (1.02) (0.58) (0.61) (0.43) (0.56) (0.16)
------- ------- ------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 18.22 $ 15.10 $ 13.73 $ 11.98 $ 12.42 $11.53
======= ======= ======= ======= ======= ======
Total return 28.43% 14.43% 20.32% (0.11)% 12.86% 6.23%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of pe-
riod (in thousands) $31,674 $37,567 $24,525 $17,610 $12,928 $2,501
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.84% 0.79% 0.67% 0.65% 0.80% 0.95%/2/
Before
advisory/administration
fee waivers 0.89% 0.90% 0.88% 0.91% 0.98% 1.51%/2/
Ratios of net investment
income to average
net assets
After
advisory/administration
fee waivers 2.98% 3.16% 3.78% 3.16% 2.89% 3.28%/2/
Before
advisory/administration
fee waivers 2.92% 3.06% 3.56% 2.89% 2.71% 2.72%/2/
PORTFOLIO TURNOVER RATE 173% 275% 154% 54% 32% 36%
AVERAGE COMMISSION
RATE/3/ $0.0364 $0.0599 N/A N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
17.
<PAGE>
- -------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- -------------------------------------------------------------------------------
The BLACKROCK FUND family consists of 32 portfolios and has
been structured to include many different investment styles
so that investors may participate across multiple disci-
plines in order to seek their long-term financial goals.
The Equity Portfolios of BLACKROCK FUNDS consist of thirteen
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the equity sec-
tor. 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 var-
ious product options in the way that most closely fits the
investor's goals and sentiments.
INVESTMENT
OBJECTIVES Each of the twelve BlackRock Equity Portfolios described
herein seeks to provide long-term Capital Appreciation.
The Select Equity, Large Cap Value Equity and Mid-Cap Value
Equity Portfolios pursue a secondary objective of Current
Income from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described on the following two
pages. No assurance can be made that a Portfolio will
achieve its investment objective.
18.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE DIFFERENCES
AMONG THE PORTFOLIOS?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERFORMANCE
BLACKROCK FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
Large Cap Value Pursues equity Stocks with Russell 1000
Equity securities (defined as price/earnings and Value Index
common stocks or price/book ratios at time
securities convertible of purchase below average
into common stocks) for benchmark and
which the sub-adviser capitalization in excess
believes are of $5 billion.
undervalued. A
security's earnings
trend and its dividend
growth rate will also be
factors considered in
security selection.
Large Cap Growth Pursues stocks with Stocks with growth rate Russell 1000
Equity earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization in excess
adviser considers to of $5 billion.
have favorable and
above-average earnings
growth prospects.
Mid-Cap Value Pursues mid cap stocks Stocks with low Russell Midcap
Equity and sectors which the price/earnings, Value Index
sub-adviser believes are price/book, price/cash
undervalued. A flow or price/sales
security's earnings ratios at the time of
trend and its dividend purchase relative to
growth rate will also be their respective sectors
factors considered in or the benchmark and
security selection. capitalization generally
between $1 billion and $5
billion.
Mid-Cap Growth Pursues mid cap stocks Stocks with growth rate Russell Midcap
Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization generally
adviser considers to between $1 billion and $5
have favorable and billion.
above-average earnings
growth prospects.
Small Cap Value Pursues small cap stocks Stocks with Russell 2000
Equity which the sub-adviser price/earnings and Value Index
believes are price/book ratios at time
undervalued. A of purchase below average
security's earnings for benchmark and
trend and its dividend capitalization below $1
growth rate will also be billion.
factors considered in
security selection.
Small Cap Growth Pursues small cap stocks Stocks with growth rate Russell 2000
Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
small cap stocks which capitalization below $1
the sub-adviser billion.
considers to have
favorable and above-
average earnings growth
prospects.
International Pursues non-dollar Portfolio assets are EAFE Index
Equity denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with
International Europe, price/earnings ratios
Australia and the Far below average for a
East Index ("EAFE"). security's home market or
Within this universe, a stock exchange.
value style of investing
is employed to select Diversification across
stocks which the sub- countries, industry
adviser believes are groups and companies with
undervalued. A investment at all times
security's earnings in at least three foreign
trend and its price countries.
momentum will also be
factors considered in
security selection. The
sub-adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
government policies
influencing business
conditions and the
outlook for currency
relationships.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
19.
<PAGE>
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERFORMANCE
BLACKROCK FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
International Pursues non-dollar Invests primarily in Salomon
Small Cap Equity denominated stocks of international stocks with Brothers
small cap issuers in a capitalization below $1 Extended
countries included in billion. Emphasizes Markets
the Salomon Brothers primarily stocks with World Ex-U.S.
Extended Markets World price/earnings ratios Index
Ex-U.S. Index which the below average for such
sub-adviser expects to security's home market or
appreciate. In addition, stock exchange. Seeks
there may also be up to diversification across
20% exposure to stocks countries, industry
of issuers in emerging groups and companies with
market countries. Within investment at all times
this universe, a value in at least three foreign
style of investing is developed countries.
employed to select
stocks which the sub-
adviser believes are
undervalued, taking into
account the company's
earnings trend and its
price momentum. The sub-
adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
governmental policies
influencing business
conditions and the
outlook for currency
relationships.
International Pursues non-dollar Portfolio assets are MSCI
Emerging Markets denominated stocks of primarily invested in Emerging
issuers in emerging stocks of emerging market Markets Free
country markets issuers. Index
(generally any country
considered to be Stocks with
emerging or developing price/earnings ratios
by the World Bank, the below average for a
International Finance security's home market or
Corporation or the stock exchange.
United Nations). Within
this universe, a value Ordinarily, stocks of
style of investing is issuers in at least three
employed to select emerging markets will be
stocks which the sub- held.
adviser believes are
undervalued. The sub-
adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
government policies
influencing business
conditions and the
outlook for currency
relationships.
Select Equity Combines value and Similar sector weightings S&P 500 Index
growth style as sub- as benchmark, with over-
adviser identifies or under-weighting in
market opportunity. particular securities
within those sectors.
Index Equity Invests all of its The Index Master S&P 500 Index
assets indirectly, Portfolio holds
through the U.S. Large substantially all the
Company Series (the stocks of the S&P 500
"Index Master Index in approximately
Portfolio") of The DFA the same proportions as
Investment Trust Company they are represented in
in the stocks of the S&P the Index.
500 Index using a
passive investment style
that pursues the
replication of the S&P
500 Index return.
Balanced Holds a blend of equity Maintains a minimum 25% S&P 500 and
and fixed income investment in fixed Salomon Broad
securities to deliver income senior securities. Investment
total return through Grade Index
capital appreciation and
current income.
Equity Portion: Combines Equity Portion: Similar
value and growth style sector weightings as
as sub-adviser benchmark, with over- or
identifies market under- weighting in
opportunity. particular securities
within those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation Dollar-denominated
and security selection investment grade bonds,
across a broad universe including U.S.
of fixed income Government, mortgage-
securities. backed, asset-backed and
corporate debt
securities.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
20.
<PAGE>
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WHAT ADDITIONAL INVESTMENT POLICIES
AND RISKS APPLY?
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The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
EQUITY SECURITIES. During normal market conditions each Portfolio, except the
Balanced Portfolio, will normally invest at least 80% of the value of its total
assets in equity securities. The Portfolios will invest primarily in equity se-
curities of U.S. issuers, except the International Equity, International Emerg-
ing Markets and International Small Cap Equity Portfolios, which will invest
primarily in foreign issuers. Equity securities include common stock and pre-
ferred stock (including convertible preferred stock); bonds, notes and deben-
tures convertible into common or preferred stock; stock purchase warrants and
rights; equity interests in trusts and partnerships; and depositary receipts.
ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may
invest in both sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar global instruments. ADRs typically are issued by an American bank
or trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR
and GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information con-
cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs,
and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if
such instruments were sponsored by the issuer. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write (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 Equity, Interna-
tional Emerging Markets and International Small Cap Equity Portfolios, 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) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular securi-
ties, securities indices, or the yield differential between two securities, or,
in the case of the International Equity, International Emerging Markets and In-
ternational Small Cap Equity Portfolios, foreign currencies, and may or may not
be listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. A Portfolio will not purchase put and call options when
the aggregate premiums on outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections af-
forded purchasers of listed options issued by the Options Clearing Corporation,
which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes is 5% or less of its net assets.
21.
<PAGE>
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Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset
an expected decrease in the value of its portfolio positions that might other-
wise result from a market decline or currency exchange fluctuation. A 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, 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)
a 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."
LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de-
termines that market conditions warrant, each Portfolio, other than the Index
Master Portfolio, may invest without limitation in high quality money market
instruments. The Portfolios may also invest in high quality money market in-
struments pending investment or to meet anticipated redemption requests. The
Balanced Portfolio may also invest in these securities in furtherance of its
investment objective. The Index Master Portfolio may invest a portion of its
assets, normally not more than 5% of its net assets, in certain short-term
fixed income obligations in order to maintain liquidity or to invest temporar-
ily uncommitted cash balances.
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, a 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 a Portfolio to possible loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the
Index Master Portfolio) may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These trans-
actions involve a commitment by a Portfolio to purchase or sell particular se-
curities with payment and delivery taking place at a future date (perhaps one
or two months later), and permit a Portfolio to lock in a price or yield on a
security it owns or intends to purchase, regardless of future changes in in-
terest 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
22.
<PAGE>
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forward commitments are not expected to exceed 25% of the value of its total
assets absent unusual market conditions.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from fi-
nancial 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
by each Portfolio through reverse repurchase agreements under which the Portfo-
lio sells portfolio securities to financial institutions such as banks and bro-
ker-dealers and agrees to repurchase them at a particular date and price. A
Portfolio may use the proceeds of reverse repurchase agreements to purchase
other securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase agree-
ment. The Index Master Portfolio does not intend to invest in reverse repur-
chase agreements. The Balanced Portfolio may utilize reverse repurchase agree-
ments when it is anticipated that the interest income to be earned from the in-
vestment of the proceeds of the transaction is greater than the interest ex-
pense of the transaction. This use of reverse repurchase agreements may be re-
garded as leveraging and, therefore, speculative. Reverse repurchase agreements
involve the risks that the interest income earned in the investment of the pro-
ceeds will be less than the interest expense, that the market value of the se-
curities sold by a Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase and that the securities may not be re-
turned to the Portfolio. During the time a reverse repurchase agreement is out-
standing, a Portfolio will maintain a segregated account with the Fund's custo-
dian containing cash, U.S. Government or other appropriate liquid securities
having a value at least equal to the repurchase price. A Portfolio's reverse
repurchase agreements, together with any other borrowings, will not exceed, in
the aggregate, 33 1/3% of the value of its total assets (33% in the case of the
Index Master Portfolio). In addition, the Balanced Portfolio may borrow up to
an additional 5% of its total assets for temporary purposes. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolios (other than
the Index Master Portfolio and the Balanced Portfolio) will not make any in-
vestments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) may invest in
securities issued by other investment companies which invest in short-term debt
securities and which seek to maintain a $1.00 net asset value per share. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (SPDRs) and shares of other investment
companies that are structured to seek a similar correlation to the performance
of the S&P 500 Index. Securities of other investment companies will be acquired
within limits prescribed by the Investment Company Act of 1940 (the "1940
Act"). As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained on a current basis equal in value to at least the market value of the
loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of
the value of its total assets. Securities loans involve risks of delay in re-
ceiving additional collateral or in recovering the loaned securities, or possi-
bly loss of rights in the collateral if the borrower of the securities becomes
insolvent.
23.
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ILLIQUID SECURITIES. No Portfolio will invest more than 15% (10% with respect
to the Index Master Portfolio) of the value of its net assets in securities
that are illiquid. Variable and floating rate instruments that cannot be dis-
posed of within seven days, and repurchase agreements and time deposits that do
not provide for payment within seven days after notice, without taking a re-
duced price, are subject to these limits. Each Portfolio may purchase securi-
ties which are not registered under the Securities Act of 1933 (the "1933 Act")
but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the 1933 Act. These securities will not be considered illiquid
so long as it is determined by the adviser or sub-adviser that an adequate
trading market exists for the securities. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any pe-
riod that qualified institutional buyers become uninterested in purchasing
these restricted securities.
SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small Cap
Growth Equity Portfolio, the Small Cap Value Equity Portfolio and the Interna-
tional Small Cap Equity Portfolio will invest at least 90% (and in any event at
least 65%) of their respective total assets in equity securities of smaller-
capitalized organizations (less than $1 billion at the time of purchase or,
with respect to the International Small Cap Equity Portfolio, $1.5 billion for
Japanese issuers). Similarly, the Mid-Cap Value Equity Portfolio and Mid-Cap
Growth Equity Portfolio will invest, under normal market conditions, at least
90% (and in any event at least 65%) of their respective total assets in equity
securities of medium-capitalized organizations (between $1 billion and $5 bil-
lion at the time of purchase). These organizations will normally have more lim-
ited product lines, markets and financial resources and will be dependent upon
a more limited management group than larger capitalized companies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Index Master Portfolio operates
as an index portfolio and, therefore, is not actively managed (through the use
of economic, financial or market analysis), and adverse performance will ordi-
narily not result in the elimination of a stock from the Portfolio. The Portfo-
lio will remain fully invested in common stocks even when stock prices are gen-
erally falling. Ordinarily, portfolio securities will not be sold except to re-
flect additions or deletions of the stocks that comprise the S&P 500 Index, in-
cluding mergers, reorganizations and similar transactions and, to the extent
necessary, to provide cash to pay redemptions of the Portfolio's shares. The
investment performance of the Index Master Portfolio and the Index Equity Port-
folio is expected to approximate the investment performance of the S&P 500 In-
dex, which tends to be cyclical in nature, reflecting periods when stock prices
generally rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio or the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Index Equity Portfolio or
the Index Master Portfolio. S&P has no obligation to take the needs of the In-
dex Equity Portfolio or the Index Master Portfolio or their respective owners
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of the Index Equity Portfolio or the Index Master Portfolio
or the timing of the issuance or sale of the Index Equity Portfolio or the In-
dex Master Portfolio or in the determination or calculation of the equation by
which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash. S&P has no obligation or liability in connection with the ad-
ministration, marketing or trading of the Index Equity Portfolio or Index Mas-
ter Portfolio.
- --------
* "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund and The DFA Investment Trust Company.
24.
<PAGE>
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S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMIT-
ING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPE-
CIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio, the International Emerging Markets Portfolio and the Interna-
tional Small Cap Equity Portfolio (the "International Portfolios") will invest
at least 90% (and in any event at least 65%) of their total assets in equity
securities of foreign issuers. Investing in foreign securities involves consid-
erations not typically associated with investing in securities of companies or-
ganized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a Portfolio that invests in foreign securities as measured in U.S. dollars
will be affected favorably or unfavorably by changes in exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitation on the removal of funds or as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations.
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Portfolios can be expected to be higher
than those of Portfolios investing primarily in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such
as the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign mar-
kets and additional costs arising from delays in settlements of transactions
involving foreign securities.
As stated, the International Emerging Markets Portfolio will invest its assets
in countries with emerging economies or securities markets. These countries may
include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub-
lic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malay-
sia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Af-
rica, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and
Zimbabwe. Political and economic structures in many of these countries may be
undergoing significant evolution and rapid development, and these countries may
lack the social, political and economic stability characteristic of more devel-
oped countries. Some of these countries may have in the past failed to recog-
nize private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value
of investments in these countries and the availability to a Portfolio of addi-
tional investments in
25.
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emerging market countries. The small size and inexperience of the securities
markets in certain of these countries and the limited volume of trading in se-
curities in these countries may make investments in the countries illiquid and
more volatile than investments in Japan or most Western European countries.
There may be little financial or accounting information available with respect
to issuers located in certain emerging market countries, and it may be diffi-
cult to assess the value or prospects of an investment in such issuers.
The International Equity Portfolio invests primarily in equity securities of
issuers located in countries included in EAFE. Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United
Kingdom are currently included in EAFE. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Small Cap Equity Portfolio invests primarily in equity secu-
rities of issuers located in countries included in the Salomon Brothers Ex-
tended Markets World Ex-U.S. Index. Australia, Austria, Belgium, Canada, Den-
mark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Netherlands,
New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the
United Kingdom currently comprise the Salomon Index. From time to time the
Portfolio may invest more than 25% of its total assets in the securities of is-
suers located in Japan or the United Kingdom. As discussed above, investments
of 25% or more of the International Small Cap Equity Portfolio's total assets
in Japan, the United Kingdom or any other country would 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 is-
suers in different countries.
The International Small Cap Equity Portfolio may also invest up to 20% of its
assets in countries with emerging economies or securities markets which, as
stated above, involves special risks. These countries may include Argentina,
Brazil, Bulgaria, Chile, China, Colombia, The Czech Republic, Ecuador, Egypt,
Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia, Mexico, Morocco,
Peru, The Philippines, Poland, Romania, Russia, South Africa, South Korea, Tai-
wan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and Zimbabwe.
The International Portfolios may (but are not required to) use forward foreign
currency exchange contracts to hedge against movements in the value of foreign
currencies (including the European Currency Unit) relative to the U.S. dollar
in connection with specific portfolio transactions or with respect to portfolio
positions. 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 a Portfolio
to establish a rate of exchange for a future point in time.
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guaranteed investment contracts (GICs), ob-
ligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities and state and local Municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups as-
signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-
ings Group ("S&P") or another nationally recognized statistical rating organi-
zation. If unrated, the securities will be determined at the time of purchase
to be of comparable quality by the sub-adviser. Securities rated "Baa" by
Moody's or "BBB" by S&P, respectively, are generally considered to be invest-
ment grade although they have speculative characteristics. If a fixed income
security is reduced below Baa by Moody's or BBB by S&P, the Portfolio's
26.
<PAGE>
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sub-adviser will dispose of the security in an orderly fashion as soon as prac-
ticable. Investments in securities of foreign issuers, which present additional
investment considerations as described above under "International Portfolios,"
will be limited to 5% of the Portfolio's total assets.
The Balanced Portfolio may make significant investments in residential and com-
mercial mortgage-related and other asset-backed securities (i.e., securities
backed by home equity loans, installment sale contracts, credit card receiv-
ables or other assets) issued by governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, including guaranteed mortgage pass-through certificates, which provide
the holder with a pro rata interest in the underlying mortgages, adjustable
rate mortgage-related securities ("ARMs") and collateralized mortgage obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers of CMOs frequently elect to be taxed as a pass-through entity known as
real estate mortgage investment conduits, or REMICs. CMOs are issued in multi-
ple classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in many ways. In most cases, however, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest at a specified rate until other specified classes have been retired and
are converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws which give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the 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 trustees for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivable. Therefore, there is
a possibility that recoveries on repossessed collateral may not, in some cases,
be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may be prepaid at any time be-
cause the underlying assets (i.e., loans) generally may be prepaid at any time.
The average life of a mortgage-related instrument, in particular, is likely to
be substantially less than the original maturity of the mortgage pools under-
lying the securities as the result of scheduled principal payments and mortgage
prepayments. In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans and is less likely to ex-
perience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally be at lower rates than the rates that were carried by the obligations that
have been prepaid. Because of these and other reasons, an asset-backed
security's total return and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
27.
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The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank, National Associa-
tion ("PNC Bank") or its affiliates. It is possible that, under some circum-
stances, 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.
The Balanced Fund may also purchase obligations issued or guaranteed by the
U.S. Government and U.S. Government agencies and instrumentalities. Obliga-
tions of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury. Others are sup-
ported by the right of the issuer to borrow from the U.S. Treasury; and still
others are supported only by the credit of the agency or instrumentality issu-
ing the obligation. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. Certain U.S. Treasury and agency securities
may be held by trusts that issue participation certificates (such as Treasury
income growth receipts ("TIGRs") and certificates of accrual on Treasury cer-
tificates ("CATs")). The Balanced Portfolio may purchase these certificates,
as well as Treasury receipts and other stripped securities, which represent
beneficial ownership interests in either future interest payments or the fu-
ture principal payments on U.S. Government obligations. These instruments are
issued at a discount to their "face value" and may (particularly in the case
of stripped mortgage-backed securities) exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount
debt obligations that do not make periodic interest payments) and state and
local government obligations. Zero-coupon bonds are subject to greater market
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. Municipal obligations
may be purchased when the Portfolio's sub-adviser believes that their return,
on a pre-tax basis, will be comparable to the returns of other permitted in-
vestments. Dividends paid by the Portfolio that are derived from interest on
municipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to
enhance current income, the Balanced 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 Port-
folio 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, the Portfolio will not be en-
titled to receive interest and principal payments on the securities sold. Pro-
ceeds of the sale will be invested in additional instruments for the Portfo-
lio, and the income from these investments will generate income for the Port-
folio. 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 per-
formance of the Portfolio compared with what the performance would have been
without the use of dollar rolls. At the time that the Portfolio enters into a
dollar roll transaction, it will place in a segregated account maintained with
its custodian cash, U.S. Government securities or other liquid securities hav-
ing a value equal to the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure that its value is maintained.
The Portfolio's dollar rolls, together with its reverse repurchase agreements
and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value
of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to
28.
<PAGE>
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correctly predict interest rates and prepayments. There is no assurance that
dollar rolls can be successfully employed.
The Balanced Portfolio may enter into interest rate swaps and may purchase or
sell interest rate caps and floors. The Portfolio may enter into these transac-
tions primarily to preserve a return or spread on a particular investment or
portion of its holdings, as a duration management technique or to protect
against an increase in the price of securities the Portfolio anticipates pur-
chasing at a later date. The Portfolio intends to use these transactions as a
hedge and not as a speculative investment.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. 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.
The Balanced Portfolio 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. Although the Portfolio does not
currently intend to do so under current market conditions, the Portfolio may
invest up to 10% of its total assets in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate of an inverse floater re-
sets in the opposite direction from the market rate of interest to which it is
indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in their market values.
Unrated variable and floating rate instruments will be comparable in quality to
investment grade securities as determined by the Portfolio's sub-advisers. The
absence of an active secondary market with respect to particular variable and
floating rate instruments, however, could make it difficult for the Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
The Portfolio may only make short sales of securities "against-the-box." A
short sale is a transaction in which the Portfolio sells a security it does not
own in anticipation that the market price of that security will decline. The
Portfolio 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 port-
folio 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,"
the Portfolio forgoes an opportunity for capital appreciation in the security.
The market value of the Balanced Portfolio's investments in fixed income secu-
rities will change in response to changes in interest rates and the relative
financial strength of each issuer. During periods of falling interest rates,
the values of long-term fixed income securities generally rise. Conversely,
during periods of rising interest rates the values of such securities generally
decline. Changes in the financial strength of an issuer or changes in the rat-
ings of any particular security may also affect the value of these investments.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the International Small Cap Equity Port-
folio will not exceed 100%. The past portfolio turnover rates of the other
Portfolios are set forth above under "What Are The Portfolios' Financial High-
lights?" A Portfolio's annual portfolio turnover rate will not be a factor pre-
venting a sale or purchase when the adviser or sub-adviser believes investment
considerations warrant such sale or purchase. Portfolio turnover may vary
greatly from year to year as well as within a particular year. High portfolio
turnover rates (i.e. 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.
29.
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WHAT ARE THE PORTFOLIOS' FUNDAMENTAL
INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
change to a Portfolio's investment objective. The investment objective of the
Index Master Portfolio may not be changed without the approval of shareholders
of that Portfolio. No assurance can be provided that a Portfolio will achieve
its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of a Portfolio's total assets may be invested without regard
to this 5% limitation;
(2) subject to the foregoing 25% exception (other than with respect to the In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets
(33% of net assets in the case of the Index Master Portfolio) at the time
of such borrowing.
These investment limitations are applied at the time investment securities are
purchased. Notwithstanding the investment limitations, the Index Equity Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions as that Portfolio.
30.
<PAGE>
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of the Fund and of The DFA Investment
Trust Company (in which the assets of the Fund's Index Equity
Portfolio are invested) are managed under the direction of
their separate Boards of Trustees. The following persons cur-
rently serve as trustees of BlackRock Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Global Wireless.
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 both the Fund
and The DFA Investment Trust Company.
ADVISER AND
SUB-ADVISERS The Adviser to BlackRock Funds is BlackRock, Inc., except with
respect to the Index Equity Portfolio. Each of the Portfolios
within the BlackRock Fund family (except the Index Equity Port-
folio) is managed by a specialized portfolio manager who is a
member of one of BlackRock, Inc.'s portfolio management affili-
ates.
As adviser, BlackRock, Inc. is responsible for the overall in-
vestment management of the Portfolios. The sub-advisers are re-
sponsible for the day-to-day management of the Portfolios, and
generally make all purchase and sale investment decisions for
the Portfolios. The sub-advisers also provide research and
credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-dollar
fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
Provident Capital Management, Inc. ("PCM"), which has its pri-
mary offices at 1600 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103, acts as sub-adviser to the Large Cap Value
Equity, Mid-Cap Value Equity, Small Cap Value Equity and Select
Equity Portfolios. PNC Equity Advisors Company ("PEAC"), which
has its primary offices at 1600 Market Street, 27th Floor,
Philadelphia, Pennsylvania 19103, acts as sub-adviser to the
Large Cap Growth Equity, Mid-Cap Growth Equity and Small Cap
Growth Equity Portfolios. CastleInternational Asset Management
Limited, which has its primary offices at 7 Castle Street, Ed-
inburgh, Scotland, EH2 3AH, acts as sub-adviser to the Interna-
tional Equity, International Emerging Markets and International
Small Cap Equity Portfolios. BlackRock Financial Management,
Inc. ("BlackRock"), which has its primary offices at 345 Park
Avenue, New York, New York 10154, and PCM act as subadvisers to
the Balanced Portfolio.
31.
<PAGE>
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The Portfolios (other than the Index Equity Portfolio) and
their portfolio managers are as follows:
<TABLE>
<CAPTION>
BLACKROCK PORTFOLIO PORTFOLIO MANAGER
------------------- -----------------
<C> <S>
Large Cap Value Equity Daniel B. Eagan; portfolio manager with sub-adviser since
1995; director of investment strategy at BlackRock, Inc.
during 1994 and 1995; prior to 1994, served as senior
research consultant for Mercer Investment Consulting;
Portfolio manager since January 1997.
Large Cap Growth Equity R. Andrew Damm; investment manager with sub-adviser since
1997; senior investment strategist with BlackRock, Inc.
since 1995; portfolio manager with PNC Bank from 1988 to
1995; Mr. Damm has participated in the management of the
Portfolio since 1996 and has been designated Portfolio
manager since September 1997.
Mid-Cap Value Equity Christian K. Stadlinger; Vice President of sub-adviser
since July 1996; prior to joining sub-adviser, Portfolio
Manager and Research Analyst with Morgan Stanley Asset
Management; Portfolio co-manager since inception.
Daniel B. Eagan (see above).
Portfolio co-manager since its inception.
Mid-Cap Growth Equity William C. McVail; investment manager with sub-adviser
since 1994; prior to joining sub-adviser, equity and
fixed income analyst with PNC Bank; Portfolio co-manager
since its inception.
William J. Wykle; investment manager with sub-adviser
since 1995; investment manager with PNC Bank, National
Association since 1986; Portfolio co-manager since its
inception.
Small Cap Value Equity Christian K. Stadlinger; Vice President of sub-adviser
since July 1996; prior to joining sub-adviser, Portfolio
Manager and Research Analyst with Morgan Stanley Asset
Management; Portfolio manager since July 1996.
Small Cap Growth Equity William J. Wykle (see above); Portfolio co-manager since
its inception.
William C. McVail; (see above); Portfolio co-manager
since inception.
International Equity Gordon Anderson; Managing and Investment Director with
sub- adviser since 1996; prior to joining sub-adviser,
Investment Director of Dunedin Fund Managers Ltd.;
Portfolio manager since 1996.
International Small Cap Equity Peter J. Tait; Director and Global Strategist of sub-
adviser since 1996. Director and Head of Continental
European desk at Dunedin Fund Managers Ltd. from 1990 to
1996. Portfolio manager since its inception.
International Emerging Euan Rae; Senior Investment Manager with sub-adviser
Markets since 1996; prior to joining sub-adviser, Head of
Emerging Markets at Dunedin Fund Managers Ltd. and
investment manager with Edinburgh Fund Managers;
Portfolio manager since 1996.
</TABLE>
32.
<PAGE>
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<TABLE>
<CAPTION>
BLACKROCK PORTFOLIO PORTFOLIO MANAGER
------------------- -----------------
<C> <S>
Select Equity Daniel B. Eagan (see above); Portfolio manager since
1995.
Balanced R. Andrew Damm; Senior investment strategist with
BlackRock, Inc. since 1995; portfolio manager with PNC
Bank from 1988 to 1995; Portfolio co-manager since 1996.
Robert S. Kapito; Vice Chairman of BlackRock since 1988;
Portfolio co-manager since 1995.
Keith T. Anderson; Managing Director and co-chair of
Portfolio Management Group and Investment Strategy
Committee of BlackRock since 1988; Portfolio co-manager
since 1995.
</TABLE>
BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) 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. BlackRock, Inc.
is an indirect wholly-owned subsidiary of PNC Bank Corp., a
multi-bank holding company.
For their investment advisory and sub-advisory services, Black-
Rock, Inc. and the Portfolios' sub-advisers are entitled to
fees, computed daily on a portfolio-by-portfolio basis and pay-
able monthly, at the maximum annual rates set forth below. As
stated under "What Are the Expenses of the Portfolios?", with
respect to certain Portfolios, BlackRock, Inc. and the sub-ad-
visers intend to waive a portion of their fees during the cur-
rent fiscal year. All sub-advisory fees are paid by BlackRock,
Inc. and do not represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
EXCEPTTHE INDEX EQUITY, MID-CAP VALUE EQUITY, MID-CAP GROWTH
EQUITY AND THE INTERNATIONAL PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .550% .400%
$1 billion -- $2 billion .500 .350
$2 billion -- $3 billion .475 .325
greater than $3 billion .450 .300
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP VALUE
EQUITY AND
MID-CAP GROWTH EQUITY PORTFOLIOS (BEFORE WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .800% .650%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .500
greater than $3 billion .625 .475
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EQUITY PORTFOLIO (BEFORE WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .750% .600%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .525
greater than $3 billion .650 .500
</TABLE>
33.
<PAGE>
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MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
SMALL CAP EQUITY PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion 1.00% .85%
$1 billion -- $2 billion .95 .80
$2 billion -- $3 billion .90 .75
greater than $3 billion .85 .70
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EMERGING MARKETS PORTFOLIO (BEFORE WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 .950
</TABLE>
Although the advisory fee rates payable by the International
Emerging Markets and International Small Cap Equity Portfo-
lios are higher than the rates payable by mutual funds in-
vesting in domestic securities, the Fund believes they are
comparable to the rates paid by many other funds with similar
investment objectives and policies and is appropriate for the
Portfolio in light of its investment objective and policies.
For their last fiscal year the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a
percentage of average daily net assets) after voluntary fee
waivers: Large Cap Value Equity Portfolio, .48%; Large Cap
Growth Equity Portfolio, .52%; Mid-Cap Value Equity Portfo-
lio, .79%; Mid-Cap Growth Equity Portfolio, .79%; Small Cap
Value Equity Portfolio, .55%; Small Cap Growth Equity Portfo-
lio, .54%; International Equity Portfolio, .66%; Interna-
tional Emerging Markets Portfolio, 1.16%; Select Equity Port-
folio, .52%; and Balanced Portfolio, .52%.
The Portfolios' sub-advisers strive to achieve best execution
on all transactions. Infrequently, brokerage transactions for
the Portfolios may be directed to registered broker/dealers
who have entered into dealer agreements with the Fund's dis-
tributor.
ADVISER TO Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX MASTER Avenue, 11th Floor, Santa Monica, CA 90401, serves as invest-
PORTFOLIO ment adviser to the Index Master Portfolio.
DFA was organized in May 1981 and is engaged in the business
of providing investment management services to institutional
investors. DFA's assets under management totalled approxi-
mately $27 billion at November 30, 1997. David G. Booth and
Rex A. Sinquefield, both of whom are trustees and officers of
The DFA Investment Trust Company and directors,officers and
shareholders of DFA, may be deemed controlling persons of
DFA.
Investment decisions for the Index Master Portfolio are made
by the Investment Committee of DFA, which meets on a regular
basis and also as needed to consider investment issues. The
Investment Committee is composed of certain officers and di-
rectors of DFA who are elected annually. DFA provides the In-
dex Master Portfolio with a trading department and selects
brokers and dealers to effect securities transactions.
34.
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For the investment advisory services provided to the Index Mas-
ter Portfolio under the advisory agreement, DFA is entitled to
receive a fee at the annual rate of .025% of the Index Master
Portfolio's average daily net assets. For the Index Master
Portfolio's fiscal year ended November 30, 1997, DFA received a
monthly fee for its investment advisory services which, on an
annual basis, equaled .025% of the Index Master Portfolio's net
assets.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors,
Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad-
ministrators. BlackRock, Inc. and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub-
sidiary 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. 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 BDI 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 av-
erage daily net assets of each Portfolio in excess of $1 bil-
lion 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 bil-
lion. From time to time the Administrators may waive some or
all of their administration fees from a Portfolio. PFPC serves
as the administrative services, dividend disbursing and trans-
fer agent to the Index Master Portfolio, for which PFPC is en-
titled to compensation at the annual rate of .015% of the Index
Master Portfolio's net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER
AGENT, PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING lios' custodian and PFPC, whose principal offices are located
AGENT AND at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN their transfer agent and dividend disbursing agent.
EXPENSES
Expenses are deducted from the total income of each Portfolio
before dividends and distributions are paid. Expenses include,
but are not limited to, fees paid to the investment adviser and
the Administrators, transfer agency and custodian fees, trustee
fees, taxes, interest, professional fees, fees and expenses in
registering and qualifying the Portfolios and their shares for
distribution under Federal and state securities laws, expenses
of preparing prospectuses and statements of additional informa-
tion and of printing and distributing prospectuses and state-
ments of additional information to existing shareholders, ex-
penses relating to shareholder reports, shareholder meetings
and proxy solicitations, insurance premiums, the expense of in-
dependent pricing services, and other expenses which are not
expressly assumed by BlackRock, Inc. or the Fund's service
providers under their agreements with the Fund. Any general ex-
penses of the Fund that do not belong to a particular invest-
ment portfolio will be allocated among all investment portfo-
lios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
35.
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HOW ARE SHARES PURCHASED AND REDEEMED?
- -------------------------------------------------------------------------------
DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous
basis by BDI as distributor (the "Distributor"). BDI 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 BDI, 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. 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. The Fund does not accept third party checks for initial or subsequent
investments.
The Fund may in its discretion waive or modify the minimum investment amount,
may reject any order for Institutional Shares and may suspend and resume the
sale of shares of any 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
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 redemption order if, in the judgment of BlackRock, Inc., an
earlier payment could adversely affect a Portfolio. No charge for wiring re-
demption payments is imposed by the Fund.
36.
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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 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.
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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 (including, for the Index Equity Portfolio,
all of its shares in the Index Master Portfolio) that are allocated to its In-
stitutional Shares, less the liabilities charged to its Institutional Shares,
by the number of its Institutional Shares that are outstanding. The net asset
value per share of the Index Master Portfolio is calculated as of the close of
the NYSE by dividing the total market value of its investments and other as-
sets, less any liabilities, by the total outstanding shares of the Index Master
Portfolio.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees or, in the case of the Index Master Portfolio,
The DFA Investment Trust Company's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless a Portfolio's sub-adviser under the super-
vision of the Board of Trustees determines such method does not represent fair
value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Each Portfolio of the Fund will distribute substantially all of its net invest-
ment income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to in-
vestors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid not later than ten days after the
end of each quarter. Any net realized capital gains (including net short-term
capital gains) will be distributed by each Portfolio of the Fund at least annu-
ally. The period for which dividends are payable and the time for payment are
subject to change by the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional Institutional Shares of the relevant Portfolio, unless a shareholder
elects to receive distributions in cash. This election, or any revocation
thereof, must be made in writing to PFPC, and will become effective with re-
spect to distributions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses of
the Index Master Portfolio. This net income, less the Index Equity Portfolio's
expenses incurred in operations, is the Index Equity Portfolio's net investment
income from which dividends are distributed as described above. The Index Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
38.
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HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
Each Portfolio of the Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). If a Portfolio qualifies, it generally will be relieved of Federal in-
come tax on amounts distributed to shareholders, but shareholders, unless oth-
erwise exempt, will pay income or capital gains taxes on distributions (except
distributions that are treated as a return of capital), whether the distribu-
tions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends received
deduction allowed to certain corporations only to the extent of the total qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum tax purposes. The dividends received deduction is not avail-
able for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange.
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities may be subject to foreign withholding taxes or other taxes. So long as
more than 50% of the value of a Portfolio's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Port-
folio may elect, for U.S. Federal income tax purposes, to treat certain foreign
taxes paid by it, including generally any withholding taxes and other foreign
income taxes, as paid by its shareholders. It is possible that the Interna-
tional Equity and International Emerging Markets Portfolios will make this
election in certain years. If a Portfolio makes the election, the amount of
such foreign taxes paid by the Portfolio will be included in its shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and subject to applicable limitations in the Code, each shareholder will
be entitled either (a) to credit a proportionate amount of such taxes against a
shareholder's U.S. Federal income tax liabilities, or (b) if a shareholder
itemizes deductions, to deduct such proportionate amounts from U.S. Federal
taxable income.
The Index Master Portfolio is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. The application of state and local income taxes to investments in
the Portfolios may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
39.
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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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight investment portfolios. Each Equity Portfolio of-
fers five separate classes of shares--Institutional Shares, Service Shares, In-
vestor A Shares, Investor B Shares and Investor C Shares. This prospectus re-
lates only to Institutional Shares of the twelve 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 a Portfo-
lio's Institutional Shares is expected to be higher than the performance of the
Portfolio's Service Shares, and the performance of both the Institutional
Shares and Service Shares of a Portfolio is expected to be higher than the per-
formance of the Portfolio's three classes of Investor Shares. The performance
of each class of Investor Shares may be different. The Fund offers various
services and privileges in connection with its Investor Shares that are not
generally offered in connection with its Institutional and Service Shares, in-
cluding an automatic investment plan and an automatic withdrawal plan. For fur-
ther information regarding the Fund's Service or Investor Share classes, con-
tact 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
MASTER-FEEDER STRUCTURE. The Index Equity Portfolio, unlike many other invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The Index Equity Portfolio
purchases shares of the Index Master Portfolio at net asset value. The net as-
set value of the Index Equity Portfolio responds to increases and decreases in
the value of the Index Master Portfolio's securities and to the expenses of the
Index Master Portfolio allocable to the Index Equity Portfolio (as well as its
own expenses). The Index Equity Portfolio may withdraw its investment in the
Index Master Portfolio at any time upon 30 days notice to the Index Master
Portfolio if the Board of Trustees of the Fund determines that it is in the
best interests of the Index Equity Portfolio to do so. Upon withdrawal, the
Board of Trustees would consider what action might be taken, including the in-
vestment of all of the assets of the Index Equity Portfolio in another pooled
investment entity having the same investment objective as the Index Equity
Portfolio or the hiring of an investment adviser to manage the Index Equity
Portfolio's assets in accordance with the investment policies described above
with respect to the Index Equity Portfolio.
The Index Master Portfolio is a separate series of The DFA Investment Trust
Company (the "Trust"), which is a business trust created under the laws of the
State of Delaware. The Index Equity Portfolio and other
40.
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institutional investors that may invest in the Index Master Portfolio from time
to time (e.g. other investment companies) will each bear a share of all liabil-
ities of the Index Master Portfolio. Under the Delaware Business Trust Act,
shareholders of the Index Master Portfolio have the same limitation of personal
liability as shareholders of a Delaware corporation. Accordingly, Fund manage-
ment believes that neither the Index Equity Portfolio nor its shareholders will
be adversely affected by reason of the Index Equity Portfolio's investing in
the Index Master Portfolio.
The shares of the Index Master Portfolio are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns may differ from those of the Index Equity Portfolio. While investment in
the Index Master Portfolio by other institutional investors offers potential
benefits to the Index Master Portfolio (and, indirectly, to the Index Equity
Portfolio), economies of scale and related expense reductions might not be
achieved. Also, if an institutional investor were to redeem its interest in the
Index Master Portfolio, the remaining investors in the Index Master Portfolio
could experience higher pro rata operating expenses and correspondingly lower
returns. In addition, institutional investors that have a greater pro rata own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act and (iii) on such other matters as the trustees of
the Trust may consider necessary or desirable. In addition, approval of the
shareholders of the Trust is required to adopt any amendments to the Agreement
and Declaration of Trust of the Trust which would adversely affect to a mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master Portfolio's
shareholders will also be asked to vote on any proposal to change a fundamental
investment policy (i.e. a policy that may be changed only with the approval of
shareholders) of the Index Master Portfolio. If a shareholder of the Index Mas-
ter Portfolio redeems its entire interest in the Portfolio or becomes bankrupt,
a majority in interest of the remaining shareholders in the Portfolio must vote
within 120 days to approve the continuing existence of the Index Master Portfo-
lio or the Portfolio will be liquidated.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity Portfolio would hold a meeting of its shareholders and would cast its
votes proportionately as instructed by Index Equity Portfolio shareholders.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees fails to approve a similar change in the investment objective of the Index
Equity Portfolio, the Index Equity Portfolio would be forced to withdraw its
investment in the Index Master Portfolio and either seek to invest its assets
in another registered investment company with the same investment objective as
the Index Equity Portfolio, which might not be possible, or retain an invest-
ment adviser to manage the Index Equity Portfolio's assets in accordance with
its own investment objective, possibly at increased cost. A withdrawal by the
Index Equity Portfolio of its investment in the Index Master Portfolio could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Index Equity Portfolio. Should such a distribution occur,
the Index Equity Portfolio could incur brokerage fees or other transaction
costs in converting such securities to cash in order to pay redemptions. In ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity of the Portfolio.
41.
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The conversion of the Index Equity Portfolio into a feeder fund of the Index
Master Portfolio was approved by shareholders of the Index Equity Portfolio at
a meeting held on November 30, 1995. The policy of the Index Equity Portfolio,
and other similar investment companies, to invest their investable assets in
funds such as the Index Master Portfolio is a relatively recent development in
the mutual fund industry and, consequently, there is a lack of substantial ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Index Master Portfolio, please
contact DFA at (310) 395-8005.
42.
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HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
Performance information for Institutional Shares of the Portfolios may be
quoted in advertisements and communications to shareholders. Total return will
be calculated on an average annual total return basis for various periods. Av-
erage annual total return reflects the average annual percentage change in
value of an investment in Institutional Shares of a Portfolio over the measur-
ing period. Total return may also be calculated on an aggregate total return
basis. Aggregate total return reflects the total percentage change in value
over the measuring period. Both methods of calculating total return assume that
dividend and capital gain distributions made by a Portfolio with respect to its
Institutional Shares are reinvested in Institutional Shares.
The yield of Institutional Shares of the Balanced Portfolio is computed by di-
viding the net income allocated to that class during a 30-day (or one month)
period by the net asset value per share on the last day of the period and
annualizing the result on a semi-annual basis.
The performance of a Portfolio's Institutional Shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the performance of a Portfolio's Institu-
tional Shares may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and to the performance of the Dow Jones Industrial Average, the
"stocks, bonds and inflation Index" published annually by Ibbotson Associates,
the Lipper International Fund Index, the Lipper Small Cap International Fund
Index, the Lehman Government Corporate Bond Index and the Financial Times World
Stock Index, as well as the benchmarks attached to this Prospectus. Performance
information may also include evaluations of the Portfolios and their Institu-
tional Shares published by nationally recognized ranking services, and informa-
tion as reported in financial publications such as Business Week, Fortune, In-
stitutional Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal
and The New York Times, or in publications of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Institutional Shares of a particular Portfolio, a Portfolio
may provide other information demonstrating hypothetical investment returns.
This information may include, but is not limited to, illustrating the com-
pounding effects of dividends in a dividend reinvestment plan or the impact of
tax-deferred investing.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered representative of future results. The investment re-
turn and principal value of an investment in a Portfolio will fluctuate so that
an investor's Institutional Shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data
for Institutional Shares of a Portfolio cannot necessarily be used to compare
an investment in such shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. 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.
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OTHER INFORMATION ON THE PERFORMANCE OF PNC EQUITY ADVISORS COMPANY
The tables below set forth performance information relating to the Small Cap
Growth Equity Portfolio and a small cap growth equity account (the "Small Cap
Account") that is also managed by PEAC for certain trust accounts and which has
investment objectives, policies, strategies and risks substantially similar to
those of the Small Cap Growth Equity Portfolio. The performance of the Small
Cap Account has been restated to reflect certain expenses, as set forth in
footnote 2 to the table.
The performance data for the Small Cap Account is included to provide investors
with a longer performance record for PEAC in managing an account substantially
similar to the Small Cap Growth Equity Portfolio as measured against the Rus-
sell 2000 Growth Index. The Small Cap Account performance data does not repre-
sent the past, present or future performance of the Small Cap Growth Equity
Portfolio. Past performance is no guarantee of future results; investors should
not consider this performance data as an indication of future performance of
the Small Cap Growth Equity Portfolio or of PEAC. 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 either the Small Cap Growth Equity Portfolio or the Small Cap
Account may be worth more or less than their original cost at the time of re-
demption. The performance presentation is not audited.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
losses. All returns also reflect the brokerage costs borne by the Small Cap
Growth Equity Portfolio and the Small Cap Account for all periods presented.
The use of a different methodology to calculate performance could result in
different performance data.
The Small Cap Account was not subject to the same types of expenses and liquid-
ity requirements to which the Small Cap Growth Equity Portfolio is subject nor
to the diversification requirements, specific tax restrictions and investment
limitations imposed on the Small Cap Growth Equity Portfolio by the 1940 Act or
Subchapter M of the Internal Revenue Code. Consequently, the performance re-
sults for the Small Cap Account could have been adversely affected if the Small
Cap Account had been regulated as an investment company under the federal secu-
rities laws.
PEAC'S SMALL CAP GROWTH EQUITY PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
SMALL CAP GROWTH
YEAR OR PERIODS EQUITY SMALL CAP RUSSELL 2000
ENDED 12/31/97 PORTFOLIO(/1/) ACCOUNT(/2/) GROWTH INDEX(/3/)
--------------- ---------------- ------------ -----------------
<S> <C> <C> <C>
One Year.................. 9.20% 7.29% 12.95%
Three Years............... 28.46% 28.41% 18.09%
Five Years................ N/A 21.38% 12.74%
Ten Years................. N/A 23.29% 13.49%
From Inception(/4/)....... 21.74% 20.78% N/A
</TABLE>
- --------
(1) Total return reflects the performance of Institutional Shares of the Small
Cap Growth Equity Portfolio. The performance quoted reflects fee waivers
by the Portfolio's service providers. The Portfolio's performance would
have been lower in the absence of such waivers.
(2) The performance has been restated to reflect a total expense ratio of .87%,
which is the total expense ratio that Institutional Shares of the Small Cap
Growth Equity Portfolio are expected to incur during the current fiscal
year and which reflects an advisory fee of .54% of its average daily net
assets. This expense ratio reflects voluntary fee waivers by the Portfo-
lio's service providers which may be modified or terminated at any time. In
restating the total returns of the Small Cap Account, these expenses were
calculated on a quarterly basis for the periods presented. The calculation
of these expenses on a more frequent basis would result in lower perfor-
mance figures.
44.
<PAGE>
- --------------------------------------------------------------------------------
(3) Total return data is presented for each period. The Russell 2000 Growth In-
dex reflects the investment of income dividends and capital gain distribu-
tions, if any, but does not reflect fees, brokerage commissions or other
expenses of investing. The Russell 2000 Growth Index is an unmanaged secu-
rities index, and an investment cannot be made directly in the Russell 2000
Growth Index. For more information on the Russell 2000 Growth Index, see
the Appendix to this Prospectus.
(4) The Small Cap Growth Equity Portfolio and the Small Cap Account commenced
investment operations on 9/14/93 and 8/1/87, respectively.
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 BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock 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
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Large Cap Value Equity Russell 1000 An index composed of those Russell 1000 securities
Value Index with less-than-average growth orientation.
Securities in this index generally have low price-
to-book and price-earnings ratios, higher dividend
yields and lower forecasted growth values than more
growth-oriented securities in the Russell 1000
Growth Index.
Large Cap Growth Equity Russell 1000 The Russell 1000 Growth Index contains those Russell
Growth Index 1000 securities with a greater-than-average growth
orientation. Companies in this index tend to exhibit
higher price-to-book and price-earnings ratios,
lower dividend yields and higher forecasted growth
values than the Russell 1000 Value Index.
Mid-Cap Value Equity Russell Midcap The Russell Midcap Value Index consists of the
Value Index bottom 800 securities of the Russell 1000 Index with
less-than-average growth orientation as ranked by
total market capitalization.
Mid-Cap Growth Equity Russell Midcap The Russell Midcap Growth Index consists of the
Growth Index bottom 800 securities of the Russell 1000 Index with
greater-than-average growth orientation as ranked by
total market capitalization.
Small Cap Value Equity Russell 2000 The Russell 2000 Value Index contains those Russell
Value Index 2000 securities with a less-than-average growth
orientation. Securities in this index generally have
lower price-to-book and price-earnings ratios than
those in the Russell 2000 Growth Index.
Small Cap Growth Equity Russell 2000 An index composed of those Russell 2000 securities
Growth Index with a greater-than-average growth orientation.
Securities in this index generally have higher
price-to-book and price-earnings ratios than those
in the Russell 2000 Value Index.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of 20
European and Pacific Basin countries. The Index is a
market value-weighted average of the performance of
over 900 securities listed on the stock exchanges of
such countries.
International Small Cap Salomon Brothers Small stock index which represents the bottom 20% of
Equity Extended Markets the Salomon Brothers Broad Market Index ("BMI"). The
World Ex-U.S. Index BMI is an available equity capital weighted index
representative of the market structure of 20
international developed countries. It contains
companies with an available market capitalization
greater than $100 million.
International Emerging MSCI Emerging The Morgan Stanley Capital International (MSCI)
Markets Markets Free Emerging Markets Free Index (EMF) is a market
Index capitalization weighted index composed of companies
representative of the market structure of 22
Emerging Market countries in Europe, Latin America,
Africa and the Pacific Basin. The MSCI EMF Index
excludes closed markets and those shares in
otherwise free markets which are not purchasable by
foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Balanced S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad An unmanaged index of 3500 bonds. The Broad
Investment Investment Grade Index is market capitalization
Grade Index weighted and includes Treasury, Government sponsored
mortgages and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
47.
<PAGE>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Mid-Cap Growth Equity Micro-Cap Equity
International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity International Small Cap Equity [/R]
Index Equity
Small Cap Value Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- --------------------------------------------------------------------------------
THE EQUITY 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?............... 6
What Are The Portfolios?..................................... 18
What Are The Differences Among The Portfolios?............... 19
What Additional Investment Policies And Risks Apply?......... 21
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 30
Who Manages The Fund?........................................ 31
How Are Shares Purchased And Redeemed?....................... 37
What Special Purchase And Redemption Procedures May Apply?... 39
How Is Net Asset Value Calculated?........................... 41
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 41
How Are Fund Distributions Taxed?............................ 42
How Is the Fund Organized?................................... 43
How Is Performance Calculated?............................... 46
Other Information On The Performance Of PNC Equity Advisors
Company..................................................... 47
How Can I Get More Information?.............................. 49
</TABLE>
This Prospectus sets forth concisely information about the Black-
Rock FundsSM (the "Fund") equity Portfolios that a prospective
investor needs to know before investing. Please keep it for fu-
ture reference. A Statement of Additional Information dated Janu-
ary 28, 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 the Fund by calling (800) 441-
7764. The Statement of Additional Information, as supplemented
from time to time, is incorporated by reference into this Pro-
spectus. The SEC maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incor-
porated by reference and other information regarding the Fund
that has been filed with the SEC.
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.
The Index Equity Portfolio seeks to achieve its investment objec-
tive by investing all of its investable assets in a series of
shares (the "Index Master Portfolio") of The DFA Investment Trust
Company, another open-end management investment company, rather
than through a portfolio of various securities. The investment
experience of the Index Equity Portfolio corresponds directly
with the investment experience of the Index Master Portfolio. The
Index Master Portfolio has substantially the same investment ob-
jective, policies and limitations as the Index Equity Portfolio
and, except as specifically noted, is also referred to as a
"Portfolio" in this Prospectus. For additional information, see
"How Is The Fund Organized?"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE EQUITY PORTFOLIOS OF BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Equity Portfolios of BLACKROCK FUNDS consist of thirteen
diversified investment portfolios that provide investors 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 twelve* of these Portfolios (the "Port-
folios") begins on page 18 and a summary of each Performance
Benchmark is contained in the Appendix.
BLACKROCK PERFORMANCE LIPPER PEER GROUP
PORTFOLIO BENCHMARK
LARGE CAP Russell 1000 Growth and Income
VALUE EQUITY Value Index
LARGE CAP Russell 1000 Growth
GROWTH EQUITY Growth Index
MID-CAP VALUE Russell Midcap Midcap
EQUITY Value Index
MID-CAP GROWTH Russell Midcap Midcap
EQUITY Growth Index
SMALL CAP Russell 2000 Small Company Growth
VALUE EQUITY Value Index
SMALL CAP Russell 2000 Small Company Growth
GROWTH EQUITY Growth Index
INTERNATIONAL EAFE Index International
EQUITY
INTERNATIONAL Salomon International Small Cap
SMALL CAP Brothers
EQUITY Extended
Markets World
Ex-U.S. Index
INTERNATIONAL MSCI Emerging Markets
EMERGING Emerging Markets
MARKETS Free Index
SELECT EQUITY S&P 500 Index Growth and Income
INDEX EQUITY S&P 500 Index S&P 500 Index
BALANCED S&P 500 Index Balanced
and Salomon
Broad Investment
Grade Index
* A copy of the Micro-Cap Equity Prospectus can be obtained by
calling 1-888-8BLACKROCK.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
EQUITY different directions in equity investing.
PORTFOLIOS
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS IN investment objective. The Portfolios will hold equity securi-
EQUITY ties, and some or all of the Portfolios may acquire warrants,
INVESTING foreign securities, securities of smaller capitalized foreign
and domestic issuers and illiquid securities; enter into repur-
chase and reverse repurchase agreements; lend portfolio securi-
ties to third parties; and enter into futures contracts and op-
tions and forward currency exchange contracts. These and the
other investment practices set forth below, and their associ-
ated risks, deserve careful consideration. Certain risks asso-
ciated with international investments are heightened because of
currency fluctuations and investments in emerging markets. 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?" and
THE "What Special Purchase And Redemption Procedures May Apply?"
BLACKROCK
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 for the fiscal year ended September 30, 1997 as a percentage
of average daily net assets. The figures shown for the Large Cap Value Equity,
Large Cap Growth Equity, Small Cap Growth Equity, Small Cap Value Equity, Se-
lect Equity and Balanced Portfolios have been restated to reflect current ex-
penses and fee waivers. Because the Mid-Cap Value Equity Portfolio, Mid-Cap
Growth Equity Portfolio and International Small Cap Equity Portfolio are new,
the figures shown for these Portfolios under "Other expenses" are estimates for
the current fiscal year. An example based on the summary is also shown.
<TABLE>
<CAPTION>
LARGE CAP LARGE CAP MID-CAP SMALL CAP SMALL CAP
VALUE GROWTH MID-CAP GROWTH VALUE GROWTH
EQUITY EQUITY VALUE EQUITY EQUITY EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees
(after fee waivers)(/1/) .48% .52% .79% .79% .55% .54%
Other operating expenses .61 .57 .65 .65 .62 .63
------- ------- ------- ----- ----- -----
Administration fees
(after fee waivers)(/1/) .20 .19 .20 .20 .22 .23
Shareholder servicing fees .15 .15 .15 .15 .15 .15
Other expenses .26 .23 .30 .30 .25 .25
------ ------ ------ ---- ----- ----
Total Portfolio operating
expenses
(after fee waivers)(/1/) 1.09% 1.09% 1.44% 1.44% 1.17% 1.17%
======= ======= ======= ===== ===== =====
<CAPTION>
INTERNATIONAL INTERNATIONAL
INTERNATIONAL SMALL CAP EMERGING SELECT INDEX
EQUITY EQUITY MARKETS EQUITY EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees
(after fee waivers)(/1/)(/2/) .66% .80% 1.16% .52% .025% .52%
Other operating expenses .70 .83 .92 .57 .455 .62
------- ------- ------- ----- ----- -----
Administration fees
(after fee waivers)(/1/) .21 .21 .27 .19 .033 .20
Shareholder servicing fees .15 .15 .15 .15 .150 .15
Other expenses .34 .47 .50 .23 .272 .27
------ ------ ------ ---- ----- ----
Total Portfolio operating
expenses
(after fee waivers)(/1/) 1.36% 1.63% 2.08% 1.09% .480% 1.14%
======= ======= ======= ===== ===== =====
</TABLE>
(1) Without waivers, advisory fees would be .54% for the Large Cap Value Equity
Portfolio, .80% for the Mid-Cap Value Equity and Mid-Cap Growth Equity
Portfolios, .75%, 1.00% and 1.25%, respectively, for the International Eq-
uity, International Small Cap Equity and International Emerging Markets
Portfolios and .55% for each of the remaining Portfolios and administration
fees would be .21% for the Large Cap Value Equity Portfolio, .22% for the
Large Cap Growth Portfolio, .28% for the International Emerging Markets
Portfolio and .23% for each other Portfolio. BlackRock, Inc. and the Port-
folios' administrators are under no obligation to waive or continue waiving
their fees, but have informed the Fund that they expect to waive fees as
necessary to maintain the Portfolios' total operating expenses during the
remainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be .62%, .62%, .68%,
.68%, .63%, .62%, .71%, .86%, .92%, .61%, .48% and .65%, respectively and
"Total Portfolio operating expenses" would be 1.16%, 1.17%, 1.48%, 1.48%,
1.18%, 1.17%, 1.46%, 1.86%, 2.17%, 1.16%, .68% and 1.20%, respectively.
(2) Advisory fees with respect to the Index Equity Portfolio represent advisory
fees of the Index Master Portfolio.
+ Includes the operating expenses of the Index Master Portfolio that are allo-
cable to the Index Equity Portfolio.
4.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) a 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Large Cap Value Equity Portfolio $11 $35 $60 $133
Large Cap Growth Equity Portfolio 11 35 60 133
Mid-Cap Value Equity Portfolio 15 46 N/A N/A
Mid-Cap Growth Equity Portfolio 15 46 N/A N/A
Small Cap Value Equity Portfolio 12 37 64 142
Small Cap Growth Equity Portfolio 12 37 64 142
International Equity Portfolio 14 43 74 164
International Small Cap Equity
Portfolio 17 51 N/A N/A
International Emerging Markets
Portfolio 21 65 112 241
Select Equity Portfolio 11 35 60 133
Index Equity Portfolio 5 15 27 60
Balanced Portfolio 12 36 63 139
</TABLE>
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 foregoing Table and Example are intended to assist investors in understand-
ing the costs and expenses (including the Index Equity Portfolio's pro rata
share of the Index Master Portfolio's advisory fees and operating expenses) an
investor will bear either directly or indirectly. They do not reflect any
charges that may be imposed by affiliates of the Portfolios' investment adviser
or other institutions directly on their customer accounts in connection with
investments in the Portfolios.
The Board of Trustees of the Fund believes that the aggregate per share ex-
penses of the Index Equity Portfolio and the Index Master Portfolio in which
the Index Equity Portfolio's assets are invested are approximately equal to the
expenses which the Index Equity Portfolio would incur if the Fund retained the
services of an investment adviser for the Index Equity Portfolio and the assets
of the Index Equity Portfolio were invested directly in the type of securities
held by the Index Master Portfolio.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
5.
<PAGE>
- -------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
- -------------------------------------------------------------------------------
The following financial information has been derived from
the financial statements incorporated by reference into the
Statement of Additional Information and has been audited by
the Portfolios' independent accountant. This financial in-
formation should be read together with those financial
statements. Further information about the performance of the
Portfolios is available in the Fund's annual shareholder re-
ports. Both the Statement of Additional Information and the
annual shareholder reports may be obtained from the Fund
free of charge by calling (800) 441-7764. Information con-
cerning the historical investment results of Service Shares
of the Index Equity Portfolio reflects the financial experi-
ence of that Portfolio prior to its conversion on June 2,
1996 to a feeder portfolio of the Index Master Portfolio.
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP VALUE EQUITY PORTFOLIO
(FORMERLY THE VALUE EQUITY 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 $ 15.35 $ 13.92 $ 11.62 $ 11.68 $ 11.21
-------- -------- -------- -------- -------
Income from investment
operations
Net investment income 0.24 0.32 0.30 0.25 0.04
Net gain (loss) on investments
(both realized and unrealized) 4.70 2.40 2.55 0.16 0.48
-------- -------- -------- -------- -------
Total from investment
operations 4.94 2.72 2.85 0.41 0.52
-------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.25) (0.32) (0.30) (0.25) (0.05)
Distributions from net
realized capital gains (2.52) (0.97) (0.25) (0.22) - -
-------- -------- -------- -------- -------
Total distributions (2.77) (1.29) (0.55) (0.47) (0.05)
-------- -------- -------- -------- -------
NET ASSET VALUE AT END OF
PERIOD $ 17.52 $ 15.35 $ 13.92 $ 11.62 $ 11.68
======== ======== ======== ======== =======
Total return 37.22% 20.68% 25.40% 3.51% 4.64%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $595,189 $457,283 $170,832 $105,035 $23,137
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.09% 1.05% 0.95% 0.90% 0.91%/2/
Before
advisory/administration fee
waivers 1.16% 1.14% 1.09% 1.06% 0.94%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 1.62% 2.13% 2.40% 2.24% 2.44%/2/
Before
advisory/administration fee
waivers 1.55% 2.04% 2.26% 2.08% 2.41%/2/
PORTFOLIO TURNOVER RATE 37% 60% 12% 11% 11%
AVERAGE COMMISSION RATE/3/ $ 0.0580 $ 0.0556 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
6.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LARGE CAP GROWTH EQUITY PORTFOLIO
(FORMERLY THE GROWTH EQUITY PORTFOLIO)
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 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 $ 14.95 $ 13.02 $ 10.18 $ 11.57 $10.54
-------- -------- ------- ------- ------
Income from investment
operations
Net investment income 0.04 0.05 0.10 0.03 - -
Net gain (loss) on
investments
(both realized and
unrealized) 4.72 2.28 2.87 (1.32) 1.03
-------- -------- ------- ------- ------
Total from investment
operations 4.76 2.33 2.97 (1.29) 1.03
-------- -------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.04) (0.02) (0.13) - - - -
Distributions from capital - - - - - - - - - -
Distributions from net
realized capital gains (0.74) (0.38) - - (0.10) - -
-------- -------- ------- ------- ------
Total distributions (0.78) (0.40) (0.13) (0.10) - -
-------- -------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 18.93 $ 14.95 $ 13.02 $ 10.18 $11.57
======== ======== ======= ======= ======
Total return 33.38% 18.34% 29.43% (11.20)% 9.77%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $262,409 $191,023 $76,769 $36,752 $8,606
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.10% 1.05% 0.95% 0.90% 0.89%/2/
Before
advisory/administration
fee waivers 1.17% 1.17% 1.13% 1.14% 0.95%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.24% 0.31% 0.91% 0.51% (0.03)%/2/
Before
advisory/administration
fee waivers 0.17% 0.20% 0.73% 0.26% (0.09)%/2/
PORTFOLIO TURNOVER RATE 81% 58% 55% 212% 175%
AVERAGE COMMISSION RATE/3/ $ 0.0594 $ 0.0598% N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
7.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MID-CAP VALUE EQUITY PORTFOLIO [/R]
<TABLE>
<CAPTION>
FOR THE
PERIOD
12/27/96/1/
THROUGH
9/30/97
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.00
-------
Income from investment operations
Net investment income 0.07
-------
Net gain (loss) on investments
(both realized and unrealized) 2.80
-------
Total from investment operations 2.87
-------
LESS DISTRIBUTIONS
Distributions from net investment income (0.08)
Distributions from capital - -
Distributions from net realized capital gains - -
-------
Total distributions (0.08)
-------
NET ASSET VALUE AT END OF PERIOD $ 12.79
=======
Total return 28.81%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $22,757
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.44%/2/
Before advisory/administration fee waivers 1.48%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 0.98%/2/
Before advisory/administration fee waivers 0.94%/2/
PORTFOLIO TURNOVER RATE 36%
AVERAGE COMMISSION RATE/3/ $0.0528
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
8.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MID-CAP GROWTH EQUITY PORTFOLIO [/R]
<TABLE>
<CAPTION>
FOR THE
PERIOD
12/27/96/1/
THROUGH
9/30/97
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.00
-------
Income from investment operations
Net investment income (0.03)
Net gain (loss) on investments
(both realized and unrealized) 2.20
-------
Total from investment operations 2.17
-------
LESS DISTRIBUTIONS
Distributions from net investment income - -
Distributions from capital - -
Distributions from net realized capital gains - -
-------
Total distributions - -
-------
NET ASSET VALUE AT END OF PERIOD $ 12.17
=======
Total return 21.70%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $22,984
Ratios of expenses to average net assets
After advisory/administration fee waivers 1.44%/2/
Before advisory/administration fee waivers 1.48%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers (0.54)%/2/
Before advisory/administration fee waivers (0.58)%/2/
PORTFOLIO TURNOVER RATE 64%
AVERAGE COMMISSION RATE/3/ $0.0576
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
9.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP VALUE EQUITY 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 $ 15.98 $ 15.15 $ 13.59 $ 13.08 $ 12.28
-------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.13 0.06 0.02 - - - -
Net gain (loss) on investments
(both realized and unrealized) 6.39 1.70 2.18 0.77 0.80
-------- ------- ------- ------- -------
Total from investment
operations 6.52 1.76 2.20 0.77 0.80
-------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.13) (0.06) (0.03) (0.01) - -
Distributions from net
realized capital gains (2.17) (0.87) (0.61) (0.25) - -
-------- ------- ------- ------- -------
Total distributions (2.30) (0.93) (0.64) (0.26) - -
-------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 20.20 $ 15.98 $ 15.15 $ 13.59 $ 13.08
======== ======= ======= ======= =======
Total return 46.95% 12.30% 17.17% 5.96% 6.51%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $122,431 $80,981 $61,313 $45,372 $21,689
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.17% 1.15% 1.02% 0.98% 0.99%/2/
Before
advisory/administration fee
waivers 1.18% 1.16% 1.12% 1.10% 1.03%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 0.79% 0.38% 0.16% 0.03% 0.12%/2/
Before
advisory/administration fee
waivers 0.78% 0.37% 0.07% (0.09)% 0.08%/2/
PORTFOLIO TURNOVER RATE 66% 50% 31% 18% 41%
AVERAGE COMMISSION RATE/3/ $ 0.0504 $0.0580 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SMALL CAP GROWTH EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 9/15/93/1/
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 $ 21.80 $ 15.02 $ 10.14 $ 10.47 $ 9.96
-------- -------- ------- ------- ------
Income from investment
operations
Net investment income (0.03) (0.06) (0.01) 0.01 - -
Net gain (loss) on
investments (both
realized and
unrealized) 3.15 6.84 4.89 (0.34) 0.51
-------- -------- ------- ------- ------
Total from investment
operations 3.12 6.78 4.88 (0.33) 0.51
-------- -------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income - - - - - - - - - -
Distributions from net
realized capital gains (1.49) - - - - - - - -
-------- -------- ------- ------- ------
Total distributions (1.49) - - - - - - - -
-------- -------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 23.43 $ 21.80 $ 15.02 $ 10.14 $10.47
======== ======== ======= ======= ======
Total return 15.54% 45.14% 48.13% (3.12)% 5.12%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $225,089 $158,901 $62,604 $22,648 $ 911
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.17% 1.16% 1.03% 0.71% 0.99%/2/
Before
advisory/administration
fee waivers 1.17% 1.18% 1.16% 1.27% 1.68%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers (0.29)% (0.38)% (0.07)% 0.21% (0.34)%/2/
Before
advisory/administration
fee waivers (0.29)% (0.40)% (0.20)% (0.34)% (1.03)%/2/
PORTFOLIO TURNOVER RATE 82% 89% 74% 89% 9%
AVERAGE COMMISSION
RATE/3/ $ 0.0572 $ 0.0569 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
11.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EQUITY 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 $ 13.37 $ 13.24 $ 13.41 $ 12.47 $ 11.76
-------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.10 0.19 0.11 0.14 0.02
Net realized gain (loss)
on investments (both
realized and
unrealized) 1.76 0.78 0.16 1.14 0.69
-------- -------- -------- ------- -------
Total from investment
operations 1.86 0.97 0.27 1.28 0.71
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.24) (0.17) (0.08) (0.09) - -
Distributions from net
realized capital gains (0.41) (0.67) (0.36) (0.25) - -
-------- -------- -------- ------- -------
Total distributions (0.65) (0.84) (0.44) (0.34) - -
-------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 14.58 $ 13.37 $ 13.24 $ 13.41 $ 12.47
======== ======== ======== ======= =======
Total return 14.52% 7.71% 2.19% 10.36% 6.03%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $199,939 $161,321 $106,045 $75,174 $11,985
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.36% 1.36% 1.25% 1.20% 1.18%/2/
Before
advisory/administration
fee waivers 1.46% 1.47% 1.42% 1.39% 1.24%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.42% 0.71% 1.16% 1.09% 1.01%/2/
Before
advisory/administration
fee waivers 0.32% 0.60% 0.98% 0.90% 0.95%/2/
PORTFOLIO TURNOVER RATE 62% 70% 105% 37% 31%
AVERAGE COMMISSION
RATE/3/ $ 0.0166 $ 0.0158 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
12.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL SMALL CAP EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
9/26/97/1/
THROUGH
9/30/97
<S> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 10.00
-------
Income from investment operations
Net investment income - -
Net gain (loss) on investments
(both realized and unrealized) (0.06)
-------
Total from investment
operations (0.06)
LESS DISTRIBUTIONS
Distributions from net investment
income - -
Distributions from net realized
capital gains - -
-------
Total distributions - -
NET ASSET VALUE AT END OF PERIOD $ 9.94
=======
Total return (0.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 10
Ratios of expenses to average net
assets
After advisory/administration
fee waivers 1.63%/2/
Before advisory/administration
fee waivers 1.86%/2/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 1.42%/2/
Before advisory/administration
fee waivers 1.19%/2/
PORTFOLIO TURNOVER RATE 0%
AVERAGE COMMISSION RATE/3/ $0.0268
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
13.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERNATIONAL EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR YEAR 6/17/94/1/
ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 8.72 $ 8.18 $ 10.55 $10.00
------- ------- ------- ------
Income from investment operations
Net investment income 0.01 0.04 0.06 0.02
Net gain (loss) on investments (both
realized and unrealized) 0.93 0.51 (2.15) 0.53
------- ------- ------- ------
Total from investment operations 0.94 0.55 (2.09) 0.55
------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.03) - - (0.08) - -
Distributions from capital - - - - (0.01) - -
Distributions from net realized
capital gains - - (0.01) (0.19) - -
------- ------- ------- ------
Total distributions (.03) (0.01) (0.28) - -
------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 9.63 $ 8.72 $ 8.18 $10.55
======= ======= ======= ======
Total return 10.74% 6.61% (19.91)% 5.50%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $66,064 $37,987 $15,020 $3,505
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 2.08% 2.08% 2.06% 2.00%/2/
Before advisory/administration fee
waivers 2.17% 2.18% 2.30% 2.98%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 0.09% 0.70% 1.72% 1.10%/2/
Before advisory/administration fee
waivers (0.01)% 0.60% 1.48% 0.12%/2/
PORTFOLIO TURNOVER RATE 33% 44% 75% 4%
AVERAGE COMMISSION RATE/3/ $0.0016 $0.0018 N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
14.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SELECT EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR YEAR YEAR 9/15/93/1/
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 $ 13.56 $ 11.88 $ 9.92 $ 9.97 $10.00
-------- -------- ------- ------- ------
Income from investment
operations
Net investment income 0.11 0.17 0.22 0.19 - -
Net gain (loss) on
investments (both realized
and unrealized) 5.18 2.07 2.05 (0.04) (0.03)
-------- -------- ------- ------- ------
Total from investment
operations 5.29 2.24 2.27 0.15 (0.03)
-------- -------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.14) (0.17) (0.19) (0.20) - -
Distributions from net
realized capital gains (1.21) (0.39) (0.12) - - - -
-------- -------- ------- ------- ------
Total distributions (1.35) (0.56) (0.31) (0.20) - -
-------- -------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 17.50 $ 13.56 $ 11.88 $ 9.92 $ 9.97
======== ======== ======= ======= ======
Total return 42.12% 19.43% 23.43% 1.55% (.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $174,418 $113,777 $83,705 $49,293 $ 704
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.09% 1.04% 0.95% 0.90% 0.90%/2/
Before
advisory/administration
fee waivers 1.16% 1.17% 1.13% 1.18% 1.12%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 0.93% 1.41% 2.10% 1.96% 1.92%/2/
Before
advisory/administration
fee waivers 0.86% 1.28% 1.91% 1.68% 1.70%/2/
PORTFOLIO TURNOVER RATE 29% 55% 51% 88% 2%
AVERAGE COMMISSION RATE/3/ $ 0.0547 $ 0.0487 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
15.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INDEX EQUITY PORTFOLIO
<TABLE>
<CAPTION>
FOR
THE PERIOD
YEAR YEAR YEAR 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 $ 13.97 $ 13.58 $ 10.93 $ 11.02 $ 10.76
-------- -------- ------- ------- -------
Income from investment
operations
Net investment income 0.23 0.29 0.35 0.29 0.05
Net gain (loss) on
investments (both
realized and
unrealized) 5.01 2.10 2.73 0.02 0.29
-------- -------- ------- ------- -------
Total from investment
operations 5.24 2.39 3.08 0.31 0.34
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.21) (0.30) (0.31) (0.29) (0.08)
Distributions from net
realized capital gains (0.68) (1.70) (0.12) (0.11) - -
-------- -------- ------- ------- -------
Total distributions (0.89) (2.00) (0.43) (0.40) (0.08)
-------- -------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 18.32 $ 13.97 $ 13.58 $ 10.93 $ 11.02
======== ======== ======= ======= =======
Total return 39.58% 19.45% 28.99% 2.78% 3.16%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $193,319 $103,080 $61,536 $27,376 $12,441
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.48% 0.48% 0.45% 0.40% 0.41%/2/
Before
advisory/administration
fee waivers 0.68%/3/ 0.80%/3/ 0.79% 0.77% 0.53%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 1.41% 1.98% 2.62% 2.49% 3.04%/2/
Before
advisory/administration
fee waivers 1.21% 1.67% 2.28% 2.12% 2.92%/2/
PORTFOLIO TURNOVER RATE -- /5/ 18%/4/,/5/ 18% 17% 8%
AVERAGE COMMISSION RATE -- /5/ 0.0319/4/,/5/ N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including expenses allocated from The U.S. Large Company Series of The DFA
Investment Trust Company of 0.13%.
/4/For the period from October 1, 1995 through May 31, 1996.
/5/See footnotes to the financial statements of The DFA Investment Trust for
the year ended November 30, 1996 and the period ended September 30, 1997.
16.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
BALANCED 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 $ 15.09 $ 13.72 $ 11.98 $ 12.42 $ 12.05
-------- -------- ------- ------- -------
Income from investment
operations
Net investment income 0.45 0.42 0.44 0.34 0.06
Net realized gain (loss)
on investments (both
realized and
unrealized) 3.64 1.49 1.88 (0.38) 0.38
-------- -------- ------- ------- -------
Total from investment
operations 4.09 1.91 2.32 (0.04) 0.44
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.45) (0.41) (0.44) (0.34) (0.07)
Distributions from net
realized capital gains (0.52) (0.13) (0.14) (0.06) - -
-------- -------- ------- ------- -------
Total distributions (0.97) (0.54) (0.58) (0.40) (0.07)
-------- -------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 18.21 $ 15.09 $ 13.72 $ 11.98 $ 12.42
======== ======== ======= ======= =======
Total return 28.07% 14.11% 19.94% (0.36)% 3.66%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $176,232 $134,121 $85,668 $66,024 $15,842
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.14% 1.09% 0.94% 0.90% 0.93%/2/
Before
advisory/administration
fee waivers 1.20% 1.20% 1.16% 1.16% 1.11%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.68% 2.87% 3.49% 2.96% 2.75%/2/
Before
advisory/administration
fee waivers 2.62% 2.76% 3.28% 2.70% 2.57%/2/
PORTFOLIO TURNOVER RATE 173% 275% 154% 54% 32%
AVERAGE COMMISSION
RATE/3/ $ 0.0364 $ 0.0599 N/A N/A N/A
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Computed by dividing the total amount of commission paid by the total number
of shares purchased and sold during the period.
17.
<PAGE>
- -------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- -------------------------------------------------------------------------------
The BLACKROCK FUND family consists of 32 portfolios and has
been structured to include many different investment styles
so that investors may participate across multiple disci-
plines in order to seek their long-term financial goals.
The Equity Portfolios of BLACKROCK FUNDS consist of thirteen
investment portfolios that provide investors with a broad
spectrum of investment alternatives within the equity sec-
tor. 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 var-
ious product options in the way that most closely fits the
investor's goals and sentiments.
INVESTMENT
OBJECTIVES Each of the twelve BlackRock Equity Portfolios described
herein seeks to provide long-term Capital Appreciation.
The Select Equity, Large Cap Value Equity and Mid-Cap Value
Equity Portfolios pursue a secondary objective of Current
Income from dividends.
The Balanced Portfolio pursues a secondary objective of Cur-
rent Income from an allocation to fixed income securities.
To meet its investment objective, each Portfolio employs a
specific investment style, as described on the following two
pages. No assurance can be made that a Portfolio will
achieve its investment objective.
18.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE DIFFERENCES AMONG THE PORTFOLIOS?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERFORMANCE
BLACKROCK FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
Large Cap Value Pursues equity Stocks with Russell 1000
Equity securities (defined as price/earnings and Value Index
common stocks or price/book ratios at time
securities convertible of purchase below average
into common stocks) for benchmark and
which the sub-adviser capitalization in excess
believes are of $5 billion.
undervalued. A
security's earnings
trend and its dividend
growth rate will also be
factors considered in
security selection.
Large Cap Growth Pursues stocks with Stocks with growth rate Russell 1000
Equity earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization in excess
adviser considers to of $5 billion.
have favorable and
above-average earnings
growth prospects.
Mid-Cap Value Pursues mid cap stocks Stocks with low Russell Midcap
Equity and sectors which the price/earnings, Value Index
sub-adviser believes are price/book, price/cash
undervalued. A flow or price/sales
security's earnings ratios at the time of
trend and its dividend purchase relative to
growth rate will also be their respective sectors
factors considered in or the benchmark and
security selection. capitalization generally
between $1 billion and $5
billion.
Mid-Cap Growth Pursues mid cap stocks Stocks with growth rate Russell Midcap
Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
stocks which the sub- capitalization generally
adviser considers to between $1 billion and $5
have favorable and billion.
above-average earnings
growth prospects.
Small Cap Value Pursues small cap stocks Stocks with Russell 2000
Equity which the sub-adviser price/earnings and Value Index
believes are price/book ratios at time
undervalued. A of purchase below average
security's earnings for benchmark and
trend and its dividend capitalization below $1
growth rate will also be billion.
factors considered in
security selection.
Small Cap Growth Pursues small cap stocks Stocks with growth rate Russell 2000
Equity with earnings growth estimates in excess of Growth Index
potential. Emphasizes average for benchmark and
small cap stocks which capitalization below $1
the sub-adviser billion.
considers to have
favorable and above-
average earnings growth
prospects.
International Pursues non-dollar Portfolio assets are EAFE Index
Equity denominated stocks of primarily invested in
issuers in countries international stocks.
included in the Morgan
Stanley Capital Stocks with
International Europe, price/earnings ratios
Australia and the Far below average for a
East Index ("EAFE"). security's home market or
Within this universe, a stock exchange.
value style of investing
is employed to select Diversification across
stocks which the sub- countries, industry
adviser believes are groups and companies with
undervalued. A investment at all times
security's earnings in at least three foreign
trend and its price countries.
momentum will also be
factors considered in
security selection. The
sub-adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
government policies
influencing business
conditions and the
outlook for currency
relationships.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
19.
<PAGE>
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERFORMANCE
BLACKROCK FUND INVESTMENT STYLE PORTFOLIO EMPHASIS BENCHMARK*
<C> <S> <C> <C>
International Pursues non-dollar Invests primarily in Salomon Brothers
Small denominated stocks of international stocks with Extended Markets
Cap Equity small cap issuers in a capitalization below $1 World Ex-U.S. Index
countries included in billion. Emphasizes
the Salomon Brothers primarily stocks with
Extended Markets World price/earnings ratios
Ex-US Index which the below average for such
sub-adviser expects to security's home market or
appreciate. In addition, stock exchange. Seeks
there may also be up to diversification across
20% exposure to stocks countries, industry
of issuers in emerging groups and companies with
market countries. Within investment at all times
this universe, a value in at least three foreign
style of investing is developed countries.
employed to select
stocks which the sub-
adviser believes are
undervalued, taking into
account the company's
earnings trend and its
price momentum. The sub-
adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
governmental policies
influencing business
conditions and the
outlook for currency
relationships.
International Pursues non-dollar Portfolio assets are MSCI
Emerging Markets denominated stocks of primarily invested in International
issuers in emerging stocks of emerging market Emerging
country markets issuers. Markets Free
(generally any country Index
considered to be Stocks with
emerging or developing price/earnings ratios
by the World Bank, the below average for a
International Finance security's home market or
Corporation or the stock exchange.
United Nations). Within
this universe, a value Ordinarily, stocks of
style of investing is issuers in at least three
employed to select emerging markets will be
stocks which the sub- held.
adviser believes are
undervalued. The sub-
adviser will also
consider macroeconomic
factors such as the
prospects for relative
economic growth among
certain foreign
countries, expected
levels of inflation,
government policies
influencing business
conditions and the
outlook for currency
relationships.
Select Equity Combines value and Similar sector weightings S&P 500 Index
growth style as sub- as benchmark, with over-
adviser identifies or under-weighting in
market opportunity. particular securities
within those sectors.
Index Equity Invests all of its The Index Master S&P 500 Index
assets indirectly, Portfolio holds
through the U.S. Large substantially all the
Company Series (the stocks of the S&P 500
"Index Master Index in approximately
Portfolio") of The DFA the same proportions as
Investment Trust Company they are represented in
in the stocks of the S&P the Index.
500 Index using a
passive investment style
that pursues the
replication of the S&P
500 Index return.
Balanced Holds a blend of equity Maintains a minimum 25% S&P 500 and
and fixed income investment in fixed Salomon Broad
securities to deliver income senior securities. Investment
total return through Grade Index
capital appreciation and
current income.
Equity Portion: Combines Equity Portion: Similar
value and growth style sector weightings as
as sub-adviser benchmark, with over- or
identifies market under weighting in
opportunity. particular securities
within those sectors.
Fixed Income Portion: Fixed Income Portion:
Combines sector rotation Dollar- denominated
and security selection investment grade bonds,
across a broad universe including U.S.
of fixed income Government, mortgage-
securities. backed, asset-backed and
corporate debt
securities.
</TABLE>
*For more information on a Portfolio's benchmark, see the Appendix at the back
of this Prospectus.
20.
<PAGE>
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WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
The discussion below applies to each of the Portfolios (and, with respect to
the Index Equity Portfolio, its investment in the Index Master Portfolio) un-
less otherwise noted.
EQUITY SECURITIES. During normal market conditions each Portfolio, except the
Balanced Portfolio, will normally invest at least 80% of the value of its total
assets in equity securities. The Portfolios will invest primarily in equity se-
curities of U.S. issuers, except the International Equity, International Emerg-
ing Markets and International Small Cap Equity Portfolios, which will invest
primarily in foreign issuers. Equity securities include common stock and pre-
ferred stock (including convertible preferred stock); bonds, notes and deben-
tures convertible into common or preferred stock; stock purchase warrants and
rights; equity interests in trusts and partnerships; and depositary receipts.
ADRS, EDRS AND GDRS. Each Portfolio (other than the Index Master Portfolio) may
invest in both sponsored and unsponsored American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar global instruments. ADRs typically are issued by an American bank
or trust company and evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which are sometimes referred to as Continental De-
pository Receipts, are receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either foreign or domestic un-
derlying securities. GDRs are depository receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR
and GDR programs are organized independently and without the cooperation of the
issuer of the underlying securities. As a result, available information con-
cerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs,
and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if
such instruments were sponsored by the issuer. Investments in ADRs, EDRs and
GDRs present additional investment considerations as described below under "In-
ternational Portfolios."
OPTIONS AND FUTURES CONTRACTS. To the extent consistent with its investment ob-
jective, each Portfolio (other than the Index Master Portfolio) may write (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 Equity, Interna-
tional Emerging Markets and International Small Cap Equity Portfolios, 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) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular securi-
ties, securities indices, or the yield differential between two securities, or,
in the case of the International Equity, International Emerging Markets and In-
ternational Small Cap Equity Portfolios, foreign currencies, and may or may not
be listed on a securities exchange and may or may not be issued by the Options
Clearing Corporation. A Portfolio will not purchase put and call options when
the aggregate premiums on outstanding options exceed 5% of its net assets at
the time of purchase, and will not write options on more than 25% of the value
of its net assets (measured at the time an option is written). Options trading
is a highly specialized activity that entails greater than ordinary investment
risks. In addition, unlisted options are not subject to the protections af-
forded purchasers of listed options issued by the Options Clearing Corporation,
which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts to commit funds
awaiting investment in stocks or maintain cash liquidity or, except with re-
spect to the Index Master Portfolio, for other hedging purposes. The value of a
Portfolio's contracts may equal or exceed 100% of its total assets, although a
Portfolio will not purchase or sell a futures contract unless immediately af-
terwards the aggregate amount of margin deposits on its existing futures posi-
tions plus the amount of premiums paid for related futures options entered into
for other than bona fide hedging purposes is 5% or less of its net assets.
21.
<PAGE>
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Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of securities, the cash value of a securities index or a stated quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset
an expected decrease in the value of its portfolio positions that might other-
wise result from a market decline or currency exchange fluctuation. A 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, 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)
a 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."
LIQUIDITY MANAGEMENT. As a temporary defensive measure if its sub-adviser de-
termines that market conditions warrant, each Portfolio other than the Index
Master Portfolio may invest without limitation in high quality money market
instruments. The Portfolios may also invest in high quality money market in-
struments pending investment or to meet anticipated redemption requests. The
Balanced Portfolio may also invest in these securities in furtherance of its
investment objective. The Index Master Portfolio may invest a portion of its
assets, normally not more than 5% of its net assets, in certain short-term
fixed income obligations in order to maintain liquidity or to invest temporar-
ily uncommitted cash balances.
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, a 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 a Portfolio to possible loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio (other than the
Index Master Portfolio) may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These trans-
actions involve a commitment by a Portfolio to purchase or sell particular se-
curities with payment and delivery taking place at a future date (perhaps one
or two months later), and permit a Portfolio to lock in a price or yield on a
security it owns or intends to purchase, regardless of future changes in in-
terest 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
22.
<PAGE>
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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.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from fi-
nancial 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
by each Portfolio through reverse repurchase agreements under which the Portfo-
lio sells portfolio securities to financial institutions such as banks and bro-
ker-dealers and agrees to repurchase them at a particular date and price. A
Portfolio may use the proceeds of reverse repurchase agreements to purchase
other securities either maturing, or under an agreement to resell, on a date
simultaneous with or prior to the expiration of the reverse repurchase agree-
ment. The Index Master Portfolio does not intend to invest in reverse repur-
chase agreements. The Balanced Portfolio may utilize reverse repurchase agree-
ments when it is anticipated that the interest income to be earned from the in-
vestment of the proceeds of the transaction is greater than the interest ex-
pense of the transaction. This use of reverse repurchase agreements may be re-
garded as leveraging and, therefore, speculative. Reverse repurchase agreements
involve the risks that the interest income earned in the investment of the pro-
ceeds will be less than the interest expense, that the market value of the se-
curities sold by a Portfolio may decline below the price of the securities the
Portfolio is obligated to repurchase and that the securities may not be re-
turned to the Portfolio. During the time a reverse repurchase agreement is out-
standing, a Portfolio will maintain a segregated account with the Fund's custo-
dian containing cash, U.S. Government or other appropriate liquid securities
having a value at least equal to the repurchase price. A Portfolio's reverse
repurchase agreements, together with any other borrowings, will not exceed, in
the aggregate, 33 1/3% of the value of its total assets (33% in the case of the
Index Master Portfolio). In addition, the Balanced Portfolio may borrow up to
an additional 5% of its total assets for temporary purposes. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolios (other than
the Index Master Portfolio and the Balanced Portfolio) will not make any in-
vestments.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios (other than the Index Master Portfolio) may invest in
securities issued by other investment companies which invest in short-term debt
securities and which seek to maintain a $1.00 net asset value per share. Such
Portfolios may also invest in securities issued by other investment companies
with similar investment objectives. The International Equity and International
Emerging Markets Portfolios may purchase shares of investment companies invest-
ing primarily in foreign securities, including so-called "country funds." Coun-
try funds have portfolios consisting exclusively of securities of issuers lo-
cated in one foreign country. The Index Equity Portfolio may also invest in
Standard & Poor's Depository Receipts (SPDRs) and shares of other investment
companies that are structured to seek a similar correlation to the performance
of the S&P 500 Index. Securities of other investment companies will be acquired
within limits prescribed by the Investment Company Act of 1940 (the "1940
Act"). As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in addi-
tion to the expenses each bears directly in connection with its own operations.
SECURITIES LENDING. A Portfolio may seek additional income by lending securi-
ties on a short-term basis. The securities lending agreements will require that
the loans be secured by collateral in cash, U.S. Government securities or (ex-
cept for the Index Master Portfolio) irrevocable bank letters of credit main-
tained on a current basis equal in value to at least the market value of the
loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of
the value of its total assets. Securities loans involve risks of delay in re-
ceiving
23.
<PAGE>
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additional collateral or in recovering the loaned securities, or possibly loss
of rights in the collateral if the borrower of the securities becomes insol-
vent.
ILLIQUID SECURITIES. No Portfolio will invest more than 15% (10% with respect
to the Index Master Portfolio) of the value of its net assets in securities
that are illiquid. Variable and floating rate instruments that cannot be dis-
posed of within seven days, and repurchase agreements and time deposits that
do not provide for payment within seven days after notice, without taking a
reduced price, are subject to these limits. Each Portfolio may purchase secu-
rities 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 il-
liquid so long as it is determined by the adviser or sub-adviser that an ade-
quate 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 uninterested in purchas-
ing these restricted securities.
SMALL CAP AND MID-CAP PORTFOLIOS. Under normal market conditions, the Small
Cap Growth Equity Portfolio, the Small Cap Value Equity Portfolio and the In-
ternational Small Cap Equity Portfolio will invest at least 90% (and in any
event at least 65%) of their respective total assets in equity securities of
smaller-capitalized organizations (less than $1 billion at the time of pur-
chase or, with respect to the International Small Cap Equity Portfolio, $1.5
billion for Japanese issuers). Similarly, the Mid-Cap Value Equity Portfolio
and Mid-Cap Growth Equity Portfolio will invest, under normal market condi-
tions, at least 90% (and in any event at least 65%) or their respective total
assets in equity securities of medium-capitalized organizations (between $1
billion and $5 billion at the time of purchase). These organizations will nor-
mally have more limited product lines, markets and financial resources and
will be more dependent upon a limited management group than larger capitalized
companies.
INDEX EQUITY AND INDEX MASTER PORTFOLIOS. During normal market conditions, the
Index Master Portfolio (in which all of the assets of the Index Equity Portfo-
lio are invested) invests at least 95% of the value of its total assets in se-
curities included in the Standard & Poor's 500(R) Composite Stock Price Index
(the "S&P 500 Index")*. The Index Master Portfolio intends to invest in all of
the stocks that comprise the S&P 500 Index in approximately the same propor-
tions as they are represented in the Index. The Index Master Portfolio oper-
ates as an index portfolio and, therefore, is not actively managed (through
the use of economic, financial or market analysis), and adverse performance
will ordinarily not result in the elimination of a stock from the Portfolio.
The Portfolio will remain fully invested in common stocks even when stock
prices are generally falling. Ordinarily, portfolio securities will not be
sold except to reflect additions or deletions of the stocks that comprise the
S&P 500 Index, including mergers, reorganizations and similar transactions
and, to the extent necessary, to provide cash to pay redemptions of the Port-
folio's shares. The investment performance of the Index Master Portfolio and
the Index Equity Portfolio is expected to approximate the investment perfor-
mance of the S&P 500 Index, which tends to be cyclical in nature, reflecting
periods when stock prices generally rise or fall.
Neither the Index Equity Portfolio nor the Index Master Portfolio are spon-
sored, endorsed, sold or promoted by S&P. S&P makes no representation or war-
ranty, express or implied, to the owners of the Index Equity Portfolio or the
Index Master Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Index Equity Portfolio and the
Index Master Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to the Index
Equity Portfolio and the Index Master Portfolio is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index which is deter-
mined, composed and calculated by S&P without regard to the Index Equity Port-
folio or the Index Master Portfolio. S&P has no obligation to take the needs
of the Index Equity Portfolio or the Index Master Portfolio or their respec-
tive owners into consideration in determining, composing or calculating the
S&P 500 Index. S&P is not responsible for and has not participated in the de-
termination of the prices and amount of the Index Equity Portfolio or the In-
dex Master Portfolio or the timing of the issuance or sale of the Index Equity
Portfolio or the Index Master Portfolio or in the determination or calculation
of the equation
- -------
* "Standard & Poor's(R)," "S&P," "S&P 500(R)," "Standard & Poor's 500(R)" and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by the Fund and The DFA Investment Trust Company.
24.
<PAGE>
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by which the Index Equity Portfolio or the Index Master Portfolio is to be con-
verted into cash. S&P has no obligation or liability in connection with the ad-
ministration, marketing or trading of the Index Equity Portfolio or Index Mas-
ter Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 IN-
DEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ER-
RORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IM-
PLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRAN-TIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INTERNATIONAL PORTFOLIOS. During normal market conditions, the International
Equity Portfolio, the International Emerging Markets Portfolio and the Interna-
tional Small Cap Equity Portfolio (the "International Portfolios") will invest
at least 90% (and in any event at least 65%) of their total assets in equity
securities of foreign issuers. Investing in foreign securities involves consid-
erations not typically associated with investing in securities of companies or-
ganized and operated in the United States. Because foreign securities generally
are denominated and pay dividends or interest in foreign currencies, the value
of a Portfolio that invests in foreign securities as measured in U.S. dollars
will be affected favorably or unfavorably by changes in exchange rates.
A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitation on the removal of funds or as-
sets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations.
In general, less information is publicly available with respect to foreign is-
suers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting require-
ments applicable to issuers in the United States. While the volume of transac-
tions effected on foreign stock exchanges has increased in recent years, it re-
mains appreciably below that of the New York Stock Exchange. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addi-
tion, there is generally less government supervision and regulation of securi-
ties exchanges, brokers and issuers in foreign countries than in the United
States.
The expense ratios of the International Portfolios can be expected to be higher
than those of Portfolios investing primarily in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such
as the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign mar-
kets and additional costs arising from delays in settlements of transactions
involving foreign securities.
As stated, the International Emerging Markets Portfolio will invest its assets
in countries with emerging economies or securities markets. These countries may
include Argentina, Brazil, Bulgaria, Chile, China, Colombia, The Czech Repub-
lic, Ecuador, Egypt, Greece, Hungary, India, Indonesia, Israel, Lebanon, Malay-
sia, Mexico, Morocco, Peru, The Philippines, Poland, Romania, Russia, South Af-
rica, South Korea, Taiwan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and
Zimbabwe. Political and economic structures in many of these countries may be
undergoing significant evolution and rapid development, and these countries may
lack the social, political and economic stability characteristic of more devel-
oped countries. Some of these countries may have in the past failed to recog-
nize private property rights and have at times nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization
25.
<PAGE>
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or expropriation of assets, may be heightened. In addition, unanticipated po-
litical or social developments may affect the value of investments in these
countries and the availability to a Portfolio of additional investments in
emerging market countries. The small size and inexperience of the securities
markets in certain of these countries and the limited volume of trading in se-
curities in these countries may make investments in the countries illiquid and
more volatile than investments in Japan or most Western European countries.
There may be little financial or accounting information available with respect
to issuers located in certain emerging market countries, and it may be diffi-
cult to assess the value or prospects of an investment in such issuers.
The International Equity Portfolio invests primarily in equity securities of
issuers located in countries included in EAFE. Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Netherlands, New
Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the United
Kingdom are currently included in EAFE. From time to time the International Eq-
uity Portfolio may invest more than 25% of its total assets in the securities
of issuers located in Japan. Investments of 25% or more of the Portfolio's to-
tal assets in this or any other country will make the Portfolio's performance
more dependent upon the political and economic circumstances of a particular
country than a mutual fund that is more widely diversified among issuers in
different countries. For example, in the past events in the Japanese economy as
well as social developments and natural disasters have affected Japanese secu-
rities and currency markets, and have periodically disrupted the relationship
of the Japanese yen with other currencies and with the U.S. dollar.
The International Small Cap Equity Portfolio invests primarily in equity secu-
rities of issuers located in countries included in the Salomon Brothers Ex-
tended Markets World Ex-U.S. Index. Australia, Austria, Belgium, Canada, Den-
mark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Netherlands,
New Zealand, Norway, Singapore, Malaysia, Spain, Sweden, Switzerland and the
United Kingdom currently comprise the Salomon Index. From time to time the
Portfolio may invest more than 25% of its total assets in the securities of is-
suers located in Japan or the United Kingdom. As discussed above, investments
of 25% or more of the Portfolio's total assets in Japan, the United Kingdom or
any other country would make the Portfolio's performance more dependent upon
the political and economic circumstances of a particular country than a mutual
fund that is more widely diversified among issuers in different countries.
The International Small Cap Equity Portfolio may also invest up to 20% of its
assets in countries with emerging economies or securities markets which, as
stated above, involves special risks. These countries may include Argentina,
Brazil, Bulgaria, Chile, China, Colombia, The Czech Republic, Ecuador, Egypt,
Greece, Hungary, India, Indonesia, Israel, Lebanon, Malaysia, Mexico, Morocco,
Peru, The Philippines, Poland, Romania, Russia, South Africa, South Korea, Tai-
wan, Thailand, Tunisia, Turkey, Venezuela, Vietnam and Zimbabwe.
The International Portfolios may (but are not required to) use forward foreign
currency exchange contracts to hedge against movements in the value of foreign
currencies (including the European Currency Unit) relative to the U.S. dollar
in connection with specific portfolio transactions or with respect to portfolio
positions. 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 a Portfolio
to establish a rate of exchange for a future point in time.
BALANCED PORTFOLIO. Fixed income securities purchased by the Balanced Portfolio
may include domestic and dollar-denominated foreign debt securities, including
bonds, debentures, notes, equipment lease and trust certificates, mortgage-re-
lated and asset-backed securities, guaranteed investment contracts (GICs), ob-
ligations issued or guaranteed by the U.S. Government or its agencies or in-
strumentalities and state and local municipal obligations. These securities
will be rated at the time of purchase within the four highest rating groups as-
signed by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Rat-
ings Group ("S&P") or another nationally recognized statistical rating agency.
If unrated, the securities will be determined at the time of purchase to be of
comparable quality by the sub-adviser. Securities rated "Baa" by Moody's or
"BBB" by S&P, respectively, are generally considered to be investment grade al-
though they have speculative characteristics. If a fixed income security is re-
duced below Baa by Moody's or BBB by S&P, the Portfolio's sub-ad-
26.
<PAGE>
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viser will dispose of the security in an orderly fashion as soon as practica-
ble. Investments in securities of foreign issuers, which present additional in-
vestment considerations as described above under "International Portfolios,"
will be limited to 5% of the Portfolio's total assets.
The Balanced Portfolio may make significant investments in residential and com-
mercial mortgage-related and other asset-backed securities (i.e., securities
backed by home equity loans, installment sale contracts, credit card receiv-
ables or other assets) issued by governmental entities and private issuers.
The Balanced Portfolio may acquire several types of mortgage-related securi-
ties, including guaranteed mortgage pass-through certificates, which provide
the holder with a pro rata interest in the underlying mortgages, adjustable
rate mortgage-related securities ("ARMs") and collateralized mortgage obliga-
tions ("CMOs"), which provide the holder with a specified interest in the cash
flow of a pool of underlying mortgages or other mortgage-backed securities. Is-
suers of CMOs frequently elect to be taxed as a pass-through entity known as
real estate mortgage investment conduits, or REMICs. CMOs are issued in multi-
ple classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in many ways. In most cases, however, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other clas-
ses having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue in-
terest at a specified rate until other specified classes have been retired and
are converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date,
and generally exhibit less yield and market volatility than other classes.
Non-mortgage asset-backed securities involve risks that are not presented by
mortgage-related securities. Primarily, these securities do not have the bene-
fit of the same security interest in the underlying collateral. Credit card re-
ceivables are generally unsecured, and the debtors are entitled to the protec-
tion of a number of state and Federal consumer credit laws which give debtors
the right to set off certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the 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 trustees for
the holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
The yield and maturity characteristics of mortgage-related and other asset-
backed securities differ from traditional debt securities. A major difference
is that the principal amount of the obligations may be prepaid at any time be-
cause the underlying assets (i.e. loans) generally may be prepaid at any time.
The average life of a mortgage-related instrument, in particular, is likely to
be substantially less than the original maturity of the mortgage pools under-
lying the securities as the result of scheduled principal payments and mortgage
prepayments. In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans and is less likely to ex-
perience substantial prepayments.
The relationship between prepayments and interest rates may give some high-
yielding asset-backed securities less potential for growth in value than con-
ventional bonds with comparable maturities. In addition, in periods of falling
interest rates, the rate of prepayments tends to increase. During such periods,
the reinvestment of prepayment proceeds by the Balanced Portfolio will gener-
ally be at lower rates than the rates that were carried by the obligations that
have been prepaid. Because of these and other reasons, an asset-backed
security's total return and maturity may be difficult to predict precisely. To
the extent that the Balanced Portfolio purchases asset-backed securities at a
premium, prepayments (which may be made without penalty) may result in loss of
the Balanced Portfolio's principal investment to the extent of premium paid.
27.
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The Balanced Portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged and master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears Mortgage) or mortgage-related securi-
ties containing loans or mortgages originated by PNC Bank, National Associa-
tion ("PNC Bank") or its affiliates. It is possible that, under some circum-
stances, 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.
The Balanced Fund may also purchase obligations issued or guaranteed by the
U.S. Government and U.S. Government agencies and instrumentalities. Obliga-
tions of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury. Others are sup-
ported by the right of the issuer to borrow from the U.S. Treasury; and still
others are supported only by the credit of the agency or instrumentality issu-
ing the obligation. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. Certain U.S. Treasury and agency securities
may be held by trusts that issue participation certificates (such as Treasury
income growth receipts ("TIGRs") and certificates of accrual on Treasury cer-
tificates ("CATs")). The Balanced Portfolio may purchase these certificates,
as well as Treasury receipts and other stripped securities, which represent
beneficial ownership interests in either future interest payments or the fu-
ture principal payments on U.S. Government obligations. These instruments are
issued at a discount to their "face value" and may (particularly in the case
of stripped mortgage-backed securities) exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
The Balanced Portfolio may also purchase zero-coupon bonds (i.e., discount
debt obligations that do not make periodic interest payments) and state and
local government obligations. Zero-coupon bonds are subject to greater market
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. Municipal obligations
may be purchased when the Portfolio's sub-adviser believes that their return,
on a pre-tax basis, will be comparable to the returns of other permitted in-
vestments. Dividends paid by the Portfolio that are derived from interest on
municipal obligations will be taxable to shareholders.
To take advantage of attractive opportunities in the mortgage market and to
enhance current income, the Balanced 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 Port-
folio 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, the Portfolio will not be en-
titled to receive interest and principal payments on the securities sold. Pro-
ceeds of the sale will be invested in additional instruments for the Portfo-
lio, and the income from these investments will generate income for the Port-
folio. 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 per-
formance of the Portfolio compared with what the performance would have been
without the use of dollar rolls. At the time that the Portfolio enters into a
dollar roll transaction, it will place in a segregated account maintained with
its custodian cash, U.S. Government securities or other liquid securities hav-
ing a value equal to the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure that its value is maintained.
The Portfolio's dollar rolls, together with its reverse repurchase agreements
and other borrowings, will not exceed, in the aggregate, 33 1/3% of the value
of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties the Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom the Portfo-
lio sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the sub-adviser's ability to
28.
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correctly predict interest rates and prepayments. There is no assurance that
dollar rolls can be successfully employed.
The Balanced Portfolio may enter into interest rate swaps and may purchase or
sell interest rate caps and floors. The Portfolio may enter into these transac-
tions primarily to preserve a return or spread on a particular investment or
portion of its holdings, as a duration management technique or to protect
against an increase in the price of securities the Portfolio anticipates pur-
chasing at a later date. The Portfolio intends to use these transactions as a
hedge and not as a speculative investment.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. 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.
The Balanced Portfolio 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. Although the Portfolio does not
currently intend to do so under current market conditions, the Portfolio may
invest up to 10% of its total assets in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate of an inverse floater re-
sets in the opposite direction from the market rate of interest to which it is
indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in their market values.
Unrated variable and floating rate instruments will be comparable in quality to
investment grade securities as determined by the Portfolio's sub-advisers. The
absence of an active secondary market with respect to particular variable and
floating rate instruments, however, could make it difficult for the Portfolio
to dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligation or during periods when the Portfolio is not entitled to
exercise its demand rights.
The Portfolio may only make short sales of securities "against-the-box." A
short sale is a transaction in which the Portfolio sells a security it does not
own in anticipation that the market price of that security will decline. The
Portfolio 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 port-
folio 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,"
the Portfolio forgoes an opportunity for capital appreciation in the security.
The market value of the Balanced Portfolio's investments in fixed income secu-
rities will change in response to changes in interest rates and the relative
financial strength of each issuer. During periods of falling interest rates,
the values of long-term fixed income securities generally rise. Conversely,
during periods of rising interest rates the values of such securities generally
decline. Changes in the financial strength of an issuer or changes in the rat-
ings of any particular security may also affect the value of these investments.
PORTFOLIO TURNOVER RATES. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the International Small Cap Equity Port-
folio will not exceed 100%. The past portfolio turnover rates of the other
Portfolios are set forth above under "What Are The Portfolios' Financial High-
lights?" A Portfolio's annual portfolio turnover rate will not be a factor pre-
venting a sale or purchase when the adviser or sub-adviser believes investment
considerations warrant such sale or purchase. Portfolio turnover may vary
greatly from year to year as well as within a particular year. High portfolio
turnover rates (i.e. 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.
29.
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WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
- --------------------------------------------------------------------------------
A Portfolio's (other than the Index Master Portfolio) investment objective and
policies may be changed by the Fund's Board of Trustees without shareholder ap-
proval. However, shareholders will be given at least 30 days' notice before any
change to a Portfolio's investment objective. The investment objective of the
Index Master Portfolio may not be changed without the approval of shareholders
of that Portfolio. No assurance can be provided that a Portfolio will achieve
its investment objective.
Each Portfolio has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of a Portfolio" (as defined in the Statement of Additional Information). Sev-
eral of the Portfolios' fundamental investment policies, which are set forth in
full in the Statement of Additional Information, are summarized below.
No Portfolio may:
(1) purchase securities (except obligations of the U.S. Government and its in-
strumentalities and related repurchase agreements) if more than 5% of its
total assets will be invested in the securities of any one issuer, except
that up to 25% of a Portfolio's total assets may be invested without regard
to this 5% limitation;
(2) subject to the foregoing 25% exception (other than with respect to the In-
dex Master Portfolio), purchase more than 10% of the outstanding voting se-
curities of any issuer;
(3) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry; and
(4) borrow money in amounts over one-third of the value of its total assets
(33% of net assets in the case of the Index Master Portfolio) at the time
of such borrowing.
These investment limitations are applied at the time investment securities are
purchased. Notwithstanding the investment limitations, the Index Equity Portfo-
lio may invest all of its assets in shares of an open-end management investment
company with substantially the same investment objective, policies and limita-
tions as that Portfolio.
30.
<PAGE>
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of the Fund and of The DFA Investment
Trust Company (in which the assets of the Fund's Index Equity
Portfolio are invested) are managed under the direction of
their separate Boards of Trustees. The following persons cur-
rently serve as trustees of BlackRock Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Global Wireless.
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 both the Fund
and The DFA Investment Trust Company.
ADVISER AND
SUB-ADVISERS The Adviser to BlackRock Funds is BlackRock, Inc., except with
respect to the Index Equity Portfolio. Each of the Portfolios
within the BlackRock Fund family (except the Index Equity Port-
folio) is managed by a specialized portfolio manager who is a
member of one of BlackRock, Inc.'s portfolio management
affiliates.
As adviser, BlackRock, Inc. is responsible for the overall in-
vestment management of the Portfolios. The sub-advisers are re-
sponsible for the day-to-day management of the Portfolios, and
generally make all purchase and sale investment decisions for
the Portfolios. The sub-advisers also provide research and
credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-dollar
fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
Provident Capital Management, Inc. ("PCM"), which has its pri-
mary offices at 1600 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103, acts as sub-adviser to the Large Cap Value
Equity, Mid-Cap Value Equity, Small Cap Value Equity and Select
Equity Portfolios. PNC Equity Advisors Company ("PEAC"), which
has its primary offices at 1600 Market Street, 27th Floor,
Philadelphia, Pennsylvania 19103, acts as sub-adviser to the
Large Cap Growth Equity, Mid-Cap Growth Equity and Small Cap
Growth Equity Portfolios. CastleInternational Asset Management
Limited, which has its primary offices at 7 Castle Street, Ed-
inburgh, Scotland, EH2 3AH, acts as sub-adviser to the Interna-
tional Equity, International Emerging Markets and International
Small Cap Equity Portfolios. BlackRock Financial Management,
Inc. ("BlackRock"), primary offices at 345 Park Avenue, New
York, New York 10154, and PCM act as sub-advisers to the Bal-
anced Portfolio.
31.
<PAGE>
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The Portfolios (other than the Index Equity Portfolio) and
their investment sub-advisers and portfolio managers are as
follows:
<TABLE>
<CAPTION>
BLACKROCK PORTFOLIO PORTFOLIO MANAGER
------------------- -----------------
<C> <S>
Large Cap Value Equity Daniel B. Eagan; portfolio manager with
sub-adviser since 1995; director of
investment strategy at BlackRock, Inc.
during 1994 and 1995; prior to 1994, served
as senior research consultant for Mercer
Investment Consulting; Portfolio manager
since January 1997.
Large Cap Growth Equity R. Andrew Damm; investment manager with
sub-adviser since 1997; senior investment
strategist with BlackRock, Inc. since 1995;
portfolio manager with PNC Bank from 1988
to 1995; Mr. Damm has participated in the
management of the Portfolio since 1996 and
has been designated Portfolio manager since
September 1997.
Mid-Cap Value Equity Christian K. Stadlinger; Vice President of
sub-adviser since July 1996; prior to
joining sub-adviser, Portfolio Manager and
Research Analyst with Morgan Stanley Asset
Management; Portfolio co-manager since
inception.
Daniel B. Eagan (see above); Portfolio co-
manager since its inception.
Mid-Cap Growth Equity William C. McVail; investment manager with
sub-adviser since 1994; prior to joining
sub-adviser, equity and fixed income
analyst with PNC Bank; Portfolio co-manager
since its inception.
William J. Wykle; investment manager with
sub-adviser since 1995; investment manager
with PNC Bank, National Association since
1986; Portfolio co-manager since its
inception.
Small Cap Value Equity Christian K. Stadlinger; Vice President of
sub-adviser since July 1996; prior to
joining sub-adviser, Portfolio Manager and
Research Analyst with Morgan Stanley Asset
Management; Portfolio manager since July
1996.
Small Cap Growth Equity William J. Wykle (see above); Portfolio co-
manager since its inception.
William C. McVail; (see above); Portfolio
co-manager since inception.
International Equity Gordon Anderson; Managing and Investment
Director with sub-adviser since 1996; prior
to joining sub-adviser, Investment Director
of Dunedin Fund Managers Ltd.; Portfolio
manager since 1996.
International Small Cap Equity Peter J. Tait; Director and Global
Strategist of sub-adviser since 1996.
Director and Head of Continental European
desk at Dunedin Fund Managers Ltd. from
1990 to 1996. Portfolio manager since its
inception.
International Emerging Markets Euan Rae; Senior Investment Manager with
sub-adviser since 1996; prior to joining
sub-adviser, Head of Emerging Markets at
Dunedin Fund Managers Ltd. and investment
manager with Edinburgh Fund Managers;
Portfolio manager since 1996.
Select Equity Daniel B. Eagan (see above); Portfolio
manager since 1995.
Balanced R. Andrew Damm; senior investment
strategist with BlackRock, Inc. since 1995;
portfolio manager with PNC Bank from 1988
to 1995; Portfolio co-manager since 1996.
Robert S. Kapito; Vice Chairman of
BlackRock since 1988; Portfolio co-manager
since 1995.
Keith T. Anderson; Managing Director and
co-chair of Portfolio Management Group and
Investment Strategy Committee of BlackRock
since 1988; Portfolio co-manager since
1995.
</TABLE>
32.
<PAGE>
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BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) 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. BlackRock, Inc.
is an indirect wholly-owned subsidiary of PNC Bank Corp., a
multi-bank holding company.
For their investment advisory and sub-advisory services, Black-
Rock, Inc. and the Portfolios' sub-advisers are entitled to
fees, computed daily on a portfolio-by-portfolio basis and pay-
able monthly, at the maximum annual rates set forth below. As
stated under "What Are the Expenses of the Portfolios?", with
respect to certain Portfolios, BlackRock, Inc. and the sub-ad-
visers intend to waive a portion of their fees during the cur-
rent fiscal year. All sub-advisory fees are paid by BlackRock,
Inc. and do not represent an extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
EXCEPTTHE INDEX EQUITY, MID-CAP VALUE EQUITY, MID-CAP GROWTH
EQUITY AND THE INTERNATIONAL PORTFOLIOS (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .550% .400%
$1 billion--$2 billion .500 .350
$2 billion--$3 billion .475 .325
greater than $3 billion .450 .300
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP VALUE
EQUITY AND
MID-CAP GROWTH EQUITY PORTFOLIOS (BEFORE WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .800% .650%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .500
greater than $3 billion .625 .475
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EQUITY PORTFOLIO (BEFORE WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .750% .600%
$1 billion -- $2 billion .700 .550
$2 billion -- $3 billion .675 .525
greater than $3 billion .650 .500
MAXIMUM ANNUAL CONTRACTUAL FEE RATE
FOR THE INTERNATIONAL SMALL CAP EQUITY PORTFOLIO (BEFORE
WAIVERS)
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion 1.00% .85%
$1 billion -- $2 billion .95 .80
$2 billion -- $3 billion .90 .75
greater than $3 billion .85 .70
</TABLE>
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL
EMERGING MARKETS PORTFOLIO (BEFORE WAIVERS)
<TABLE>
<CAPTION>
INVESTMENT SUB-ADVISORY
AVERAGE DAILY NET ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion 1.250% 1.100%
$1 billion -- $2 billion 1.200 1.050
$2 billion -- $3 billion 1.155 1.005
greater than $3 billion 1.100 0.950
</TABLE>
33.
<PAGE>
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Although the advisory fee rates payable by the International
Emerging Markets and International Small Cap Equity Portfo-
lios are higher than the rates payable by mutual funds in-
vesting in domestic securities, the Fund believes they are
comparable to the rates paid by many other funds with similar
investment objectives and policies and is appropriate for the
Portfolio in light of its investment objective and policies.
For their last fiscal year the Portfolios paid investment ad-
visory fees at the following annual rates (expressed as a
percentage of average daily net assets) after voluntary fee
waivers: Large Cap Value Equity Portfolio, .48%; Large Cap
Growth Equity Portfolio, .52%; Mid-Cap Value Equity Portfolio
.79%; Mid-Cap Growth Equity Portfolio .79%; Small Cap Value
Equity Portfolio, .55%; Small Cap Growth Equity Portfolio,
.54%; International Equity Portfolio, .66%; International
Emerging Markets Portfolio, 1.16%; Select Equity Portfolio,
.52%; and Balanced Portfolio, .52%.
The Portfolios' sub-advisers strive to achieve best execution
on all transactions. Infrequently, brokerage transactions for
the Portfolios may be directed to registered broker/dealers
who have entered into dealer agreements with the Funds' dis-
tributor.
ADVISER TO Dimensional Fund Advisors Inc. ("DFA"), located at 1299 Ocean
INDEX MASTER Avenue, 11th Floor, Santa Monica, CA 90401, serves as invest-
PORTFOLIO ment adviser to the Index Master Portfolio.
DFA was organized in May 1981 and is engaged in the business
of providing investment management services to institutional
investors. DFA's assets under management totalled approxi-
mately $27 billion at November 30, 1997. David G. Booth and
Rex A. Sinquefield, both of whom are trustees and officers of
The DFA Investment Trust Company and directors, officers and
shareholders of DFA, may be deemed controlling persons of
DFA.
Investment decisions for the Index Master Portfolio are made
by the Investment Committee of DFA, which meets on a regular
basis and also as needed to consider investment issues. The
Investment Committee is composed of certain officers and di-
rectors of DFA who are elected annually. DFA provides the In-
dex Master Portfolio with a trading department and selects
brokers and dealers to effect securities transactions.
For the investment advisory services provided to the Index
Master Portfolio under the advisory agreement, DFA is enti-
tled to receive a fee at the annual rate of .025% of the In-
dex Master Portfolio's average daily net assets. For the In-
dex Master Portfolio's fiscal year ended November 30, 1997,
DFA received a monthly fee for its investment advisory serv-
ices which, on an annual basis, equaled .025% of the Index
Master Portfolio's net assets.
34.
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ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors,
Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad-
ministrators. BlackRock, Inc. and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub-
sidiary 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. 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 BDI 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 av-
erage daily net assets of each Portfolio in excess of $1 bil-
lion 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 adminis-
tration fees from a Portfolio. PFPC serves as the administra-
tive services, dividend disbursing and transfer agent to the
Index Master Portfolio, for which PFPC is entitled to compensa-
tion at the annual rate of .015% of the Index Master Portfo-
lio's net assets.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER
AGENT, PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING lios' custodian and PFPC, whose principal offices are located
AGENT AND at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN their transfer agent and dividend disbursing agent.
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 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 designa-
35.
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tions 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 each Portfo-
lio 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 custo-
dian fees, trustee fees, taxes, interest, professional fees,
shareholder servicing and processing fees, fees and expenses
in registering and qualifying the Portfolios and their
shares for distribution under Federal and state securities
laws, expenses of preparing prospectuses and statements of
additional information and of printing and distributing pro-
spectuses and statements of additional information to exist-
ing 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 BlackRock,
Inc. 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 allo-
cated among all investment portfolios by or under the direc-
tion of the Board of Trustees in a manner the Board deter-
mines to be fair and equitable.
36.
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HOW ARE SHARES PURCHASED AND REDEEMED?
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DISTRIBUTOR. Shares of each Portfolio of the Fund are offered on a continuous
basis by BDI as distributor (the "Distributor"). BDI 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 BDI, 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 ap-
plicable NASD regulations, may include contributions to various non-cash and
cash incentive arrangements to promote the sale of shares, as well as sponsor-
ship 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 "In-
vestment Advisory, Administration, Distribution and Servicing Arrangements" 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 the Compass Capital Group of Funds at the time of its com-
bination 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 state-
ments 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. The Fund does not accept third party
checks for initial or subsequent investments.
The Fund may in its discretion modify or waive the minimum investment amount,
may reject any order for Service Shares and may suspend and resume the sale of
shares of any 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
37.
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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 BlackRock, Inc., an
earlier payment could adversely affect a Portfolio. No charge for wiring re-
demption payments is imposed by the Fund, although Institutions may charge
their customer accounts for redemption services. Information relating to such
redemption services and charges, if any, should be obtained by customers from
their 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
balance 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'
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 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 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.
38.
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WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?
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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-
authorized investment amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their shares of
the Portfolios at any time by sending a written redemption request in proper
form to BlackRock Funds c/o PFPC Inc., P.O. Box 8907, Wilmington, Delaware
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. The Fund re-
serves 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.
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 BlackRock Funds c/o PFPC, P.O.
Box 8907, Wilmington, Delaware 19899-8907.
39.
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The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so. The Fund, the Administrators and the Distributor will em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions reasonably believed to be genuine in accordance with such proce-
dures.
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
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.
Persons who were shareholders of an investment portfolio of the Compass Capi-
tal 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
described in this section.
40.
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HOW IS NET ASSET VALUE CALCULATED?
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Net asset value is calculated separately for Service Shares of each Portfolio
as of the close of regular trading hours on the NYSE (currently 4:00 p.m. East-
ern Time) on each Business Day by dividing the value of all securities and
other assets owned by a Portfolio (including, for the Index Equity Portfolio,
all of its shares in the Index Master Portfolio) that are allocated to its
Service Shares, less the liabilities charged to its Service Shares, by the num-
ber of its Service Shares that are outstanding. The net asset value per share
of the Index Master Portfolio is calculated as of the close of the NYSE by di-
viding the total market value of its investments and other assets, less any li-
abilities, by the total outstanding shares of the Index Master Portfolio.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices, or the mean between bid and asked prices,
that are provided by securities dealers or pricing services. Portfolio securi-
ties which are primarily traded on foreign securities exchanges are normally
valued at the preceding closing values of such securities on their respective
exchanges. Securities for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the direc-
tion of the Board of Trustees or, in the case of the Index Master Portfolio,
The DFA Investment Trust Company's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless a Portfolio's sub-adviser under the super-
vision of the Board of Trustees determines such method does not represent fair
value.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
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Each Portfolio of the Fund will distribute substantially all of its net invest-
ment income and net realized capital gains, if any, to shareholders. The net
investment income of each Portfolio is declared quarterly as a dividend to in-
vestors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid not later than ten days after the
end of each quarter. Any net realized capital gains (including net short-term
capital gains) will be distributed by each Portfolio of the Fund at least annu-
ally. The period for which dividends are payable and the time for payment are
subject to change by the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and frac-
tional Service Shares of the relevant Portfolio, unless a shareholder elects to
receive distributions in cash. This election, or any revocation thereof, must
be made in writing to PFPC, and will become effective with respect to distribu-
tions paid after its receipt by PFPC.
The Index Equity Portfolio seeks its investment objective by investing all of
its investable assets in the Index Master Portfolio, and the Index Equity Port-
folio is allocated its pro rata share of the ordinary income and expenses of
the Index Master Portfolio. This net income, less the Index Equity Portfolio's
expenses incurred in operations, is the Index Equity Portfolio's net investment
income from which dividends are distributed as described above. The Index Mas-
ter Portfolio also allocates to the Index Equity Portfolio its pro rata share
of capital gains, if any, realized by the Index Master Portfolio.
41.
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HOW ARE FUND DISTRIBUTIONS TAXED?
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Each Portfolio of the Fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). If a Portfolio qualifies, it generally will be relieved of Federal in-
come tax on amounts distributed to shareholders, but shareholders, unless oth-
erwise exempt, will pay income or capital gains taxes on distributions (except
distributions that are treated as a return of capital), whether the distribu-
tions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
Dividends paid by the Portfolios will be eligible for the dividends received
deduction allowed to certain corporations only to the extent of the total qual-
ifying dividends received by a Portfolio from domestic corporations for a tax-
able year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for Federal al-
ternative minimum tax purposes. The dividends received deduction is not avail-
able for capital gain distributions.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
An investor considering buying shares on or just before a dividend record date
should be aware that the amount of the forthcoming dividend payment, although
in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption,
transfer or exchange of shares depending upon their tax basis and their price
at the time of redemption, transfer or exchange.
Dividends and certain interest income earned by a Portfolio from foreign secu-
rities may be subject to foreign withholding taxes or other taxes. So long as
more than 50% of the value of a Portfolio's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the Port-
folio may elect, for U.S. Federal income tax purposes, to treat certain foreign
taxes paid by it, including generally any withholding taxes and other foreign
income taxes, as paid by its shareholders. It is possible that the Interna-
tional Equity and International Emerging Markets Portfolios will make this
election in certain years. If a Portfolio makes the election, the amount of
such foreign taxes paid by the Portfolio will be included in its shareholders'
income pro rata (in addition to taxable distributions actually received by
them), and subject to applicable limitations in the Code, each shareholder will
be entitled either (a) to credit a proportionate amount of such taxes against a
shareholder's U.S. Federal income tax liabilities, or (b) if a shareholder
itemizes deductions, to deduct such proportionate amounts from U.S. Federal
taxable income.
The Index Master Portfolio is classified as a partnership for Federal income
tax purposes. As such, the Index Master Portfolio will not be subject to Fed-
eral income tax, and the Index Equity Portfolio will be allocated its propor-
tionate share of the income and realized and unrealized gains and losses of the
Index Master Portfolio.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. The application of state and local income taxes to investments in
the Portfolios may differ from the Federal income tax consequences described
above. In addition, shareholders who are non-resident alien individuals, for-
eign trusts or estates, foreign corporations or foreign partnerships may be
subject to different Federal income tax treatment. Future legislative or admin-
istrative changes or court decisions may materially affect the tax consequences
of investing in the Portfolios.
42.
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HOW IS THE FUND ORGANIZED?
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The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment com-
pany. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight investment portfolios. Each Equity Portfolio of-
fers five separate classes of shares--Institutional Shares, Service Shares, In-
vestor A Shares, Investor B Shares and Investor C Shares. This prospectus re-
lates only to Service Shares of the twelve 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 a Portfo-
lio's Institutional Shares is expected to be higher than the performance of the
Portfolio's Service Shares, and the performance of both the Institutional
Shares and Service Shares of a Portfolio is expected to be higher than the per-
formance of the Portfolio's three classes of Investor Shares. The performance
of each class of Investor Shares may be different. The Fund offers various
services and privileges in connection with its Investor Shares that are not
generally offered in connection with its Institutional and Service Shares, in-
cluding an automatic investment plan and an automatic withdrawal plan. For fur-
ther information regarding the Fund's Institutional or Investor Share classes,
contact PFPC at (800) 441-7764 (Institutional Shares) or (800) 441-7762 (In-
vestor 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
MASTER-FEEDER STRUCTURE. The Index Equity Portfolio, unlike many other invest-
ment companies which directly acquire and manage their own portfolio of securi-
ties, seeks to achieve its investment objective by investing all of its
investable assets in the Index Master Portfolio. The Index Equity Portfolio
purchases shares of the Index Master Portfolio at net asset value. The net as-
set value of the Index Equity Portfolio responds to increases and decreases in
the value of the Index Master Portfolio's securities and to the expenses of the
Index Master Portfolio allocable to the Index Equity Portfolio (as well as its
own expenses). The Index Equity Portfolio may withdraw its investment in the
Index Master Portfolio at any time upon 30 days notice to the Index Master
Portfolio if the Board of Trustees of the Fund determines that it is in the
best interests of the Index Equity Portfolio to do so. Upon withdrawal, the
Board of Trustees would consider what action might be taken, including the in-
vestment of all of the assets of the Index Equity Portfolio in another pooled
investment entity having the same investment objective as the Index Equity
Portfolio or the hiring of an investment adviser to manage the Index Equity
Portfolio's assets in accordance with the investment policies described above
with respect to the Index Equity Portfolio.
The Index Master Portfolio is a separate series of The DFA Investment Trust
Company (the "Trust"), which is a business trust created under the laws of the
State of Delaware. The Index Equity Portfolio and other institutional
43.
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investors that may invest in the Index Master Portfolio from time to time (e.g.
other investment companies) will each bear a share of all liabilities of the
Index Master Portfolio. Under the Delaware Business Trust Act, shareholders of
the Index Master Portfolio have the same limitation of personal liability as
shareholders of a Delaware corporation. Accordingly, Fund management believes
that neither the Index Equity Portfolio nor its shareholders will be adversely
affected by reason of the Index Equity Portfolio's investing in the Index Mas-
ter Portfolio.
The shares of the Index Master Portfolio are offered to institutional investors
in private placements for the purpose of increasing the funds available for in-
vestment and achieving economies of scale that might be available at higher as-
set levels. The expenses of such other institutional investors and their re-
turns may differ from those of the Index Equity Portfolio. While investment in
the Index Master Portfolio by other institutional investors offers potential
benefits to the Index Master Portfolio (and, indirectly, to the Index Equity
Portfolio), economies of scale and related expense reductions might not be
achieved. Also, if an institutional investor were to redeem its interest in the
Index Master Portfolio, the remaining investors in the Index Master Portfolio
could experience higher pro rata operating expenses and correspondingly lower
returns. In addition, institutional investors that have a greater pro rata own-
ership interest in the Index Master Portfolio than the Index Equity Portfolio
could have effective voting control over the operation of the Index Master
Portfolio.
Shares in the Index Master Portfolio have equal, non-cumulative voting rights,
except as set forth below, with no preferences as to conversion, exchange, div-
idends, redemption or any other feature. Shareholders of the Trust have the
right to vote only (i) for removal of its trustees, (ii) with respect to such
additional matters relating to the Trust as may be required by the applicable
provisions of the 1940 Act and (iii) on such other matters as the trustees of
the Trust may consider necessary or desirable. In addition, approval of the
shareholders of the Trust is required to adopt any amendments to the Agreement
and Declaration of Trust of the Trust which would adversely affect to a mate-
rial degree the rights and preferences of the shares of the Index Master Port-
folio or to increase or decrease their par value. The Index Master Portfolio's
shareholders will also be asked to vote on any proposal to change a fundamental
investment policy (i.e. a policy that may be changed only with the approval of
shareholders) of the Index Master Portfolio. If a shareholder of the Index Mas-
ter Portfolio redeems its entire interest in the Portfolio or becomes bankrupt,
a majority in interest of the remaining shareholders in the Portfolio must vote
within 120 days to approve the continuing existence of the Index Master Portfo-
lio or the Portfolio will be liquidated.
When the Index Equity Portfolio, as a shareholder of the Index Master Portfo-
lio, votes on matters pertaining to the Index Master Portfolio, the Index Eq-
uity Portfolio would hold a meeting of its shareholders and would cast its
votes proportionately as instructed by Index Equity Portfolio shareholders.
The investment objective of the Index Master Portfolio may not be changed with-
out approval of its shareholders. Shareholders of the Portfolio will receive
written notice thirty days prior to the effective date of any change in the in-
vestment objective of the Master Portfolio. If the Index Master Portfolio
changes its investment objective in a manner which is inconsistent with the in-
vestment objective of the Index Equity Portfolio and the Fund's Board of Trust-
ees fails to approve a similar change in the investment objective of the Index
Equity Portfolio, the Index Equity Portfolio would be forced to withdraw its
investment in the Index Master Portfolio and either seek to invest its assets
in another registered investment company with the same investment objective as
the Index Equity Portfolio, which might not be possible, or retain an invest-
ment adviser to manage the Index Equity Portfolio's assets in accordance with
its own investment objective, possibly at increased cost. A withdrawal by the
Index Equity Portfolio of its investment in the Index Master Portfolio could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution) to the Index Equity Portfolio. Should such a distribution occur,
the Index Equity Portfolio could incur brokerage fees or other transaction
costs in converting such securities to cash in order to pay redemptions. In ad-
dition, a distribution in kind to the Index Equity Portfolio could result in a
less diversified portfolio of investments and could adversely affect the li-
quidity of the Portfolio.
44.
<PAGE>
- --------------------------------------------------------------------------------
The conversion of the Index Equity Portfolio into a feeder fund of the Index
Master Portfolio was approved by shareholders of the Index Equity Portfolio at
a meeting held on November 30, 1995. The policy of the Index Equity Portfolio,
and other similar investment companies, to invest their investable assets in
funds such as the Index Master Portfolio is a relatively recent development in
the mutual fund industry and, consequently, there is a lack of substantial ex-
perience with the operation of this policy. There may also be other investment
companies or entities through which you can invest in the Index Master Portfo-
lio which may have different sales charges, fees and other expenses which may
affect performance. As of the date of this Prospectus, one other feeder fund
invests all of its investable assets in the Index Master Portfolio. For infor-
mation about other funds that may invest in the Master Index Portfolio, please
contact DFA at (310) 395-8005.
45.
<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
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 a Portfolio with respect to its Service Shares
are reinvested in shares of the same class.
The yield of Service Shares of the Balanced Portfolio is computed by dividing
the net income allocated to its Service Shares during a 30-day (or one month)
period by the net asset value per share on the last day of the period and
annualizing the result on a semi-annual basis.
The performance of a Portfolio's Service Shares may be compared to the perfor-
mance of other mutual funds with similar investment objectives and to relevant
indices, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mu-
tual funds. For example, the performance of a Portfolio's Service Shares may
be compared to data prepared by Lipper Analytical Services, Inc., CDA Invest-
ment 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 Inter-
national Fund Index, the Lipper Small Cap International Fund Index, the Lehman
Government Corporate Bond Index and the Financial Times World Stock Index, as
well as the benchmarks attached to this Prospectus. Performance information
may also include evaluations of the Portfolios and their Service Shares pub-
lished by nationally recognized ranking services, and information as reported
in financial publications such as Business Week, Fortune, Institutional In-
vestor, Money Magazine, Forbes, Barron's, The Wall Street Journal and The New
York Times, or in publications of a local or regional nature.
In addition to providing performance information that demonstrates the actual
yield or return of Service Shares of a particular Portfolio, a Portfolio may
provide other information demonstrating hypothetical investment returns. This
information may include, but is not limited to, illustrating the compounding
effects of dividends in a dividend reinvestment plan or the impact of tax-de-
ferred investing.
Performance quotations for shares of a Portfolio represent past performance
and should not be considered representative of future results. The investment
return 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 in-
vestment 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.
46.
<PAGE>
- --------------------------------------------------------------------------------
OTHER INFORMATION ON THE PERFORMANCE OF PNC EQUITY ADVISORS COMPANY
The tables below set forth performance information relating to the Small Cap
Growth Equity Portfolio and a small cap growth equity account (the "Small Cap
Account") that is also managed by PEAC for certain trust accounts and which has
investment objectives, policies, strategies and risks substantially similar to
those of the Small Cap Growth Equity Portfolio. The performance of the Small
Cap Account has been restated to reflect certain expenses, as set forth in
footnote 2 to the table.
The performance data for the Small Cap Account is included to provide investors
with a longer performance record for PEAC in managing an account substantially
similar to the Small Cap Growth Equity Portfolio as measured against the Rus-
sell 2000 Growth Index. The Small Cap Account performance data does not repre-
sent the past, present or future performance of the Small Cap Growth Equity
Portfolio. Past performance is no guarantee of future results; investors should
not consider this performance data as an indication of future performance of
the Small Cap Growth Equity Portfolio or of PEAC. 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 either the Small Cap Growth Equity Portfolio or the Small Cap
Account may be worth more or less than their original cost at the time of re-
demption. The performance presentation is not audited.
All returns presented were calculated on a total return basis and include all
dividends and interest, accrued income and realized and unrealized gains and
losses. All returns also reflect the brokerage costs borne by the Small Cap
Growth Equity Portfolio and the Small Cap Account for all periods presented.
The use of a different methodology to calculate performance could result in
different performance data.
The Small Cap Account was not subject to the same types of expenses and liquid-
ity requirements to which the Small Cap Growth Equity Portfolio is subject nor
to the diversification requirements, specific tax restrictions and investment
limitations imposed on the Small Cap Growth Equity Portfolio by the 1940 Act or
Subchapter M of the Internal Revenue Code. Consequently, the performance re-
sults for the Small Cap Account could have been adversely affected if the Small
Cap Account had been regulated as an investment company under the federal secu-
rities laws.
PEAC'S SMALL CAP GROWTH EQUITY PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
SMALL CAP GROWTH
YEAR OR PERIODS EQUITY SMALL CAP RUSSELL 2000
ENDED 12/31/97 PORTFOLIO(/1/) ACCOUNT(/2/) GROWTH INDEX(/3/)
--------------- ---------------- ------------ -----------------
<S> <C> <C> <C>
One Year.................. 8.79% 6.96% 12.95%
Three Years............... 27.99% 28.02% 18.09%
Five Years................ N/A 21.01% 12.74%
Ten Years................. N/A 22.91% 13.49%
From Inception(/4/)....... 21.34% 20.41% N/A
</TABLE>
- ------
(1) Total return reflects the performance of Service Shares of the Small Cap
Growth Equity Portfolio since the commencement of operations of the Port-
folio rather than the date Service Shares in the Portfolio were intro-
duced. Performance information for the Portfolio's Service Shares prior to
their introduction date on 9/15/93 does not reflect shareholder servicing,
shareholder processing and certain other expenses borne by Service Shares
which, if reflected, would reduce the performance quoted for such period.
Performance information presented for Service Shares of the Portfolio
prior to their introduction is based upon historical expenses of the
Portfolio's Institutional Shares which do not reflect the actual expenses
that an investor would have incurred as a holder of Service Shares of the
Portfolio. The performance quoted reflects fee waivers by the Portfolio's
service providers. The Portfolio's performance would have been lower in
the absence of such waivers.
(2) The performance has been restated to reflect a total expense ratio of
1.17%, which is the total expense ratio that Service Shares of the Small
Cap Growth Equity Portfolio are expected to incur during the current fiscal
year and which reflects an advisory fee of .54% of its average daily net
assets. This expense ratio reflects voluntary fee waivers by the Portfo-
lio's service providers which may be modified or terminated at any time. In
restating the total returns of the Small Cap Account, these expenses were
calculated on a quarterly basis for the periods presented. The calculation
of these expenses on a more frequent basis would result in lower perfor-
mance figures.
47.
<PAGE>
- --------------------------------------------------------------------------------
(3) Total return data is presented for each period. The Russell 2000 Growth In-
dex reflects the investment of income dividends and capital gain distribu-
tions, if any, but does not reflect fees, brokerage commissions or other
expenses of investing. The Russell 2000 Growth Index is an unmanaged secu-
rities index, and an investment cannot be made directly in the Russell 2000
Growth Index. For more information on the Russell 2000 Growth Index, see
the Appendix to this Prospectus.
(4) The Small Cap Growth Equity Portfolio and the Small Cap Account commenced
investment operations on 9/14/93 and 8/1/87, respectively.
48.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
49.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
<TABLE>
<CAPTION>
COMPASS CAPITAL PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Large Cap Value Equity Russell 1000 An index composed of those Russell 1000 securities
Value Index with less-than-average growth orientation.
Securities in this index generally have low price-
to-book and price-earnings ratios, higher dividend
yields and lower forecasted growth values than more
growth-oriented securities in the Russell 1000
Growth Index.
Large Cap Growth Equity Russell 1000 The Russell 1000 Growth Index contains those Russell
Growth Index 1000 securities with a greater-than-average growth
orientation. Companies in this index tend to exhibit
higher price-to-book and price-earnings ratios,
lower dividend yields and higher forecasted growth
values than the Russell 1000 Value Index.
Mid-Cap Value Equity Russell Midcap The Russell Midcap Value Index consists of the
Value Index bottom 800 securities of the Russell 1000 Index with
less-than-average growth orientation as ranked by
total market capitalization.
Mid-Cap Growth Equity Russell Midcap The Russell Midcap Growth Index consists of the
Growth Index bottom 800 securities of the Russell 1000 Index with
greater-than-average growth orientation as ranked by
total market capitalization.
Small Cap Value Equity Russell 2000 The Russell 2000 Value Index contains those Russell
Value Index 2000 securities with a less-than-average growth
orientation. Securities in this index generally have
lower price-to-book and price-earnings ratios than
those in the Russell 2000 Growth Index.
Small Cap Growth Equity Russell 2000 An index composed of those Russell 2000 securities
Growth Index with a greater-than-average growth orientation.
Securities in this index generally have higher
price-to-book and price-earnings ratios than those
in the Russell 2000 Value Index.
International Equity EAFE Index An index composed of a sample of companies
representative of the market structure of 20
European and Pacific Basin countries. The Index is a
market value-weighted average of the performance of
over 900 securities listed on the stock exchanges of
such countries.
International Small Cap Salomon Brothers Small stock index which represents the bottom 20% of
Equity Extended the Salomon Brothers Broad Market Index ("BMI"). The
Markets World BMI is an available equity capital weighted index
Ex-U.S. Index representative of the market structure of 20
international developed countries. It contains
companies with an available market capitalization
greater than $100 million.
International Emerging MSCI Emerging The Morgan Stanley Capital International (MSCI)
Markets Markets Free Emerging Markets Free Index (EMF) is a market
Index capitalization weighted index composed of companies
representative of the market structure of 22
Emerging Market countries in Europe, Latin America,
Africa and the Pacific Basin. The MSCI EMF Index
excludes closed markets and those shares in
otherwise free markets which are not purchasable by
foreigners.
Select Equity S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Index Equity S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Balanced S&P 500 Index An unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock
Exchange. The Index is heavily weighted toward
stocks with large market capitalizations and
represents approximately two-thirds of the total
market value of all domestic common stocks.
Salomon Broad An unmanaged index of 3500 bonds. The Broad
Investment Investment Grade Index is market capitalization
Grade Index weighted and includes Treasury, Government sponsored
mortgages and investment grade fixed rate corporates
with a maturity of 1 year or longer.
</TABLE>
50.
<PAGE>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Mid-Cap Growth Equity Micro-Cap Equity
International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity
Small Cap Value Equity International Small Cap Equity
Index Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 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 sets forth concisely information about the
BlackRock Micro-Cap Equity Portfolio (the "Portfolio") that a
prospective investor needs to know before investing. Please keep
it for future reference. A Statement of Additional Information
dated January 28, 1998 has been filed with the Securities and
Exchange Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from BlackRock Funds SM
(the "Fund") by calling (800) 441-7762. The Statement of Addi-
tional Information, as supplemented from time to time, is incor-
porated by reference into this Prospectus. The SEC maintains a
Web site (http://www.sec.gov) that contains the Statement of Ad-
ditional Information, material incorporated by reference and
other information regarding the Fund 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
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 BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Micro-Cap Equity Portfolio of BLACKROCK FUNDS is one of
thirteen diversified investment portfolios that provide invest-
ors 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 Equity Portfolio
begins on page 6. To obtain a prospectus describing the Fund's
other equity portfolios, call (800) 441-7762.
The Portfolio's performance benchmark is the Wilshire Quantum
MicroCap Index and its Lipper peer group is the Micro Cap Funds
category. The Wilshire Quantum 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 contains all publicly traded U.S. stocks, excluding
REITS and limited partnerships.
BlackRock, Inc. serves as the Portfolio's investment adviser.
PNC Equity Advisors Company, an affiliate of BlackRock, Inc.
("PEAC"), serves as sub-adviser to the Portfolio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Micro-Cap Equity
BLACKROCK Portfolio. We intend this document to be an effective tool as
MICRO-CAP you explore one approach to micro cap equity investing.
EQUITY
PORTFOLIO
[/R]
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?"
For information on how to purchase and redeem shares of the
INVESTING IN Portfolio, see "How Are Shares Purchased?" and "How Are Shares
THE Redeemed?"
BLACKROCK
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIO?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses and shareholder transaction
expenses expected to be incurred by Investor Shares of the Portfolio for the
current fiscal year as a percentage of average daily net assets. The figures
shown under "Other expenses" are estimated for the current fiscal year. An ex-
ample based on the summary is also shown.
<TABLE>
<CAPTION>
MICRO-CAP EQUITY PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C
<S> <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
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 1.10% 1.10% 1.10%
12b-1 fees(/3/)(/4/) .00 .75 .75
Other operating expenses (after fee
waivers)(/3/) .82 .82 .82
----- ----- -----
Shareholder servicing fee .25 .25 .25
Shareholder processing fee .15 .15 .15
Other expenses .42 .42 .42
--- ---- ----
Total Portfolio operating expenses (after
fee waivers)(/3/) 1.92% 2.67% 2.67%
====== ====== ======
</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.
BlackRock, Inc. 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
operating expenses through the fiscal year ending September 30, 1998 at the
levels set forth in the table. Without waivers, "Total Portfolio operating
expenses" would be: (i) 1.95% for Investor A Shares; and (ii) 2.70% for In-
vestor B Shares and Investor C Shares. The Portfolio does not expect to in-
cur 12b-1 fees in excess of .005% with respect to Investor A Shares (other-
wise payable 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* $69 $107
B Shares (Redemption)** 72 120
B Shares (No Redemption) 27 83
C Shares 27 83
</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.
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 "Who Manages The Fund?--Distribu-
tion and Service Plan" in the Prospectus and "Investment Advisory, Administra-
tion, Distribution and Servicing Arrangements" in the Statement of Additional
Information.
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 BLACKROCK FUNDS is one of
thirteen BlackRock investment portfolios that provide
investors with a broad spectrum of investment alternatives
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 var-
ious product options in the way that most closely fits the
investor's investment goals and sentiments.
INVESTMENT The Micro-Cap Equity Portfolio seeks to provide long-term
OBJECTIVE capital appreciation.
INVESTMENT
STYLE Pursues micro cap equity securities with earnings growth po-
tential. Emphasizes micro cap equity securities which the
sub-adviser considers to have favorable and above-average
earnings growth prospects.
PORTFOLIO
EMPHASIS Equity securities with growth rate estimates in excess of
average for benchmark and capitalizations of $25 million to
$300 million.
The Portfolio will invest primarily in micro cap companies
that have revenue and earnings growth visibility of 20% or
higher; generally, only companies in the top 40th percentile
of the micro cap sector will be considered appropriate in-
vestments. Such companies will generally have debt which
does not exceed 40% of its capitalization.
IMPORTANT In certain investment cycles and over certain holding peri-
ods, an equity fund that invests in micro cap stocks may
RISK perform above or below the market. An investment program
that combines multiple disciplines across different styles
CONSIDERATIONS and market capitalizations allows investors to select from
various product options in a way that most closely fits the
investor's investment goals. The BlackRock Micro-Cap Equity
Portfolio should be considered an aggressive allocation
within an overall investment strategy. [/R]
6.
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WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
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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.
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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) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular securi-
ties, 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 Options Clearing Corporation. The Portfolio
will not purchase put and call options when the aggregate premiums on outstand-
ing options exceed 5% of its net assets at the time of purchase, and will not
write options on more than 25% of the value of its net assets (measured at the
time an option is written). Options trading is a highly specialized activity
that entails greater than ordinary investment risks. In addition, unlisted op-
tions are not subject to the protections afforded purchasers of listed options
issued by the Options Clearing Corporation, which performs the obligations of
its members if they default.
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.
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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; (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 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.
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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.
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase securities from fi-
nancial 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 the
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. 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
10.
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not registered under the Securities Act of 1933 (the "1933 Act") but which can
be sold to "qualified institutional buyers" in accordance with Rule 144A under
the 1933 Act. These securities will not be considered illiquid so long as it is
determined by the adviser or sub-adviser that an adequate trading market exists
for the securities. This investment practice could have the effect of increas-
ing the level of illiquidity in the Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted securi-
ties.
PORTFOLIO TURNOVER RATE. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the Portfolio will not exceed 150%. 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.
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of BlackRock Funds are managed under
the direction of the Board of Trustees. The following persons
currently serve as trustees of BlackRock Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Global Wireless.
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
SUB-ADVISER The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
Inc. (formerly PNC Asset Management Group, Inc.) 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. BlackRock, Inc. is an
indirect wholly-owned subsidiary of PNC Bank Corp., a multi-
bank holding company.
The sub-adviser to the Portfolio is PNC Equity Advisors Company
("PEAC"), an affiliate of BlackRock, Inc., 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 and Thomas Callan serve as
portfolio managers of the Portfolio. Mr. Wykle has been an
investment manager at the sub-adviser since 1995. From 1986 to
1995, Mr. Wykle was an investment manager with PNC Bank. Mr.
Callan has been an investment manager at the sub-adviser 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.
As adviser, BlackRock, Inc. is responsible for the overall
investment management of the Portfolio. The sub-adviser is
responsible for the day-to-day management of the Portfolio, and
generally makes all purchase and sale investment decisions for
the Portfolio. The sub-adviser also provides research and
credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-dollar
fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services, Black-
Rock, Inc. and the 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
13.
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"What Are the Expenses of the Portfolio?" BlackRock, Inc. and
the sub-adviser intend to waive a portion of their fees dur-
ing the current fiscal year. All sub-advisory fees are paid
by BlackRock, Inc. 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 1.10% .950%
$1 billion -- $2 billion 1.05 .900
$2 billion -- $3 billion 1.025 .875
greater than $3 billion 1.00 .850
</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 the Fund's distributor.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distribu-
tors, Inc. ("BDI") (the "Administrators") serve as the Fund's
co-administrators. BlackRock, Inc. and PFPC are indirect
wholly-owned subsidiaries of PNC Bank Corp. BDI is a wholly-
owned subsidiary of Provident Distributors, Inc. ("PDI"). A
majority of the outstanding stock of PDI is owned by its of-
ficers.
The Administrators generally assist the Fund in all aspects
of its administration and operation, including matters relat-
ing to the maintenance of financial records and fund account-
ing. As compensation for these services, BlackRock, Inc. is
entitled to receive a fee, computed daily and payable month-
ly, at an annual rate of .03% of the Portfolio's average
daily net assets. PFPC and BDI are entitled to receive a com-
bined administration fee, computed daily and payable monthly,
at the aggregate annual rate of (i) .085% of the first $500
million of the Portfolio's average daily net assets, .075% of
the next $500 million of the Portfolio's average daily net
assets and .065% of the average daily net assets of the Port-
folio 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 the 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 the Portfolio in excess of $1 billion.
From time to time the Administrators may waive some or all of
their administration fees from the 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 AGENT,
DIVIDEND PNC Bank, whose principal offices are located at 1600 Market
DISBURSING Street, Philadelphia, Pennsylvania 19103, serves as the Port-
AGENT AND folio's custodian and PFPC serves as its transfer agent and
CUSTODIAN dividend disbursing agent. PFPC has its principal offices at
400 Bellevue Parkway, Wilmington, Delaware 19809.
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"),
PLAN Investor Shares of the Portfolio bear the expense of payments
("distribution fees") made to BDI, 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 offer-
ing and sale of Investor Shares. The distribution fees may
also be used to reimburse the Distributor
14.
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and PNC Bank affiliates for related expenses, including pay-
ments to brokers, dealers, financial institutions and industry
professionals ("Service Organizations") for sales support serv-
ices and related expenses. Distribution fees payable under the
Plan will not exceed .10% (annualized) of the average daily net
asset value of 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 directly to out-of-pocket
expenses and therefore may be used by the recipients as they
choose (for example, to defray their overhead expenses). The
Plan also permits the Distributor, the Administrators and other
companies that receive fees from the Fund to make payments re-
lating to distribution and sales support activities out of
their past profits or other sources available to them. For fur-
ther information, see "Investment Advisory, Administration,
Distribution and Servicing Arrangements" in the Statement of
Additional Information.
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.
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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 BlackRock, Inc. or the Fund's serv-
ice providers under their agreements with the Fund. Any gen-
eral 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.
16.
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WHAT PRICING OPTIONS ARE AVAILABLE TO INVESTORS?
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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 BlackRock Funds fam-
ily
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 BlackRock Funds fam-
ily
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 BlackRock Funds fam-
ily
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>
- -------------------------------------------------------------------------------
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.
<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 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 BlackRock Funds. The Fund does not accept third party
checks for initial or subsequent investments. 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 BDI as the Distributor. BDI 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>
- -------------------------------------------------------------------------------
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 BlackRock Funds
c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the con-
tingent deferred sales charge, if applicable, there is no charge for a redemp-
tion. 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 BlackRock 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 BlackRock Funds c/o PFPC, P.O. Box 8907, Wilmington,
Delaware 19899-8907. Proceeds from the redemption of shares will be reduced by
the amount of any applicable contingent deferred sales charge. Unless another
payment option is used as described above, payment for redeemed shares is nor-
mally made by check mailed within seven days after acceptance by PFPC of the
request and any other necessary documents in proper order. Payment may, howev-
er, be postponed or the right of redemption suspended as provided by the rules
of the SEC. If the shares to be redeemed have been recently purchased by check,
the Fund's transfer agent may delay the payment of redemption proceeds, which
may be a period of up to 15 days after the purchase date, pending a determina-
tion that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
21.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
- --------------------------------------------------------------------------------
BLACKROCK FUNDS offers shareholders many special features which enable an in-
vestor to have greater investment flexibility as well as greater access to in-
formation 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>
- --------------------------------------------------------------------------------
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>
- -------------------------------------------------------------------------------
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 as shown 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, BlackRock, Inc. and/or
their affiliates 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 "Investment Advisory, Administration, Distribution and Servicing Arrange-
ments" 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 such Qualified Plans of Investor A Shares aggregat-
ing $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.
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
25.
<PAGE>
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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 in-
vestment requirement and represent at least 5% of the total intended invest-
ment. The investor must instruct PFPC upon making subsequent purchases that
such purchases are subject to a Letter of Intent. All dividends and capital
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, BlackRock,
Inc. 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 In-
vestor 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, BlackRock, Inc. 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 purchase
date and the date the Investor B Shares are redeemed as set forth in the fol-
lowing chart:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
NUMBER OF YEARS PERCENTAGE OF DOLLAR AMOUNT
ELAPSED SINCE PURCHASE SUBJECT TO THE CHARGE)
<S> <C>
Less than one 4.50%
More than one, but less than two 4.00
More than two, but less than three 3.50
More than three, but less than four 3.00
More than four, but less than five 2.00
More than five, but less than six 1.00
More than six, but less than seven 0.00
More than seven, but less than eight 0.00
</TABLE>
PURCHASES OF INVESTOR C SHARES. Investor C Shares are subject to a deferred
sales charge of 1.00% based on the lesser of the offering price or the net as-
set value of the Investor C Shares on the redemption date if redeemed within
twelve months after purchase. Dealers will 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
26.
<PAGE>
- --------------------------------------------------------------------------------
described under "Who Manages the Fund?" Dealers may not receive a commission in
connection with sales of Investor C Shares to certain retirement plans spon-
sored by the Fund, BlackRock, Inc. or its affiliates, but may receive fees un-
der 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 infor-
mation on additional sales incentives which the Distributor, BlackRock, Inc.
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,
BlackRock, Inc. or its affiliates; (4) redemptions in connection with a share-
holder's death or disability (as defined in the Internal Revenue Code) subse-
quent to the purchase of Investor B Shares or Investor C Shares; (5) involun-
tary redemptions of Investor 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 Systematic Withdrawal Plan, subject to the limitations set
forth above under "What Are The Shareholder Features Of The Fund?--Systematic
Withdrawal Plan." In addition, no contingent deferred sales charge is charged
on Investor B Shares or Investor C Shares acquired through the reinvestment of
dividends or distributions. The Fund also waives the contingent deferred sales
charge on redemptions of Investor B Shares of the Portfolio purchased through
certain Qualified Plans participating in programs whose sponsors or administra-
tors have entered into arrangements with the Fund. For further information, see
"Purchase and Redemption Information" in the Statement of Additional Informa-
tion.
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>
- --------------------------------------------------------------------------------
HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Net asset value is calculated separately 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 secu-
rities and other assets owned by the Portfolio that are allocated to a particu-
lar 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 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 tax purposes. The dividends received deduction is not avail-
able 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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight 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 re-
lates only to Investor A Shares, Investor B Shares and Investor C Shares.
Shares of each class bear their pro rata portion of all operating expenses paid
by the 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 Port-
folio's Institutional Shares is expected to be higher than the performance of
the Portfolio's Service Shares, and the performance of each of the Institu-
tional Shares and Service Shares of the Portfolio is expected to be higher than
the performance of the Portfolio's three classes of Investor Shares. The per-
formance of each class of Investor Shares may be different. The Portfolio of-
fers various services and privileges in connection with its Investor Shares
that are not generally offered in connection with its Institutional and Service
Shares, including an automatic investment plan and an automatic withdrawal
plan. For further information regarding the Portfolio's Institutional and Serv-
ice 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 January 23, 1998, PNC Bank held of record approximately 77% 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 BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7762
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock 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>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Micro-Cap Equity
Mid-Cap Growth Equity International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity
Small Cap Value Equity International Small Cap Equity
Index Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- -------------------------------------------------------------------------------
MICRO-CAP EQUITY PORTFOLIO INSTITUTIONAL SHARES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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?................................................ 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>
ASKING THE KEY
QUESTIONS
This Prospectus sets forth concisely information about the
BlackRock Micro-Cap Equity Portfolio (the "Portfolio") that a
prospective investor needs to know before investing. Please keep
it for future reference. A Statement of Additional Information
dated January 28, 1998 has been filed with the Securities and
Exchange Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from BlackRock Funds SM
(the "Fund") by calling (800) 441-7764. The Statement of Addi-
tional Information, as supplemented from time to time, is incor-
porated by reference into this Prospectus. The SEC maintains a
Web site (http://www.sec.gov) that contains the Statement of Ad-
ditional Information, material incorporated by reference and
other information regarding the Fund 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 BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Micro-Cap Equity Portfolio of BLACKROCK FUNDS is one of
thirteen diversified investment portfolios that provide invest-
ors 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 Equity Portfolio
begins on page 5. To obtain a prospectus describing the Fund's
other equity portfolios, call (800) 441-7762.
The Portfolio's performance benchmark is the Wilshire Quantum
MicroCap Index and its Lipper peer group is the Micro Cap Funds
category. The Wilshire Quantum 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 contains all publicly traded U.S. stocks, excluding
REITS and limited partnerships.
BlackRock, Inc. serves as the Portfolio's investment adviser.
PNC Equity Advisors Company, an affiliate of BlackRock, Inc.
("PEAC"), serves as sub-adviser to the Portfolio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Micro-Cap Equity
BLACKROCK Portfolio. We intend this document to be an effective tool as
MICRO-CAP you explore one approach to micro cap equity investing.
EQUITY
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?"
For information on how to purchase and redeem shares of the
INVESTING IN Portfolio, see "How Are Shares Purchased And Redeemed?"
THE
BLACKROCK
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. The figure shown under "Other expenses" is es-
timated for the current fiscal year. 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 1.10%
Other operating expenses .35
---
Administration fees (after fee waivers)(/1/) .20
Other expenses .15
---
Total Portfolio operating expenses (after fee waivers)(/1/) 1.45%
====
</TABLE>
(1) BlackRock, Inc. 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 to-
tal operating expenses through the fiscal year ending September 30, 1998 at
the levels set forth in the table. Without waivers, "Total Portfolio oper-
ating expenses" would be 1.48%.
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> <C> <C> <C> <C> <C> <C> <C>
$15 $46
</TABLE>
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 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 BLACKROCK FUNDS is one of
thirteen BlackRock investment portfolios that provide investors
with a broad spectrum of investment alternatives within the eq-
uity 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 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
STYLE Pursues micro cap equity securities with earnings growth poten-
tial. Emphasizes micro cap equity securities which the sub-ad-
viser considers to have favorable and above-average earnings
growth prospects.
PORTFOLIO
EMPHASIS Equity securities with growth rate estimates in excess of aver-
age for benchmark and capitalizations of $25 million to $300
million.
The Portfolio will invest primarily in micro cap companies that
have revenue and earnings growth visibility of 20% or higher;
generally, only companies in the top 40th percentile of the mi-
cro cap sector will be considered appropriate investments. Such
companies will generally have debt which does not exceed 40% of
its capitalization.
IMPORTANT In certain investment cycles and over certain holding periods,
RISK an equity fund that invests in micro cap stocks may perform
CONSIDERATIONS above or below the market. An investment program that combines
multiple disciplines across different styles and market
capitalizations allows investors to select from various product
options in a way that most closely fits the investor's
investment goals. The BlackRock Micro-Cap Equity Portfolio
should be considered an aggressive allocation within an overall
investment strategy.
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.
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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) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular securi-
ties, 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 Options Clearing Corporation. The Portfolio
will not purchase put and call options when the aggregate premiums on outstand-
ing options exceed 5% of its net assets at the time of purchase, and will not
write options on more than 25% of the value of its net assets (measured at the
time an option is written). Options trading is a highly specialized activity
that entails greater than ordinary investment risks. In addition, unlisted op-
tions are not subject to the protections afforded purchasers of listed options
issued by the Options Clearing Corporation, which performs the obligations of
its members if they default.
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.
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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; (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 In-
formation.
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.
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase securities from fi-
nancial 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
the Portfolio to possible loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying
obligations.
8.
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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.
PORTFOLIO TURNOVER RATE. Under normal market conditions, it is expected that
the annual portfolio turnover rate for the Portfolio will not exceed 150%. 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.
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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.
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of BlackRock Funds are managed under
the direction of the Board of Trustees. The following persons
currently serve as trustees of BlackRock Funds:
William O. Albertini--Executive Vice President and Chief Finan-
cial Officer of Bell Atlantic Global Wireless.
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
SUB-ADVISER The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
Inc. (formerly PNC Asset Management Group, Inc.) 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. BlackRock, Inc. is an
indirect wholly-owned subsidiary of PNC Bank Corp., a multi-
bank holding company.
The sub-adviser to the Portfolio is PNC Equity Advisors Company
("PEAC"), an affiliate of BlackRock, Inc., 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 and Thomas Callan serve as port-
folio managers of the Portfolio. Mr. Wykle has been an invest-
ment manager at the sub-adviser since 1995. From 1986 to 1995,
Mr. Wykle was an investment manager with PNC Bank. Mr. Callan
has been an investment manager at the sub-adviser 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.
As adviser, BlackRock, Inc. is responsible for the overall in-
vestment management of the Portfolio. The sub-adviser is re-
sponsible for the day-to-day management of the Portfolio, and
generally makes all purchase and sale investment decisions for
the Portfolio. The sub-adviser also provides research and
credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-dollar
fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services, Black-
Rock, Inc. and the 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 Portfolio?" BlackRock, Inc. and the
sub-adviser intend to waive a portion of their fees during the
current fiscal year. All sub-advisory fees are paid by
BlackRock, Inc. and do not represent an extra charge to the
Portfolio.
11.
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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 1.10% .950%
$1 billion -- $2 billion 1.05 .900
$2 billion -- $3 billion 1.025 .875
greater than $3 billion 1.00 .850
</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 the Fund's distributor.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distribu-
tors, Inc. ("BDI") (the "Administrators") serve as the Fund's
co-administrators. BlackRock, Inc. and PFPC are indirect
wholly-owned subsidiaries of PNC Bank Corp. BDI is a wholly-
owned subsidiary of Provident Distributors, Inc. ("PDI"). A
majority of the outstanding stock of PDI is owned by its of-
ficers.
The Administrators generally assist the Fund in all aspects
of its administration and operation, including matters relat-
ing to the maintenance of financial records and fund account-
ing. As compensation for these services, BlackRock, Inc. is
entitled to receive a fee, computed daily and payable month-
ly, at an annual rate of .03% of the Portfolio's average
daily net assets. PFPC and BDI are entitled to receive a com-
bined administration fee, computed daily and payable monthly,
at the aggregate annual rate of (i) .085% of the first $500
million of the Portfolio's average daily net assets, .075% of
the next $500 million of the Portfolio's average daily net
assets and .065% of the average daily net assets of the Port-
folio in excess of $1 billion and (ii) .115% of the first
$500 million of the average daily net assets allocated to In-
stitutional Shares of the Portfolio, .105% of the next $500
million of such average daily net assets and .095% of the av-
erage daily net assets allocated to Institutional Shares of
the Portfolio in excess of $1 billion. From time to time the
Administrators may waive some or all of their administration
fees from the 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 AGENT,
DIVIDEND PNC Bank, whose principal offices are located at 1600 Market
DISBURSING Street, Philadelphia, Pennsylvania 19103, serves as the Port-
AGENT AND folio's custodian and PFPC serves as its transfer agent and
CUSTODIAN dividend disbursing agent. PFPC has its principal offices at
400 Bellevue Parkway, Wilmington, Delaware 19809.
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 custodian
fees, trustee fees, taxes, interest, professional fees, fees
and expenses in registering and qualifying the Portfolio and
its shares for distribution under Federal and state securi-
ties laws, expenses of preparing prospectuses and statements
of additional information and of printing and distributing
prospectuses and statements of additional information to ex-
isting shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insur-
ance premiums, the expense of independent pricing services,
and other expenses which are not expressly assumed by Black-
Rock, Inc. or the Fund's service providers under their agree-
ments with the Fund. Any general expenses of the Fund that do
not belong to a particular investment portfolio will be allo-
cated among all investment portfolios by or under the direc-
tion of the Board of Trustees in a manner the Board deter-
mines to be fair and equitable.
12.
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HOW ARE SHARES PURCHASED AND REDEEMED?
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DISTRIBUTOR. Shares of the Portfolio are offered on a continuous basis by BDI
as distributor (the "Distributor"). BDI 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 BDI, 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 sponsor-
ship 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 "In-
vestment Advisory, Administration, Distribution, and Servicing 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. (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 does
not accept third party checks for initial or subsequent investments.
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 BlackRock, Inc., an earlier pay-
ment could adversely affect the Portfolio. No charge for wiring redemption pay-
ments is imposed by the Fund.
13.
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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.
Shares of the Portfolio 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.
14.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Net asset value is calculated separately for Institutional Shares of the 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 the 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 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 tax purposes. The dividends received deduction is not avail-
able 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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight 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 re-
lates 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 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 Port-
folio's Institutional Shares is expected to be higher than the performance of
the Portfolio's Service Shares, and the performance of each of the Institu-
tional Shares and Service Shares of the Portfolio is expected to be higher than
the performance of the Portfolio's three classes of Investor Shares. The per-
formance of each class of Investor Shares may be different. The Portfolio of-
fers various services and privileges in connection with its Investor Shares
that are not generally offered in connection with its Institutional and Service
Shares, including an automatic investment plan and an automatic withdrawal
plan. For further information regarding the 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
17.
<PAGE>
- -------------------------------------------------------------------------------
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 BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock 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>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Micro-Cap Equity
Mid-Cap Growth Equity International Equity
Mid-Cap Value Equity Small Cap Growth Equity Small Cap Value Equity
International Emerging Markets
International Small Cap Equity
Index Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- --------------------------------------------------------------------------------
MICRO-CAP EQUITY PORTFOLIO SERVICE SHARES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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>
ASKING THE KEY
QUESTIONS
This Prospectus sets forth concisely information about the Black-
Rock Micro-Cap Equity Portfolio (the "Portfolio") that a prospec-
tive investor needs to know before investing. Please keep it for
future reference. A Statement of Additional Information dated
January 28, 1998 has been filed with the Securities and Exchange
Commission (the "SEC"). The Statement of Additional Information
may be obtained free of charge from BlackRock Funds SM (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 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 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 BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Micro-Cap Equity Portfolio of BLACKROCK FUNDS is one of
thirteen diversified investment portfolios that provide invest-
ors 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 Equity Portfolio
begins on page 5. To obtain a prospectus describing the Fund's
other equity portfolios, call (800) 441-7762.
The Portfolio's performance benchmark is the Wilshire Quantum
MicroCap Index and its Lipper peer group is the Micro Cap Funds
category. The Wilshire Quantum 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 contains all publicly traded U.S. stocks, excluding
REITS and limited partnerships.
BlackRock, Inc. serves as the Portfolio's investment adviser.
PNC Equity Advisors Company, an affiliate of BlackRock, Inc.
("PEAC"), serves as sub-adviser to the Portfolio.
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Micro-Cap Equity
BLACKROCK Portfolio. We intend this document to be an effective tool as
MICRO-CAP you explore one approach to micro cap equity investing.
EQUITY
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?"
For information on how to purchase and redeem shares of the
INVESTING IN Portfolio, see "How Are Shares Purchased And Redeemed?"
THE
BLACKROCK
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. The figure shown under "Other expenses" is estimated
for the current fiscal year. 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 1.10%
Other operating expenses .65
--------
Administration fees (after fee waivers)(/1/) .20
Shareholder servicing fees .15
Other expenses .30
-------
Total Portfolio operating expenses
(after fee waivers)(/1/) 1.75%
========
</TABLE>
(1) BlackRock, Inc. 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
operating expenses through the fiscal year ending September 30, 1998 at the
levels set forth in the table. Without waivers, "Total Portfolio operating
expenses" would be 1.78%.
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>
$18 $55
</TABLE>
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 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 BLACKROCK FUNDS is one of
thirteen BlackRock investment portfolios that provide investors
with a broad spectrum of investment alternatives within the eq-
uity 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 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
STYLE Pursues micro cap equity securities with earnings growth poten-
tial. Emphasizes micro cap equity securities which the sub-ad-
viser considers to have favorable and above-average earnings
growth prospects.
PORTFOLIO
EMPHASIS Equity securities with growth rate estimates in excess of aver-
age for benchmark and capitalizations of $25 million to $300
million.
The Portfolio will invest primarily in micro cap companies that
have revenue and earnings growth visibility of 20% or higher;
generally, only companies in the top 40th percentile of the mi-
cro cap sector will be considered appropriate investments. Such
companies will generally have debt which does not exceed 40% of
its capitalization.
IMPORTANT In certain investment cycles and over certain holding periods,
RISK an equity fund that invests in micro cap stocks may perform
CONSIDERATIONS above or below the market. An investment program that combines
multiple disciplines across different styles and market
capitalizations allows investors to select from various product
options in a way that most closely fits the investor's
investment goals. The BlackRock Micro-Cap Equity Portfolio
should be considered an aggressive allocation within an overall
investment strategy.
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) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular securi-
ties, 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 Options Clearing Corporation. The Portfolio
will not purchase put and call options when the aggregate premiums on outstand-
ing options exceed 5% of its net assets at the time of purchase, and will not
write options on more than 25% of the value of its net assets (measured at the
time an option is written). Options trading is a highly specialized activity
that entails greater than ordinary investment risks. In addition, unlisted op-
tions are not subject to the protections afforded purchasers of listed options
issued by the Options Clearing Corporation, which performs the obligations of
its members if they default.
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.
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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; (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 In-
formation.
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.
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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.
REPURCHASE AGREEMENTS. The Portfolio may agree to purchase securities from fi-
nancial 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 the
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. 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
9.
<PAGE>
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securities. This investment practice could have the effect of increasing the
level of illiquidity in the Portfolio during any period that qualified institu-
tional buyers become uninterested 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 150%. 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.
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WHO MANAGES THE FUND?
- -------------------------------------------------------------------------------
BOARD OF
TRUSTEES The business and affairs of BlackRock Funds are managed un-
der the direction of the Board of Trustees. The following
persons currently serve as trustees of BlackRock Funds:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Global Wireless.
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 & Asso-
ciates, Inc.
The Statement of Additional Information furnishes additional
information about the trustees and officers of the Fund.
ADVISER AND
SUB-ADVISER The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
Inc. (formerly PNC Asset Management Group, Inc.) was orga-
nized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1600 Market
Street, 29th Floor, Philadelphia, Pennsylvania 19103.
BlackRock, Inc. is an indirect wholly-owned subsidiary of
PNC Bank Corp., a multi-bank holding company.
The sub-adviser to the Portfolio is PNC Equity Advisors Com-
pany ("PEAC"), an affiliate of BlackRock, Inc., 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 and Thomas
Callan serve as portfolio managers of the Portfolio. Mr.
Wykle has been an investment manager at the sub-adviser
since 1995. From 1986 to 1995, Mr. Wykle was an investment
manager with PNC Bank. Mr. Callan has been an investment
manager at the sub-adviser 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.
As adviser, BlackRock, Inc. is responsible for the overall
investment management of the Portfolio. The sub-adviser is
responsible for the day-to-day management of the Portfolio,
and generally makes all purchase and sale investment deci-
sions for the Portfolio. The sub-adviser also provides re-
search and credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-
dollar fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International
equity.
. PIMC: Money market.
12.
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For their investment advisory and sub-advisory services,
BlackRock, Inc. and the 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 Portfolio?" BlackRock, Inc.
and the sub-adviser intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are paid
by BlackRock, Inc. 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 1.10% .950%
$1 billion -- $2 billion 1.05 .900
$2 billion -- $3 billion 1.025 .875
greater than $3 billion 1.00 .850
</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 the Fund's distributor.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors,
Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad-
ministrators. BlackRock, Inc. and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub-
sidiary 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. is entitled to
receive a fee, computed daily and payable monthly, at an annual
rate of .03% of the Portfolio's average daily net assets. PFPC
and BDI 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 the Portfolio's
average daily net assets, .075% of the next $500 million of the
Portfolio's average daily net assets and .065% of the average
daily net assets of the 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 the 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 the Portfolio in excess of $1 billion. From time to
time the Administrators may waive some or all of their adminis-
tration fees from the 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
AGENT, PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING lio's custodian and PFPC serves as its transfer agent and divi-
AGENT AND dend disbursing agent. PFPC has its principal offices at 400
CUSTODIAN Bellevue Parkway, Wilmington, Delaware 19809.
13.
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SHAREHOLDER
SERVICING The Fund intends to enter into service arrangements with in-
stitutional investors ("Institutions") (including PNC Bank
and its affiliates) which provide that the Institutions will
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 an annualized basis) of the
average daily net asset value of Service Shares owned bene-
ficially by their customers, Institutions may provide one or
more of the follow- ing services: processing purchase and
redemption requests from customers and placing orders with
the Fund's transfer agent or the distributor; processing
dividend payments from the Fund on behalf of customers; pro-
viding sub-accounting with respect to Service Shares benefi-
cially owned by customers or the information necessary for
sub-accounting; and providing other similar services. In
consideration for payment of a separate shareholder servic-
ing fee of up to .15% (on an annualized basis) of the aver-
age daily net asset value of Service Shares owned benefi-
cially by their customers, Institutions may provide one or
more of these additional services to such customers: re-
sponding to customer inquiries relating to the services per-
formed by the Institution and to customer inquiries concern-
ing their investments in Service Shares; assisting customers
in designating and changing dividend options, account desig-
nations and addresses; and providing other similar share-
holder liaison services. Customers who are beneficial owners
of Service Shares should read this Prospectus in light of
the terms and fees governing their accounts with
Institutions.
Conflict-of-interest restrictions may apply to the receipt
of compensation paid by the Fund in connection with the 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 BlackRock,
Inc. 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 allo-
cated among all investment portfolios by or under the direc-
tion of the Board of Trustees in a manner the Board deter-
mines to be fair and equitable.
14.
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HOW ARE SHARES PURCHASED AND REDEEMED?
- --------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolio are offered on a continuous basis by BDI
as distributor (the "Distributor"). BDI 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 BDI, 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 ap-
plicable NASD regulations, may include contributions to various non-cash and
cash incentive arrangements to promote the sale of shares, as well as sponsor-
ship 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 "In-
vestment Advisory, Administration, Distribution and Servicing Arrangements" 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 does not accept third party checks
for initial or subsequent investments.
The Fund may in its discretion waive or modify the minimum investment amount,
may reject 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.
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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 BlackRock, Inc., an
earlier payment could adversely affect the Portfolio. No charge for wiring re-
demption payments is imposed by the Fund, although Institutions may charge
their customer accounts for redemption services. Information relating to such
redemption services and charges, if any, should be obtained by customers from
their 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.
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HOW IS NET ASSET VALUE CALCULATED?
- --------------------------------------------------------------------------------
Net asset value is calculated separately 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>
- --------------------------------------------------------------------------------
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 tax purposes. The dividends received deduction is not avail-
able 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>
- --------------------------------------------------------------------------------
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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight 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 re-
lates 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 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 Port-
folio's Institutional Shares is expected to be higher than the performance of
the Portfolio's Service Shares, and the performance of each of the Institu-
tional Shares and Service Shares of the Portfolio is expected to be higher than
the performance of the Portfolio's three classes of Investor Shares. The per-
formance of each class of Investor Shares may be different. The Portfolio of-
fers various services and privileges in connection with its Investor Shares
that are not generally offered in connection with its Institutional and Service
Shares, including an automatic investment plan and an automatic withdrawal
plan. For further information regarding the Portfolio's Institutional or In-
vestor 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
19.
<PAGE>
- -------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL
WHOLESALERS/BROKER-DEALER
SUPPORT: 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
Monday through Friday toll-free 888-825-2257
PORTFOLIO MANAGERS
COMMENTARY: 24 Hours, 7 days a week toll-free 800-FUTURE4
(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
REPRESENTATIVES: 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
Available to discuss Monday through Friday
account balance
information, mutual fund
prospectus, literature and
discuss programs and
services available.
PURCHASES AND REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7764
Monday through Friday
WORLD WIDE WEB: 24 Hours, 7 days a week http://www.blackrock.com
Access general fund
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
BlackRock Funds BlackRock 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>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Micro-Cap Equity
Mid-Cap Growth Equity International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity
Small Cap Value Equity International Small Cap Equity
Index Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- -------------------------------------------------------------------------------
THE BOND PORTFOLIOS INVESTOR SHARES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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?........................................ 35
What Pricing Options Are Available To Investors?............. 39
What Are The Key Considerations In Selecting A Pricing
Option?..................................................... 41
How Are Shares Purchased?.................................... 42
How Are Shares Redeemed?..................................... 43
What Are The Shareholder Features Of The Fund?............... 45
What Is The Schedule Of Sales Charges And Exemptions?........ 47
How Is Net Asset Value Calculated?........................... 52
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 52
How Are Fund Distributions Taxed?............................ 53
How Is The Fund Organized?................................... 57
How Is Performance Calculated?............................... 58
How Can I Get More Information?.............................. 59
</TABLE>
ASKING THE KEY
QUESTIONS
This Prospectus sets forth concisely information about the
BlackRock FundsSM (the "Fund") bond Portfolios that a prospec-
tive investor needs to know before investing. Please keep it for
future reference. A Statement of Additional Information dated
January 28, 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 supple-
mented 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 information regarding the
Fund that has been filed with the SEC.
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
INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE BOND PORTFOLIOS OF BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Bond Portfolios of BLACKROCK FUNDS consist of 11 investment
portfolios (the "Portfolios") that provide investors with a
broad spectrum of investment alternatives within the fixed in-
come sector. Seven of these Portfolios invest in taxable bonds,
and four of these Portfolios invest in tax-exempt bonds. A de-
tailed description of each Portfolio begins on page 20.
PERFORMANCE LIPPER PEER GROUP
BLACKROCK BENCHMARK
PORTFOLIO
Merrill 1-3 Short-Intermediate
LOW Year Treasury Investment Grade Debt
DURATION Index
BOND
INTERMEDIATE Lehman Intermediate U.S. Government
GOVERNMENT Brothers
BOND Intermediate
Government
Index
INTERMEDIATE Lehman
BOND Brothers Intermediate Investment
Intermediate Grade Debt
Government/Corporate
Index
CORE BOND Lehman Intermediate Investment
Aggregate Grade Debt
Index
GOVERNMENT Lehman General U.S. Government
INCOME Mortgage
Index/10 Year
Treasury
MANAGED Lehman Corporate Debt A-Rated
INCOME Aggregate
Index
INTERNATIONAL Salomon Non- International Income
BOND U.S. Hedged
World
Government
Bond Index
TAX-FREE Lehman General Municipal Debt
INCOME Municipal
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 This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
BOND different directions in fixed income investing.
PORTFOLIOS
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, which is a specula-
tive technique; lend portfolio securities to third parties; and
enter into futures contracts and opinions. Each of the Pennsyl-
vania, New Jersey and Ohio Tax-Free Income Portfolios (the
"State-Specific Tax-Free Portfolios") concentrates in the secu-
rities of issuers located in a particular state, and is non-di-
versified, 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 Low Dura-
tion Bond Portfolio invests in high yield securities which are
considered high risk securities. See "What Additional Invest-
ment Policies And Risks Apply?--High Yield Securities."
For information on how to purchase and redeem shares of the
INVESTING IN Portfolios, see "How Are Shares Purchased" and "How Are Shares
THE Redeemed?"
BLACKROCK
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses and shareholder transaction
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 fig-
ures shown for each Portfolio have been restated to reflect current expenses
and fee waivers. Because no Investor B or Investor C Shares of the Intermediate
Bond Portfolio and no Investor C Shares of the Managed Income, Pennsylvania
Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-Free Income Portfolios
were outstanding during the fiscal year ended September 30, 1997, the figures
shown for those share classes under "Other expenses" are estimates for the cur-
rent 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/) .22% .22% .22% .30% .30% .30% .27% .27% .27%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee
waivers)(/3/) .80 .80 .80 .77 .77 .77 .80 .80 .80
--- --- --- --- --- --- --- --- ---
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 .40 .40 .40 .37 .37 .37 .40 .40 .40
--- --- --- --- --- --- --- --- ---
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.02% 1.77% 1.77% 1.07% 1.82% 1.82% 1.07% 1.82% 1.82%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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. BlackRock, Inc. and the
Portfolios' administrators are under no obligation to waive fees or reim-
burse expenses, but have informed the Fund that they expect to waive fees
and reimburse expenses during the remainder of the current fiscal year as
necessary to maintain the Portfolios' total operating expenses at the lev-
els set forth in the table. Without waivers, "Other operating expenses"
would be: (i) .85%, .83% and .79%, respectively, for Investor A Shares; and
(ii) .81%, .83% and .79%, respectively, for Investor B Shares and Investor
C Shares, and "Total Portfolio operating expenses" would be: (iii) 1.35%,
1.33% and 1.29%, respectively, for Investor A Shares; and (iv) 2.06%, 2.08%
and 2.04%, respectively, for Investor B Shares and Investor C Shares. The
Portfolios do not expect to incur 12b-1 fees in excess of .005% with re-
spect 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 interest paid by the Portfolios in con-
nection 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/) .22% .22% .22% .00% .00% .00% .35% .35% .35%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee
waivers)(/3/) .80 .80 .80 1.07 1.07 1.07 .77 .77 .77
--- --- --- ---- ---- ---- --- --- ---
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 .40 .40 .40 .67 .67 .67 .37 .37 .37
--- --- --- --- --- --- --- --- ---
Total Portfolio
operating
expenses (after
fee
waivers)(/3/) 1.02% 1.77% 1.77% 1.07% 1.82% 1.82% 1.12% 1.87% 1.87%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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. BlackRock, Inc. and the
Portfolios' administrators are under no obligation to waive fees or reim-
burse expenses, but have informed the Fund that they expect to waive fees
and reimburse expenses during the remainder of the current fiscal year as
necessary to maintain the Portfolios' total operating expenses at the lev-
els set forth in the table. Without waivers, "Other operating expenses"
would be: (i) .80%, 1.24% and .80%, respectively, for Investor A Shares;
and (ii) .79%, 1.24% and .80%, respectively, for Investor B Shares and In-
vestor C Shares, and "Total Portfolio operating expenses" would be: (iii)
1.30%, 1.74% and 1.30%, respectively, for Investor A Shares; and (iv)
2.04%, 2.49% and 2.05%, respectively, 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. See "What are the Portfolios' Finan-
cial Highlights?" for information about interest paid by the Portfolios in
connection with their investment activity.
(4) Investors with a long-term perspective may prefer Investor A Shares, as de-
scribed under "What Are The Key Considerations In Selecting A Pricing Op-
tion?" 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>
INTERNATIONAL BOND TAX-FREE INCOME
PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Maximum Front-End Sales
Charge(/1/) (as a
percentage of offering
price) 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%
Sales Charge on
Reinvested Dividends None None None None None None
ANNUAL PORTFOLIO
OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE
NET ASSETS)
Advisory fees (after fee
waivers)(/3/) .50% .50% .50% .25% .25% .25%
12b-1 fees(/3/)(/4/) .00 .75 .75 .00 .75 .75
Other operating expenses
(after fee waivers and
expense
reimbursements)(/3/) 1.00 1.00 1.00 .82 .82 .82
---- ---- ---- --- --- ---
Shareholder servicing
fee .25 .25 .25 .25 .25 .25
Shareholder processing
fee .15 .15 .15 .15 .15 .15
Other expenses .60 .60 .60 .42 .42 .42
--- --- --- --- --- ---
Total Portfolio
operating expenses
(after fee waivers and
expense
reimbursements)(/3/) 1.50% 2.25% 2.25% 1.07% 1.82% 1.82%
==== ==== ==== ==== ==== ====
</TABLE>
(1) Reduced front-end sales charges may be available. A deferred sales charge
of up to 1.00% is assessed on certain redemptions of Investor A Shares that
are purchased with no initial sales charge as part of an investment of
$1,000,000 or more. See "What Is the Schedule of Sales Charges and Exemp-
tions?"
(2) This amount applies to redemptions during the first year. The deferred
sales charge for Investor B Shares decreases for redemptions made in subse-
quent years. No deferred sales charge is charged after the sixth year on
Investor B Shares or after the first year on Investor C Shares. See "What
Is the Schedule of Sales Charges and Exemptions?"
(3) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .55% and .50%, respectively,
and administration fees would be .23% for each class of each Portfolio. In
addition, the Expense Summary reflects reimbursements made to the Tax-Free
Income Portfolio by the adviser. BlackRock, Inc. and the Portfolios' admin-
istrators 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)
.97% and .87%, respectively, for Investor A Shares; and (ii) .97% and .87%,
respectively, for Investor B Shares and Investor C Shares, and "Total Port-
folio operating expenses" would be: (iii) 1.52% and 1.37%, respectively,
for Investor A Shares; and (iv) 2.27% and 2.12%, respectively, 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 pay-
able 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% .28% .28% .28% .09% .09% .09%
12b-1
fees(/3/)(/4/) .00 .75 .75 .00 .75 .75 .00 .75 .75
Other operating
expenses (after
fee waivers and
expense
reimbursements)(/3/) .77 .77 .77 .79 .79 .79 .98 .98 .98
--- --- --- --- --- --- --- --- ---
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 .37 .37 .37 .39 .39 .39 .58 .58 .58
--- --- --- --- --- --- --- --- ---
Total Portfolio
operating
expenses
(after fee
waivers and
expense
reimbursements)(/3/) 1.07% 1.82% 1.82% 1.07% 1.82% 1.82% 1.07% 1.82% 1.82%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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. BlackRock, Inc. and the
Portfolios' administrators are under no obligation to waive fees or reim-
burse expenses, but have informed the Fund that they expect to waive fees
and reimburse expenses during the remainder of the current fiscal year as
necessary to maintain the Portfolios' total operating expenses at the lev-
els set forth in the table. Without waivers, "Other operating expenses"
would be: (i) .80%, .84% and 1.03%, respectively, for Investor A Shares;
and (ii) .80%, .84% and 1.03%, respectively, for Investor B Shares and In-
vestor C Shares, and "Total Portfolio operating expenses" would be: (iii)
1.30%, 1.34% and 1.53%, respectively, for Investor A Shares; and (iv)
2.05%, 2.09% and 2.28, respectively, 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.
7.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) a 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 $62 $ 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 Portfolio
A Shares* 50 73 97 165
B Shares (Redemption)** 63 95 121 184***
B Shares (No Redemption) 18 57 99 184***
C Shares 18 57 99 214
Intermediate Bond Portfolio
A Shares* 50 73 97 165
B Shares (Redemption)** 63 95 121 184***
B Shares (No Redemption) 18 57 99 184***
C Shares 18 57 99 214
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 78 101 170
B Shares (Redemption)** 63 95 121 184***
B Shares (No Redemption) 18 57 99 184***
C Shares 18 57 99 214
Managed Income Portfolio
A Shares* 56 79 104 175
B Shares (Redemption)** 64 96 124 190***
B Shares (No Redemption) 19 59 101 190***
C Shares 19 59 101 219
International Bond Portfolio
A Shares* 65 95 128 220
B Shares (Redemption)** 68 107 143 230***
B Shares (No Redemption) 23 70 120 230***
C Shares 23 70 120 258
Tax-Free Income Portfolio
A Shares* 50 73 97 165
B Shares (Redemption)** 63 95 121 184***
B Shares (No Redemption) 18 57 99 184***
C Shares 18 57 99 214
Pennsylvania Tax-Free Income
Portfolio
A Shares* 50 73 97 165
B Shares (Redemption)** 63 95 121 184
B Shares (No Redemption) 18 57 99 184
C Shares 18 57 99 214
New Jersey Tax-Free Income
Portfolio
A Shares* 50 73 97 165
B Shares (Redemption)** 63 95 121 184***
B Shares (No Redemption) 18 57 99 184***
C Shares 18 57 99 214
Ohio Tax-Free Income Portfolio
A Shares* 50 73 97 165
B Shares (Redemption)** 63 95 121 184***
B Shares (No Redemption) 18 57 99 184***
C Shares 18 57 99 214
</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.
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 "Who Manages The Fund?--Distribu-
tion and Service Plan" in the Prospectus and "Investment Advisory, Administra-
tion, Distribution and Servicing Arrangements" in the Statement of Additional
Information.
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 Inter-
mediate Bond Portfolio and no Investor C Shares of the Managed
Income, Pennsylvania Tax-Free Income, New-Jersey Tax-Free In-
come and Ohio Tax-Free Income Portfolios were outstanding.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR B INVESTOR C
INVESTOR A SHARES SHARES SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR 4/1/96 1/12/96/1/ 11/18/96/1/ 2/24/97/1/
ENDED THROUGH THROUGH THROUGH THROUGH
9/30/97 9/30/96 3/31/96 9/30/97 9/30/97
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.79 $ 9.79 $ 9.91 $ 9.86 $ 9.87
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.52 0.25 0.10 0.41 0.26
Net gain (loss) on
investments (both
realized and
unrealized) 0.09 (0.01) (0.12) -- 0.02
------ ------ ------ ------ ------
Total from investment
operations 0.61 0.24 (0.02) 0.41 0.28
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.51) (0.24) (0.10) (0.38) (0.26)
Distributions from net
realized capital gains - - - - -
------ ------ ------ ------ ------
Total distributions (0.51) (0.24) (0.10) (0.38) (0.26)
------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 9.89 $ 9.79 $ 9.79 $ 9.89 $ 9.89
====== ====== ====== ====== ======
Total return/3/ 6.39% 2.46% (0.15)% 4.31% 2.91%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $1,079 $ 938 $ 719 $ 13 $ 72
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.02%/4/ 1.02%/2/,/4/ 1.01%/2/,/4/ 1.73%/2/,/4/ 1.72%/2/,/4/
Before
advisory/administration
fee waivers 1.35% 1.30%/2/ 1.21%/2/ 2.06%/2/ 2.05%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.72% 5.20%/2/ 4.94%/2/ 4.96%/2/ 5.00%/2/
Before
advisory/administration
fee waivers 5.39% 4.92%/2/ 4.74%/2/ 4.63%/2/ 4.67%/2/
PORTFOLIO TURNOVER RATE 371% 228% 185% 371% 371%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Neither front-end sales load nor contingent deferred sales load is re-
flected.
/4/Including interest expense, ratios for the Investor A, Investor B and In-
vestor C Shares would have been 1.42%, 2.19% and 2.23%, respectively, 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, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INTERMEDIATE GOVERNMENT BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR INVESTOR
INVESTOR A SHARES B SHARES C SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR YEAR YEAR YEAR 5/11/92/1/ 10/11/96/1/ 10/8/96/1/
ENDED ENDED ENDED ENDED ENDED THROUGH THROUGH THROUGH
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 $ 9.92 $10.03 $ 9.64 $10.60 $10.46 $10.05 $ 9.98 $ 9.98
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.54 0.55 0.55 0.53 0.54 0.24 0.45 0.45
Net gain (loss) on
investments (both
realized and
unrealized) 0.19 (0.13) 0.39 (0.87) 0.16 0.41 0.13 0.13
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations 0.73 0.42 0.94 (0.34) 0.70 0.65 0.58 0.58
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.54) (0.53) (0.55) (0.52) (0.54) (0.24) (0.45) (0.45)
Distributions from net
realized capital gains - - - - - - (0.10) (0.02) - - - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.54) (0.53) (0.55) (0.62) (0.56) (0.24) (0.45) (0.45)
------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.11 $ 9.92 $10.03 $ 9.64 $10.60 $10.46 $10.11 $10.11
====== ====== ====== ====== ====== ====== ====== ======
Total return/3/ 7.57% 4.36% 9.98% (3.36)% 6.84% 6.64% 5.94% 5.94%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $5,374 $5,903 $9,802 $8,508 $7,666 $1,484 $ 28 $ 51
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.02%/4/ 0.95%/4/ 0.70%/4/ 0.65% 0.76% 0.80%/2/ 1.77%/2/,/4/ 1.71%/2/,/4/
Before
advisory/administration
fee waivers 1.33% 1.25% 1.07% 1.05% 0.84% 0.80%/2/ 2.08%/2/ 2.02%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.54% 5.64% 5.67% 5.24% 5.19% 5.28%/2/ 4.75%/2/ 4.57%/2/
Before
advisory/administration
fee waivers 5.23% 5.35% 5.30% 4.84% 5.11% 5.28%/2/ 4.44%/2/ 4.26%/2/
PORTFOLIO TURNOVER RATE 291% 580% 247% 9% 80% 38% 291% 291%
</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, Investor B and
Investor C Shares would have been 1.14%, 1.90% and 1.78%, respectively, 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 A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 5/20/94/1/
ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 9.32 $9.43 $ 9.05 $ 9.23
------ ----- ------ ------
Income from investment
operations
Net investment income 0.53 0.52 0.54 0.20
Net gain (loss) on investments
(both realized and
unrealized) 0.17 (0.09) 0.38 (0.17)
------ ----- ------ ------
Total from investment
operations 0.70 0.43 0.92 0.03
------ ----- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.53) (0.51) (0.54) (0.21)
Distributions from net
realized capital gains - - (0.03) - - - -
------ ----- ------ ------
Total distributions (0.53) (0.54) (0.54) (0.21)
------ ----- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 9.49 $9.32 $ 9.43 $ 9.05
====== ===== ====== ======
Total return/3/ 7.89 4.74% 10.35% 0.31%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $1,116 $ 935 $ 647 $ 87
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 1.00%/4/ 0.97%/4/ 0.76%/4/ 0.85%/2/
Before advisory/administration
fee waivers 1.29% 1.27% 1.11% 1.28%/2/
Ratios of net investment
income to average net assets
After advisory/administration
fee waivers 6.14% 5.83% 5.89% 5.35%/2/
Before advisory/administration
fee waivers 5.85% 5.53% 5.55% 4.92%/2/
PORTFOLIO TURNOVER RATE 321% 670% 262% 92%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Sales load not reflected in total return.
/4/Including interest expense, ratios would have been 1.44% 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
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
CORE BOND PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
<CAPTION>
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/
ENDED THROUGH THROUGH ENDED THROUGH THROUGH
9/30/97 9/30/96 3/31/96 9/30/97 9/30/96 3/31/96
FOR THE
PERIOD
2/28/97/1/
THROUGH
9/30/97
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.55 $ 9.61 $ 9.99 $ 9.55 $ 9.61 $ 9.58
------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.58 0.28 0.08 0.51 0.26 0.01
Net gain (loss) on
investments (both
realized and
unrealized) 0.26 (0.06) (0.38) 0.26 (0.07) 0.03
------ ------ ------ ------ ------ ------
Total from investment
operations 0.84 0.22 (0.30) 0.77 0.19 0.04
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.57) (0.28) (0.08) (0.50) (0.25) (0.01)
Distributions from net
realized capital gains - - - - - - - - - - - -
------ ------ ------ ------ ------ ------
Total distributions (0.57) (0.28) (0.08) (0.50) (0.25) (0.01)
------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 9.82 $ 9.55 $ 9.61 $ 9.82 $ 9.55 $ 9.61
====== ====== ====== ====== ====== ======
Total returns/3/ 9.52% 2.36% (2.96)% 8.71% 1.98% 0.33%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $2,441 $ 320 $ 80 $5,295 $1,497 $ 77
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.01%/4/ 1.02%/2/,/4/ 1.02%/2/,/4/ 1.75%/4/ 1.72%/2/,/4/ 1.77%/2/,/4/
Before
advisory/administration
fee waivers 1.30% 1.31%/2/ 1.27%/2/ 2.04% 2.01%/2/ 2.02%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.31% 6.29%/2/ 5.43%/2/ 5.61% 5.68%/2/ 4.71%/2/
Before
advisory/administration
fee waivers 6.02% 6.00%/2/ 5.19%/2/ 5.32% 5.39%/2/ 4.46%/2/
PORTFOLIO TURNOVER RATE 441% 308% 723% 441% 308% 723%
<S> <C>
INVESTOR C SHARES
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.64
----------------
Income from investment
operations
Net investment income 0.29
Net gain (loss) on
investments (both
realized and
unrealized) 0.17
----------------
Total from investment
operations 0.46
----------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.28)
Distributions from net
realized capital gains - -
----------------
Total distributions (0.28)
----------------
NET ASSET VALUE AT END OF
PERIOD $ 9.82
================
Total returns/3/ 4.82%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 128
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.74%/2/,/4/
Before
advisory/administration
fee waivers 2.03%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.41%/2/
Before
advisory/administration
fee waivers 5.12%/2/
PORTFOLIO TURNOVER RATE 441%
</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, Investor B and
Investor C Shares would have been 1.36%, 2.17% and 1.93%, 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.
12.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GOVERNMENT INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES INVESTOR B SHARES C SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR 10/03/94/1/ YEAR YEAR 10/03/94/1/ 2/28/97/1/
ENDED ENDED THROUGH ENDED ENDED THROUGH THROUGH
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 $10.20 $10.68 $10.00 $ 10.20 $10.68 $ 10.00 $10.30
------ ------ ------ ------- ------- ------- ------
Income from investment
operations
Net investment income 0.73 0.68 0.55 0.66 0.60 0.50 0.37
Net gain (loss) on
investments (both
realized and
unrealized) 0.30 (0.22) 0.68 0.30 (0.21) 0.68 0.20
------ ------ ------ ------- ------- ------- ------
Total from investment
operations 1.03 0.46 1.23 0.96 0.39 1.18 0.57
------ ------ ------ ------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.74) (0.66) (0.55) (0.67) (0.59) (0.50) (0.38)
Distributions from net
realized capital gains - - (0.28) - - - - (0.28) - - - -
------ ------ ------ ------- ------- ------- ------
Total distributions (0.74) (0.94) (0.55) (0.67) (0.87) (0.50) (0.38)
------ ------ ------ ------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $10.49 $10.20 $10.68 $ 10.49 $10.20 $ 10.68 $10.49
====== ====== ====== ======= ======= ======= ======
Total return/3/ 10.48% 4.43% 14.27% 9.66% 3.68% 13.52% 5.64%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $4,876 $3,651 $2,990 $14,796 $11,119 $10,188 $ 849
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.02%/4/ 0.91%/4/ 0.37%/2/, /4/ 1.77%/4/ 1.64%/4/ 1.05%/2/, /4/ 1.70%/2/, /4/
Before
advisory/administration
fee waivers 1.74% 1.67% 1.81%/2/ 2.49% 2.40% 2.50%/2/ 2.42%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 8.02% 8.59% 6.89%/2/ 7.26% 7.81% 6.17%/2/ 7.11%/2/
Before
advisory/administration
fee waivers 7.30% 7.83% 5.44%/2/ 6.54% 7.05% 4.72%/2/ 6.39%/2/
PORTFOLIO TURNOVER RATE 393% 434% 258% 393% 434% 258% 393%
</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, Investor B and
Investor C Shares would have been 1.41%, 2.14% and 3.24%, 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 OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES B SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR YEAR 2/05/92/1/ 7/15/97/1/
ENDED ENDED ENDED ENDED ENDED THROUGH THROUGH
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 $ 10.09 $10.38 $ 9.79 $ 11.18 $10.74 $10.40 $10.39
------- ------- ------- ------- ------ ------ ------
Income from investment
operations
Net investment income 0.65 0.59 0.60 0.57 0.66 0.46 0.09
Net gain (loss) on
investments (both
realized and
unrealized) 0.31 (0.20) 0.60 (1.19) 0.57 0.34 0.02
------- ------- ------- ------- ------ ------ ------
Total from investment
operations 0.96 0.39 1.20 (0.62) 1.23 0.80 0.11
------- ------- ------- ------- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.64) (0.58) (0.60) (0.60) (0.66) (0.46) (0.09)
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 (0.64) (0.68) (0.61) (0.77) (0.79) (0.46) (0.09)
------- ------- ------- ------- ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 10.41 $ 10.09 $ 10.38 $ 9.79 $11.18 $10.74 $10.41
======= ======= ======= ======= ====== ====== ======
Total return/3/ 9.74% 3.83% 12.74% (5.76)% 12.13% 7.86% 1.35%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $15,230 $11,193 $11,977 $10,921 $7,252 $1,417 $ 468
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.05%/4/ 1.05% 1.05% 1.00% 0.84% 0.80%/2/ 1.31%/2/,/4/
Before
advisory/administration
fee waivers 1.30% 1.29% 1.25% 1.22% 0.88% 0.80%/2/ 1.56%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.54% 5.67% 5.96% 5.66% 6.09% 6.28%/2/ 4.68%/2/
Before
advisory/administration
fee waivers 6.29% 5.44% 5.76% 5.44% 6.05% 6.28%/2/ 4.43%/2/
PORTFOLIO TURNOVER RATE 428% 638% 203% 61% 72% 56% 428%
</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 Investor A and Investor B Shares would
have been 1.41% and 2.14% respectively, for the year ended September 30,
1997. For the periods prior to September 30, 1997, interest income was pre-
sented net of interest expense.
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 $11.71 $11.37 $11.71 $11.36 $11.71 $11.58
------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income 1.10 0.26 1.06 0.22 1.15 0.02
Net gain (loss) on
investments (both
realized and
unrealized) 0.05 0.32 - - 0.33 (0.09) 0.12
------ ------ ------ ------ ------ ------
Total from investment
operations 1.15 0.58 1.06 0.55 1.06 0.14
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (1.42) (0.24) (1.33) (0.20) (1.33) (0.01)
Distributions from net
realized capital gains (0.49) - - (0.49) - - (0.49) - -
------ ------ ------ ------ ------ ------
Total distributions (1.91) (0.24) (1.82) (0.20) (1.82) (0.01)
------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.95 $11.71 $10.95 $11.71 $10.95 $11.71
====== ====== ====== ====== ====== ======
Total return/3/ 11.02% 5.13% 10.11% 4.90% 10.13% 1.24%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $1,015 $ 176 $ 979 $ 136 $ 474 $ 19
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.42%/3/ 1.45%/2/ 2.12%/3/ 2.09%/2/ 2.11%/2/ 1.53%/2/
Before
advisory/administration
fee waivers 1.52% 1.86%/2/ 2.22% 2.49%/2/ 2.21% 1.93%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.49% 5.29%/2/ 3.65% 4.61%/2/ 3.57% 2.79%/2/
Before
advisory/administration
fee waivers 4.39% 4.88%/2/ 3.55% 4.21%/2/ 3.47% 2.38%/2/
PORTFOLIO TURNOVER RATE 272% 108% 272% 108% 272% 108%
</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.
15.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
TAX-FREE INCOME PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR B SHARES
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR YEAR 5/14/90/1/ YEAR 7/18/96/1/
ENDED ENDED ENDED ENDED ENDED ENDED ENDED THROUGH 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 9/30/97 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.84 $10.61 $10.04 $11.31 $10.60 $10.33 $ 9.91 $10.00 $10.84 $ 10.74
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Income from
investment
operations
Net investment
income 0.50 0.45 0.48 0.48 0.55 0.58 0.64 0.25 0.44 0.08
Net gain (loss) on
investments (both
realized and
unrealized) 0.51 0.21 0.59 (0.93) 0.83 0.49 0.46 (0.11) 0.49 0.10
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Total from
investment
operations 1.01 0.66 1.07 (0.45) 1.38 1.07 1.10 0.14 0.93 0.18
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
LESS DISTRIBUTIONS
Distributions from
net investment
income (0.51) (0.43) (0.48) (0.48) (0.55) (0.59) (0.66) (0.23) (0.43) (0.08)
Distributions from
net realized
capital gains - - - - (0.02) (0.34) (0.12) (0.21) (0.02) - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Total distributions (0.51) (0.43) (0.50) (0.82) (0.67) (0.80) (0.68) (0.23) (0.43) (0.08)
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE AT
END OF PERIOD $11.34 $10.84 $10.61 $10.04 $11.31 $10.60 $10.33 $ 9.91 $11.34 $ 10.84
====== ====== ====== ====== ====== ====== ====== ====== ====== =======
Total return3 9.58% 6.94% 10.99% (4.19)% 13.48% 10.67% 11.40% 1.40% 8.77% 1.72%
RATIOS/SUPPLEMENTAL
DATA
Net assets at end
of period (in
thousands) $5,530 $4,873 $6,591 $6,972 $7,831 $7,349 $3,510 $4,044 $ 926 $ 10
Ratios of expenses
to average net
assets
After
advisory/administration
fee waivers 1.02% 1.04% 1.00% 0.95% 0.57% 0.53% 1.00% 1.00%/2/ 1.75% 1.65%/2/
Before
advisory/administration
fee waivers 1.37% 1.37% 1.78% 2.18% 1.36% 1.67% 1.89% 1.70%/2/ 2.10% 1.98%/2/
Ratios of net
investment income
to average net
assets
After
advisory/administration
fee waivers 4.60% 4.67% 4.74% 4.53% 5.06% 5.56% 6.23% 6.56%/2/ 3.65% 3.84%/2/
Before
advisory/administration
fee waivers 4.25% 4.35% 3.96% 3.30% 4.27% 4.42% 5.34% 5.86%/2/ 3.30% 3.51%/2/
PORTFOLIO TURNOVER
RATE 262% 268% 92% 40% 71% 38% 95% 18% 262% 268%
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.04
----------
<CAPTION>
INVESTOR
C SHARES
PERIOD
2/28/97/1/
THROUGH
9/30/97
Net investment
income 0.28
Net gain (loss) on
investments (both
realized and
unrealized) 0.27
----------
Total from
investment
operations 0.55
----------
LESS DISTRIBUTIONS
Distributions from
net investment
income (0.25)
Distributions from
net realized
capital gains - -
----------
Total distributions (0.25)
----------
NET ASSET VALUE AT
END OF PERIOD $11.34
==========
Total return3 5.02%
RATIOS/SUPPLEMENTAL
DATA
Net assets at end
of period (in
thousands) - -
Ratios of expenses
to average net
assets
After
advisory/administration
fee waivers 1.70%2
Before
advisory/administration
fee waivers 2.05%2
Ratios of net
investment income
to average net
assets
After
advisory/administration
fee waivers 3.95%2
Before
advisory/administration
fee waivers 3.60%2
PORTFOLIO TURNOVER
RATE 262%
</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 $ 10.44 $ 10.33 $ 9.82 $ 10.70 $ 10.00 $ 10.44 $10.33 $ 9.82
------- ------- ------- ------- ------- ------- ------ ------
Income from investment
operations
Net investment income 0.48 0.48 0.48 0.52 0.42 0.40 0.40 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.33 0.11 0.51 (0.85) 0.73 0.33 0.11 0.51
------- ------- ------- ------- ------- ------- ------ ------
Total from investment
operations 0.81 0.59 0.99 (0.33) 1.15 0.73 0.51 0.93
------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.48) (0.48) (0.48) (0.52) (0.42) (0.40) (0.40) (0.42)
Distributions from net
realized capital gains - - - - - - (0.03) (0.03) - - - - - -
------- ------- ------- ------- ------- ------- ------ ------
Total distributions (0.48) (0.48) (0.48) (0.55) (0.45) (0.40) (0.40) (0.42)
------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 10.77 $ 10.44 $ 10.33 $ 9.82 $ 10.70 $ 10.77 $10.44 $10.33
======= ======= ======= ======= ======= ======= ====== ======
Total return3 7.95% 5.81% 10.30% (3.06)% 11.69% 7.12% 5.04% 9.69%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $32,900 $38,031 $42,775 $46,563 $35,934 $12,388 $7,974 $4,008
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.97% 1.00% 0.98% 0.41% 0.07%/2/ 1.76% 1.74% 1.57%/2/
Before
advisory/administration
fee waivers 1.30% 1.30% 1.30% 1.01% 0.95%/2/ 2.07% 2.03% 1.89%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.54% 4.58% 4.88% 5.06% 5.19%/2/ 3.73% 3.81% 4.07%/2/
Before
advisory/administration
fee waivers 4.23% 4.29% 4.56% 4.46% 4.31%/2/ 3.42% 3.51% 3.75%/2/
PORTFOLIO TURNOVER RATE 97% 119% 66% 30% 40% 97% 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 $11.27 $11.61 $11.54 $11.27 $11.15
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.51 0.34 - - 0.41 0.09
Net gain (loss) on
investments (both
realized and
unrealized) 0.37 (0.34) 0.07 0.38 0.12
------ ------ ------ ------ ------
Total from investment
operations 0.88 0.00 0.07 0.79 0.21
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.50) (0.34) - - (0.41) (0.09)
------ ------ ------ ------ ------
Total distributions (0.50) (0.34) - - (0.41) (0.09)
------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $11.65 $11.27 $11.61 $11.65 $11.27
====== ====== ====== ====== ======
Total return/3/ 7.94% (0.01)% 0.63% 7.14% 2.04%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $1,548 $ 894 $ 14 $ 767 $ 30
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.02% 1.01%/2/ 1.02%/2/ 1.74% 1.74%/2/
Before
advisory/administration
fee waivers 1.34% 1.33%/2/ 1.36%/2/ 2.06% 2.06%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.41% 4.29%/2/ 2.79%/2/ 3.60% 3.48%/2/
Before
advisory/administration
fee waivers 4.09% 3.98%/2/ 2.45%/2/ 3.28% 3.16%/2/
PORTFOLIO TURNOVER RATE 77% 109% 26% 77% 109%
</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.
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 $10.15 $10.05 $ 9.60 $10.53 $10.00 $10.15 $10.05 $ 9.58
------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.45 0.46 0.52 0.53 0.36 0.37 0.38 0.42
Net gain (loss) on
investments (both
realized and
unrealized) 0.35 0.10 0.45 (0.91) 0.53 0.35 0.10 0.47
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations 0.80 0.56 0.97 (0.38) 0.89 0.72 0.48 0.89
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.45) (0.46) (0.52) (0.53) (0.36) (0.37) (0.38) (0.42)
Distributions from net
realized capital gains - - - - - - (0.02) - - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total distributions (0.45) (0.46) (0.52) (0.55) (0.36) (0.37) (0.38) (0.42)
------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.50 $10.15 $10.05 $ 9.60 $10.53 $10.50 $10.15 $10.05
====== ====== ====== ====== ====== ====== ====== ======
Total return/3/ 8.03% 5.66% 10.46% (3.75)% 9.10% 7.23% 4.87% 9.33%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $2,614 $2,833 $3,303 $3,825 $2,386 $ 622 $ 161 $ 106
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.02% 0.91% 0.38% 0.10% 0.07%/2/ 1.75% 1.66% 1.17%/2/
Before
advisory/administration
fee waivers 1.53% 1.50% 1.45% 1.49% 2.58%/2/ 2.26% 2.26% 2.25%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.35% 4.57% 5.42% 5.18% 4.90%/2/ 3.52% 3.80% 4.48%/2/
Before
advisory/administration
fee waivers 3.84% 3.98% 4.35% 3.79% 2.39%/2/ 3.01% 3.21% 3.41%/2/
PORTFOLIO TURNOVER RATE 87% 136% 63% 61% 36% 87% 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 BLACKROCK FUNDS consist of 11 invest-
ment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector.
Seven of these Portfolios invest solely in taxable bonds and
four of these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding 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.
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
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.
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>
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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>
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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 except the Low Duration Bond Portfolio 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 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. The Low Duration Bond Portfolio may invest up to 20% of its
assets in non-investment grade fixed-income or convertible securities with a
minimum rating of "B". See "High Yield Securities" below.
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 on either a currency hedged or unhedged basis, and may hold from
time to time various foreign currencies pending investment or conversion into
U.S. dollars. Some of these instruments 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 fu-
ture 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, hedg-
ing and cross-hedging are described below and under "Interest Rate and Cur-
rency Transactions" and "Options and Futures Contracts." Investing in securi-
ties 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.
24.
<PAGE>
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A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in government administrations or economic or monetary policies in
the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general, less information is publicly available with respect to foreign issuers
than is available with respect to U.S. companies. Most foreign companies are
also not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. While the volume of transactions
effected on foreign stock exchanges has increased in recent years, it remains
appreciably below that of the New York Stock Exchange. Accordingly, a Portfo-
lio's foreign investments may be less liquid and their prices may be more vola-
tile than comparable investments in securities in U.S. companies. In addition,
there is generally less government supervision and regulation of securities ex-
changes, brokers and issuers in foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, a Portfolio may invest in instruments which
have the characteristics of futures contracts. These instruments may take a va-
riety of forms, such as debt securities with interest or principal payments de-
termined by reference to the value of a currency or commodity at a future point
in time. The risks of such investments could reflect the risks of investing in
futures, currencies and securities, including volatility 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 Low Duration Bond Portfolio may invest in non-in-
vestment 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 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 agen-
cy.
While generally providing greater income and opportunity for gain, non-invest-
ment grade debt securities may be subject to greater risks than securities
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
25.
<PAGE>
- --------------------------------------------------------------------------------
be non-rated. High yield securities are considered to be speculative with re-
spect 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.
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. Investors in high yield securities have a lower degree of protec-
tion with respect to principal and interest payments then do investors in
higher rated securities due to the reduced creditworthiness of high yield is-
suers. During an economic downturn, a substantial period of rising interest
rates or a recession, highly leveraged issuers of high yield securities may ex-
perience 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 dis-
rupt 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 re-
covery 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,
due to the market's relative youth and growth 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. In addition, 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 devel-
opments. These developments could adversely affect a Portfolio's net asset
value and investment practices, the secondary market for high yield securities,
the financial condition of issuers of these securities and the value and li-
quidity of outstanding high yield securities, especially in a thinly traded
market.
The Low Duration Bond Portfolio may invest in securities rated "B" and above or
determined by the sub-adviser to be of comparable quality. Securities which are
rated "BB" by S&P and "Ba" by Moody's have speculative characteristics with re-
spect to capacity to pay interest and repay principal. Securities which are
rated "B" generally lack characteristics of a desirable investment and assur-
ance of interest and principal payments over any long period of time may be
small. For a description of securities ratings, see Appendix A in the Statement
of Additional Information. Adverse business, financial or economic conditions
will likely impair capacity or willingness to pay interest and principal. 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 costs attributable to
investing in the high yield markets are usually higher for several reasons,
such as higher investment research costs and higher commission costs. For more
information regarding non-investment grade securities, see "Investment Poli-
cies--Non-Investment Grade Securities" in the Statement of Additional Informa-
tion.
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 stand-
26.
<PAGE>
- --------------------------------------------------------------------------------
ing of the corporate user of the facility involved. Municipal Obligations may
also include "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 ob-
ligation of the state or municipality which created the issuer.
Also included within the general category of Municipal Obligations are partici-
pation certificates in a lease, an installment purchase contract, or a condi-
tional sales contract ("lease obligations") entered into by a state or politi-
cal subdivision to finance the acquisition or construction of equipment, land,
or facilities. Although lease obligations are not general obligations of the
issuer for which the state or other governmental body's unlimited taxing power
is pledged, certain lease obligations are backed by a covenant to appropriate
money to make the lease obligation payments. However, under certain lease obli-
gations, the state or governmental body has no obligation to make these pay-
ments in future years unless money is appropriated on a yearly basis. Although
"non-appropriation" lease obligations are secured by the leased property, dis-
position of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that is not yet as marketable as
more conventional securities.
Each Tax-Free Portfolio may invest up to 20% of its total assets in private ac-
tivity bonds the interest on which is an item of tax preference for purposes of
the Federal alternative minimum tax ("AMT Paper") when added together with any
other taxable investments held by the Portfolio. In addition, each Tax-Free
Portfolio may invest 25% or more of its assets in Municipal Obligations the in-
terest on which is paid solely from revenues of similar projects. To the extent
a Portfolio's assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activity bonds, the
Portfolio will be subject to the particular risks presented by the laws and
economic conditions relating to such projects and bonds to a greater extent
than it would be if its assets were not so invested.
The Tax-Free Income Portfolio is classified as a diversified portfolio, and the
State-Specific Tax-Free Portfolios are classified as non-diversified portfo-
lios, under the 1940 Act. Investment returns on a non-diversified portfolio
typically are dependent upon the performance of a smaller number of securities
relative to the number held in a diversified portfolio. Consequently, the
change in value of any one security may affect the overall value of a non-di-
versified portfolio more than it would a diversified portfolio.
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.
27.
<PAGE>
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MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios (except the Tax-
Free Portfolios) may make significant investments in residential and commercial
mortgage-related and other asset-backed securities (i.e., securities backed by
home equity loans, installment sale contracts, credit card receivables or other
assets) issued by governmental entities and private issuers.
The Portfolios may acquire several types of mortgage-related securities, in-
cluding guaranteed mortgage pass-through certificates, which provide the holder
with a pro rata interest in the underlying mortgages, adjustable rate mortgage-
related securities ("ARMs") and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool
of underlying mortgages or other mortgage-backed securities. Issuers of CMOs
ordinarily elect to be taxed as pass-through entities known as real estate
mortgage investment conduits ("REMICs"). CMOs are issued in multiple classes,
each with a specified fixed or floating interest rate and a final distribution
date. The relative payment rights of the various CMO classes may be structured
in a variety of ways. In most cases, however, payments of principal are applied
to the CMO classes in the order of their respective stated maturities, so that
no principal payments will be made on a CMO class until all other classes hav-
ing an earlier stated maturity date are paid in full. The classes may include
accrual certificates (also known as "Z-Bonds"), which only accrue interest at a
specified rate until other specified classes have been retired and are con-
verted thereafter to interest-paying securities. They may also include planned
amortization classes ("PACs") which generally require, within certain limits,
that 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.
28.
<PAGE>
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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. 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?"
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. Bank obligations may include certificates
of deposit, notes, bankers' acceptances and fixed time deposits. These obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. Government such as the
29.
<PAGE>
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Government National Mortgage Association are supported by the United States'
full faith and credit; 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. Government will provide financial support to U.S. Government-
sponsored agencies or instrumentalities if it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios 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) the item which is the
subject of the option 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 International
Bond Portfolio, foreign currencies, and may or may not be listed on a securi-
ties 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 (mea-
sured at the time an option is written). Options trading is a highly special-
ized activity that entails greater than ordinary investment risks. In addition,
unlisted options are not subject to the protections afforded purchasers of
listed options issued by the Options Clearing Corporation, which performs the
obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its total assets, although a Portfolio will not purchase or
sell a futures contract
30.
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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. 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
31.
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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 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.
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.
32.
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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 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
33.
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than securities with shorter maturities. The Portfolios are not restricted to
any maximum or minimum time to maturity in purchasing individual portfolio se-
curities, 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. Al-
though 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 five
years. As of June 30, 1996, the General Fund had a surplus of $635.2 million. A
relatively high proportion of persons 65 and older in the Commonwealth, court
ordered increases in healthcare reimbursement rates and higher correctional
program costs place increased pressures on the tax resources of the Common-
wealth and its municipalities. The Commonwealth's debt burden remains moderate.
Employment growth has shifted to the trade and service sectors, with losses in
more high-paid manufacturing positions. A new governor took office in January
1995, but the Commonwealth has continued to show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county. 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 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 six years the
State rates were below the national rates (4.9% versus 5.4% in 1996). 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.
34.
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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 Global Wireless.
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 BlackRock Funds is BlackRock, Inc. Each of the
Portfolios within the BlackRock Funds family is managed by
a specialized portfolio manager who is a member of BlackRock,
Inc.'s fixed income portfolio management affiliate, 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>
BLACKROCK FUNDS 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; Director and head of U.S.
Fixed Income Investments at CS First Boston
Investment Management Corporation from 1993 to
1995; 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>
35.
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<TABLE>
<CAPTION>
BLACKROCK FUNDS PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<C> <S>
Managed Income Keith Anderson (see above); Portfolio co-manager
since June 1997.
Robert Michele (see above); Portfolio co-manager
since June 1997.
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>
BlackRock, Inc. (formerly PNC Asset Management Group, Inc.)
was organized in 1994 to perform advisory services for in-
vestment companies, and has its principal offices at 1600
Market Street, 29th Floor, Philadelphia, Pennsylvania 19103.
BlackRock, Inc. is an indirect wholly-owned subsidiary of
PNC Bank Corp., a multi-bank holding company.
As adviser, BlackRock, Inc. is responsible for the overall
investment management of the Portfolios. As sub-adviser,
BlackRock Financial Management is responsible for the day-
to-day management of the Portfolios, and generally makes all
purchase and sale investment decisions for the Portfolios.
BlackRock Financial Management also provides research and
credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-
dollar fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International
equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services,
BlackRock, Inc. 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 Portfo-
lios?", with respect to certain Portfolios, BlackRock, Inc.
and the sub-adviser intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by BlackRock, Inc., and do not represent an extra
charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO EXCEPT THE
INTERNATIONAL BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
---------------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
----------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 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 Portfo- lio, .30%; Intermediate Bond Portfolio, .30%;
Government Income Portfolio, .00%; Man-aged Income Portfo-
lio, .35%; Tax-Free Income Portfolio, .28%; Pennsylvania
Tax-Free
36.
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Income Portfolio, .29%; Ohio Tax-Free Income Portfolio, .09%;
Low Duration Bond Portfolio, .27%; Core Bond Portfolio, .26%,
New Jersey Tax-Free Income Portfolio, .29%; and the Interna-
tional Bond Portfolio, .56%.
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 the
Fund's distributor, subject to the requirements of best execu-
tion.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors,
Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad-
ministrators. BlackRock, Inc. and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub-
sidiary 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. 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 BDI 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 av-
erage daily net assets of each Portfolio in excess of $1 bil-
lion 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 al-
located 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 Portfo-
lio.
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
AGENT, PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING lios' custodian and PFPC, whose principal offices are located
AGENT AND at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN their transfer agent and dividend disbursing agent.
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"),
PLAN Investor Shares of the Portfolios bear the expense of payments
("distribution fees") made to BDI, 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
Portfolio's outstanding Investor A Shares and .75% (annualized)
of the average daily net asset value of each Portfolio's out-
standing Investor B and Investor C Shares. Payments under the
Plan are not tied directly to out-of-pocket expenses and there-
fore may be used by the recipients as they choose (for example,
to defray their overhead expenses). The Plan also permits the
Distributor, the Administrators and other companies that re-
ceive fees from the Fund to make payments relating to distri
-
37.
<PAGE>
- --------------------------------------------------------------------------------
bution and sales support activities out of their past profits
or other sources available to them. For further information,
see "Investment Advisory, Administration, Distribution and
Servicing Arrangements" in the Statement of Additional Infor-
mation.
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 BlackRock, Inc.
and the Administrators, transfer agency and custodian fees,
trustee fees, taxes, interest, professional fees, shareholder
servicing and processing fees, distribution fees, fees and
expenses in registering and qualifying the Portfolios and
their shares for distribution under Federal and state securi-
ties laws, expenses of preparing prospectuses and statements
of additional information and of printing and distributing
prospectuses and statements of additional information to ex-
isting shareholders, expenses relating to shareholder re-
ports, shareholder meetings and proxy solicitations, insur-
ance premiums, the expense of independent pricing services,
and other expenses which are not expressly assumed by Black-
Rock, Inc. or the Fund's service providers under their agree-
ments with the Fund. Any general expenses of the Fund that do
not belong to a particular investment portfolio will be allo-
cated among all investment portfolios by or under the direc-
tion of the Board of Trustees in a manner the Board deter-
mines to be fair and equitable.
38.
<PAGE>
- --------------------------------------------------------------------------------
WHAT PRICING OPTIONS ARE AVAILABLE TO INVESTORS?
- --------------------------------------------------------------------------------
The Bond Portfolios of BlackRock 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 BlackRock Funds fam-
ily
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 BlackRock Funds fam-
ily
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 BlackRock Funds fam-
ily
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.
39.
<PAGE>
- --------------------------------------------------------------------------------
THE PRICING OPTIONS FOR EACH PORTFOLIO ARE DESCRIBED IN THE TABLES BELOW:
INTERMEDIATE GOVERNMENT BOND, INTERMEDIATE BOND, CORE BOND, TAX-FREE INCOME,
PENNSYLVANIA TAX-FREE INCOME, NEW JERSEY TAX-FREE INCOME AND OHIO TAX-FREE
INCOME PORTFOLIOS:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 4.00% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
GOVERNMENT INCOME AND MANAGED INCOME PORTFOLIOS:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge 4.50% 0.00% 0.00%
12b-1 Fee 0.00%* 0.75% 0.75%
CDSC (Redemption Charge) 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
LOW DURATION BOND PORTFOLIO:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge................. 3.00% 0.00% 0.00%
12b-1 Fee............... 0.00%* 0.75% 0.75%
CDSC (Redemption
Charge)................ 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
INTERNATIONAL BOND PORTFOLIO:
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
Maximum Front-End Sales
Charge................. 5.00% 0.00% 0.00%
12b-1 Fee............... 0.00%* 0.75% 0.75%
CDSC (Redemption
Charge)................ 0.00% 4.50%-0.00% 1.00%
(Depends on when (If redeemed within
shares are redeemed) 12 months of purchase)
</TABLE>
*The Portfolios do not expect to incur 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?"
40.
<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.
41.
<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 BlackRock Funds. The Fund does not accept third party
checks for initial or subsequent investments. 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 BDI as the Distributor. BDI 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, to modify or waive the minimum initial
or subsequent investment requirement and to suspend and resume the sale of any
share class of a Portfolio at any time.
42.
<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 BlackRock Funds
c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the con-
tingent deferred sales charge, if applicable, there is no charge for a redemp-
tion. 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 BlackRock 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.
43.
<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
result of a redemption or an exchange request. A shareholder will be notified
in writing that the value of the shareholder's account in a Portfolio is less
than the required amount and will be allowed 30 days to make additional in-
vestments 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 BlackRock Funds c/o PFPC, P.O. Box 8907, Wilmington,
Delaware 19899-8907. Proceeds from the redemption of shares will be reduced by
the amount of any applicable contingent deferred sales charge. Unless another
payment option is used as described above, payment for redeemed shares is nor-
mally made by check mailed within seven days after acceptance by PFPC of the
request and any other necessary documents in proper order. Payment may, howev-
er, be postponed or the right of redemption suspended as provided by the rules
of the SEC. If the shares to be redeemed have been recently purchased by
check, the Fund's transfer agent may delay the payment of redemption proceeds,
which may be a period of up to 15 days after the purchase date, pending a de-
termination that the check has cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Fund's responsi-
bilities under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
44.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
- --------------------------------------------------------------------------------
BlackRock Funds offers shareholders many special features which enable an in-
vestor to have greater investment flexibility as well as greater access to in-
formation 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.
45.
<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.
46.
<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 AS SALES CHARGE AS PLACEMENT FEES
AMOUNT OF TRANSACTION % 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
$1-2 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 AS SALES CHARGE AS PLACEMENT FEES
AMOUNT OF TRANSACTION % 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
$1-2 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 as shown on purchases of
Investor A Shares of $1,000,000 or more.
47.
<PAGE>
- --------------------------------------------------------------------------------
GOVERNMENT INCOME AND MANAGED INCOME PORTFOLIOS:
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES CHARGE AS SALES CHARGE AS PLACEMENT FEES
AMOUNT OF TRANSACTION % 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>
INTERNATIONAL BOND PORTFOLIO:
<TABLE>
<CAPTION>
REALLOWANCE OR
SALES CHARGE AS SALES CHARGE AS PLACEMENT FEES
AMOUNT OF TRANSACTION % 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 as shown 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, BlackRock, Inc. and/or their affili-
ates 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
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 partici-
pants 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 Arrangements" in the
Statement of Additional Information.
48.
<PAGE>
- --------------------------------------------------------------------------------
SALES CHARGE WAIVERS--INVESTOR A SHARES. The following persons associated with
the Fund, the Distributor, the Fund's investment adviser, sub-adviser or trans-
fer agent and their affiliates may buy Investor A Shares without paying a sales
charge to the extent permitted by these firms: (a) officers, directors and
partners (and their spouses and minor children); (b) employees and retirees
(and their spouses and minor children); (c) registered representatives of bro-
kers who have entered into selling agreements with the Distributor; (d) spouses
or children of such persons; and (e) any trust, pension, profit-sharing or
other benefit plan for any of the persons set forth in (a) through (c). The
following persons may also buy Investor A Shares without paying a sales charge:
(a) persons investing through an authorized payroll deduction plan; (b) persons
investing through an authorized investment plan for organizations which operate
under Section 501(c)(3) of the Internal Revenue Code; (c) registered investment
advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Portfolio,
provided that the aggregate amount invested pursuant to this exemption in In-
vestor 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
financial 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 such Qualified Plans of Investor A Shares aggregat-
ing $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.
49.
<PAGE>
- -------------------------------------------------------------------------------
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.
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, Black-
Rock, Inc. 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 C Shares. See "What Is The Sched-
ule Of Sales Charges And Exemptions--Investor A Shares" for information on ad-
ditional sales incentives which the Distributor, BlackRock, Inc. and/or their
affiliates may provide to dealers in connection with the sale of shares.
50.
<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, BlackRock,
Inc. 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 In-
vestor 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, BlackRock, Inc. and/or their affiliates may
provide to dealers in connection 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, BlackRock, Inc. or its affiliates;
(4) redemptions in connection with a shareholder's death or disability (as de-
fined 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 accounts with low balances as described in "How Are Shares Re-
deemed?"; and (6) redemptions made pursuant to the Systematic Withdrawal Plan,
subject to the limitations set forth above under "What Are the Shareholder Fea-
tures of the Fund?--Systematic Withdrawal Plan." In addition, no contingent de-
ferred sales charge is charged on Investor B or Investor C Shares acquired
through the reinvestment of dividends or distributions. The Fund also waives
the contingent deferred sales charge on redemptions of Investor 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 Redemption 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.
51.
<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.
52.
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds 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 tax liabil-
ity. Second, "exempt interest dividends" must be taken into account by corpo-
rate taxpayers in determining certain adjustments for alternative minimum tax
purposes. In addition, investors should be aware of the possibility of state
and local alternative minimum or minimum income tax liability on interest from
private activity bonds. Shareholders who are recipients of Social Security Act
or Railroad Retirement Act benefits should note that "exempt interest divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each 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
53.
<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 is not taxable to individuals, estates or
trusts under the Personal Income Tax; to corporations under the Corporate Net
Income Tax; nor to individuals under the Philadelphia School District Net In-
vestment 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, but such income is not taxable under 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
54.
<PAGE>
- --------------------------------------------------------------------------------
Income Tax and Corporate 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 the New Jersey Tax-Free
Income Portfolio will qualify as a "qualified investment fund" and as a result,
substantially all distributions paid by the New Jersey Tax-Free Income Portfo-
lio will not be subject to the New Jersey personal income tax. A qualified in-
vestment fund is an investment company or trust registered with the Securities
and Exchange Commission, or any series of such investment company or trust,
which for the calendar year in which the distribution is paid: (a) has no in-
vestments other than interest-bearing obligations, obligations issued at a dis-
count, and cash and cash items, including receivables and financial options,
futures, forward contracts, or other similar financial instruments related to
interest-bearing obligations, obligations issued at a discount or bond indexes
related thereto; and (b) has at least 80% of the aggregate principal amount of
all of its investments, excluding financial options, futures, forward con-
tracts, or other similar financial instruments related to interest-bearing ob-
ligations, obligations issued at a discount or bond indexes related thereto to
the extent such instruments are authorized by the regulated investment company
rules of the Code, cash and cash items, which cash items shall include receiv-
ables, in New Jersey State-Specific Obligations or U.S. Government Obligations.
In accordance with New Jersey law as currently in effect, distributions paid by
a qualified investment fund are excluded from personal income tax to the extent
that the distributions are attributable to interest or gains from New Jersey
State-Specific Obligations or to interest or gains from direct U.S. Government
Obligations. New Jersey State-Specific Obligations are obligations issued by or
on behalf of New Jersey or any county, municipality, or other political subdi-
vision of New Jersey. U.S. Government Obligations are obligations which are
statutorily free from tax under the laws of the United States. Distributions by
a qualified investment fund from most other sources will be subject to the New
Jersey personal income tax. Shares of the New Jersey Tax-Free Income Portfolio
are not subject to property taxation by New Jersey.
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
55.
<PAGE>
- --------------------------------------------------------------------------------
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 attributable to interest on
Ohio State-Specific Obligations or the U.S. obligations described above provid-
ed, in the case of U.S. territorial obligations, such interest is excluded from
gross income for federal income tax purposes. 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 prop-
erly attributable to gain on the sale, exchange or other disposition of Ohio
State-Specific Obligations will not be subject to the Ohio personal income tax,
or municipal or school district income taxes in Ohio and will not be included
in the net income base of the Ohio corporation franchise tax. Distributions at-
tributable to other sources will be subject to the Ohio personal income tax and
the Ohio corporation franchise tax. This discussion of Ohio taxes assumes that
the Ohio Tax-Free Income Portfolio will continue to qualify as a regulated in-
vestment company as defined in the Code and that 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.
56.
<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
company. The Declaration of Trust authorizes the Board of Trustees to classify
and reclassify any unissued shares into one or more classes of shares. Pursuant
to this authority, the Trustees have authorized the issuance of an unlimited
number of shares in thirty-eight investment portfolios. Each Portfolio, other
than the Government Income Portfolio, offers five separate classes of shares--
Institutional Shares, Service Shares, Investor A Shares, Investor B Shares and
Investor C Shares. The Government Income Portfolio offers only Investor A
Shares, Investor B Shares and Investor C Shares. In addition, the Low Duration
Bond, Core Bond and Intermediate Bond Portfolios offer a sixth share class-
BlackRock Shares. This prospectus relates only to Investor A Shares, Investor B
Shares and Investor C Shares of the Portfolios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, 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, Service and BlackRock 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
57.
<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.
58.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7762
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
59.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
<TABLE>
<CAPTION>
BLACKROCK 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 January 20, 1998, the composition of
the Lehman Brothers Aggregate Index is:
58% allocation to Treasury and government
securities
15% allocation to mortgage-backed
securities
27% 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 January 20, 1998, the composition of
the Lehman Brothers Aggregate Index is:
58% allocation to Treasury and government
securities
15% allocation to mortgage-backed
securities
27% allocation to corporate and asset-
backed securities
International Bond Salomon Non-U.S. Hedged A market-capitalization weighted benchmark
World Government Bond that tracks the performance of the 13
Index Government bond markets of Australia,
Austria, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, the Netherlands,
Spain, Sweden and the United Kingdom. The
currency-hedged return is computed by using
a rolling one-month forward exchange
contract as a hedging instrument.
Tax-Free Income Lehman Municipal Bond All of the bonds in the following Municipal
Index Indices possess the following
characteristics:
. A minimum credit rating of Baa-3
. Outstanding par value of at least $3
million
. Must be issued as part of a deal of at
least $50 million
. Individual bonds must have been issued
within the last 5 years
. Remaining maturity of not less than one
year
Excludes bonds subject to the alternative
minimum tax (AMT), taxable municipal bonds,
and floating-rate or zero coupon municipal
bonds
Pennsylvania Tax-Free Lehman Local GO Index Local general obligation bonds
Income
New Jersey Tax-Free Lehman Local GO Index Local general obligation bonds
Income
Ohio Tax-Free Income Lehman Local GO Index Local general obligation bonds
</TABLE>
60.
<PAGE>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Micro-Cap Equity
Mid-Cap Growth Equity International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity International Small Cap Equity
Index Equity
Small Cap Value Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 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?........................................ 30
How Are Shares Purchased And Redeemed?....................... 34
How Is Net Asset Value Calculated?........................... 36
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 36
How Are Fund Distributions Taxed?............................ 37
How Is The Fund Organized?................................... 40
How Is Performance Calculated?............................... 41
How Can I Get More Information?.............................. 42
</TABLE>
This Prospectus sets forth concisely information about the Black-
Rock Funds SM (the "Fund") bond Portfolios that a prospective in-
vestor needs to know before investing. Please keep it for future
reference. A Statement of Additional Information dated January
28, 1998 has been filed with the Securities and Exchange Commis-
sion (the "SEC"). The Statement of Additional Information may be
obtained free of charge from the Fund by calling (800) 441-7764.
The Statement of Additional Information, as supplemented from
time to time, is incorporated by reference into this Prospectus.
The SEC maintains a Web site (http://www.sec.gov) that contains
the Statement of Additional Information, material incorporated by
reference and other information regarding the Fund that has been
filed with the SEC.
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 BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Bond Portfolios of BLACKROCK FUNDS consist of 11 investment
portfolios (the "Portfolios") that provide investors with a
broad spectrum of investment alternatives within the fixed in-
come sector. Seven of these Portfolios invest in taxable bonds,
and four of these Portfolios invest in tax-exempt bonds. All
Portfolios except the Government Income Portfolio offer Insti-
tutional Shares. A detailed description of each Portfolio be-
gins on page 15.
BLACKROCK PERFORMANCE LIPPER PEER GROUP
PORTFOLIO BENCHMARK
LOW DURATION Merrill 1-3 Short-Intermediate
BOND Year Treasury Investment Grade Debt
Index
INTERMEDIATE Lehman Brothers Intermediate U.S.
GOVERNMENT Intermediate Government
BOND Government
Index
INTERMEDIATE Lehman Brothers Intermediate Investment
BOND Intermediate Grade Debt
Government/Corporate
Index
CORE BOND Lehman Aggregate Intermediate Investment
Index Grade Debt
MANAGED INCOME Lehman Aggregate Corporate Debt A-Rated
Index
INTERNATIONAL Salomon Non-U.S. International Income
BOND Hedged World
Government
Bond Index
TAX-FREE Lehman Municipal General Municipal Debt
INCOME Bond Index
PA TAX-FREE Lehman Local GO PA Municipal Debt
INCOME Index
NJ TAX-FREE Lehman Local GO NJ Municipal Debt
INCOME Index
OH TAX FREE Lehman Local GO OH Municipal Debt
INCOME Index
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
BOND different directions in fixed income investing.
PORTFOLIOS
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS IN investment objective. Some or all of the Portfolios may pur-
BOND chase mortgage-related, asset-backed, foreign, high yield and
INVESTING illiquid securities; enter into repurchase and reverse repur-
chase agreements and engage in leveraging, which is a specula-
tive technique; lend portfolio securities to third parties; and
enter into futures contracts and options. Each of the Pennsyl-
vania, New Jersey and Ohio Tax-Free Income Portfolios (the
"State- Specific Tax-Free Portfolios") concentrates in the se-
curities 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?"
3.
<PAGE>
- --------------------------------------------------------------------------------
The Low Duration Bond Portfolio invests in high yield securi-
ties which are considered high risk securities. See "What Ad-
ditional Investment Policies And Risks Apply?--High Yield Se-
curities."
For information on how to purchase and redeem shares of the
INVESTING IN Portfolios, see "How Are Shares Purchased And Redeemed?"
THE BLACKROCK
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, Managed Income, Intermediate Bond, International Bond, Tax-
Free Income, Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfolios
have been restated to reflect current expenses and fee waivers. Because no In-
stitutional Shares of the New Jersey Tax-Free Income Portfolio were outstanding
during the fiscal year ended September 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/) .22% .30% .27%
Other operating expenses .33 .30 .33
--- --- ---
Administration fees
(after fee waivers)(/1/) .22 .18 .22
Other expenses .11 .12 .11
--- --- ---
Total Portfolio operating expenses (after
fee waivers)(/1/) .55% .60% .60%
=== === ===
</TABLE>
<TABLE>
<CAPTION>
CORE BOND MANAGED INCOME
PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .22% .35%
Other operating expenses .33 .30
--- ---
Administration fees (after fee waivers)(/1/) .22 .21
Other expenses .11 .09
--- ---
Total Portfolio operating expenses (after fee
waivers)(/1/) .55% .65%
=== ===
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. BlackRock, Inc. and the Portfolios' administra-
tors are under no obligation to waive fees or reimburse expenses, but have
informed the Fund that they expect to waive fees and reimburse expenses
during the remainder of the current fiscal year as necessary to maintain
the Portfolios' total operating expenses at the levels set forth in the ta-
ble. Without waivers, "Other operating expenses" would be .38%, .36%, .32%,
.35% and .33%, respectively, and "Total Portfolio operating expenses" would
be .88%, .86%, .82%, .85% and .83%, respectively. See "What are the Portfo-
lios' 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% .25% .30%
Other operating expenses .53 .35 .30
--------- ------- --------
Administration fees
(after fee
waivers)(/1/) .22 .17 .18
Other expenses (after
expense reimbursement) .31 .18 .12
-------- ------- --------
Total Portfolio
operating expenses
(after fee waivers and
expense reimbursements)
(/1/) 1.03% .60% .60%
========= ======= ========
</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/) .28% .09%
Other operating expenses .32 .51
----- -----
Administration fees (after fee waivers)(/1/) .18 .14
Other expenses .14 .37
----- -----
Total Portfolio operating expenses (after fee
waivers)(/1/) .60% .60%
===== =====
</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. BlackRock, Inc. and the Portfolios' admin-
istrators 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 .53%,
.40%, .36%, .37% and .56% respectively, and "Total Portfolio operating ex-
penses" would be 1.08%, .90%, .86%, .87% and 1.06%, respectively.
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment assuming (1) a 5% annual return, and (2) redemption at the
end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio $ 6 $18 $31 $ 69
Intermediate Government Portfolio 6 19 33 75
Intermediate Bond Portfolio 6 19 33 75
Core Bond Portfolio 6 18 31 69
Managed Income Portfolio 7 21 36 81
International Bond Portfolio 11 33 57 126
Tax-Free Income Portfolio 6 19 33 75
Pennsylvania Tax-Free Income
Portfolio 6 19 33 75
New Jersey Tax-Free Income Portfolio 6 19 33 75
Ohio Tax-Free Income Portfolio 6 19 33 75
</TABLE>
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 "Investment Advisory, Administra-
tion, Distribution and Servicing Arrangements" in the Statement of Additional
Information.
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 were outstanding.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
YEAR 4/1/96 7/1/95 YEAR YEAR 7/17/92/1/
ENDED THROUGH THROUGH ENDED ENDED THROUGH
9/30/97 9/30/96 3/31/96 6/30/95 6/30/94 6/30/93
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.79 $ 9.79 $ 9.83 $ 9.71 $ 9.96 $ 10.00
-------- -------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.58 0.28 0.42 0.58 0.48 0.51
Net gain (loss) on
investments (both
realized and
unrealized) 0.08 (0.01) - - 0.13 (0.25) (0.06)
-------- -------- ------- ------- ------- -------
Total from investment
operations 0.66 0.27 0.42 0.71 0.23 0.45
-------- -------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.56) (0.27) (0.41) (0.58) (0.48) (0.49)
Distribution in excess
of net investment
income - - - - (0.04) - - - - - -
Distributions from net
realized capital gains - - - - (0.01) (0.01) - - - -
-------- -------- ------- ------- ------- -------
Total distributions (0.56) (0.27) (0.46) (0.59) (0.48) (0.49)
-------- -------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 9.89 $ 9.79 $ 9.79 $ 9.83 $ 9.71 $ 9.96
======== ======== ======= ======= ======= =======
Total return 6.89% 2.70% 4.25% 6.99% 2.33% 4.63%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $102,490 $135,686 $52,843 $44,486 $31,265 $51,611
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.55%/3/ 0.55%/2/,/3/ 0.63%/2/,/3/ 0.57% 0.57% 0.56%/2/
Before
advisory/administration
fee waivers 0.88% 0.83%/2/ 0.83%/2/ 1.05% 1.02% 0.66%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.14% 5.72%/2/ 5.25%/2/ 6.08% 4.70% 5.32%/2/
Before
advisory/administration
fee waivers 5.81% 5.45%/2/ 5.05%/2/ 5.60% 4.25% 5.22%/2/
PORTFOLIO TURNOVER RATE 371% 228% 185% 586% 455% 513%
</TABLE>
/1/ Commencement of operations of share class.
/2/ Annualized.
/3/ Including interest expense, ratios would have been 0.92% for the year 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 $ 9.92 $ 10.02 $ 9.64 $ 10.60 $ 10.46 $ 10.00
------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.59 0.58 0.58 0.55 0.54 0.24
Net gain (loss) on
investments
(both realized and
unrealized) 0.19 (0.11) 0.38 (0.86) 0.16 0.46
------- -------- -------- -------- -------- --------
Total from investment
operations 0.78 0.47 0.96 (0.31) 0.70 0.70
------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.59) (0.57) (0.58) (0.55) (0.54) (0.24)
Distributions from net
realized capital gains - - - - - - (0.10) (0.02) - -
------- -------- -------- -------- -------- --------
Total distributions (0.59) (0.57) (0.58) (0.65) (0.56) (0.24)
------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 10.11 $ 9.92 $ 10.02 $ 9.64 $ 10.60 $ 10.46
======= ======== ======== ======== ======== ========
Total return 8.08% 4.82% 10.28% (3.08)% 6.88% 7.14%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $96,605 $126,312 $134,835 $128,974 $137,065 $105,620
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.55%/3/ 0.53%/3/ 0.42%/3/ 0.40% 0.73% 0.80%/2/
Before
advisory/administration
fee waivers 0.86% 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 6.00% 6.03% 5.94% 5.48% 5.23% 5.28%/2/
Before
advisory/administration
fee waivers 5.69% 5.73% 5.57% 5.08% 5.15% 5.28%/2/
PORTFOLIO TURNOVER RATE 291% 580% 247% 9% 80% 38%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 0.67% for the year ended
September 30, 1997, 0.70% for the year ended September 30, 1996, and 0.42%
for the year ended September 30, 1995.
8.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL 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 $9.32 $ 9.43 $ 9.05 $ 10.01 $ 10.00
-------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.58 0.56 0.56 0.54 0.02
Net gain (loss) on
investments
(both realized and
unrealized) 0.17 (0.09) 0.38 (0.88) (0.01)
-------- -------- -------- ------- -------
Total from investment
operations 0.75 0.47 0.94 (0.34) 0.01
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.58) (0.55) (0.56) (0.56) - -
Distributions from net
realized capital gains - - (0.03) - - (0.06) - -
-------- -------- -------- ------- -------
Total distributions (0.58) (0.58) (0.56) (0.62) - -
-------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $9.49 $ 9.32 $ 9.43 $ 9.05 $ 10.01
======== ======== ======== ======= =======
Total return 8.40% 5.10% 10.76% (3.52)% 0.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $295,709 $207,909 $124,979 $71,896 $56,713
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.53%/3/ 0.53%/3/ 0.47%/3/ 0.45% 0.45%/2/
Before
advisory/administration
fee waivers 0.82% 0.83% 0.81% 0.88% 0.84%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.63% 6.27% 6.18% 5.54% 4.72%/2/
Before
advisory/administration
fee waivers 6.34% 5.97% 5.84% 5.11% 4.33%/2/
PORTFOLIO TURNOVER RATE 321% 670% 262% 92% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 0.98% for the year ended
September 30, 1997, 0.83% for the year ended September 30, 1996, and 0.55%
for the year 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 FOR THE
PERIOD PERIOD PERIOD
YEAR 4/1/96 7/1/95 YEAR YEAR 12/9/92/1/
ENDED THROUGH THROUGH ENDED ENDED THROUGH
9/30/97 9/30/96 3/31/96 6/30/95 6/30/94 6/30/93
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 9.55 $ 9.61 $ 9.85 $ 9.36 $ 10.37 $10.00
-------- -------- ------- ------- ------- ------
Income from investment
operations
Net investment income 0.62 0.30 0.47 0.62 0.55 0.32
Net gain (loss) on
investments (both
realized
and unrealized 0.26 (0.06) (0.07) 0.50 (0.60) 0.37
-------- -------- ------- ------- ------- ------
Total from investment
operations 0.88 0.24 0.40 1.12 (0.05) 0.69
-------- -------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.61) (0.30) (0.47) (0.62) (0.55) (0.32)
Distributions from net
realized capital gains - - - - (0.17) (0.01) (0.41) - -
-------- -------- ------- ------- ------- ------
Total distributions (0.61) (0.30) (0.64) (0.63) (0.96) (0.32)
-------- -------- ------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 9.82 $ 9.55 $ 9.61 $ 9.85 $ 9.36 $10.37
======== ======== ======= ======= ======= ======
Total return 10.03% 2.55% 3.93% 11.79% (0.69)% 6.88%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $393,657 $162,626 $64,707 $32,191 $12,507 $7,803
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.55%/3/ 0.55%/2/,/3/ 0.66%/2/,/3/ 0.55% 0.55% 0.55%/2/
Before
advisory/administration
fee waivers 0.85% 0.84%/2/ 0.91%/2/ 1.75% 2.65% 2.44%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.81% 6.75%/2/ 5.89%/2/ 6.62% 5.61% 5.57%/2/
Before
advisory/administration
fee waivers 6.52% 6.45%/2/ 5.64%/2/ 5.43% 3.51% 3.68%/2/
PORTFOLIO TURNOVER RATE 441% 308% 723% 435% 722% 354%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 0.84% for the year 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 $ 10.09 $ 10.38 $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70 $ 10.00
-------- -------- -------- -------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.68 0.64 0.65 0.64 0.67 0.69 0.74 0.66
Net gain (loss) on
investments (both
realized and
unrealized) 0.32 (0.21) 0.60 (1.21) 0.56 0.48 0.63 (0.29)
-------- -------- -------- -------- -------- -------- ------- -------
Total from investment
operations 1.00 0.43 1.25 (0.57) 1.23 1.17 1.37 0.37
-------- -------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.68) (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 (0.68) (0.72) (0.66) (0.81) (0.80) (0.69) (0.81) (0.67)
-------- -------- -------- -------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.41 $ 10.09 $ 10.38 $ 9.79 $ 11.17 $ 10.74 $ 10.26 $ 9.70
======== ======== ======== ======== ======== ======== ======= =======
Total return 10.25% 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) $537,260 $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%/3/ 0.58% 0.57% 0.55% 0.74% 0.80% 0.80% 0.80%/2/
Before
advisory/administration
fee waivers 0.83% 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 6.99% 6.17% 6.44% 6.11% 6.25% 6.28% 7.36% 7.31%/2/
Before
advisory/administration
fee waivers 6.74% 5.95% 6.24% 5.89% 6.21% 6.28% 7.32% 7.29%/2/
PORTFOLIO TURNOVER RATE 428% 638% 203% 61% 72% 56% 38% 18%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratio would have been 0.92% for the period ended
September 30, 1997. For the periods prior to September 30, 1997, interest in-
come was presented net of interest expense.
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 $ 11.71 $ 11.37
------- -------
Income from investment operations
Net investment income 0.78 0.21
Net gain (loss) on investments (both realized and
unrealized) 0.42 0.30
------- -------
Total from investment operations 1.20 0.51
------- -------
LESS DISTRIBUTIONS
Distributions from net investment income (1.47) (0.17)
Distributions from net realized capital gains (0.49) - -
------- -------
Total distributions (1.96) (0.17)
------- -------
NET ASSET VALUE AT END OF PERIOD $ 10.95 $ 11.71
======= =======
Total return 11.59% 4.48%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $43,310 $30,882
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.98% 0.92%/2/
Before advisory/administration fee waivers 1.08% 1.32%/2/
Ratios of net investment income to average net assets
After advisory/administration fee waivers 5.28% 6.28%/2/
Before advisory/administration fee waivers 5.18% 5.88%/2/
PORTFOLIO TURNOVER RATE 272% 108%
</TABLE>
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 $10.84 $10.61 $10.04 $11.31 $10.61
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.56 0.49 0.53 0.53 0.42
Net gain (loss) on
investments (both realized
and unrealized) 0.51 0.28 0.59 (0.93) 0.70
------ ------ ------ ------ ------
Total from investment
operations 1.07 0.77 1.12 (0.40) 1.12
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.57) (0.54) (0.53) (0.53) (0.42)
Distributions from net
realized capital gains - - - - (0.02) (0.34) - -
------ ------ ------ ------ ------
Total distributions (0.57) (0.54) (0.55) (0.87) (0.42)
------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $11.34 $10.84 $10.61 $10.04 $11.31
====== ====== ====== ====== ======
Total return 10.09% 7.45% 11.54% (3.77)% 10.72%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $9,419 $8,350 $ 271 $ 132 $ 675
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.55% 0.55% 0.52% 0.50% 0.50%/2/
Before
advisory/administration fee
waivers 0.90% 0.89% 1.30% 1.73% 1.28%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 5.07% 5.10% 5.19% 4.97% 5.14%/2/
Before
advisory/administration fee
waivers 4.72% 4.78% 4.41% 3.74% 4.36%/2/
PORTFOLIO TURNOVER RATE 262% 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 $10.44 $10.33 $ 9.82 $10.70 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.53 0.52 0.52 0.53 0.39
Net gain (loss) on
investments (both realized
and unrealized) 0.33 0.12 0.51 (0.85) 0.73
------ ------ ------ ------ ------
Total from investment
operations 0.86 0.64 1.03 (0.32) 1.12
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.53) (0.53) (0.52) (0.53) (0.39)
Distributions from net
realized capital gains - - - - - - (0.03) (0.03)
------ ------ ------ ------ ------
Total distributions (0.53) (0.53) (0.52) (0.56) (0.42)
------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.77 $10.44 $10.33 $ 9.82 $10.70
====== ====== ====== ====== ======
Total return 8.43% 6.29% 10.81% (2.96)% 11.69%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $5,108 $3,609 $2,092 $ 639 $ 256
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.55% 0.55% 0.52% 0.39% 0.09%/2/
Before
advisory/administration fee
waivers 0.86% 0.85% 0.84% 0.99% 0.97%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 4.97% 5.01% 5.23% 5.27% 5.19%/2/
Before
advisory/administration fee
waivers 4.66% 4.72% 4.91% 4.67% 4.31%/2/
PORTFOLIO TURNOVER RATE 97% 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 $10.15 $10.05 $ 9.60 $10.53 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.51 0.50 0.55 0.53 0.36
Net gain (loss) on
investments (both realized
and unrealized) 0.34 0.10 0.45 (0.91) 0.53
------ ------ ------ ------ ------
Total from investment
operations 0.85 0.60 1.00 (0.38) 0.89
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.50) (0.50) (0.55) (0.53) (0.36)
Distributions from net
realized capital gains - - - - - - (0.02) - -
------ ------ ------ ------ ------
Total distributions (0.50) (0.50) (0.55) (0.55) (0.36)
------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.50 $10.15 $10.05 $ 9.60 $10.53
====== ====== ====== ====== ======
Total return 8.53% 6.12% 10.75% (3.75)% 9.10%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $ 928 $ 409 $ 200 $ 127 $1,676
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.55% 0.51% 0.12% 0.10% 0.08%/2/
Before
advisory/administration fee
waivers 1.06% 1.10% 1.19% 1.49% 2.59%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 4.80% 4.96% 5.61% 5.16% 4.99%/2/
Before
advisory/administration fee
waivers 4.29% 4.37% 4.54% 3.77% 2.48%/2/
PORTFOLIO TURNOVER RATE 87% 136% 63% 61% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
14.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The Bond Portfolios of BLACKROCK FUNDS consist of 11 investment
portfolios that provide investors with a broad spectrum of in-
vestment alternatives within the fixed income sector. Seven of
these Portfolios invest solely in taxable bonds and four of
these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding periods,
a fund that invests in any one of these styles may perform
above or below the market. An investment program that combines
these multiple disciplines allows investors to select from
among these various product options in the way that most
closely fits the investor's goals and sentiments.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVE
<S> <C>
Low Duration Bond To realize a rate of return that
exceeds the total return of the
Merrill Lynch 1-3 Year Treasury Index.
Intermediate Government To seek current income consistent with
Bond, Intermediate Bond, the preservation of capital.
Managed Income and
International Bond
Core Bond To realize a total rate of return that
exceeds the total return of the Lehman
Brothers Aggregate Index.
Tax-Free Income, To seek as high a level of current
Pennsylvania Tax-Free income exempt from Federal income tax
Income, New Jersey Tax- and, to the extent possible for each
Free Income and Ohio State-Specific Tax-Free Portfolio,
Tax-Free Income income tax of the specific state in
which the Portfolio concentrates, as
is consistent with preservation of
capital.
</TABLE>
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
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 Elig. Elig.
Managed Income Yes Yes Yes Elig. Yes Yes No Elig. Elig.
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>
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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 Portfolio's sub-ad-
viser. Securities acquired by the other Portfolios except the Low Duration Bond
Portfolio 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" by Moody's or "BBB" by S&P
are generally considered 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. The Low Duration
Bond Portfolio may invest up to 20% of its assets in non-investment grade
fixed-income or convertible securities with a minimum rating of "B". See "High
Yield Securities" below.
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 on either a currency hedged or unhedged basis, and may hold
from time to time various foreign currencies pending investment or conversion
into U.S. dollars. Some of these instruments 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
19.
<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 a Portfolio's op-
erations. In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign
companies are also not subject to the uniform accounting and financial report-
ing requirements applicable to issuers in the United States. While the volume
of transactions effected on foreign stock exchanges has increased in recent
years, it remains appreciably below that of the New York Stock Exchange. Ac-
cordingly, a Portfolio's foreign investments may be less liquid and their
prices may be more volatile than comparable investments in securities in U.S.
companies. In addition, there is generally less government supervision and reg-
ulation 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, a Portfolio may invest in instruments which
have the characteristics of futures contracts. These instruments may take a va-
riety of forms, such as debt securities with interest or principal payments de-
termined by reference to the value of a currency or commodity at a future point
in time. The risks of such investments could reflect the risks of investing in
futures, currencies and securities, including volatility 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 Low Duration Bond Portfolio may invest in non-in-
vestment 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 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 agen-
cy.
While generally providing greater income and opportunity for gain, non-invest-
ment grade debt securities may be subject to greater risks than securities
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. 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>
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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. Investors in high yield securities have a lower degree of protec-
tion with respect to principal and interest payments then do investors in
higher rated securities due to the reduced creditworthiness of high yield is-
suers. During an economic downturn, a substantial period of rising interest
rates or a recession, highly leveraged issuers of high yield securities may ex-
perience 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 dis-
rupt 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 re-
covery 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,
due to the market's relative youth and growth 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. In addition, 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 devel-
opments. These developments could adversely affect a Portfolio's net asset
value and investment practices, the secondary market for high yield securities,
the financial condition of issuers of these securities and the value and li-
quidity of outstanding high yield securities, especially in a thinly traded
market.
The Low Duration Bond Portfolio may invest in securities rated "B" and above or
determined by the sub-adviser to be of comparable quality. Securities which are
rated "BB" by S&P and "Ba" by Moody's have speculative characteristics with re-
spect to capacity to pay interest and repay principal. Securities which are
rated "B" generally lack characteristics of a desirable investment and assur-
ance of interest and principal payments over any long period of time may be
small. For a description of securities ratings, see Appendix A in the Statement
of Additional Information. Adverse business, financial or economic conditions
will likely impair capacity or willingness to pay interest and principal. 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 costs attributable to
investing in the high yield markets are usually higher for several reasons,
such as higher investment research costs and higher commission costs. For more
information regarding non-investment grade securities, see "Investment Poli-
cies--Non-Investment Grade Securities" in the Statement of Additional
Information.
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.
21.
<PAGE>
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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.
22.
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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 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
23.
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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?"
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. Bank obligations may include certificates
of deposit, notes, bankers' acceptances and fixed time deposits. These obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. 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 instru-
24.
<PAGE>
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mentality. No assurance can be given that the U.S. Government will provide fi-
nancial support to U.S. Government-sponsored agencies or instrumentalities if
it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios 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) the item which is the
subject of the option 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 International
Bond Portfolio, foreign currencies, and may or may not be listed on a securi-
ties 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 (mea-
sured at the time an option is written). Options trading is a highly special-
ized activity that entails greater than ordinary investment risks. In addition,
unlisted options are not subject to the protections afforded purchasers of
listed options issued by the Options Clearing Corporation, which performs the
obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its total assets, although a Portfolio will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered 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
25.
<PAGE>
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order to offset an expected decrease in the value of its portfolio positions
that might otherwise result from a market decline or currency exchange fluctu-
ation. A Portfolio may do so either to hedge the value of its securities port-
folio 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 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 the market value of the loaned securities. A Portfolio may
not make such loans in excess of 33 1/3% of the value of its total assets. Se-
curities loans 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 in-
terest 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
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 Port-
folio. 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.
26.
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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 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.
27.
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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 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 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 subdivi-
28.
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sions 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 Re-
garding 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 five
years. As of June 30, 1996, the General Fund had a surplus of $635.2 million. A
relatively high proportion of persons 65 and older in the Commonwealth, court
ordered increases in healthcare reimbursement rates and higher correctional
program costs place increased pressures on the tax resources of the Common-
wealth and its municipalities. The Commonwealth's debt burden remains moderate.
Employment growth has shifted to the trade and service sectors, with losses in
more high-paid manufacturing positions. A new governor took office in January
1995, but the Commonwealth has continued to show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county. 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 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 six years the
State rates were below the national rates (4.9% versus 5.4% in 1996). 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.
29.
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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 Global Wireless.
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 BlackRock Funds is BlackRock, Inc. Each of
the Portfolios within the BlackRock Funds family is managed
by a specialized portfolio manager who is a member of Black-
Rock, Inc.'s fixed income portfolio management affiliate,
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>
BLACKROCK FUNDS 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; Director and head of
U.S. Fixed Income Investments at CS First
Boston Investment Management Corporation
from 1993 to 1995; From 1985-1993, he
served as Deputy Manager and Senior
Portfolio Manager at Brown Brothers
Harriman & Co.; Portfolio co-manager since
June 1997.
</TABLE>
30.
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<TABLE>
<CAPTION>
BLACKROCK FUNDS PORTFOLIO PORTFOLIO MANAGER
------------------------- -----------------
<S> <C>
Managed Income Keith Anderson (see above); Portfolio co-
manager since June 1997.
Robert Michele (see above); Portfolio co-
manager since June 1997.
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>
31.
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BlackRock, Inc. (formerly PNC Asset Management Group, Inc.)
was organized in 1994 to perform advisory services for in-
vestment companies, and has its principal offices at 1600
Market Street, 29th Floor, Philadelphia, Pennsylvania 19103.
BlackRock, Inc. is an indirect wholly-owned subsidiary of
PNC Bank Corp., a multi-bank holding company.
As adviser, BlackRock, Inc. is responsible for the overall
investment management of the Portfolios. As sub-adviser,
BlackRock Financial Management is responsible for the day-
to-day management of the Portfolios, and generally makes all
purchase and sale investment decisions for the Portfolios.
BlackRock Financial Management also provides research and
credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-
dollar fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International
equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services,
BlackRock, Inc. 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 Portfo-
lios?", with respect to certain Portfolios, BlackRock, Inc.
and the sub-adviser intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by BlackRock, Inc., and do not represent an extra
charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO
EXCEPT THE INTERNATIONAL
BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
For the twelve months ended September 30, 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, .30%; Intermediate Bond Portfolio, .30%;
Managed Income Portfolio, .35%; Tax-Free Income Portfolio,
.28%; Pennsylvania Tax-Free Income Portfolio, .29%; Ohio
Tax-Free Income Portfolio, .09%; Low Duration Bond Portfo-
lio, .27%; Core Bond Portfolio, .26%; New Jersey Tax-Free
Income Portfolio, .29%; and the International Bond Portfo-
lio, .56%.
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
the Fund's distributor, subject to the requirements of best
execution.
32.
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ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors,
Inc. ("BDI") (the "Administrators") serve as the Fund's co-ad-
ministrators. BlackRock, Inc. and PFPC are indirect wholly-
owned subsidiaries of PNC Bank Corp. BDI is a wholly-owned sub-
sidiary 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. 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 BDI 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 av-
erage daily net assets of each Portfolio in excess of $1 bil-
lion 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 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
AGENT, PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING lios' custodian and PFPC, whose principal offices are located
AGENT AND at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN their transfer agent and dividend disbursing agent.
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 BlackRock, Inc. and the
Administrators, 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 informa-
tion and of printing and distributing prospectuses and state-
ments of additional information to existing shareholders, ex-
penses relating to shareholder reports, shareholder meetings
and proxy solicitations, insurance premiums, the expense of in-
dependent pricing services, and other expenses which are not
expressly assumed by BlackRock, Inc. or the Fund's service
providers under their agreements with the Fund. Any general ex-
penses of the Fund that do not belong to a particular invest-
ment portfolio will be allocated among all investment portfo-
lios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
33.
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HOW ARE SHARES PURCHASED AND REDEEMED?
- -------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by BDI
as distributor (the "Distributor"). BDI 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 BDI, 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. 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. The Fund does not accept third party checks for initial or subsequent
investments.
The Fund may in its discretion waive or modify the minimum investment amount,
may reject any order for Institutional Shares and may suspend and resume the
sale of shares of any 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
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-
34.
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tion order if, in the judgment of BlackRock, Inc., an earlier payment could ad-
versely affect a Portfolio. No charge for wiring redemption payments is imposed
by the Fund.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may redeem Institutional Shares in any Portfolio account if the ac-
count balance drops below $5,000 as the result of redemption requests and the
shareholder does not increase the balance to at least $5,000 on thirty days'
written notice.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
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.
35.
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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.
36.
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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 (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds 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 tax liabil-
ity. Second, "exempt interest dividends" must be taken into account by corpo-
rate taxpayers in determining certain adjustments for alternative minimum tax
purposes. In addition, investors should be aware of the possibility of state
and local alternative minimum or minimum income tax liability on interest from
private activity bonds. Shareholders who are recipients of Social Security Act
or Railroad Retirement Act benefits should note that "exempt interest divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each 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.
37.
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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 is not taxable to individuals, estates or
trusts under the Personal Income Tax; to corporations under the Corporate Net
Income Tax; nor to individuals under the Philadelphia School District Net In-
vestment 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 but such income is not taxable under 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 and other
financial 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.)
38.
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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 the New Jersey Tax-Free
Income Portfolio will qualify as a "qualified investment fund" and as a result,
substantially all distributions paid by the New Jersey Tax-Free Income Portfo-
lio will not be subject to the New Jersey personal income tax. A qualified in-
vestment fund is an investment company or trust registered with the Securities
and Exchange Commission, or any series of such investment company or trust,
which for the calendar year in which the distribution is paid: (a) has no in-
vestments other than interest-bearing obligations, obligations issued at a dis-
count, and cash and cash items, including receivables, and financial options,
futures, forward contracts, or other similar financial instruments related to
interest-bearing obligations, obligations issued at a discount or bond indexes
related thereto; and (b) has at least 80% of the aggregate principal amount of
all of its investments, excluding financial options, futures, forward con-
tracts, or other similar financial instruments related to interest-bearing ob-
ligations, obligations issued at a discount or bond indexes related thereto to
the extent such instruments are authorized by the regulated investment company
rules of the Code, cash and cash items, which cash items shall include receiv-
ables, in New Jersey State-Specific Obligations or U.S. Government Obligations.
In accordance with New Jersey law as currently in effect, distributions paid by
a qualified investment fund are excluded from personal income tax to the extent
that the distributions are attributable to interest or gains from New Jersey
State-Specific Obligations or to interest or gains from direct U.S. Government
Obligations. New Jersey State-Specific Obligations are obligations issued by or
on behalf of New Jersey or any county, municipality, or other political subdi-
vision of New Jersey. U.S. Government Obligations are obligations which are
statutorily free from tax under the laws of the United States. Distributions by
a qualified investment fund from most other sources will be subject to the New
Jersey personal income tax. Shares of the New Jersey Tax-Free Income Portfolio
are not subject to property taxation by New Jersey.
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, provided, in the case of U.S. territorial obligations,
such interest is excluded from gross income for federal income tax purposes.
However, Shares of the Ohio Tax-Free Income Portfolio will be included in a
corporation's net worth base for purposes of calculating the Ohio corporation
franchise tax. Distributions properly attributable to gain on the sale, ex-
change or other disposition of Ohio State-Specific Obligations will not be sub-
ject to the Ohio personal income tax, or municipal or school district income
taxes in Ohio and will not be included in the net income base of the Ohio cor-
poration franchise tax. Distributions attributable to other sources will be
subject to the Ohio personal income tax and the Ohio corporation franchise tax.
This discussion of Ohio taxes assumes that the Ohio Tax-Free Income Portfolio
will continue to qualify as a regulated investment company as defined in the
Code and that 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.
39.
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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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight investment portfolios. Each Portfolio offers five
separate classes of shares--Institutional Shares, Service Shares, Investor A
Shares, Investor B Shares and Investor C Shares. In addition, the Low Duration
Bond, Core Bond and Intermediate Bond Portfolios offer a sixth share class -
BlackRock Shares. This prospectus relates only to Institutional 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 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 Service,
Investor and BlackRock Share classes, contact PFPC at (800) 441-7764 (Service
and BlackRock 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
40.
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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.
41.
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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 BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
42.
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
<TABLE>
<CAPTION>
BLACKROCK PERFORMANCE
PORTFOLIO BENCHMARK DESCRIPTION
<S> <C> <C>
Low Duration Bond Merrill 1-3 Year Treasuries with maturities ranging from 1 to 2.99
Treasury Index years
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 January 20, 1998, the composition of the
Lehman Brothers Aggregate Index is:
58% allocation to Treasury and government securities
15% allocation to mortgage-backed securities
27% 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 January 20, 1998, the composition of the
Lehman Brothers Aggregate Index is:
58% allocation to Treasury and government securities
15% allocation to mortgage-backed securities
27% allocation to corporate and asset-backed
securities
International Bond Salomon Non-U.S. A market-capitalization weighted benchmark that
Hedged World tracks the performance of the 13 Government bond
Government Bond Index 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 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>
43.
<PAGE>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Micro-Cap Equity
Mid-Cap Growth Equity International Equity
International Emerging Markets
Mid-Cap Value Equity
Small Cap Growth Equity International Small Cap Equity
Index Equity
Small Cap Value Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- -------------------------------------------------------------------------------
THE BOND PORTFOLIOS SERVICE SHARES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ASKING THE What Are The Expenses Of The Portfolios?..................... 4
KEY What Are The Portfolios' Financial Highlights?............... 7
QUESTIONS 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?........................................ 30
How Are Shares Purchased And Redeemed?....................... 34
What Special Purchase And Redemption Procedures May Apply?... 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
How Can I Get More Information?.............................. 44
</TABLE>
This Prospectus sets forth concisely information about the
BlackRock Funds SM (the "Fund") bond Portfolios that a prospec-
tive investor needs to know before investing. Please keep it for
future reference. A Statement of Additional Information dated
January 28, 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 Information, as sup-
plemented 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 that has been filed with the SEC.
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
INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC TAX-FREE PORTFOLIOS
ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE BOND PORTFOLIOS OF BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock FundsSM.
The Bond Portfolios of BLACKROCK FUNDS consist of 11 investment
portfolios (the "Portfolios") that provide investors with a
broad spectrum of investment alternatives within the fixed in-
come sector. Seven of these Portfolios invest in taxable 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.
BLACKROCK PERFORMANCE LIPPER PEER GROUP
PORTFOLIO BENCHMARK
LOW DURATION Merrill 1-3 Short-Intermediate
BOND Year Treasury Investment Grade Debt
Index
INTERMEDIATE Lehman Brothers Intermediate U.S.
GOVERNMENT Intermediate Government
BOND Government
Index
INTERMEDIATE Lehman Brothers Intermediate Investment
BOND Intermediate Grade Debt
Government/Corporate
Index
CORE BOND Lehman Intermediate Investment
Aggregate Grade Debt
Index
MANAGED INCOME Lehman Corporate Debt A-Rated
Aggregate
Index
INTERNATIONAL Salomon Non- International Income
BOND U.S. Hedged
World
Government
Bond Index
TAX-FREE Lehman General Municipal Debt
INCOME Municipal Bond
Index
PA TAX-FREE Lehman Local GO PA Municipal Debt
INCOME Index
NJ TAX-FREE Lehman Local GO NJ Municipal Debt
INCOME Index
OH TAX FREE Lehman Local GO OH Municipal Debt
INCOME Index
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
BOND different directions in fixed income investing.
PORTFOLIOS
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, which is a specula-
tive technique; lend portfolio securities to third parties; and
enter into futures contracts and options. Each of the Pennsyl-
vania, New Jersey and Ohio Tax-Free Income Portfolios (the
"State-Specific Tax-Free Portfolios") concentrates in the secu-
rities 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 Low Dura-
tion Bond Portfolio invests in high yield securities which are
considered high risk securities. See "What Additional Invest-
ment Policies And Risks Apply?--High Yield Securities."
For information on how to purchase and redeem shares of the
INVESTING IN Portfolios, see "How Are Shares Purchased And Redeemed?" and
THE "What Special Purchase And Redemption Procedures May Apply?"
BLACKROCK
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, Managed Income, International,
Tax-Free Income, Pennsylvania Tax-Free Income and Ohio Tax-Free Income Portfo-
lios have been restated to reflect current expenses and fee waivers. An example
based on the summary is also shown.
<TABLE>
<CAPTION>
LOW INTERMEDIATE
DURATION GOVERNMENT INTERMEDIATE
BOND BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees (after fee waivers)(/1/) .22% .30% .27%
Other operating expenses .63 .60 .63
----- ------ ------
Administration fees (after fee
waivers)(/1/) .22 .18 .22
Shareholder servicing fees .15 .15 .15
Other expenses .26 .27 .26
---- ----- -----
Total Portfolio operating expenses
(after fee waivers)(/1/) .85% .90% .90%
===== ====== ======
<CAPTION>
CORE MANAGED
BOND INCOME
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% .35%
Other operating expenses .63 .60
----- ------
Administration fees (after fee
waivers)(/1/) .22 .21
Shareholder servicing fees .15 .15
Other expenses .26 .24
---- -----
Total Portfolio operating expenses
(after fee waivers)(/1/) .85% .95%
===== ======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. BlackRock, Inc. and the Portfolios' administra-
tors are under no obligation to waive fees or reimburse expenses, but have
informed the Fund that they expect to waive fees and reimburse expenses
during the remainder of the current fiscal year as necessary to maintain
the Portfolios' total operating expenses at the levels set forth in the ta-
ble. Without waivers, "Other operating expenses" would be .68%, .66%, .62%,
.64% and .63%, respectively, and "Total Portfolio operating expenses" would
be 1.18%, 1.16%, 1.12%, 1.14% and 1.13%, 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% .25% .30%
Other operating expenses .83 .65 .60
--- --- ---
Administration fees (after fee
waivers)(/1/) .22 .17 .18
Shareholder servicing fees .15 .15 .15
Other expenses (after expense
reimbursements) .46 .33 .27
--- --- ---
Total Portfolio operating expenses
(after fee waivers and expense
reimbursements)(/1/) 1.33% .90% .90%
==== === ===
</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/) .28% .09%
Other operating expenses .62 .81
--- ---
Administration fees (after
fee waivers)(/1/) .18 .14
Shareholder servicing fees .15 .15
Other expenses .29 .52
---- ----
Total Portfolio operating
expenses
(after fee waivers)(/1/) .90% .90%
=== ===
</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. BlackRock, Inc. and the Portfolio's admin-
istrators 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 .84%,
.70%, .66%, .67% and .86% respectively, and "Total Portfolio operating ex-
penses" would be 1.39%, 1.20%, 1.16%,1.17% and 1.36%, respectively.
5.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) a 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio $ 9 $27 $47 $105
Intermediate Government Portfolio 9 29 50 111
Intermediate Bond Portfolio 9 29 50 111
Core Bond Portfolio 9 27 47 105
Managed Income Portfolio 10 30 53 117
International Bond Portfolio 14 42 73 160
Tax-Free Income Portfolio 9 29 50 111
Pennsylvania Tax-Free Income
Portfolio 9 29 50 111
New Jersey Tax-Free Income Portfolio 9 29 50 111
Ohio Tax-Free Income Portfolio 9 29 50 111
</TABLE>
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 "Who Manages The Fund?--Share-
holder Servicing" in the Prospectus and "Investment Advisory, Administration,
Distribution and Servicing Arrangements" in the Statement of Additional Infor-
mation.
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.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
LOW DURATION BOND PORTFOLIO
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
YEAR 4/1/96 1/12/96/1/
ENDED THROUGH THROUGH
9/30/97 9/30/96 3/31/96
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 9.79 $ 9.79 $ 9.91
------- ------- --------
Income from investment operations
Net investment income 0.54 0.26 0.11
Net gain (loss) on investments
(both realized and unrealized) 0.09 (0.01) (0.12)
------- ------- --------
Total from investment operations 0.63 0.25 (0.01)
------- ------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.53) (0.25) (0.11)
Distributions from net realized
capital gains - - - - - -
------- ------- --------
Total distributions (0.53) (0.25) (0.11)
------- ------- --------
NET ASSET VALUE AT END OF PERIOD $ 9.89 $ 9.79 $ 9.79
======= ======= ========
Total return 6.57% 2.54% (0.11)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $82,873 $91,870 $181,670
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.85%/3/ 0.85%/2/,/3/ 0.85%/2/,/3/
Before advisory/administration
fee waivers 1.18% 1.13%/2/ 1.05%/2/
Ratios of net investment income
to average net assets
After advisory/administration fee
waivers 5.86% 5.40%/2/ 5.25%/2/
Before advisory/administration
fee waivers 5.53% 5.13%/2/ 5.05%/2/
PORTFOLIO TURNOVER RATE 371% 228% 185%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 1.24% 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.
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 $ 9.92 $ 10.02 $ 9.64 $ 10.60 $ 10.45
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.56 0.56 0.56 0.53 0.09
Net gain (loss) on
investments
(both realized and
unrealized) 0.19 (0.12) 0.37 (0.86) 0.15
------- ------- ------- ------- -------
Total from investment
operations 0.75 0.44 0.93 (0.33) 0.24
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.56) (0.54) (0.55) (0.53) (0.09)
Distributions from net
realized capital gains - - - - - - (0.10) - -
------- ------- ------- ------- -------
Total distributions (0.56) (0.54) (0.55) (0.63) (0.09)
------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.11 $ 9.92 $ 10.02 $ 9.64 $ 10.60
======= ======= ======= ======= =======
Total return 7.75% 4.51% 9.99% (3.31)% 2.30%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $50,535 $47,494 $49,762 $60,812 $15,035
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.85%/3/ 0.83%/3/ 0.69%/3/ 0.65% 0.67%/2/
Before
advisory/administration
fee waivers 1.16% 1.13% 1.06% 1.05% 0.75%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.70% 5.73% 5.67% 5.30% 5.14%/2/
Before
advisory/administration
fee waivers 5.39% 5.43% 5.30% 4.90% 5.06%/2/
PORTFOLIO TURNOVER RATE 291% 580% 247% 9% 80%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 0.97% for the year ended
September 30, 1997, 1.00% for the year ended September 30, 1996, and 0.69%
for the year 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 9/23/93/1/
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 $ 9.32 $ 9.43 $ 9.05 $ 10.01 $ 9.99
------- ------- ------- ------- ------
Income from investment
operations
Net investment income 0.55 0.53 0.54 0.54 - -
Net gain (loss) on
investments (both
realized and
unrealized) 0.17 (0.09) 0.38 (0.91) 0.02
------- ------- ------- ------- ------
Total from investment
operations 0.72 0.44 0.92 (0.37) 0.02
------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.55) (0.52) (0.54) (0.53) - -
Distributions from net
realized capital gains - - (0.03) - - (0.06) - -
------- ------- ------- ------- ------
Total distributions (0.55) (0.55) (0.54) (0.59) - -
------- ------- ------- ------- ------
NET ASSET VALUE AT END OF
PERIOD $ 9.49 $ 9.32 $ 9.43 $ 9.05 $10.01
======= ======= ======= ======= ======
Total return 8.07% 4.79% 10.46% (3.80)% 0.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $52,316 $45,362 $36,718 $35,764 $ 91
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.83%/3/ 0.83%/3/ 0.74%/3/ 0.70% 0.70%/2/
Before
advisory/administration
fee waivers 1.12% 1.13% 1.09% 1.13% 1.09%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.32% 5.98% 5.90% 5.33% 4.35%/2/
Before
advisory/administration
fee waivers 6.03% 5.67% 5.55% 4.90% 3.96%/2/
PORTFOLIO TURNOVER RATE 321% 670% 262% 92% 4%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 1.27% for the year ended
September 30, 1997, 1.14% for the year ended September 30, 1996, and 0.82%
for the year 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
YEAR 4/1/96 FOR THE PERIOD
ENDED THROUGH 1/12/96/1/
9/30/97 9/30/96 THROUGH 3/31/96
<S> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $9.55 $ 9.61 $ 9.91
-------- -------- --------
Income from investment
operations
Net investment income 0.59 0.30 0.11
Net gain (loss) on
investments (both
realized and
unrealized) 0.26 (0.07) (0.30)
-------- -------- --------
Total from investment
operations 0.85 0.23 (0.19)
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.58) (0.29) (0.11)
Distributions from net
realized capital gains - - - - - -
-------- -------- --------
TOTAL DISTRIBUTIONS (0.58) (0.29) (0.11)
-------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $9.82 $ 9.55 $ 9.61
======== ======== ========
Total return 9.71% 2.40% (1.90)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $122,308 $117,207 $232,040
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.85%/3/ 0.85%/2/,/3/ 0.85%/2/,/3/
Before
advisory/administration
fee waivers 1.14% 1.14%/2/ 1.10%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.59% 6.33%/2/ 5.46%/2/
Before
advisory/administration
fee waivers 6.31% 6.04%/2/ 5.21%/2/
PORTFOLIO TURNOVER RATE 441% 308% 723%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 1.35% for the year ended
September 30, 1997, 1.08% for the period ended September 30, 1996 and 0.94%
for the period ended March 31, 1996.
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 $ 10.09 $ 10.38 $ 9.79 $ 11.17 $ 10.96
-------- -------- -------- ------- -------
Income from investment
operations
Net investment income 0.66 0.61 0.63 0.59 0.11
Net gain (loss) on
investments (both
realized and
unrealized) 0.31 (0.20) 0.60 (1.18) 0.21
-------- -------- -------- ------- -------
Total from investment
operations 0.97 0.41 1.23 (0.59) 0.32
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.65) (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 (0.65) (0.70) (0.64) (0.79) (0.11)
-------- -------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.41 $ 10.09 $ 10.38 $ 9.79 $ 11.17
======== ======== ======== ======= =======
Total return 9.93% 4.05% 12.97% (5.49)% 2.93%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $266,750 $165,073 $116,846 $67,655 $15,322
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.88%/3/ 0.88% 0.85% 0.80% 0.80%/2/
Before
advisory/administration
fee waivers 1.13% 1.11% 1.05% 1.02% 0.84%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 6.76% 5.87% 6.14% 5.95% 5.83%/2/
Before
advisory/administration
fee waivers 6.51% 5.65% 5.94% 5.73% 5.79%/2/
PORTFOLIO TURNOVER RATE 428% 638% 203% 61% 72%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
/3/Including interest expense, ratio would have been 1.27% for the year ended
September 30, 1997. For the periods prior to September 30, 1997, interest
income was presented net of interest expense.
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 7/1/91/1/
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
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.71 $11.39 $ 10.52 $ 10.75 $ 10.76 $ 10.21 $ 10.00
------- ------ ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 1.36 0.89 0.62 0.62 0.65 0.52 0.31
Net gain (loss) on
investments (both
realized and
unrealized) (0.19) (0.29) 1.13 (0.48) 0.46 0.47 0.26
------- ------ ------- ------- ------- ------- -------
Total from investment
operations 1.17 0.60 1.75 0.14 1.11 0.99 0.57
------- ------ ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (1.44) (0.28) (0.88) (0.13) (0.90) (0.30) - -
Distributions from net
realized capital gains (0.49) - - - - (0.24) (0.22) (0.14) (0.36)
------- ------ ------- ------- ------- ------- -------
Total distributions (1.93) (0.28) (0.88) (0.37) (1.12) (0.44) (0.36)
------- ------ ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $10.95 $11.71 $ 11.39 $ 10.52 $ 10.75 $ 10.76 $ 10.21
======= ====== ======= ======= ======= ======= =======
Total return 11.23% 5.39% 16.79% 1.50% 10.24% 9.55% 5.84%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 6,708 $7,836 $37,627 $45,657 $46,888 $38,257 $27,744
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 1.29% 1.09%/2/ 1.23%/2/ 1.24% 1.38% 1.30% 1.33%/2/
Before
advisory/administration
fee waivers 1.39% 1.20%/2/ 1.23%/2/ 1.24% 1.38% 1.30% 1.37%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.02% 3.82%/2/ 5.62%/2/ 5.96% 6.00% 6.31% 6.79%/2/
Before
advisory/administration
fee waivers 4.92% 3.72%/2/ 5.62%/2/ 5.96% 6.00% 6.31% 6.75%/2/
PORTFOLIO TURNOVER RATE 272% 108% 159% 131% 128% 115% 110%
</TABLE>
/1/Commencement of operations of share class.
Annualized.
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 $ 10.84 $ 10.61 $10.04 $11.31 $10.97
------- ------- ------ ------ ------
Income from investment
operations
Net investment income 0.53 0.51 0.50 0.51 0.09
Net gain (loss) on
investments (both realized
and unrealized) 0.50 0.23 0.59 (0.93) 0.34
------- ------- ------ ------ ------
Total from investment
operations 1.03 0.74 1.09 (0.42) 0.43
------- ------- ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.53) (0.51) (0.50) (0.51) (0.09)
Distributions from net
realized capital gains - - - - (0.02) (0.34) - -
------- ------- ------ ------ ------
Total distributions (0.53) (0.51) (0.52) (0.85) (0.09)
------- ------- ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $ 11.34 $ 10.84 $10.61 $10.04 $11.31
======= ======= ====== ====== ======
Total return 9.77% 7.14% 11.24% (4.02)% 3.92%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $58,779 $36,161 $4,713 $2,109 $ 634
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.85% 0.85% 0.80% 0.75% 0.71%/2/
Before
advisory/administration fee
waivers 1.20% 1.18% 1.57% 1.98% 1.49%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 4.76% 4.88% 4.92% 4.75% 4.99%/2/
Before
advisory/administration fee
waivers 4.41% 4.56% 4.15% 3.52% 4.21%/2/
PORTFOLIO TURNOVER RATE 262% 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 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $ 10.44 $ 10.33 $ 9.82 $ 10.70 $ 10.43
------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.50 0.50 0.50 0.51 0.09
Net gain (loss) on
investments (both realized
and unrealized) 0.33 0.11 0.51 (0.85) 0.28
------- ------- ------- ------- -------
Total from investment
operations 0.83 0.61 1.01 (0.34) 0.37
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.50) (0.50) (0.50) (0.51) (0.09)
Distributions from net
realized capital gains - - - - - - (0.03) (0.01)
------- ------- ------- ------- -------
Total distributions (0.50) (0.50) (0.50) (0.54) (0.10)
------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 10.77 $ 10.44 $ 10.33 $ 9.82 $ 10.70
======= ======= ======= ======= =======
Total return 8.10% 5.97% 10.51% (3.20)% 3.54%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $50,395 $34,297 $13,815 $11,518 $ 3,894
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.85% 0.85% 0.79% 0.55% 0.34%/2/
Before
advisory/administration
fee waivers 1.16% 1.15% 1.11% 1.15% 1.22%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.67% 4.74% 5.04% 4.97% 4.90%/2/
Before
advisory/administration
fee waivers 4.36% 4.44% 4.72% 4.37% 4.02%/2/
PORTFOLIO TURNOVER RATE 97% 119% 66% 30% 40%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
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 FOR THE
PERIOD PERIOD PERIOD
YEAR 2/1/96 3/1/95 YEAR YEAR YEAR 7/1/91/1/
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 2/28/92
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 11.27 $ 11.61 $ 10.94 $ 11.31 $ 11.30 $ 10.46 $ 10.00
------- ------- ------- ------- -------- ------- -------
Income from investment
operations
Net investment income 0.52 0.73 0.46 0.51 0.54 0.52 0.34
Net gain (loss) on
investments (both
realized and
unrealized) 0.37 (0.32) 0.65 (0.36) 0.04 0.85 0.45
------- ------- ------- ------- -------- ------- -------
Total from investment
operations 0.89 0.41 1.11 0.15 0.58 1.37 0.79
------- ------- ------- ------- -------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.51) (0.75) (0.44) (0.51) (0.54) (0.53) (0.33)
Distributions from net
realized capital gains - - - - - - (0.01) (0.03) - - - -
------- ------- ------- ------- -------- ------- -------
Total distributions (0.51) (0.75) (0.44) (0.52) (0.57) (0.53) (0.33)
------- ------- ------- ------- -------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 11.65 $ 11.27 $ 11.61 $ 10.94 $ 11.31 $ 11.30 $ 10.46
======= ======= ======= ======= ======== ======= =======
Total return 8.11% 0.15% 10.35% 1.49% 5.18% 13.48% 12.33%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $84,596 $88,077 $97,976 $96,857 $111,354 $47,169 $10,673
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.85% 0.85%/2/ 0.88%/2/ 0.79% 0.38% 0.48% 0.52%/2/
Before
advisory/administration
fee waivers 1.17% 1.17%/2/ 0.90%/2/ 0.87% 0.86% 1.04% 1.29%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.59% 4.44%/2/ 4.43%/2/ 4.71% 4.75% 5.04% 5.35%/2/
Before
advisory/administration
fee waivers 4.27% 4.13%/2/ 4.41%/2/ 4.63% 4.27% 4.48% 4.58%/2/
PORTFOLIO TURNOVER RATE 77% 109% 26% 28% 12% 16% 0%
</TABLE>
/1/Commencement of operations of share class.
/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 9/30/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $10.15 $10.05 $ 9.60 $10.53 $10.24
------ ------ ------ ------ ------
Income from investment
operations
Net investment income 0.47 0.48 0.52 0.49 0.09
Net gain (loss) on
investments (both realized
and unrealized) 0.35 0.10 0.45 (0.91) 0.29
------ ------ ------ ------ ------
Total from investment
operations 0.82 0.58 0.97 (0.42) 0.38
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.47) (0.48) (0.52) (0.49) (0.09)
Distributions from net
realized capital gains - - - - - - (0.02) - -
------ ------ ------ ------ ------
Total distributions (0.47) (0.48) (0.52) (0.51) (0.09)
------ ------ ------ ------ ------
NET ASSET VALUE AT END OF
PERIOD $10.50 $10.15 $10.05 $ 9.60 $10.53
====== ====== ====== ====== ======
Total return 8.21% 5.80% 10.45% (4.00)% 3.68%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period
(in thousands) $7,421 $6,377 $5,150 $4,428 $ 907
Ratios of expenses to
average net assets
After
advisory/administration fee
waivers 0.85% 0.79% 0.39% 0.35% 0.32%/2/
Before
advisory/administration fee
waivers 1.36% 1.38% 1.46% 1.74% 2.83%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration fee
waivers 4.51% 4.69% 5.39% 5.06% 4.71%/2/
Before
advisory/administration fee
waivers 4.00% 4.10% 4.31% 3.67% 2.20%/2/
PORTFOLIO TURNOVER RATE 87% 136% 63% 61% 36%
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
15.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The Bond Portfolios of BLACKROCK FUNDS consist of 11 invest-
ment portfolios that provide investors with a broad spectrum
of investment alternatives within the fixed income sector.
Seven of these Portfolios invest solely in taxable bonds and
four of these Portfolios invest in tax-exempt bonds.
In certain investment cycles and over certain holding 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.
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
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.
Managed Income Yes Yes Yes Elig. Yes Yes No Elig. Elig.
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 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 Portfolio's sub-ad-
viser. Securities acquired by the other Portfolios except the Low Duration Bond
Portfolio 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" by Moody's or "BBB" by S&P
are generally considered 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. The Low Duration
Bond Portfolio may invest up to 20% of its assets in non-investment grade
fixed-income or convertible securities with a minimum rating of "B". See "High
Yield Securities" below.
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 on either a currency hedged or unhedged basis, and may hold from
time to time various foreign currencies pending investment or conversion into
U.S. dollars. Some of these instruments 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 invest-
ments and transactions involving foreign securities, currencies, options (in-
cluding 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 secu-
rities generally are denominated and pay dividends or interest in foreign cur-
rencies, the value of a Portfolio that invests in foreign securities will be
affected favorably or unfavorably by changes in currency exchange rates.
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A Portfolio's investments in foreign securities may also be adversely affected
by changes in foreign political or social conditions, diplomatic relations,
confiscatory taxation, expropriation, limitations on the removal of funds or
assets, or imposition of (or change in) exchange control regulations. In addi-
tion, changes in govern
ment administrations or economic or monetary policies in the U.S. or abroad
could result in appreciation or depreciation of portfolio securities and could
favorably or adversely affect a Portfolio's operations. In general, less infor-
mation is publicly available with respect to foreign issuers than is available
with respect to U.S. companies. Most foreign companies are also not subject to
the uniform accounting and financial reporting requirements applicable to is-
suers in the United States. While the volume of transactions effected on for-
eign stock exchanges has increased in recent years, it remains appreciably be-
low that of the New York Stock Exchange. Accordingly, a Portfolio's foreign in-
vestments may be less liquid and their prices may be more volatile than compa-
rable investments in securities in U.S. companies. In addition, there is gener-
ally less government supervision and regulation of securities exchanges, bro-
kers and issuers in foreign countries than in the United States.
Foreign investments may include: (a) debt obligations issued or guaranteed by
foreign sovereign governments or their agencies, authorities, instrumentalities
or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations such as the World Bank,
Asian Development Bank, European Investment Bank, and European Economic Commu-
nity; (c) debt obligations of foreign banks and bank holding companies; (d)
debt obligations of domestic banks and corporations issued in foreign curren-
cies; (e) debt obligations denominated in the European Currency Unit (ECU); and
(f) foreign corporate debt securities and commercial paper. Such securities may
include loan participations and assignments, convertible securities and zero-
coupon securities.
Because the securities markets in these countries are highly developed, the In-
ternational Bond Portfolio may invest more than 25% of its total assets in the
securities of issuers located in Canada, France, Germany, Japan and the United
Kingdom. Investments of 25% or more of the Portfolio's total assets in a par-
ticular country will make the Portfolio's performance more dependent upon the
political and economic circumstances of a particular country than a mutual fund
that is more widely diversified among issuers in different countries.
To maintain greater flexibility, a Portfolio may invest in instruments which
have the characteristics of futures contracts. These instruments may take a va-
riety of forms, such as debt securities with interest or principal payments de-
termined by reference to the value of a currency or commodity at a future point
in time. The risks of such investments could reflect the risks of investing in
futures, currencies and securities, including volatility 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 Low Duration Bond Portfolio may invest in non-in-
vestment 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 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 agen-
cy.
While generally providing greater income and opportunity for gain, non-invest-
ment grade debt securities may be subject to greater risks than securities
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. 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.
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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. Investors in high yield securities have a lower degree of protec-
tion with respect to principal and interest payments then do investors in
higher rated securities due to the reduced creditworthiness of high yield is-
suers. During an economic downturn, a substantial period of rising interest
rates or a recession, highly leveraged issuers of high yield securities may ex-
perience 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 dis-
rupt 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 re-
covery 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,
due to the market's relative youth and growth 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. In addition, 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 devel-
opments. These developments could adversely affect a Portfolio's net asset
value and investment practices, the secondary market for high yield securities,
the financial condition of issuers of these securities and the value and li-
quidity of outstanding high yield securities, especially in a thinly traded
market.
The Low Duration Bond Portfolio may invest in securities rated "B" and above or
determined by the sub-adviser to be of comparable quality. Securities which are
rated "BB" by S&P and "Ba" by Moody's have speculative characteristics with re-
spect to capacity to pay interest and repay principal. Securities which are
rated "B" generally lack characteristics of a desirable investment and assur-
ance of interest and principal payments over any long period of time may be
small. For a description of securities ratings, see Appendix A in the Statement
of Additional Information. Adverse business, financial or economic conditions
will likely impair capacity or willingness to pay interest and principal. 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 costs attributable to
investing in the high yield markets are usually higher for several reasons,
such as higher investment research costs and higher commission costs. For more
information regarding non-investment grade securities, see "Investment Poli-
cies--Non-Investment Grade Securities" in the Statement of Additional Informa-
tion.
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 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 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
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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?"
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire com-
mercial obligations issued by Canadian corporations and Canadian counterparts
of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated
commercial paper of a foreign issuer. Bank obligations may include certificates
of deposit, notes, bankers' acceptances and fixed time deposits. These obliga-
tions may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by gov-
ernment regulation. The Portfolios may also make interest-bearing savings de-
posits in commercial and savings banks in amounts not in excess of 5% of their
respective total assets.
U.S. GOVERNMENT OBLIGATIONS. Treasury obligations differ only in their interest
rates, maturities and times of issuance. Obligations of certain agencies and
instrumentalities of the U.S. 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 instru-
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mentality. No assurance can be given that the U.S. Government will provide fi-
nancial support to U.S. Government-sponsored agencies or instrumentalities if
it is not obligated to do so by law.
INTEREST RATE AND CURRENCY TRANSACTIONS. The Portfolios may enter into interest
rate swaps and may purchase or sell interest rate caps and floors. The Portfo-
lios 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) the item which is the
subject of the option 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 International
Bond Portfolio, foreign currencies, and may or may not be listed on a securi-
ties 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 (mea-
sured at the time an option is written). Options trading is a highly special-
ized activity that entails greater than ordinary investment risks. In addition,
unlisted options are not subject to the protections afforded purchasers of
listed options issued by the Options Clearing Corporation, which performs the
obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its total assets, although a Portfolio will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered into for other than bona fide hedging
purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in
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order to offset an expected decrease in the value of its portfolio positions
that might otherwise result from a market decline or currency exchange fluctu-
ation. A Portfolio may do so either to hedge the value of its securities port-
folio 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 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 the market value of the loaned securities. A Portfolio may
not make such loans in excess of 33 1/3% of the value of its total assets. Se-
curities loans 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 in-
terest 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
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 Port-
folio. 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.
26.
<PAGE>
- --------------------------------------------------------------------------------
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 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 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.
27.
<PAGE>
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DOLLAR ROLL TRANSACTIONS. To take advantage of attractive opportunities in the
mortgage market and to enhance current income, each Portfolio (except the Tax-
Free Portfolios) may enter into dollar roll transactions. A dollar roll trans-
action involves a sale by the Portfolio of a mortgage-backed or other security
concurrently with an agreement by the Portfolio to repurchase a similar secu-
rity at a later date at an agreed-upon price. The securities that are repur-
chased will bear the same interest rate and stated maturity as those sold, but
pools of mortgages collateralizing those securities may have different prepay-
ment histories than those sold. During the period between the sale and repur-
chase, a Portfolio will not be entitled to receive interest and principal pay-
ments on the securities sold. Proceeds of the sale will be invested in addi-
tional instruments for the Portfolio, and the income from these investments
will generate income for the Portfolio. If such income does not exceed the in-
come, capital appreciation and gain or loss that would have been realized on
the securities sold as part of the dollar roll, the use of this technique will
diminish the investment performance of a Portfolio compared with what the per-
formance would have been without the use of dollar rolls. At the time a Port-
folio enters into a dollar roll transaction, it will place in a segregated ac-
count maintained with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to the repurchase price (including ac-
crued interest) and will subsequently monitor the account to ensure that its
value is maintained. A Portfolio's dollar rolls, together with its reverse re-
purchase agreements and other borrowings, will not exceed, in the aggregate, 33
1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the securi-
ties a Portfolio is required to purchase may decline below the agreed upon re-
purchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or repur-
chase securities may be restricted. Successful use of mortgage dollar rolls may
depend upon the sub-adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully em-
ployed.
SHORT SALES. The Portfolios may only make short sales of securities "against-
the-box." A short sale is a transaction in which a Portfolio sells a security
it does not own in anticipation that the market price of that security will de-
cline. The Portfolios may make short sales both as a form of hedging to offset
potential declines in long positions in similar securities and in order to
maintain portfolio flexibility. In a short sale "against-the-box," at the time
of sale, the Portfolio owns or has the immediate and unconditional right to ac-
quire the identical security at no additional cost. When selling short
"against-the-box," a Portfolio forgoes an opportunity for capital appreciation
in the security.
PORTFOLIO TURNOVER RATES. The past portfolio turnover rates of the Portfolios
are set forth above under "What Are the Portfolios' Financial Highlights?" A
Portfolio's annual portfolio turnover rate will not be a factor preventing a
sale or purchase when the sub-adviser believes 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 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.
28.
<PAGE>
- --------------------------------------------------------------------------------
In particular, changes in the economic condition and governmental policies of a
state and its political subdivisions could adversely affect the value of a
Portfolio's shares. Certain matters relating to the states in which the State-
Specific Tax-Free Portfolios invest are described below. For further informa-
tion, see "Special Considerations Regarding State-Specific 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 five
years. As of June 30, 1996, the General Fund had a surplus of $635.2 million. A
relatively high proportion of persons 65 and older in the Commonwealth, court
ordered increases in healthcare reimbursement rates and higher correctional
program costs place increased pressures on the tax resources of the Common-
wealth and its municipalities. The Commonwealth's debt burden remains moderate.
Employment growth has shifted to the trade and service sectors, with losses in
more high-paid manufacturing positions. A new governor took office in January
1995, but the Commonwealth has continued to show fiscal restraint.
New Jersey. The State of New Jersey generally has a diversified economic base
consisting of, among others, commerce and service industries, selective commer-
cial agriculture, insurance, tourism, petroleum refining and manufacturing, al-
though New Jersey's manufacturing industry has experienced a downward trend in
the last few years. New Jersey is a major recipient of Federal assistance and,
of all the states, is among the highest in the amount of Federal aid received.
Therefore, a decrease in Federal financial assistance may adversely affect the
financial condition of New Jersey and its political subdivisions and instrumen-
talities. While New Jersey's economic base has become more diversified over
time and thus its economy appears to be less vulnerable during recessionary pe-
riods, a recurrence of high levels of unemployment could adversely affect New
Jersey's overall economy and the ability of New Jersey and its political subdi-
visions and instrumentalities to meet their financial obligations. In addition,
New Jersey maintains a balanced budget which restricts total appropriation in-
creases to only 5% annually with respect to any municipality or county. 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 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 six years the
State rates were below the national rates (4.9% versus 5.4% in 1996). 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.
29.
<PAGE>
- --------------------------------------------------------------------------------
WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of its Board of Trustees. The following persons
currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Global Wireless.
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 BlackRock Funds is BlackRock, Inc. Each of the
Portfolios within the BlackRock Funds family is managed by a
specialized portfolio manager who is a member of BlackRock,
Inc.'s fixed income portfolio management affiliate, 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>
BLACKROCK FUNDS
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; Director and head of U.S. Fixed Income
Investments at CS First Boston Investment Management
Corporation from 1993 to 1995; From 1985-1993, he
served as Deputy Manager and Senior Portfolio
Manager at Brown Brothers Harriman & Co.; Portfolio
co-manager since June 1997.
Managed Income Keith Anderson (see above); Portfolio co-manager
since June 1997.
</TABLE>
30.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLACKROCK PORTFOLIO PORTFOLIO MANAGER
------------------- -----------------
<S> <C>
Robert Michele (See above); Portfolio co-manager
since June 1997.
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>
BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) 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. BlackRock, Inc.
is an indirect wholly-owned subsidiary of PNC Bank Corp., a
multi-bank holding company.
As adviser, BlackRock, Inc. is responsible for the overall in-
vestment management of the Portfolios. As sub-adviser, Black-
Rock Financial Management is responsible for the day-to-day
management of the Portfolios, and generally makes all purchase
and sale investment decisions for the Portfolios. BlackRock Fi-
nancial Management also provides research and credit analysis.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-dollar
fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services,
BlackRock, Inc. 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?",
with respect to certain Portfolios, BlackRock, Inc. and the
sub-adviser intend to waive a portion of their fees during the
current fiscal year. All sub-advisory fees are paid by
BlackRock, Inc., and do not represent an extra charge to the
Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE (BEFORE WAIVERS)
<TABLE>
<CAPTION>
EACH PORTFOLIO EXCEPT THE
INTERNATIONAL BOND PORTFOLIO INTERNATIONAL BOND PORTFOLIO
---------------------------------- ----------------------------------
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE ADVISORY FEE FEE
- ----------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
first $1 billion .500% .350% .550% .400%
$1 billion--$2 billion .450 .300 .500 .350
$2 billion--$3 billion .425 .275 .475 .325
greater than $3 billion .400 .250 .450 .300
</TABLE>
31.
<PAGE>
- -------------------------------------------------------------------------------
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, .30%; Intermediate Bond Portfolio, .30%;
Managed Income Portfolio, .35%; Tax-Free Income Portfolio,
.28%; Pennsylvania Tax-Free Income Portfolio, .29%; Ohio
Tax-Free Income Portfolio, .09%; Low Duration Bond Portfo-
lio, .27%; Core Bond Portfolio, .26%; New Jersey Tax-Free
Income Portfolio, .29%; and International Bond Portfolio,
.56%.
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
the Fund's distributor, subject to the requirements of best
execution.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distribu-
tors, Inc. ("BDI") (the "Administrators") serve as the
Fund's co-administrators. BlackRock, Inc. and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. BDI 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, BlackRock,
Inc. is entitled to receive a fee, computed daily and pay-
able monthly, at an annual rate of .03% of each Portfolio's
average daily net assets. PFPC and BDI are entitled to re-
ceive a combined administration fee, computed daily and pay-
able 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 as-
sets 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 Portfolios
paid for the most recent fiscal period, see "What Are the
Expenses of the Portfolios?"
TRANSFER
AGENT, PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND Street, Philadelphia, Pennsylvania 19103, serves as the
DISBURSING Portfolios' custodian and PFPC, whose principal offices are
AGENT AND located at 400 Bellevue Parkway, Wilmington, Delaware 19809,
CUSTODIAN serves as their transfer agent and dividend disbursing
agent.
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 an annualized basis) of the
average daily net asset value of Service Shares owned bene-
ficially by their customers, Institutions may provide one or
more of the follow-
32.
<PAGE>
- --------------------------------------------------------------------------------
<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.
<PAGE>
- -------------------------------------------------------------------------------
HOW ARE SHARES PURCHASED AND REDEEMED?
- -------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by BDI
as distributor (the "Distributor"). BDI 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 BDI, 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. 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. The Fund does not accept third
party checks for initial or subsequent investments.
The Fund may in its discretion waive or modify the minimum investment amount,
may reject any order for Service Shares and may suspend and resume the sale of
shares of any 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
certificates must accompany the redemption request.
34.
<PAGE>
- --------------------------------------------------------------------------------
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Fund, the Administrators and the
Distributor will employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. The Fund and its service providers will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such
procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the next Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received after 4:00 p.m. (Eastern Time) or on a day when the Fund's custo-
dian is closed is normally wired in Federal funds on the next Business Day fol-
lowing redemption on which the Fund's custodian is open for business. The Fund
reserves the right to wire redemption proceeds within seven days after receiv-
ing a redemption order if, in the judgment of BlackRock, Inc., an earlier pay-
ment could adversely affect a Portfolio. No charge for wiring redemption pay-
ments is imposed by the Fund, although Institutions may charge their customer
accounts for redemption services. Information relating to such redemption serv-
ices and charges, if any, should be obtained by customers from their Institu-
tions.
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.
35.
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WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?
- --------------------------------------------------------------------------------
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 BlackRock Funds c/o PFPC Inc., P.O. Box 8907, Wilmington, Delaware
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. The Fund re-
serves 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.
36.
<PAGE>
- --------------------------------------------------------------------------------
The Fund is not responsible for the efficiency of the Federal wire system or
the shareholder's firm or bank. The Fund does not currently charge for wire
transfers. The shareholder is responsible for any charges imposed by the share-
holder's bank. To change the name of the single designated bank account to re-
ceive wire redemption proceeds, it is necessary to send a written request (with
a guaranteed signature as described above) to BlackRock 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.
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.
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.
37.
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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.
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 (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds 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 tax liabil-
ity. Second, "exempt interest dividends" must be taken into account by corpo-
rate taxpayers in determining certain adjustments for alternative minimum tax
purposes. In addition, investors should be aware of the possibility of state
and local alternative minimum or minimum income tax liability on interest from
private activity bonds. Shareholders who are recipients of Social Security Act
or Railroad Retirement Act benefits should note that "exempt interest divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each 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 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 is not taxable to individuals, estates or
trusts under the Personal Income Tax; to corporations under the Corporate Net
Income Tax; nor to individuals under the Philadelphia School District Net In-
vestment 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, but such income is not taxable under 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).
40.
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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 the New Jersey Tax-Free
Income Portfolio will qualify as a "qualified investment fund" and as a result,
substantially all distributions paid by the New Jersey Tax-Free Income Portfo-
lio will not be subject to the New Jersey personal income tax. A qualified in-
vestment fund is an investment company or trust registered with the Securities
and Exchange Commission, or any series of such investment company or trust,
which for the calendar year in which the distribution is paid: (a) has no in-
vestments other than interest-bearing obligations, obligations issued at a dis-
count, and cash and cash items, including receivables, and financial options,
futures, forward contracts, or other similar financial instruments related to
interest-bearing obligations, obligations issued at a discount or bond indexes
related thereto; and (b) has at least 80% of the aggregate principal amount of
all of its investments, excluding financial options, futures, forward con-
tracts, or other similar financial instruments related to interest-bearing ob-
ligations, obligations issued at a discount or bond indexes related thereto to
the extent such instruments are authorized by the regulated investment company
rules of the Code, cash and cash items, which cash items shall include receiv-
ables, in New Jersey State-Specific Obligations or U.S. Government Obligations.
In accordance with New Jersey law as currently in effect, distributions paid by
a qualified investment fund are excluded from personal income tax to the extent
that the distributions are attributable to interest or gains from New Jersey
State-Specific Obligations or to interest or gains from direct U.S. Government
Obligations. New Jersey State-Specific Obligations are obligations issued by or
on behalf of New Jersey or any county, municipality, or other political subdi-
vision of New Jersey. U.S. Government Obligations are obligations which are
statutorily free from tax under the laws of the United States. Distributions by
a qualified investment fund from most other sources will be subject to the New
Jersey personal income tax. Shares of the New Jersey Tax-Free Income Portfolio
are not subject to property taxation by New Jersey.
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, provided, in the case of U.S. territorial obligations,
such interest is excluded from gross income for federal income tax purposes.
However, Shares of the Ohio Tax-Free Income Portfolio will be included in a
corporation's net worth base for purposes of calculating the Ohio corporation
franchise tax. Distributions properly attributable to gain on the sale, ex-
change or other disposition of Ohio State Specific Obligations will not be sub-
ject to the Ohio personal income tax, or municipal or school district income
taxes in Ohio and will not be included in the net income base of the Ohio cor-
poration franchise tax. Distributions attributable to other sources will be
subject to the Ohio personal income tax and the Ohio corporation franchise tax.
This discussion of Ohio taxes assumes that the Ohio Tax-Free Income Portfolio
will continue to qualify as a regulated investment company as defined in the
Code and that 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.
41.
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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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight investment portfolios. Each Portfolio offers five
separate classes of shares--Institutional Shares, Service Shares, Investor A
Shares, Investor B Shares and Investor C Shares. In addition, the Low Duration
Bond, Core Bond and Intermediate Bond Portfolios offer a sixth share class--
BlackRock Shares. This prospectus relates only to Service Shares of the Portfo-
lios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, 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, Investor and BlackRock Share classes, contact PFPC at (800) 441-7764
(Institutional and BlackRock 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
42.
<PAGE>
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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.
43.
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HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS
COMMENTARY: 24 Hours, 7 days a week toll-free 800-FUTURE4
(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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
44.
<PAGE>
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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>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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 Select Equity
Large Cap Value Equity Micro-Cap Equity
Mid-Cap Growth Equity International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity International Small Cap Equity
Small Cap Value Equity Index Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- -------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIOS INVESTOR SHARES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
ASKING THE KEY
QUESTIONS What Are The Expenses Of The Portfolios?..................... 4
What Are The Portfolios' Financial Highlights?............... 7
What Are The Portfolios?..................................... 12
What Additional Investment Policies And Risks Apply?......... 15
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 19
Who Manages The Fund?........................................ 20
How Are Shares Purchased?.................................... 24
How Are Shares Redeemed?..................................... 26
What Are The Shareholder Features Of The Fund?............... 28
How Is Net Asset Value Calculated?........................... 30
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 30
How Are Fund Distributions Taxed?............................ 31
How Is The Fund Organized?................................... 34
How Is Performance Calculated?............................... 35
How Can I Get More Information?.............................. 36
</TABLE>
This Prospectus sets forth concisely information about the
BlackRock FundsSM (the "Fund") money market Portfolios (the
"Portfolios") that a prospective investor needs to know before
investing. Please keep it for future reference. A Statement of
Additional Information dated January 28, 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 SEC main-
tains a Web site (http://www.sec.gov) that contains the State-
ment of Additional Information, material incorporated by refer-
ence and other information regarding the Fund that has been
filed with the SEC.
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
INVESTED. THERE CAN BE NO ASSURANCE THAT THE PORTFOLIOS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
The New Jersey, North Carolina, Ohio, Pennsylvania and Virginia
Municipal Money Market Portfolios may invest a significant per-
centage of their assets in a single issuer and, therefore, in-
vestments in these Portfolios may be riskier than an investment
in other types of money market funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIOS OF BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 portfolios and has
been structured to include many different investment styles
across the spectrum of money market investments so that invest-
ors may participate across multiple disciplines in order to
seek their long-term financial goals.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Money Market Portfolios of BLACKROCK FUNDS consist of eight
short-term investment alternatives. Two of these Portfolios in-
vest solely in taxable instruments, and six of these Portfolios
invest in tax-exempt instruments. A detailed description of
each Portfolio begins on page 12.
BLACKROCK
PORTFOLIO LIPPER PEER GROUP
MONEY MARKET Money Market Instrument Funds
U.S. TREASURY
MONEY MARKET U.S. Treasury Money Market Funds
MUNICIPAL MONEY
MARKET Tax-Exempt Money Market Funds
NJ MUNICIPAL
MONEY MARKET NJ Tax-Exempt Money Market Funds
NC MUNICIPAL Other States Tax-Exempt Money
MONEY MARKET Market Funds
OH MUNICIPAL Ohio Tax-Exempt Money Market
MONEY MARKET Funds
PA MUNICIPAL
MONEY MARKET PA Tax-Exempt Money Market Funds
VA MUNICIPAL Other States Tax-Exempt Money
MONEY MARKET Market Funds
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
MONEY MARKET different directions in money market investing.
PORTFOLIOS
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS IN investment objective, or that any Portfolio will be able to
MONEY MARKET maintain a stable net asset value of $1.00 per share. Certain
INVESTING Portfolios may invest in U.S. dollar-denominated instruments of
foreign issuers or municipal securities backed by the credit of
foreign banks, which may be subject to risks in addition to
those inherent in U.S. investments. Each state-specific munici-
pal Portfolio will concentrate in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the 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?"
INVESTING IN For information on how to purchase and redeem shares of the
THE Portfolios, see "How Are Shares Purchased" and "How Are Shares
BLACKROCK 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 have been re-
stated to reflect current expenses and fee waivers. Because no Investor B
Shares of the Municipal Money Market Portfolio, no Investor C Shares of the New
Jersey Municipal Money Market Portfolio, and no Investor B or C Shares of the
other Portfolios were outstanding during the fiscal year ended September 30,
1997, the figures shown for these share classes under "Other expenses" are es-
timates for the current fiscal year. An example based on the summary is also
shown.
<TABLE>
<CAPTION>
MONEY U.S. TREASURY MUNICIPAL
MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES
(AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory fees
(after fee
waivers)(/1/) .19% .19% .19% .18% .18% .18% .15% .15% .15%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75 .10 .75 .75
Other operating
expenses
(after fee
waivers)(/1/) .70 .55 .55 .70 .55 .55 .74 .59 .59
----- ----- ----- ----- ------ ------ ----- ----- -----
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .00 .00 .15 .00 .00 .15 .00 .00
Other expenses .30 .30 .30 .30 .30 .30 .34 .34 .34
----- ---- ---- ---- ---- ---- ----- ---- ----
Total Portfolio
operating
expenses
(after fee
waivers)(/1/) .99% 1.49% 1.49% .98% 1.48% 1.48% .99% 1.49% 1.49%
===== ===== ===== ===== ====== ====== ===== ===== =====
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .42% for each class of the
Money Market Portfolio, .44% for each class of the U.S. Treasury Money Mar-
ket Portfolio and .45% for each class of the Municipal Money Market Portfo-
lio and administration fees would be .15% for each class of the Money Mar-
ket Portfolio, .16% for each class of the U.S. Treasury Money Market Port-
folio and .18% for each class of the Municipal Money Market Portfolio.
BlackRock, Inc. and the Portfolios' administrators are under no obligation
to waive or continue waiving their fees, but have informed the Fund that
they expect to waive fees as necessary to maintain the Portfolios' total
operating expenses during the remainder of the current fiscal year at the
levels set forth in the table. Without waivers, "Other operating expenses"
would be: (i) .51%, .62% and .65%, respectively, for Investor A Shares;
(ii) .55%, .47% and .50%, respectively, for Investor B Shares; and (iii)
.66%, .47% and .53%, respectively, for Investor C Shares; and "Total Port-
folio operating expenses" would be: (iv) 1.03%, 1.16% and 1.20%, respec-
tively, for Investor A Shares; (v) 1.72%, 1.66% and 1.70%, respectively,
for Investor B Shares; and (vi) 1.83%, 1.66% and 1.73%, respectively, for
Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the National As-
sociation of Securities Dealers, Inc. ("NASD").
4.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS? (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEW JERSEY NORTH CAROLINA OHIO
MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES
(AS A
PERCENTAGE OF
AVERAGE NET
ASSETS)
Advisory Fees
(after fee
waivers)(/1/) .09% .09% .09% .06% .06% .06% .11% .11% .11%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75 .10 .75 .75
Other operating
expenses
(after fee
waivers)(/1/) .77 .62 .62 .76 .61 .61 .75 .60 .60
----- --- --- ----- --- --- ----- --- ---
Shareholder
servicing fee .25 .25 .25 .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .00 .00 .15 .00 .00 .15 .00 .00
Other expenses .37 .37 .37 .36 .36 .36 .35 .35 .35
----- ---- ---- ----- ---- ---- ----- ---- ----
Total Portfolio
operating
expenses
(after fee
waivers)(/1/) .96% 1.46% 1.46% .92% 1.42% 1.42% .96% 1.46% 1.46%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% and administration fees
would be .18% for each class of each Portfolio. BlackRock, Inc. and the
Portfolios' administrators are under no obligation to waive or continue
waiving their fees, but have informed the Fund that they expect to waive
fees as necessary to maintain the Portfolios' total operating expenses dur-
ing the remainder of the current fiscal year at the levels set forth in the
table. Without waivers, "Other operating expenses" would be: (i) .75%, .66%
and .66%, respectively, for Investor A Shares; (ii) .61%, .51% and .51%,
respectively, for Investor B Shares; and (iii) .60%, .51% and .51%, respec-
tively, for Investor C Shares; and "Total Portfolio operating expenses"
would be: (iv) 1.30%, 1.21% and 1.21%, respectively, for Investor A Shares;
(v) 1.81%, 1.71% and 1.71%, respectively, for Investor B Shares; and (vi)
1.80%, 1.71% and 1.71%, respectively, for Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the NASD.
<TABLE>
<CAPTION>
PENNSYLVANIA VIRGINIA
MUNICIPAL MUNICIPAL
MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO
INVESTOR A INVESTOR B INVESTOR C INVESTOR A INVESTOR B INVESTOR C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING
EXPENSES
(AS A PERCENTAGE
OF AVERAGE
NET ASSETS)
Advisory Fees
(after fee
waivers)(/1/) .16% .16% .16% .02% .02% .02%
12b-1 fees(/2/) .10 .75 .75 .10 .75 .75
Other operating
expenses
(after fee
waivers)(/1/) .73 .58 .58 .80 .65 .65
--- --- --- --- --- ---
Shareholder
servicing fee .25 .25 .25 .25 .25 .25
Shareholder
processing fee .15 .00 .00 .15 .00 .00
Other expenses .33 .33 .33 .40 .40 .40
----- ---- ---- ----- ---- ----
Total Portfolio
operating
expenses
(after fee
waivers)(/1/) .99% 1.49% 1.49% .92% 1.42% 1.42%
===== ===== ===== ===== ===== =====
</TABLE>
(1) "Other expenses" includes the administration fees payable by the Portfo-
lios. Without waivers, advisory fees would be .45% and administration fees
would be .18% for each class of each Portfolio. BlackRock, Inc. and the
Portfolios' administrators are under no obligation to waive or continue
waiving their fees, but have informed the Fund that they expect to waive
fees as necessary to maintain the Portfolios' total operating expenses dur-
ing the remainder of the current fiscal year at the levels set forth in the
table. Without waivers, "Other operating expenses" would be: (i) .62% and
.90%, respectively, for Investor A Shares; (ii) .47% and .75%, respective-
ly, for Investor B Shares; and (iii) .47 and .75%, respectively, for In-
vestor C Shares; and "Total Portfolio operating expenses" would be: (iv)
1.17% and 1.45%, respectively, for Investor A Shares; (v) 1.67% and 1.95%,
respectively, for Investor B Shares; and (vi) 1.67% and 1.95%, respective-
ly, for Investor C Shares.
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the rules of the NASD.
5.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Investor Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) a 5% annual return and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Money Market Portfolio
A Shares $10 $32 $55 $121
B Shares* 15 47 81 164**/158***
C Shares* 15 47 81 178
U.S. Treasury Money Market
Portfolio
A Shares $10 $31 $54 $120
B Shares* 15 47 81 163**/157***
C Shares* 15 47 81 177
Municipal Money Market Portfolio
A Shares $10 $32 $55 $121
B Shares* 15 47 81 164**/158***
C Shares* 15 47 81 178
New Jersey Municipal Money Market
Portfolio
A Shares $10 $31 $53 $118
B Shares* 15 46 80 161**/154***
C Shares* 15 46 80 175
North Carolina Municipal Money
Market Portfolio
A Shares $9 $29 $51 $113
B Shares* 14 45 78 156**/150***
C Shares* 14 45 78 170
Ohio Municipal Money Market
Portfolio
A Shares $10 $31 $53 $118
B Shares* 15 46 80 161**/154***
C Shares* 15 46 80 175
Pennsylvania Municipal Money
Market Portfolio
A Shares $10 $32 $55 $121
B Shares* 15 47 81 164**/158***
C Shares* 15 47 81 178
Virginia Municipal Money Market
Portfolio
A Shares $ 9 $29 $51 $113
B Shares* 14 45 78 156**/150***
C Shares* 14 45 78 170
</TABLE>
* These expense figures do not reflect the imposition of the deferred sales
charge which may be deducted upon the redemption of Investor B or Investor C
Shares of a Portfolio received in an exchange transaction for Investor B or
Investor C Shares of a non-money market investment portfolio of the Fund as
described in the applicable prospectuses. No deferred sales charge is de-
ducted upon the redemption of Investor B or Investor C Shares of a Portfolio
that are purchased from the Fund and not acquired by exchange. See "What Are
The Shareholder Features Of The Fund?--Exchange Privilege."
** Based on the conversion of Investor B Shares to Investor A Shares after
eight years (applies to shares received in an exchange transaction for In-
vestor B Shares of an equity portfolio of the Fund).
*** Based on the conversion of Investor B Shares to Investor A Shares after
seven years (applies to shares received in an exchange transaction for In-
vestor B Shares of a fixed income portfolio of the Fund).
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 "Who Manages The Fund?--Distribu-
tion and Service Plan" in the Prospectus and "Investment Advisory, Administra-
tion, Distribution and Servicing Arrangements" in the Statement of Additional
Information.
The foregoing Tables and Example are intended to assist investors in under-
standing the expenses the Portfolios pay. Investors bear these expenses either
directly or indirectly. They do not reflect any charges that may be imposed by
brokers or other institutions directly on their customer accounts in connection
with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
6.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the
Statement of Additional Information, and has been audited by
the Portfolios' independent accountants. This financial
information should be read together with those financial
statements. For the period shown, no Investor B Shares of the
Municipal Money Market Portfolio, Investor C Shares of the New
Jersey Municipal Money Market Portfolio and Investor B or C
Shares of the other Portfolios except the Money Market
Portfolio were outstanding. Further information about the
performance of the Portfolios is available in the annual
shareholder reports. Both the Statement of Additional
Information and the annual shareholder reports may be obtained
from the Fund free of charge by calling (800) 441-7762.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A, B OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR
INVESTOR A SHARES INVESTOR B SHARES C SHARES
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR YEAR YEAR YEAR 1/13/93/1/ YEAR YEAR 9/15/95/1/ 10/17/96/1/
ENDED ENDED ENDED ENDED THROUGH ENDED ENDED THROUGH 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 9/30/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- ------- ------- -------- --------
Income from investment
operations
Net investment income 0.0491 0.0485 0.0511 0.0308 0.0188 0.0424 0.0426 0.0020 0.0390
Net realized gain (loss)
on investments - - - - - - - - - - - - - - - - - -
-------- -------- -------- -------- -------- ------- ------- -------- --------
Total from investment
operations 0.0491 0.0485 0.0511 0.0308 0.0188 0.0424 0.0426 0.0020 0.0390
-------- -------- -------- -------- -------- ------- ------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0491) (0.0485) (0.0511) (0.0308) (0.0188) (0.0424) (0.0426) (0.0020) (0.0390)
Distributions from net
realized capital gains - - - - - - - - - - - - - - - - - -
-------- -------- -------- -------- -------- ------- ------- -------- --------
Total distributions (0.0491) (0.0485) (0.0511) (0.0308) (0.0188) (0.0424) (0.0426) (0.0020) (0.0390)
-------- -------- -------- -------- -------- ------- ------- -------- --------
NET ASSET VALUE AT END
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $. 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======= ======= ======== ========
Total return 5.02% 4.96% 5.23% 3.12% 1.89% 4.32% 4.34% 0.20% 3.97%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $256,039 $162,099 $ 10,185 $ 4,342 $ 49 $238 $ 138 $ 27 $ 2
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.70% 0.74% 0.81% 0.75% 0.67%/2/ 1.39% 1.36% 1.34%/2/ 1.50%/2/
Before
advisory/administration
fee waivers 1.03% 1.10% 1.19% 1.16% 0.78%/2/ 1.72% 1.73% 1.72%/2/ 1.83%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.92% 4.81% 5.15% 3.39% 2.62%/2/ 4.26% 4.18% 4.58%/2/ 4.01%/2/
Before
advisory/administration
fee waivers 4.59% 4.45% 4.78% 2.98% 2.51%/2/ 3.93% 3.82% 4.20%/2/ 3.68%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
7.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR C SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 1/14/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0468 0.0467 0.0501 0.0309 0.0183
Net realized gain (loss)
on investments - - - - - - - - - -
------- -------- -------- -------- --------
Total from investment
operations 0.0468 0.0467 0.0501 0.0309 0.0183
------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0468) (0.0467) (0.0501) (0.0309) (0.0183)
Distributions from net
realized capital gains - - - - - - - - - -
------- -------- -------- -------- --------
Total distributions (0.0468) (0.0467) (0.0501) (0.0309) (0.0183)
------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ======== ========
Total return 4.75% 4.77% 5.13% 3.11% 1.85%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $43,425 $ 10,630 $ 1,285 $ 1,656 $ 50
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.78% 0.79% 0.80% 0.75% 0.65%/2/
Before
advisory/administration
fee waivers 1.16% 1.19% 1.21% 1.20% 0.78%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.70% 4.60% 5.03% 3.60% 2.57%/2/
Before
advisory/administration
fee waivers 4.32% 4.20% 4.62% 3.14% 2.44%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES INVESTOR C SHARES
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR YEAR YEAR 11/2/92/1/ 9/12/97/1/
ENDED ENDED ENDED ENDED THROUGH THROUGH
9/30/97 9/30/96 9/30/95 9/30/94 9/30/93 9/30/97
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- -------- -------
Income from investment
operations
Net investment income 0.0290 0.0288 0.0311 0.0193 0.0181 0.0013
Net realized gain (loss)
on investments - - - - - - - - - - - -
------- -------- -------- -------- -------- -------
Total from investment
operations 0.0290 0.0288 0.0311 0.0193 0.0181 0.0013
------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0290) (0.0288) (0.0311) (0.0193) (0.0181) (0.0013)
Distributions from net
realized capital gains - - - - - - - - - - - -
------- -------- -------- -------- -------- -------
Total distributions (0.0290) (0.0288) (0.0311) (0.0193) (0.0181) (0.0013)
------- -------- -------- -------- -------- -------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ======== ======== =======
Total return 2.93% 2.88% 3.15% 1.95% 1.83% 0.13%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 8,468 $ 1,851 $ 20 $ 41 $ 15 $ 12
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.79% 0.77% 0.79% 0.75% 0.72%/2/ 1.32%/2/
Before
advisory/administration
fee waivers 1.20% 1.21% 1.23% 1.23% 0.83%/2/ 1.73%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.92% 2.80% 3.08% 2.05% 2.23%/2/ 2.63%/2/
Before
advisory/administration
fee waivers 2.51% 2.36% 2.64% 1.58% 2.12%/2/ 2.22%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
8.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A OR B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
INVESTOR B
INVESTOR A SHARES SHARES
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
YEAR 2/1/96 1/16/96/1/ 3/20/97/1/
ENDED THROUGH THROUGH THROUGH
9/30/97 9/30/96 1/31/96 9/30/97
<S> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- --------
Income from investment
operations
Net investment income 0.0268 0.0175 0.00 0.0077
Net realized gain (loss)
on investments - - - - - - - -
------- -------- ------- --------
Total from investment
operations 0.0268 0.0175 0.00 0.0077
------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0268) (0.0175) 0.00 (0.0077)
Distributions from net
realized capital gains - - - - - - - -
------- -------- ------- --------
Total distributions (0.0268) (0.0175) 0.00 (0.0077)
------- -------- ------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ========
Total return 2.71% 1.76% 2.66% 0.77%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $21,691 $ 17,314 $21,662 - -/3/
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.86% 0.78%/2/ 0.71%/2/ 1.37%/2/
Before
advisory/administration
fee waivers 1.30% 1.27%/2/ 1.20%/2/ 1.81%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.68% 2.63%/2/ 2.66%/2/ 2.35%/2/
Before
advisory/administration
fee waivers 2.24% 2.15%/2/ 2.17%/2/ 1.91%/2/
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey
Municipal Money Market Fund, a separate investment portfolio (the
"Predecessor New Jersey Municipal Money Market Portfolio") of Compass Capital
Group, which was organized as a Massachusetts business trust. On January 13,
1996, the assets and liabilities of the Predecessor New Jersey Municipal
Money Market Portfolio were transferred to this Portfolio, and were combined
with the assets of a pre-existing portfolio of investments maintained by the
Fund.
/1/Commencement of operations of share class.
/2/Annualized.
/3/There were no Investor B Shares outstanding as of September 30, 1997.
9.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR 2/14/95/1/
ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0287 0.0286 0.0194
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0287 0.0286 0.0194
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0287) (0.0286) (0.0194)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0287) (0.0286) (0.0194)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 2.91% 2.90% 1.95%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 304 $ 111 $ 53
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.76% 0.76% 0.83%/2/
Before advisory/administration fee waivers 1.21% 1.25% 1.36%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 2.88% 2.83% 3.05%/2/
Before advisory/administration fee waivers 2.43% 2.34% 2.52%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 10/5/93/1/
ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment
operations
Net investment income 0.0292 0.0293 0.0310 0.0199
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment
operations 0.0292 0.0293 0.0310 0.0199
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0292) (0.0293) (0.0310) (0.0199)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0292) (0.0293) (0.0310) (0.0199)
-------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 2.96% 2.98% 3.15% 2.01%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 15,876 $ 5,672 $ 75 $ 28
Ratios of expenses to average
net assets
After advisory/administration
fee waivers 0.79% 0.79% 0.80% 0.62%/2/
Before advisory/administration
fee waivers 1.21% 1.25% 1.26% 1.26%/2/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.92% 2.88% 3.02% 1.94%/2/
Before advisory/administration
fee waivers 2.50% 2.42% 2.56% 1.30%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INVESTOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
YEAR YEAR YEAR 12/28/93/1/
ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
Income from investment operations
Net investment income 0.0285 0.0281 0.0302 0.0153
Net realized gain (loss) on
investments - - - - - - - -
-------- -------- -------- --------
Total from investment operations 0.0285 0.0281 0.0302 0.0153
-------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0285) (0.0281) (0.0302) (0.0153)
Distributions from net realized
capital gains - - - - - - - -
-------- -------- -------- --------
Total distributions (0.0285) (0.0281) (0.0302) (0.0153)
-------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
Total return 2.89% 2.90% 3.06% 1.58%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $ 98,218 $ 63,424 $ 750 $ 139
Ratios of expenses to average net
assets
After advisory/administration
fee waivers 0.77% 0.81% .82% 0.65%/2/
Before advisory/administration
fee waivers 1.17% 1.23% 1.24% 1.22%/2/
Ratios of net investment income
to average net assets
After advisory/administration
fee waivers 2.85% 2.81% 3.03% 2.11%/2/
Before advisory/administration
fee waivers 2.45% 2.39% 2.61% 1.54%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
INVESTOR A SHARES
FOR THE
PERIOD
5/27/97/1/
THROUGH
9/30/97
<S> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00
--------
Income from investment operations
Net investment income 0.0102
Net realized gain (loss) on investments - -
--------
Total from investment operations 0.0102
--------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0102)
Distributions from net realized capital gains - -
--------
Total distributions (0.0102)
--------
NET ASSET VALUE AT END OF PERIOD $ 1.00
========
Total return 1.03%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 1,096
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.86%/2/
Before advisory/administration fee waivers 1.45%/2/
Ratios of net investment income to average net assets
After advisory/administration fee waivers 2.95%/2/
Before advisory/administration fee waivers 2.36%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent with maintaining liquidity and stability of princi-
pal. The Portfolio may invest in a broad range of short-term,
high quality, U.S. dollar-denominated instruments, such as
government, bank, commercial and other obligations, that are
available in the money markets. In particular, the Portfolio
may invest in:
(A) U.S. dollar-denominated obligations issued or supported
by the credit of U.S. or foreign banks or savings insti-
tutions with total assets in excess of $1 billion (in-
cluding obligations of foreign branches of such banks);
(B) high quality commercial paper and other obligations is-
sued or guaranteed by U.S. and foreign corporations and
other issuers rated (at the time of purchase) A-2 or
higher by Standard & Poor's Ratings Group ("S&P"), Prime-
2 or higher by Moody's Investors Service, Inc.
("Moody's"), Duff 2 or higher by Duff & Phelps Credit Co.
("D&P"), F-2 or higher by Fitch Investors Service, Inc.
("Fitch") or TBW-2 or higher by Thomson BankWatch, Inc.
("TBW"), as well as high quality corporate bonds rated
(at the time of purchase) AA or higher by S&P, D&P, Fitch
or TBW or Aa or higher by Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's sub-
adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obliga-
tions and credit card receivables);
(E) securities issued or guaranteed as to principal and in-
terest by the U.S. Government or by its agencies or in-
strumentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by
foreign governments or their political subdivisions,
agencies or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated
U.S. insurance companies;
(H) securities issued or guaranteed by state or local govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
U.S. TREASURY The investment objective of the U.S. Treasury Money Market
MONEY MARKET Portfolio is to provide as high a level of current interest
PORTFOLIO income as is consistent with maintaining liquidity and sta-
bility of principal. It pursues this objective by investing
exclusively in short-term bills, notes and other obligations
issued or guaranteed by the U.S. Treasury and repurchase
agreements relating to such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Port-
PORTFOLIOS folio is to provide as high a level of current interest in-
come exempt from Federal income taxes as is consistent with
maintaining liquidity and stability of principal. It pursues
this objective by investing substantially all of its assets
in short-term obligations issued by or on behalf of states,
territories and possessions of the United States, the Dis-
trict of Columbia, and their political subdivisions, agen-
cies, instrumentalities and authorities ("Municipal Obliga-
tions").
12.
<PAGE>
- --------------------------------------------------------------------------------
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market
Portfolio (the "State-Specific Municipal Portfolios") is, for
each Portfolio, to seek as high a level of current income ex-
empt from Federal, and to the extent possible, state income tax
of the specific state in which a Portfolio concentrates, as is
consistent with maintaining liquidity and stability of princi-
pal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal Portfolios (together, the "Municipal Portfolios") seek
to achieve their investment objectives by primarily investing
in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2
or A-2 or higher by S&P, AA or higher by D&P or F-2 or
higher by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of com-
parable quality as determined by the Portfolios' sub-ad-
viser under guidelines established by the Fund's Board of
Trustees; and
(E) municipal bonds and notes which are guaranteed as to prin-
cipal and interest by the U.S. Government or an agency or
instrumentality thereof or which otherwise depend directly
or indirectly on the credit of the United States.
During normal market conditions, at least 80% of each Municipal
Portfolio's net assets will be invested in securities which are
Municipal Obligations. In addition, under normal conditions
each State-Specific Municipal Portfolio intends to invest at
least 65% of its net assets in Municipal Obligations of issuers
located in the particular state indicated by its name ("State-
Specific Obligations"). The Municipal Money Market Portfolio
intends, on the other hand, to invest less than 25% of its to-
tal assets in Municipal Obligations of issuers located in the
same state. During temporary defensive periods, each Municipal
Portfolio may invest without limitation in obligations that are
not Municipal Obligations and may hold without limitation
uninvested cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest on
AMT Paper that is received by taxpayers subject to the Federal
alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its assets
in Municipal Obligations the interest on which is paid solely
from revenues of similar projects. To the extent a Portfolio's
assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activ-
ity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such
projects and bonds to a greater extent than it would be if its
assets were not so invested.
13.
<PAGE>
- -------------------------------------------------------------------------------
QUALITY, All securities acquired by the Portfolios will be determined
MATURITY AND at the time of purchase by the Portfolios' sub-adviser, un-
DIVERSIFICATION der guidelines established by the Fund's Board of Trustees,
to present minimal credit risks and will be "Eligible Secu-
rities" as defined by the SEC. Eligible Securities are (a)
securities that either (i) have short-term debt ratings at
the time of purchase in the two highest rating categories by
at least two unaffiliated nationally recognized statistical
rating organizations ("NRSROs") (or one NRSRO if the secu-
rity is rated by only one NRSRO), or (ii) are comparable in
priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated
(including securities of issuers that have long-term but not
short-term ratings) but are of comparable quality as deter-
mined in accordance with guidelines approved by the Board of
Trustees.
Each Portfolio is managed so that the average maturity of
all instruments held by it (on a dollar-weighted basis) will
not exceed 90 days. In no event will a Portfolio purchase
securities which mature more than 397 days from the date of
purchase (except for certain variable and floating rate in-
struments and securities collateralizing repurchase agree-
ments). Securities in which the Portfolios invest may not
earn as high a level of income as longer term or lower qual-
ity securities, which generally have greater market risk and
more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal
Money Market Portfolios are classified as diversified port-
folios, and the State-Specific Municipal Portfolios are
classified as non-diversified portfolios, under the Invest-
ment Company Act of 1940 (the "1940 Act"). Investment re-
turns on a non-diversified portfolio typically are dependent
upon the performance of a smaller number of securities rela-
tive to the number held in a diversified portfolio. Conse-
quently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than
it would a diversified portfolio. In addition, because the
State-Specific Municipal Portfolios concentrate their in-
vestments in obligations of issuers located in particular
states, investments in these Portfolios may be riskier than
an investment in other money market funds.
14.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or
foreign corporations and banks, and may acquire commercial obligations issued
by Canadian corporations and Canadian counterparts of U.S. corporations, as
well as Europaper, which is U.S. dollar-denominated commercial paper of a
foreign issuer. Bank obligations may include certificates of deposit, notes,
bankers' acceptances and fixed time deposits. These obligations may be general
obligations of the parent bank or may be limited to the issuing branch or
subsidiary by the terms of the specific obligation or by government regulation.
The Money Market Portfolio may also make interest-bearing savings deposits in
commercial and savings banks in amounts not in excess of 5% of its total
assets. The obligations of foreign issuers may involve certain risks in
addition to those of domestic issuers, including higher transaction costs, less
complete financial information, less stringent regulatory requirements and less
market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain agencies and instrumentalities of the U.S. Government are backed by the
full faith and credit of the United States. Others are backed by the right of
the issuer to borrow from the U.S. Treasury or are backed only by the credit of
the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
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.
15.
<PAGE>
- -------------------------------------------------------------------------------
Each Municipal Portfolio may acquire "stand-by commitments" with respect to
Municipal Obligations held by it. Under a stand-by commitment, a dealer agrees
to purchase at the Portfolio's option specific Municipal Obligations at a
specified price. The acquisition of a stand-by commitment may increase the
cost, and thereby reduce the yield, of the Municipal Obligation to which such
commitment relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Municipal Portfolio and affect its
share price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest thereon from Federal or state income tax are rendered by
counsel to the respective issuers or sponsors at the time of issuance. The
Fund and its service providers will rely on such opinions and will not review
independently the underlying proceedings relating to the issuance of Municipal
Obligations or the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued
by private companies. Mortgage-related securities may include collateralized
mortgage obligations ("CMOs") issued by the Federal National Mortgage Associa-
tion, the Federal Home Loan Mortgage Corporation or other U.S. Government
agencies or instrumentalities or issued by private companies. In periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During these periods, the reinvestment of prepayment proceeds by the particu-
lar Portfolio will generally be at lower rates than the rates on the prepaid
obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instru-
ments may include variable amount master demand notes that permit the indebt-
edness thereunder to vary in addition to providing for periodic adjustments in
the interest rate. Issuers of unrated variable and floating rate instruments
must satisfy the same criteria as set forth above for the particular Portfo-
lio. 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 securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements").
The securities held subject to a repurchase agreement may have stated maturi-
ties exceeding 13 months, so long as the repurchase agreement itself matures
in less than 13 months. Default by or bankruptcy of the seller would expose
the Portfolio to possible loss because of adverse market action or delays in
connection with the disposition of the underlying obligations.
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such
16.
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as the Salomon Brothers CD Index), but is guaranteed not to be less than a cer-
tain minimum rate. The Money Market Portfolio does not expect to invest more
than 5% of its net assets in GICs at any time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
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 a
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.
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.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will invest more than 10% of the value of its
net assets in securities that are illiquid. Variable and floating rate instru-
ments that cannot be disposed of within seven days, GICs, 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 10% limit. Each
Portfolio may purchase securities which are not registered under 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 the sub-adviser determines that an adequate trading market exists
for the securities. This investment practice could have the effect of increas-
ing the level of illiquidity in a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted securi-
ties.
17.
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STATE-SPECIFIC MUNICIPAL PORTFOLIOS-ADDITIONAL RISK CONSIDERATIONS. The concen-
tration of investments by the State-Specific Municipal Portfolios in State-Spe-
cific Obligations raises special investment considerations. Changes in the eco-
nomic condition and governmental policies of a state and its political subdivi-
sions could adversely affect the value of a Portfolio's shares. Certain matters
relating to some of the states in which the State-Specific Municipal Portfolios
invest are described below. For further information, see "Special Considera-
tions Regarding State-Specific Obligations" in the Statement of Additional In-
formation.
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 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 six years the
State rates were below the national rates (4.9% versus 5.4% in 1996). 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.
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 five
years. As of June 30, 1996, the General Fund has a surplus of $635.2 million. A
relatively high proportion of persons 65 and older in the Commonwealth, court
ordered increases in healthcare reimbursement rates and higher correctional
program costs place increased pressures on the tax resources of the Common-
wealth and its municipalities. The Commonwealth's debt burden remains moderate.
Employment growth has shifted to the trade and service sectors, with losses in
more high-paid manufacturing positions. A new governor took office in January
1995, but the Commonwealth has continued to show fiscal restraint.
18.
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WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
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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 and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax (including instruments which are subject to
AMT), except during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal Portfolio will not hold any securities (except U.S. Government securities
and related repurchase agreements) that would cause, at the end of any tax
quarter, more than 5% of its total assets to be invested in securities of any
one issuer, except that up to 50% of a Portfolio's total assets may be invested
without regard to this limitation so long as no more than 25% of the Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio intends,
as a non-fundamental policy, to limit its investments in the securities of any
single issuer (other than U.S. Government securities and related repurchase
agreements) to not more than 5% of the value of its total assets at the time of
purchase, except that 25% of the value of its total assets may be invested in
any one issuer for a period of up to three business days. The Money Market
Portfolio will also limit its investments in Eligible Securities that are not
in the highest rating category as determined by two NRSROs (or one NRSRO if the
security is rated by only one NRSRO) or, if unrated, are not of comparable
quality, to 5% of its total assets, with investments in any one such issuer be-
ing limited to no more than 1% of its total assets or $1 million, whichever is
greater, measured at the time of purchase.
The investment limitations stated above are applied at the time investment se-
curities are purchased.
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 the Fund's Board of Trustees. The following per-
sons currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Global Wireless.
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.
INVESTMENT
ADVISER AND The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
SUB-ADVISER Inc. (formerly PNC Asset Management Group, Inc.) was orga-
nized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1600 Market
Street, 29th Floor, Philadelphia, Pennsylvania 19103. Black-
Rock, Inc. is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company. PNC Institutional Man-
agement Corporation ("PIMC"), an affiliate of BlackRock,
Inc., serves as each Portfolio's sub-adviser. PIMC's princi-
pal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809.
As adviser, BlackRock, Inc. is responsible for the overall
investment management of the Portfolios. As sub-adviser, PIMC
is responsible for the day-to-day management of the Portfo-
lios, and generally makes all purchase and sale investment
decisions for the Portfolios. PIMC also provides research and
credit analysis. Portfolio transactions for a Portfolio may
be directed through broker/dealers who sell Fund shares, sub-
ject to the requirements of best execution.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-
dollar fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services,
BlackRock, Inc. and PIMC are entitled to fees, computed daily
on a Portfolio-by-Portfolio basis and payable monthly, at the
annual rates set forth below. All sub-advisory fees payable
to PIMC are paid by BlackRock, Inc., and do not represent an
extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
(BEFORE WAIVERS)
<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
20.
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For the twelve months ended September 30, 1997, the Portfolios
paid investment advisory fees at the following annual rates
(expressed as a percentage of average daily net assets) after
voluntary fee waivers: Money Market Portfolio, .09%; U.S. Trea-
sury Money Market Portfolio, .08%; Municipal Money Market Port-
folio, .06%; Ohio Municipal Money Market Portfolio, .06%; Penn-
sylvania Municipal Money Market Portfolio, .07%; North Carolina
Municipal Money Market Portfolio, .06%; Virginia Municipal
Money Market Portfolio, .00%; New Jersey Municipal Money Market
Portfolio, .06%.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC"), and BlackRock Distribu-
tors, Inc. ("BDI") (the "Administrators") serve as the Fund's
co-administrators. BlackRock, Inc. and PFPC are indirect whol-
ly-owned subsidiaries of PNC Bank Corp. BDI 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. 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 BDI 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 av-
erage daily net assets of each Portfolio in excess of $1 bil-
lion and (ii) .065% of the first $500 million of the average
daily net assets allocated to each class of Investor Shares of
each Portfolio, .055% of the next $500 million of such average
daily net assets and .045% of the average daily net assets al-
located 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 Portfo-
lio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER
AGENT, PNC Bank, National Association ("PNC Bank"), whose principal
DIVIDEND offices are located at 1600 Market Street, Philadelphia, Penn-
DISBURSING sylvania 19103, serves as the Portfolios' custodian and PFPC,
AGENT AND whose principal offices are located at 400 Bellevue Parkway,
CUSTODIAN Wilmington, Delaware 19809, serves as their transfer agent and
dividend disbursing agent.
DISTRIBUTION
AND SERVICE Under the Fund's Distribution and Service Plan (the "Plan"),
PLAN Investor Shares of the Portfolios bear the expense of payments
("distribution fees") made to BDI, as the Fund's distributor
(the "Distributor"), or affiliates of PNC Bank for distribution
and sales support services. The distribution fees may be used
to compensate the Distributor for distribution services and to
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 re-
lated expenses, including payments to brokers, dealers, finan-
cial institutions and industry professionals ("Service Organi-
zations") for sales support services and related expenses. Dis-
tribution 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 asset value of each Portfolio's outstand-
ing Investor B and Investor C Shares. Payments under the Plan
are not tied directly to out-of-pocket expenses and therefore
may be used by the recipients as they choose (for example, to
defray their overhead
21.
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expenses). The Plan also permits the Distributor, the Admin-
istrators 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 pro-
grams, sales contests and promotions in which participants
may receive reimbursement of expenses, entertainment and
prizes such as travel awards, merchandise and cash. For fur-
ther information, see "Investment Advisory, Administration,
Distribution and Servicing Arrangements" in the Statement of
Additional Information.
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 ben-
eficial owners of Investor Shares. In consideration for a
shareholder servicing fee of up to .25% (annualized) of the
average daily net asset value of Investor Shares owned by
their customers, Service Organizations may provide one or
more of the following services: responding to customer in-
quiries relating to the services performed by the Service
Organization and to customer inquiries concerning their in-
vestments in Investor Shares; assisting customers in desig-
nating and changing dividend options, account designations
and addresses; and providing other similar shareholder liai-
son services. In consideration for a separate shareholder
processing fee of up to .15% (annualized) of the average
daily net asset value of Investor Shares owned by their cus-
tomers, Service Organizations may provide one or more of
these additional services to such customers: processing pur-
chase and redemption requests from customers and placing or-
ders with the Fund's transfer agent or the Distributor;
processing dividend payments from the Fund on behalf of cus-
tomers; providing sub-accounting with respect to 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 underwriting securities. It is intended that the services
provided by Service Organizations under their service agree-
ments will not be prohibited under these laws. Under state
securities laws, banks and financial institutions that re-
ceive payments from the Fund may be required to register as
dealers.
EXPENSES
Expenses are deducted from the total income of each Portfo-
lio before dividends and distributions are paid. Expenses
include, but are not limited to, fees paid to BlackRock,
Inc. and the Administrators, transfer agency and custodian
fees, trustee fees, taxes, interest, professional fees,
shareholder servicing and processing fees, distribution
fees, fees and expenses in registering and qualifying the
Portfolios and their shares for distribution under Federal
and state securities laws, expenses of preparing prospec-
tuses and statements of additional information and of print-
ing and distributing prospectuses and statements of addi-
tional information to existing shareholders, expenses relat-
ing to shareholder reports, shareholder meetings and proxy
solicitations, insurance premiums, the expense of indepen-
dent pricing services, and other ex -
22.
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penses which are not expressly assumed by BlackRock, Inc. 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 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.
23.
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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-advisers, 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 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. Pay-
ment for an order may be made by the broker in Federal funds or other funds im-
mediately available to the Portfolios' custodian no later than 4:00 p.m. (East-
ern 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 BlackRock Funds. The Fund does not accept third party
checks for initial or subsequent investments. 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.
OTHER PURCHASE INFORMATION. Purchase orders for Investor Shares of the Portfo-
lios that are in proper form are executed at their net asset value per share
next determined after receipt by the Fund; however, orders will not be executed
until payments not made in Federal funds are converted to Federal funds (which
normally occurs within two Business Days of receipt) unless a creditworthy fi-
nancial institution undertakes to pay for an order in Federal funds by 4:00
p.m. (Eastern Time) the same Business Day an order is placed.
Under certain circumstances, the Fund may reject large individual purchase or-
ders received after 12:00 noon. The Fund may in its discretion reject any order
for shares.
Investor B and C Shares have higher operating expenses than Investor A Shares
and may not be appropriate for investors that do not plan to exchange into In-
vestor B or Investor C Shares of the Fund's non-money market portfolios. In-
vestor B Shares of a Portfolio will automatically convert to Investor A Shares
at the time
24.
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the Investor B Shares of the non-money market portfolio that were previously
purchased would have converted. The purpose of the conversion is to relieve the
holders of Investor B Shares of the higher operating expenses charged to In-
vestor B Shares. The conversion from Investor B Shares to Investor A Shares
will take place at the net asset value of each class of shares at the time of
the conversion. After such conversion, an investor would hold Investor A Shares
subject to the operating expenses for Investor A Shares. Upon each conversion
of Investor B Shares that were not acquired through reinvestment of dividends
or distributions, a proportionate amount of Investor B Shares that were ac-
quired through reinvestment of dividends or distributions will likewise auto-
matically convert to Investor A Shares.
Shares of each Portfolio are sold on a continuous basis by BDI as the Distribu-
tor. BDI 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 Phil-
adelphia are open for business (a "Business Day"). Payment for orders which are
not received or accepted will bereturned after prompt inquiry. The issuance of
shares is recorded on the books of the Fund. No certificates will be issued for
shares. Payments for shares of a Portfolio may, in the discretion of the Fund's
investment adviser, be made in the form of securities that are permissible in-
vestments for that Portfolio. The Fund reserves the right to reject any pur-
chase order, to modify or waive the minimum initial or subsequent investment
requirement and to suspend and resume the sale of any share class of a Portfo-
lio at any time.
25.
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HOW ARE SHARES REDEEMED?
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REDEMPTION. Shareholders may redeem their shares for cash at any time. A writ-
ten redemption request in proper form must be sent directly to BlackRock Funds
c/o PFPC, P.O. Box 8907, Wilmington, Delaware 19899-8907. Except for the con-
tingent deferred sales charge that may be charged with respect to Investor B
and Investor C Shares, there is no charge for a redemption. Shareholders may
also place redemption requests through a broker or other institution, which may
charge a fee for this service. When redeeming Investor Shares in the Portfo-
lios, shareholders should indicate whether they are redeeming Investor A
Shares, Investor B Shares or Investor C Shares. If a redeeming shareholder owns
both Investor A Shares and Investor B or Investor C Shares in the same Portfo-
lio, the Investor A Shares will be redeemed first unless the shareholder indi-
cates otherwise. If a redeeming shareholder owns both Investor B Shares and In-
vestor C Shares in the same Portfolio, the redemption order will be processed
to minimize the amount of the contingent deferred sales charge that will be
charged unless the shareholder indicates otherwise. Except as noted below, a
request for redemption must be signed by all persons in whose names the shares
are registered. Signatures must conform exactly to the account registration. If
the proceeds of the redemption would exceed $25,000, or if the proceeds are not
to be paid to the record owner at the record address, or if the shareholder is
a corporation, partnership, trust or fiduciary, signature(s) must be guaranteed
by any eligible guarantor institution. Eligible guarantor institutions gener-
ally include banks, broker/dealers, credit unions, national securities ex-
changes, registered securities associations, clearing agencies and savings as-
sociations.
Generally, a properly signed written request with any required signature guar-
antee is all that is required for a redemption. In some cases, however, other
documents may be necessary. Shareholders holding Investor A Share certificates
must send their certificates with the redemption request. Additional documen-
tary evidence of authority is required by PFPC in the event redemption is re-
quested by a corporation, partnership, trust, fiduciary, executor or adminis-
trator.
REDEMPTION BY CHECK. Upon request, the Fund will provide the holders of In-
vestor A Shares with checkwriting privileges. An investor wishing to use this
checkwriting redemption procedure must complete the checkwriting application
and signature card when completing the account application. Investors inter-
ested in obtaining the checkwriting option on existing accounts may contact
PFPC at (800) 441-7762 and application forms will be provided. The checkwriting
option is not available in connection with the redemption of Investor B or In-
vestor C Shares.
Upon receipt of the checkwriting application and signature card by PFPC, checks
will be forwarded to the investor. The minimum amount of a check is $100.
Checks may be made payable to anyone and are negotiated according to bank
clearing procedures. If more than one shareholder owns the account, each share-
holder must sign each check, unless an election has been made to permit
checkwriting by a limited number of signatures and such election is on file
with PFPC. Investor A Shares represented by a check redemption will continue to
earn daily income until the check is presented for payment. PNC Bank, as the
investor's agent, will cause the Fund to redeem a sufficient number of Investor
A Shares owned to cover the check. When redeeming Investor A Shares by check,
an investor should make certain that there is an adequate number of Investor A
Shares in the account to cover the amount of the check. If an insufficient num-
ber of Investor A Shares is held or if checks are not properly endorsed, they
may not be honored and a service charge may be incurred. Checks may not be pre-
sented for cash payments at the offices of PNC Bank. This limitation does not
affect checks used for the payment of bills or cash at other banks.
EXPEDITED REDEMPTIONS. If a shareholder has given authorization for expedited
redemption, shares can be redeemed by telephone and the proceeds sent by check
to the shareholder or by 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
26.
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$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 BlackRock Funds c/o PFPC, P.O.
Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so. The Fund, the Administrators and the Distributor will em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not be
liable for any loss, liability, cost or expense for acting upon telephone in-
structions reasonably believed to be genuine in accordance with such proce-
dures.
ACCOUNTS WITH LOW BALANCES. The Fund reserves the right to redeem a sharehold-
er's account in any Portfolio at any time the net asset value of the account in
such Portfolio falls below the minimum initial investment requirement amount as
the result of a redemption or an exchange request. A shareholder will be noti-
fied in writing that the value of the shareholder's account in a Portfolio is
less than the required amount and will be allowed 30 days to make additional
investments before the redemption is processed.
PAYMENT OF REDEMPTION PROCEEDS. The redemption price for shares is their net
asset value per share next determined after the request for redemption is re-
ceived in proper form by BlackRock Funds c/o PFPC, P.O. Box 8907, Wilmington,
Delaware 19899-8907. While the Fund intends to use its best efforts to maintain
each Portfolio's net asset value per share at $1.00, the proceeds paid on re-
demption may be more or less than the amount invested depending on a share's
net asset value at the time of redemption. Proceeds from the redemption of In-
vestor B and Investor C Shares will be reduced by the amount of any applicable
contingent deferred sales charge. Unless another payment option is used as de-
scribed above, payment for redeemed shares is normally made by check mailed
within seven days after acceptance by PFPC of the request and any other neces-
sary documents in proper order. Payment may, however, be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to
be redeemed have been recently purchased by check, the Fund's transfer agent
may delay the payment of redemption proceeds, which may be a period of up to 15
days after the purchase date, pending a determination that the check has
cleared.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's 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.
BlackRock Funds offers shareholders many special features which enable an in-
vestor to have greater investment flexibility as well as greater access to in-
formation about the Fund throughout the investment period.
Additional information on each of these features is available from PFPC by
calling (800) 441-7762.
27.
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WHAT ARE THE SHAREHOLDER FEATURES OF THE FUND?
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE. Investor Shares of each Portfolio may be exchanged for
shares of the same class of other portfolios of the Fund which offer that class
of shares, based on their respective net asset values, subject to any applica-
ble sales charge.
Unless an exemption applies, a front-end sales charge will be charged in con-
nection with exchanges for Investor A Shares of the Fund's non-money market in-
vestment portfolios. Similarly, exchanges of Investor A Shares of a Portfolio
for Investor B or Investor C Shares of a non-money market portfolio of the Fund
will also be subject to a CDSC, unless an exemption applies. Investor B Shares
of the Portfolios are only exchangeable for Investor B Shares of the Fund's
other investment portfolios, and Investor C Shares of the Portfolios are only
exchangeable for Investor C Shares of the Fund's other investment portfolios.
Investor B and Investor C Shares are exchangeable without the payment of any
contingent deferred sales charge at the time the exchange is made. In determin-
ing the holding period for calculating the contingent deferred sales charge
payable on redemption of Investor B and Investor C Shares, the holding period
of the Investor B or Investor C Shares originally held will be added to the
holding period of the Investor B or Investor C Shares acquired through ex-
change. No exchange fee is imposed by the Fund.
Investor A Shares of money market portfolios of the Fund that were (1) acquired
through the use of the exchange privilege and (2) can be traced back to a pur-
chase of shares in one or more investment portfolios of the Fund for which a
sales charge was paid, can be exchanged for Investor A Shares of a non-money
market portfolio based on their respective net asset values. Such exchanges of
Investor A Shares may be subject to the difference between the sales charge
previously paid and the higher sales charge (if any) payable with respect to
the shares acquired in the exchange.
A shareholder wishing to make an exchange may do so by sending a written re-
quest to PFPC at the address given above. Shareholders are automatically pro-
vided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. Share-
holders holding share certificates are not eligible to exchange Investor A
Shares by phone because share certificates must accompany all exchange re-
quests. To add this feature to an existing account that previously did not pro-
vide this option, a Telephone Exchange Authorization Form must be filed with
PFPC. This form is available from PFPC. Once this election has been made, the
shareholder may simply contact PFPC by telephone at (800) 441-7762 to request
the exchange. During periods of substantial economic or market change, tele-
phone exchanges may be difficult to complete and shareholders may have to sub-
mit 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.
28.
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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 any Portfolio may
arrange for periodic investments in that Portfolio through automatic deductions
from a checking or savings account by completing the AIP Application Form which
may be obtained from PFPC. The minimum pre-authorized investment amount is $50.
RETIREMENT PLANS. Portfolio shares may be purchased in conjunction with indi-
vidual retirement accounts ("IRAs") and rollover IRAs where PNC Bank or any of
its affiliates acts as custodian. For further information as to applications
and annual fees, contact the Distributor. To determine whether the benefits of
an IRA are available and/or appropriate, a shareholder should consult with a
tax adviser.
SYSTEMATIC WITHDRAWAL PLAN ("SWP"). The Fund offers a Systematic Withdrawal
Plan which may be used by investors who wish to receive regular distributions
from their accounts. Upon commencement of the SWP, the account must have a cur-
rent value of $10,000 or more in a Portfolio. Shareholders may elect to receive
automatic cash payments of $50 or more either monthly, every other month, quar-
terly, 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 thereaf-
ter. An investor may utilize the SWP by completing the SWP Application Form
which may be obtained from PFPC.
Shareholders should realize that if withdrawals exceed income dividends their
invested principal in the account will be depleted. To participate in the SWP,
shareholders must have their dividends automatically reinvested and may not
hold share certificates. Shareholders may change or cancel the SWP at any time,
upon written notice to PFPC. No contingent deferred sales charge will be as-
sessed on redemptions of Investor B and Investor C Shares made through the SWP
that do not exceed 12% of an account's net asset value on an annualized basis.
For example, monthly, quarterly and semi-annual SWP redemptions of Investor B
and Investor C Shares will not be subject to the CDSC if they do not exceed 1%,
3% and 6%, respectively, of an account's net asset value on the redemption
date. SWP redemptions of Investor B and Investor C Shares in excess of this
limit are still subject to the applicable CDSC.
29.
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HOW IS NET ASSET VALUE CALCULATED?
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Net asset value is calculated separately for each class of Investor Shares of
each Portfolio as of 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on
each Business Day by dividing the value of all securities and other assets
owned by a Portfolio that are allocated to a particular class of shares, less
the liabilities charged to that class, by the number of shares of the class
that are outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share for pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Shareholders are entitled to dividends and distributions arising from the net
income and capital gains, if any, earned on investments held by the Portfolio
in which they invest. Each Portfolio's net income is declared daily as a divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time) do not receive div-
idends for that day, while shareholders of each Portfolio whose redemption or-
ders are received after 12:00 noon (Eastern Time) do receive dividends for that
day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing by the shareholder, within five business days after the end of the month.
Net short-term capital gains, if any, will be distributed at least annually.
The period for which dividends are payable and the time for payment are subject
to change by the Fund's Board of Trustees. The Portfolios do not expect to re-
alize net long-term capital gains.
Dividends are reinvested in additional full and fractional Investor Shares of
the same class on which the dividends are paid, unless a shareholder elects to
receive dividends in cash. Such election, or any revocation thereof, must be
made in writing to PFPC, and will become effective with respect to dividends
paid after receipt by PFPC.
30.
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HOW ARE FUND DISTRIBUTIONS TAXED?
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Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain regardless of the length of time a
shareholder holds the shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
Each Municipal Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the
receipt of "exempt interest dividends" on their Federal income tax returns for
informational purposes and in two circumstances such amounts, while exempt from
regular Federal income tax, are taxable to persons subject to alternative
minimum and environmental taxes. First, "exempt interest dividends" derived
from certain private activity bonds generally will constitute an item of tax
preference for taxpayers in determining alternative minimum tax liability.
Second, all "exempt interest dividends" must be taken into account by corporate
taxpayers in determining certain adjustments for alternative minimum tax
purposes. In addition, investors should be aware of the possibility of state
and local alternative minimum or minimum income tax liability on interest from
private activity bonds. Shareholders who are recipients of Social Security Act
or Railroad Retirement Act benefits should note that "exempt interest
dividends" will be taken into account in determining the taxability of their
benefit payments.
Each Municipal Portfolio will determine annually the percentages of its net
investment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax
purposes, and which are fully taxable. These percentages will apply uniformly
to all distributions from net investment income during that year and may differ
significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a
specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
This is not an exhaustive discussion of applicable tax consequences, and
investors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of such dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In
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
investing in the Portfolios. For additional information concerning the tax
treatment of dividends and distributions by the states listed below, including
certain restrictions applicable to such treatment, see "Taxes" in the Statement
of Additional Information.
NEW JERSEY TAXES. It is anticipated that the New Jersey Municipal Money Market
Portfolio will qualify as a "qualified investment fund" and as a result,
substantially all distributions paid by the New Jersey Municipal Money Market
Portfolio will not be subject to the New Jersey personal income tax. A
qualified investment fund is an investment company or trust registered with the
Securities and Exchange Commission, or any series of such investment company or
trust, which for the calendar year in which the distribution is paid: (a)
31.
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has no investments other than interest-bearing obligations, obligations issued
at a discount, and cash and cash items, including receivables, and financial
options, futures, forward contracts, or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto; and (b) has at least 80% of the aggregate
principal amount of all of its investments, excluding financial options,
futures, forward contracts, or other similar financial instruments related to
interest-bearing obligations, obligations issued at a discount or bond indexes
related thereto to the extent such instruments are authorized by the regulated
investment company rules of the Code, cash and cash items, which cash items
shall include receivables, in New Jersey State-Specific Obligations or U.S.
Government Obligations.
In accordance with New Jersey law as currently in effect, distributions paid by
a qualified investment fund are excluded from personal income tax to the extent
that the distributions are attributable to interest or gains from New Jersey
State--Specific Obligations or to interest or gains from direct U.S. Government
Obligations. New Jersey State--Specific Obligations are obligations issued by
or on behalf of New Jersey or any county, municipality, or other political sub-
division of New Jersey. U.S. Government Obligations are obligations which are
statutorily free from tax under the laws of the United States. Distributions by
a qualified investment fund from most other sources will be subject to the New
Jersey personal income tax. Shares of the New Jersey Municipal Money Market
Portfolio are not subject to property taxation by New Jersey.
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
Corporation Business Tax.
NORTH CAROLINA TAXES. Interest received in the form of dividends from the North
Carolina Municipal Money Market Portfolio is exempt from North Carolina state
income tax to the extent the distributions represent interest on direct
obligations of the U.S. Government or North Carolina State-Specific
Obligations. Distributions derived from interest earned on obligations of
political subdivisions of Puerto Rico, Guam and the U.S. Virgin Islands,
including the governments thereof and their agencies, instrumentalities and
authorities, are also exempt from North Carolina state income tax.
Distributions paid out of interest earned on obligations that are merely backed
or guaranteed by the U.S. Government (e.g., GNMAs, FNMAs), on repurchase
agreements collateralized by U.S. Government securities or on obligations of
other states (which the Portfolio may acquire and hold for temporary or
defensive purposes) are not exempt from North Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of certain obligations of the
State of North Carolina or its subdivisions that were issued before July 1,
1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.
OHIO TAXES. Individuals and estates that are subject to Ohio personal income
tax or municipal or school district income taxes in Ohio will not be subject to
such taxes on distributions from the Ohio Municipal Money Market Portfolio to
the extent that such distributions are properly attributable to interest on
Ohio State-Specific Obligations or obligations issued by the U.S. Government,
its agencies, instrumentalities or territories (if the interest on such
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 Municipal Money Market
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 attributable to interest on Ohio State-Specific Obligations or the
U.S. obligations described above provided, in the case of U.S. territorial
obligations, such interest is excluded from gross income for federal income tax
purposes. However, shares of the Ohio Municipal Money Market Portfolio will be
included in a corporation's net worth base for purposes of calculating the Ohio
corporation franchise tax. Distributions properly attributable to gain on the
sale,
32.
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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 corporation franchise tax.
This discussion of Ohio taxes assumes that the Ohio Municipal Money Market
Portfolio will continue to qualify as a regulated investment company as defined
in the Code and that 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.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to interest
realized by the Pennsylvania Municipal Money Market Portfolio from Pennsylvania
State-Specific Obligations is not taxable to individuals, estates or trusts
under the Personal Income Tax; to corporations under the Corporate Net Income
Tax; 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 Portfolio of Pennsylvania State-Specific Obligations is
taxable under the Personal Income Tax and the Corporate Net Income Tax, but
such income is not taxable under the School District Tax.
This discussion does not address the extent, if any, to which shares of the
Pennsylvania Municipal Money Market Portfolio, and interest and gain earned by
the Portfolio, are subject to, or included in the measure of, special taxes
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
Capital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market 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).
VIRGINIA TAXES. Dividends paid by the Virginia Municipal Money Market Portfolio
and derived from interest on obligations of the Commonwealth of Virginia or of
any political subdivision or instrumentality of the Commonwealth or derived
from interest or dividends on obligations of the United States excludable from
Virginia taxable income under the laws of the United States, which obligations
are issued in the exercise of the borrowing power of the Commonwealth or the
United States and are backed by the full faith and credit of the Commonwealth
or the United States, will generally be exempt from the Virginia income tax.
Dividends derived from interest on debt obligations of certain territories and
possessions of the United States (those issued by Puerto Rico, the Virgin
Islands and Guam) will also be exempt from the Virginia income tax. Dividends
derived from interest on debt obligations other than those described above will
be subject to the Virginia income tax even though it may be excludable from
gross income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. Capital gains
distributed to shareholders derived from Virginia obligations issued pursuant
to special Virginia enabling legislation which provides a specific exemption
for such gains will be exempt from Virginia income tax.
The Virginia Department of Taxation has adopted a policy of allowing
shareholders to exclude from their Virginia taxable income the exempt portion
of distributions from a regulated investment company even though the
shareholders receive distributions monthly but receive reports substantiating
the exempt portion of such distributions at less frequent intervals.
Accordingly, if the Portfolio receives taxable income, the Portfolio must
determine the portion of income that is exempt from Virginia income tax and
provide such information to the shareholders in accordance with the foregoing
so that the shareholders may exclude from Virginia taxable income the exempt
portion of the distribution from the Portfolio.
33.
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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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight investment portfolios. Each Money Market Portfo-
lio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Investor Shares of the eight money market portfolios
described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, certain administrative/servicing
fees and amounts payable under the Fund's Distribution and Service Plan. Be-
cause of these "class expenses", the performance of a Portfolio's Institutional
Shares is expected to be higher than the performance of the Portfolio's Service
Shares, and the performance of both the Institutional Shares and Service Shares
of a Portfolio is expected to be higher than the performance of the Portfolio's
three classes of Investor Shares. The performance of each class of Investor
Shares may be different. The Fund offers various services and privileges in
connection with its Investor Shares that are not generally offered in connec-
tion with its Institutional and Service Shares, including an automatic invest-
ment plan, automatic withdrawal plan and checkwriting. For further information
regarding the Fund's Service and Institutional share classes, contact PFPC at
(800) 441-7764.
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
34.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
Each Portfolio may advertise its "yield", "effective yield" and total return
for each class of Investor Shares. These performance figures are based on his-
torical earnings and are not intended to indicate future performance. "Yield"
refers to the income generated by an investment in a particular class of a
Portfolio's Investor Shares over a seven-day period. This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. "Effective yield" is calculated simi-
larly but, when annualized, the income earned by an investment in a particular
class of a Portfolio's Investor Shares is assumed to be reinvested. The "effec-
tive yield" will be slightly higher than the "yield" because of the compounding
effect of this assumed reinvestment. A Municipal Portfolio's "tax equivalent
yield" may also be quoted, which shows the level of taxable yield needed to
produce an after-tax equivalent to the Portfolio's tax-free yield for a partic-
ular class of Investor Shares.
The performance of each class of Investor Shares of a Portfolio may be compared
to the performance of mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the perfor-
mance of mutual funds. For example, the yield of a particular class of Investor
Shares of a Portfolio may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service. Performance information may also include evaluations of the
Portfolios published in nationally recognized ranking services, and information
as reported by financial publications such as Business Week, Fortune, Institu-
tional Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal and
The New York Times, or in publications of a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
35.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800- FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7762
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
36.
<PAGE>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Mid-Cap Growth Equity Micro-Cap Equity
International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity
Small Cap Value Equity International Small Cap Equity
Index Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- -------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIOS INSTITUTIONAL SHARES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
What Are The Expenses Of The Portfolios?..................... 4
What Are The Portfolios' Financial Highlights?............... 6
What Are The Portfolios?..................................... 14
What Additional Investment Policies And Risks Apply?......... 17
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 21
Who Manages The Fund?........................................ 22
How Are Shares Purchased And Redeemed?....................... 24
How Is Net Asset Value Calculated?........................... 26
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 26
How Are Fund Distributions Taxed?............................ 27
How Is The Fund Organized?................................... 30
How Is Performance Calculated?............................... 31
How Can I Get More Information?.............................. 32
</TABLE>
ASKING THE KEY
QUESTIONS
This Prospectus sets forth concisely information about the
BlackRock Funds SM (the "Fund") money market Portfolios that a
prospective investor needs to know before investing. Please keep
it for future reference. A Statement of Additional Information
dated January 28, 1998 has been filed with the Securities and
Exchange Commission (the "SEC"). The Statement of Additional In-
formation may be obtained free of charge from the Fund by call-
ing (800) 441-7764. The Statement of Additional Information, 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 that has been filed with the SEC.
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
INVESTED. THERE CAN BE NO ASSURANCE THAT THE PORTFOLIOS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
The New Jersey, North Carolina, Ohio, Pennsylvania and Virginia
Municipal Money Market Portfolios may invest a significant per-
centage of their assets in a single issuer and, therefore, in-
vestments in these Portfolios may be riskier than an investment
in other types of money market funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIOS OF BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 portfolios and has
been structured to include many different investment styles
across the spectrum of money market investments so that invest-
ors may participate across multiple disciplines in order to
seek their long-term financial goals.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Money Market Portfolios of BLACKROCK FUNDS consist of eight
short-term investment alternatives. Two of these Portfolios in-
vest solely in taxable instruments, and six of these Portfolios
invest in tax-exempt instruments. A detailed description of
each Portfolio begins on page 14.
LIPPER PEER GROUP
BLACKROCK
PORTFOLIO
MONEY MARKET Institutional Money Market
Instrument Funds
U.S. TREASURY MONEY Institutional U.S. Treasury Money
MARKET Market Funds
MUNICIPAL MONEY Institutional Tax-Exempt Money
MARKET Market Funds
NJ MUNICIPAL MONEY NJ Tax-Exempt Money Market Funds
MARKET
NC MUNICIPAL MONEY Other States Tax-Exempt Money Market
MARKET Funds
OH MUNICIPAL MONEY Ohio Tax-Exempt Money Market Funds
MARKET
PA MUNICIPAL MONEY PA Tax-Exempt Money Market Funds
MARKET
VA MUNICIPAL MONEY Other States Tax-Exempt Money Market
MARKET Funds
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
MONEY MARKET different directions in money market investing.
PORTFOLIOS
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS IN investment objective, or that any Portfolio will be able to
MONEY MARKET maintain a stable net asset value of $1.00 per share. Certain
INVESTING Portfolios may invest in U.S. dollar-denominated instruments of
foreign issuers or municipal securities backed by the credit of
foreign banks, which may be subject to risks in addition to
those inherent in U.S. investments. Each state-specific munici-
pal Portfolio will concentrate in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the 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?"
For information on how to purchase and redeem shares of the
INVESTING IN Portfolios, see "How Are Shares Purchased And Redeemed?"
THE
BLACKROCK
FUNDS
3.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE EXPENSES OF THE PORTFOLIOS?
- --------------------------------------------------------------------------------
Below is a summary of the annual operating expenses incurred by Institutional
Shares of the Portfolios for the fiscal year ended September 30, 1997 as a per-
centage of average daily net assets. The figures shown for each Portfolio have
been restated to reflect current expenses and fee waivers. An example based on
the summary is also shown.
<TABLE>
<CAPTION>
NEW
JERSEY
U.S. TREASURY MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers) (/1/) .19% .18% .15% .09%
Other operating expenses .23% .23 .27 .30
---- ------ ------ ----
Administration fees (after
fee waivers)(/1/) .15 .16 .18 .18
Other expenses .08 .07 .09 .12
---- ------ ------ ----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .42% .41% .42% .39%
==== ====== ====== ====
<CAPTION>
NORTH
CAROLINA OHIO PENNSYLVANIA VIRGINIA
MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .06% .11% .16% .02%
Other operating expenses .24 .28 .26 .28
---- ------ ------ ----
Administration fees (after
fee waivers)(/1/) .16 .18 .18 .15
Other expenses .08 .10 .08 .13
---- ------ ------ ----
Total Portfolio operating
expenses (after fee
waivers)(/1/) .30% .39% .42% .30%
==== ====== ====== ====
</TABLE>
(1) Without waivers, advisory fees would be .42% for the Money Market Portfo-
lio, .44% for the U.S. Treasury Money Market Portfolio and .45% for each of
the other Portfolios and administration fees would be .15% for the Money
Market Portfolio, .16% for the U.S. Treasury Money Market Portfolio and
.18% for each of the other Portfolios. BlackRock, Inc. and the Portfolios'
administrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be .23%, .25%, .27%,
.31%, .28%, .28%, .25% and .36%, respectively, and "Total Portfolio operat-
ing expenses" would be .65%, .69%, .72%, .76%, .73%, .73%, .70%, and .81%
respectively.
4.
<PAGE>
- --------------------------------------------------------------------------------
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment assuming (1) a 5% annual return, and (2) redemption at the
end of each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Money Market Portfolio $4 $13 $24 $53
U.S. Treasury Money Market Portfolio 4 13 23 52
Municipal Money Market Portfolio 4 13 24 53
New Jersey Municipal Money Market
Portfolio 4 13 22 49
North Carolina Municipal Money
Market Portfolio 3 10 17 38
Ohio Municipal Money Market
Portfolio 4 13 22 49
Pennsylvania Municipal Money Market
Portfolio 4 13 24 53
Virginia Municipal Money Market
Portfolio 3 10 17 38
</TABLE>
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 foregoing Table and Example are intended to assist investors in understand-
ing the expenses the Portfolios pay. Investors bear these expenses either di-
rectly or indirectly. They do not reflect any charges that may be imposed by
affiliates of the Portfolios' investment adviser or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
5.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS' FINANCIAL HIGHLIGHTS?
- --------------------------------------------------------------------------------
The following financial information has been derived from the
financial statements incorporated by reference into the
Statement of Additional Information, and has been audited by
the Portfolios' independent accountant. This financial infor-
mation should be read together with those financial state-
ments. Further information about the performance of the Port-
folios 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.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 8/2/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0529 0.0533 0.0564 0.0359 0.0054
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- -------- --------
Total from investment
operations 0.0529 0.0533 0.0564 0.0359 0.0054
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0529) (0.0533) (0.0564) (0.0359) (0.0054)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- -------- --------
Total distributions (0.0529) (0.0533) (0.0564) (0.0359) (0.0054)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return 5.42% 5.46% 5.79% 3.64% 0.54%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $878,566 $587,730 $654,157 $502,972 $435,586
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.32% 0.29% 0.27% 0.25% 0.27%/2/
Before
advisory/administration
fee waivers 0.65% 0.65% 0.64% 0.66% 0.38%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 5.30% 5.34% 5.66% 3.64% 3.01%/2/
Before
advisory/administration
fee waivers 4.97% 4.98% 5.28% 3.23% 2.90%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
6.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 8/2/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0515 0.0519 0.0555 0.0357 0.0049
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- -------- --------
Total from investment
operations 0.0515 0.0519 0.0555 0.0357 0.0049
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0515) (0.0519) (0.0555) (0.0357) (0.0049)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- -------- --------
Total distributions (0.0515) (0.0519) (0.0555) (0.0357) (0.0049)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return 5.27% 5.32% 5.69% 3.63% 0.49%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $162,052 $167,193 $120,540 $ 37,519 $ 13,513
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.31% 0.29% 0.27% 0.25% 0.25%/2/
Before
advisory/administration
fee waivers 0.69% 0.69% 0.69% 0.70% 0.38%/2/
Ratios of net investment
income to average
net assets
After
advisory/administration
fee waivers 5.15% 5.18% 5.64% 3.69% 3.01%/2/
Before
advisory/administration
fee waivers 4.77% 4.78% 5.22% 3.24% 2.88%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
7.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 8/2/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0337 0.0339 0.0364 0.0246 0.0040
Net realized gain (loss)
on investments - - - - - - - - - -
------- -------- -------- -------- --------
Total from investment
operations 0.0337 0.0339 0.0364 0.0246 0.0040
------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0337) (0.0339) (0.0364) (0.0246) (0.0040)
Distributions from net
realized capital gains - - - - - - - - - -
------- -------- -------- -------- --------
Total distributions (0.0337) (0.0339) (0.0364) (0.0246) (0.0040)
------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ======== ========
Total return 3.42% 3.41% 3.70% 2.48% 0.40%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $58,747 $ 43,936 $ 53,778 $ 30,608 $ 39,148
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.31% 0.29% 0.27% 0.25% 0.25%/2/
Before
advisory/administration
fee waivers 0.72% 0.73% 0.71% 0.73% 0.36%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.36% 3.37% 3.64% 2.48% 2.45%/2/
Before
advisory/administration
fee waivers 2.95% 2.93% 3.20% 2.01% 2.34%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
8.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
YEAR 2/1/96 1/16/96/1/
ENDED THROUGH THROUGH
9/30/97 9/30/96 1/31/96
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- ------
Income from investment operations
Net investment income 0.0323 0.0207 0.00
Net realized gain (loss) on investments - - - - - -
-------- -------- ------
Total from investment operations 0.0323 0.0207 0.00
-------- -------- ------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0323) (0.0207) (0.00)
Distributions from net realized capital
gains - - - - - -
-------- -------- ------
Total distributions (0.0323) (0.0207) (0.00)
-------- -------- ------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ======
Total return 3.28% 2.09% 3.07%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 7,432 $ 614 $4,195
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.32% 0.29%/2/ 0.29%/2/
Before advisory/administration fee waivers 0.76% 0.78%/2/ 0.78%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.27% 3.07%/2/ 3.07%/2/
Before advisory/administration fee waivers 2.83% 2.58%/2/ 2.58%/2/
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Money Market Fund, a separate investment portfolio (the "Predecessor New
Jersey Municipal Money Market Portfolio") of Compass Capital Group, which was
organized as a Massachusetts business trust. On January 13, 1996, the assets
and liabilities of the Predecessor New Jersey Municipal Money Market Portfo-
lio were transferred to this Portfolio, and were combined with the assets of
a pre-existing portfolio of investments maintained by the Fund.
/1/Commencement of operations of share class.
/2/Annualized.
9.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 5/4/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0334 0.0338 0.0359 0.0249 0.0097
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- -------- --------
Total from investment
operations 0.0334 0.0338 0.0359 0.0249 0.0097
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0334) (0.0338) (0.0359) (0.0249) (0.0097)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- -------- --------
Total distributions (0.0334) (0.0338) (0.0359) (0.0249) (0.0097)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return 3.39% 3.43% 3.65% 2.52% 0.97%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $147,658 $112,097 $ 76,673 $ 69,673 $ 34,135
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.28% 0.25% 0.21% 0.10% 0.10%/2/
Before
advisory/administration
fee waivers 0.73% 0.74% 0.74% 0.76% 0.81%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.34% 3.33% 3.61% 2.53% 2.35%/2/
Before
advisory/administration
fee waivers 2.89% 2.84% 3.08% 1.87% 1.64%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 6/10/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0340 0.0346 0.0363 0.0252 0.0073
Net realized gain (loss)
on investments - - - - - - - - - -
------- -------- -------- -------- --------
Total from investment
operations 0.0340 0.0346 0.0363 0.0252 0.0073
------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0340) (0.0346) (0.0363) (0.0252) (0.0073)
Distributions from net
realized capital gains - - - - - - - - - -
------- -------- -------- -------- --------
Total distributions (0.0340) (0.0346) (0.0363) (0.0252) (0.0073)
------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ======== ========
Total return 3.45% 3.52% 3.69% 2.55% 0.73%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $23,739 $ 32,944 $ 23,679 $ 10,521 $ 12,026
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.30% 0.29% 0.27% 0.13% 0.10%/2/
Before
advisory/administration
fee waivers 0.73% 0.75% 0.73% 0.77% 0.83%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.37% 3.47% 3.66% 2.56% 2.45%/2/
Before
advisory/administration
fee waivers 2.94% 3.01% 3.20% 1.93% 1.72%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
11.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 6/1/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0332 0.0334 0.0355 0.0247 0.0078
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- -------- --------
Total from investment
operations 0.0332 0.0334 0.0355 0.0247 0.0078
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0332) (0.0334) (0.0355) (0.0247) (0.0078)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- -------- --------
Total distributions (0.0332) (0.0334) (0.0355) (0.0247) (0.0078)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return 3.37% 3.40% 3.61% 2.49% 0.78%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $229,164 $198,822 $233,414 $158,102 $ 2,242
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.30% 0.29% 0.26% 0.16% 0.09%/2/
Before
advisory/administration
fee waivers 0.70% 0.71% 0.68% 0.73% 0.97%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.31% 3.34% 3.54% 2.64% 2.15%/2/
Before
advisory/administration
fee waivers 2.91% 2.92% 3.12% 2.07% 1.27%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
12.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR AN INSTITUTIONAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
VIRGINIA MUNICIPALMONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR 7/25/94/1/
ENDED ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95 9/30/94
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- --------
Income from investment operations
Net investment income 0.0347 0.0348 0.0368 0.0053
Net realized gain (loss) on
investments - - - - - - - -
------- -------- -------- --------
Total from investment operations 0.0347 0.0348 0.0368 0.0053
------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.0347) (0.0348) (0.0368) (0.0053)
Distributions from net realized
capital gains - - - - - - - -
------- -------- -------- --------
Total distributions (0.0347) (0.0348) (0.0368) (0.0053)
------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ========
Total return 3.53% 3.54% 3.74% 0.53%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in
thousands) $62,834 $ 38,553 $ 24,409 $ 13,831
Ratios of expenses to average net
assets
After advisory/administration fee
waivers 0.22% 0.14% 0.10% 0.10%/2/
Before advisory/administration fee
waivers 0.81% 0.82% 0.95% 1.02%/2/
Ratios of net investment income to
average net assets
After advisory/administration fee
waivers 3.49% 3.47% 3.71% 2.89%/2/
Before advisory/administration fee
waivers 2.90% 2.79% 2.86% 1.97%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
13.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent with maintaining liquidity and stability of princi-
pal. The Portfolio may invest in a broad range of short-term,
high quality, U.S. dollar-denominated instruments, such as
government, bank, commercial and other obligations, that are
available in the money markets. In particular, the Portfolio
may invest in:
(A) U.S. dollar-denominated obligations issued or supported
by the credit of U.S. or foreign banks or savings insti-
tutions with total assets in excess of $1 billion (in-
cluding obligations of foreign branches of such banks);
(B) high quality commercial paper and other obligations is-
sued or guaranteed by U.S. and foreign corporations and
other issuers rated (at the time of purchase) A-2 or
higher by Standard & Poor's Ratings Group ("S&P"), Prime-
2 or higher by Moody's Investors Service, Inc.
("Moody's"), Duff 2 or higher by Duff & Phelps Credit Co.
("D&P"), F-2 or higher by Fitch Investors Service, Inc.
("Fitch") or TBW-2 or higher by Thomson BankWatch, Inc.
("TBW"), as well as high quality corporate bonds rated
(at the time of purchase) AA or higher by S&P, D&P, Fitch
or TBW or Aa or higher by Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's sub-
adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obliga-
tions and credit card receivables);
(E) securities issued or guaranteed as to principal and in-
terest by the U.S. Government or by its agencies or in-
strumentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by
foreign governments or their political subdivisions,
agencies or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated
U.S. insurance companies;
(H) securities issued or guaranteed by state or local govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
U.S. TREASURY The investment objective of the U.S. Treasury Money Market
MONEY MARKET Portfolio is to provide as high a level of current interest
PORTFOLIO income as is consistent with maintaining liquidity and sta-
bility of principal. It pursues this objective by investing
exclusively in short-term bills, notes and other obligations
issued or guaranteed by the U.S. Treasury and repurchase
agreements relating to such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Port-
PORTFOLIOS folio is to provide as high a level of current interest in-
come exempt from Federal income taxes as is consistent with
maintaining liquidity and stability of principal. It pursues
this objective by investing substantially all of its assets
in short-term obligations issued by or on behalf of states,
territories and possessions of the United States, the Dis-
trict of Columbia, and their political subdivisions, agen-
cies, instrumentalities and authorities ("Municipal Obliga-
tions").
14.
<PAGE>
- --------------------------------------------------------------------------------
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market
Portfolio (the "State-Specific Municipal Portfolios") is, for
each Portfolio, to seek as high a level of current income ex-
empt from Federal, and to the extent possible, state income tax
of the specific state in which a Portfolio concentrates, as is
consistent with maintaining liquidity and stability of princi-
pal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal Portfolios (together, the "Municipal Portfolios") seek
to achieve their investment objectives by primarily investing
in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2
or A-2 or higher by S&P, AA or higher by D&P or F-2 or
higher by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of com-
parable quality as determined by the Portfolios' sub-ad-
viser under guidelines established by the Fund's Board of
Trustees; and
(E) municipal bonds and notes which are guaranteed as to prin-
cipal and interest by the U.S. Government or an agency or
instrumentality thereof or which otherwise depend directly
or indirectly on the credit of the United States.
During normal market conditions, at least 80% of each Municipal
Portfolio's net assets will be invested in securities which are
Municipal Obligations. In addition, under normal conditions
each State-Specific Municipal Portfolio intends to invest at
least 65% of its net assets in Municipal Obligations of issuers
located in the particular state indicated by its name ("State-
Specific Obligations"). The Municipal Money Market Portfolio
intends, on the other hand, to invest less than 25% of its to-
tal assets in Municipal Obligations of issuers located in the
same state. During temporary defensive periods, each Municipal
Portfolio may invest without limitation in obligations that are
not Municipal Obligations and may hold without limitation
uninvested cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest on
AMT Paper that is received by taxpayers subject to the Federal
alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its assets
in Municipal Obligations the interest on which is paid solely
from revenues of similar projects. To the extent a Portfolio's
assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activ-
ity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such
projects and bonds to a greater extent than it would be if its
assets were not so invested.
15.
<PAGE>
- -------------------------------------------------------------------------------
QUALITY, MATURITY AND DIVERSIFICATION. All securities ac-
quired by the Portfolios will be determined at the time of
purchase by the Portfolios' sub-adviser, under guidelines
established by the Fund's Board of Trustees, to present min-
imal credit risks and will be "Eligible Securities" as de-
fined by the SEC. Eligible Securities are (a) securities
that either (i) have short-term debt ratings at the time of
purchase in the two highest rating categories by at least
two unaffiliated nationally recognized statistical rating
organizations ("NRSROs") (or one NRSRO if the security is
rated by only one NRSRO), or (ii) are comparable in priority
and security with an instrument issued by an issuer which
has such ratings, and (b) securities that are unrated (in-
cluding securities of issuers that have long-term but not
short-term ratings) but are of comparable quality as deter-
mined in accordance with guidelines approved by the Board of
Trustees.
Each Portfolio is managed so that the average maturity of
all instruments held by it (on a dollar-weighted basis) will
not exceed 90 days. In no event will a Portfolio purchase
securities which mature more than 397 days from the date of
purchase (except for certain variable and floating rate in-
struments and securities collateralizing repurchase agree-
ments). Securities in which the Portfolios invest may not
earn as high a level of income as longer term or lower qual-
ity securities, which generally have greater market risk and
more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal
Money Market Portfolios are classified as diversified port-
folios, and the State-Specific Municipal Portfolios are
classified as non-diversified portfolios, under the Invest-
ment Company Act of 1940 (the "1940 Act"). Investment re-
turns on a non-diversified portfolio typically are dependent
upon the performance of a smaller number of securities rela-
tive to the number held in a diversified portfolio. Conse-
quently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than
it would a diversified portfolio. In addition, because the
State-Specific Municipal Portfolios concentrate their in-
vestments in obligations of issuers located in particular
states, investments in these Portfolios may be riskier than
an investment in other money market funds.
16.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or for-
eign corporations and banks, and may acquire commercial obligations issued by
Canadian corporations and Canadian counterparts of U.S. corporations, as well
as Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. Bank obligations may include certificates of deposit, notes, bankers'
acceptances and fixed time deposits. These obligations may be general obliga-
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the specific obligation or by government regulation. The Money
Market Portfolio may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of its total assets. The obli-
gations of foreign issuers may involve certain risks in addition to those of
domestic issuers, including higher transaction costs, less complete financial
information, less stringent regulatory requirements and less market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain agencies and instrumentalities of the U.S. Government are backed by the
full faith and credit of the United States. Others are backed by the right of
the issuer to borrow from the U.S. Treasury or are backed only by the credit of
the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
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
17.
<PAGE>
- -------------------------------------------------------------------------------
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that is not yet as marketable as
more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with respect to
Municipal Obligations held by it. Under a stand-by commitment, a dealer agrees
to purchase at the Portfolio's option specific Municipal Obligations at a
specified price. The acquisition of a stand-by commitment may increase the
cost, and thereby reduce the yield, of the Municipal Obligation to which such
commitment relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time and with re-
spect to any particular securities, be limited. In addition, Municipal Obliga-
tions purchased by the Portfolios include obligations backed by letters of
credit and other forms of credit enhancement issued by domestic and foreign
banks, as well as other financial institutions. Changes in the credit quality
of these institutions could cause loss to a Municipal Portfolio and affect its
share price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest thereon from Federal or state income tax are rendered by
counsel to the respective issuers or sponsors at the time of issuance. The
Fund and its service providers will rely on such opinions and will not review
independently the underlying proceedings relating to the issuance of Municipal
Obligations or the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued
by private companies. Mortgage-related securities may include collateralized
mortgage obligations ("CMOs") issued by the Federal National Mortgage Associa-
tion, the Federal Home Loan Mortgage Corporation or other U.S. Government
agencies or instrumentalities or issued by private companies. In periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During these periods, the reinvestment of prepayment proceeds by the particu-
lar Portfolio will generally be at lower rates than the rates on the prepaid
obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instru-
ments may include variable amount master demand notes that permit the indebt-
edness thereunder to vary in addition to providing for periodic adjustments in
the interest rate. Issuers of unrated variable and floating rate instruments
must satisfy the same criteria as set forth above for the particular
Portfolio. The absence of an active secondary market with respect to particu-
lar 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 Portfo-
lio is not entitled to exercise its demand rights.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements").
The securities held subject to a repurchase agreement may have stated maturi-
ties exceeding 13 months, so long as the repurchase agreement itself matures
in less than 13 months. Default by or bankruptcy of the seller would expose
the Portfolio to possible loss because of adverse market action or delays in
connection with the disposition of the underlying obligations.
18.
<PAGE>
- --------------------------------------------------------------------------------
GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market Portfo-
lio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
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 a
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.
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.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will invest more than 10% of the value of its
net assets in securities that are illiquid. Variable and floating rate instru-
ments that cannot be disposed of within seven days, GICs, 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 10% limit. Each
Portfolio may purchase securities which are not registered under the 1933 Act
but which can be sold to "qualified institutional buyers" in accordance with
19.
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Rule 144A under the 1933 Act. These securities will not be considered illiquid
so long as the sub-adviser determines that an adequate trading market exists
for the securities. This investment practice could have the effect of increas-
ing the level of illiquidity in a Portfolio during any period that qualified
institutional buyers become uninterested in purchasing these restricted secu-
rities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration of investments by the State-Specific Municipal Portfolios in State-
Specific Obligations raises special investment considerations. Changes in the
economic condition and governmental policies of a state and its political sub-
divisions could adversely affect the value of a Portfolio's shares. Certain
matters relating to some of the states in which the State-Specific Municipal
Portfolios invest are described below. For further information, see "Special
Consideration Regarding State-Specific Obligations" in the Statement of Addi-
tional Information.
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.
Ohio. While diversifying more into the service and other non-manufacturing
areas, the economy of Ohio continues to rely in part on durable goods manufac-
turing largely concentrated in motor vehicles and equipment, steel, rubber
products and household appliances. As a result, general economic activity in
Ohio, as in many other industrially developed states, tends to be more cycli-
cal than in some other states and in the nation as a whole. Agriculture is an
important segment of the Ohio economy with over half the State's area devoted
to farming and approximately 16% of total employment in agribusiness. In past
years, the State's overall unemployment rate has been somewhat higher than the
national figure. For example, the reported 1990 average monthly State rate was
5.7%, compared to the 5.5% national figure. However, for the last six years
the State rates were below the national rates (4.9% versus 5.4% in 1996). The
unemployment rate and its effects vary among particular geographic areas of
the State. There can be no assurance that future national, regional or state-
wide economic difficulties and the resulting impact on State or local govern-
ment finances generally will not adversely affect the market value of Ohio
State-Specific Obligations held in the Portfolio or the ability of particular
obligors to make timely payments of debt service on (or lease payments relat-
ing to) those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending decreases resulted in surpluses the following
five years. As of June 30, 1996, the General Fund has a surplus of $635.2 mil-
lion. A relatively high proportion of persons 65 and older in the Common-
wealth, court ordered increases in healthcare reimbursement rates and higher
correctional program costs place increased pressures on the tax resources of
the Commonwealth and its municipalities. The Commonwealth's debt burden re-
mains moderate. Employment growth has shifted to the trade and service sec-
tors, with losses in more high-paid manufacturing positions. A new governor
took office in January 1995, but the Commonwealth has continued to show fiscal
restraint.
20.
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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 and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax (including instruments which are subject to
AMT), except during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal Portfolio will not hold any securities (except U.S. Government securities
and related repurchase agreements) that would cause, at the end of any tax
quarter, more than 5% of its total assets to be invested in securities of any
one issuer, except that up to 50% of a Portfolio's total assets may be invested
without regard to this limitation so long as no more than 25% of the Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio intends,
as a non-fundamental policy, to limit its investments in the securities of any
single issuer (other than U.S. Government securities and related repurchase
agreements) to not more than 5% of the value of its total assets at the time of
purchase, except that 25% of the value of its total assets may be invested in
any one issuer for a period of up to three business days. The Money Market
Portfolio will also limit its investments in Eligible Securities that are not
in the highest rating category as determined by two NRSROs (or one NRSRO if the
security is rated by only one NRSRO) or, if unrated, are not of comparable
quality, to 5% of its total assets, with investments in any one such issuer be-
ing limited to no more than 1% of its total assets or $1 million, whichever is
greater, measured at the time of purchase.
The investment limitations stated above are applied at the time investment se-
curities are purchased.
21.
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WHO MANAGES THE FUND?
- --------------------------------------------------------------------------------
BOARD OF The business and affairs of the Fund are managed under the
TRUSTEES direction of the Fund's Board of Trustees. The following per-
sons currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Global Wireless.
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.
INVESTMENT
ADVISER AND The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
SUB-ADVISER Inc. (formerly PNC Asset Management Group, Inc.) was orga-
nized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1600 Market
Street, 29th Floor, Philadelphia, Pennsylvania 19103. Black-
Rock, Inc. is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company. PNC Institutional Man-
agement Corporation ("PIMC"), an affiliate of BlackRock,
Inc., serves as each Portfolio's sub-adviser. PIMC's princi-
pal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809.
As adviser, BlackRock, Inc. is responsible for the overall
investment management of the Portfolios. As sub-adviser, PIMC
is responsible for the day-to-day management of the Portfo-
lios, and generally makes all purchase and sale investment
decisions for the Portfolios. PIMC also provides research and
credit analysis. Portfolio transactions for a Portfolio may
be directed through broker/dealers who sell Fund shares, sub-
ject to the requirements of best execution.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-
dollar fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services,
BlackRock, Inc. and PIMC are entitled to fees, computed daily
on a Portfolio-by-Portfolio basis and payable monthly, at the
annual rates set forth below. All sub-advisory fees payable
to PIMC are paid by BlackRock, Inc. and do not represent an
extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
(BEFORE WAIVERS)
<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
22.
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For the twelve months ended September 30, 1997, the Portfolios
paid investment advisory fees at the following annual rates
(expressed as a percentage of average daily net assets) after
voluntary fee waivers: Money Market Portfolio, .09%; U.S.
Treasury Money Market Portfolio, .08%; Municipal Money Market
Portfolio, .06%;
Ohio Municipal Money Market Portfolio, .06%; Pennsylvania Mu-
nicipal Money Market Portfolio, .07%; North Carolina Municipal
Money Market Portfolio, .06%; and Virginia Municipal Money Mar-
ket Portfolio, .00%; and New Jersey Municipal Money Market
Portfolio, .06%.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC"), and BlackRock Distribu-
tors, Inc. ("BDI") (the "Administrators") serve as the Fund's
co-administrators. BlackRock, Inc. and PFPC are indirect whol-
ly-owned subsidiaries of PNC Bank Corp. BDI 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. 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 BDI 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 av-
erage daily net assets of each Portfolio in excess of $1 bil-
lion and (ii) .065% of the first $500 million of the average
daily net assets allocated to Institutional Shares of each
Portfolio, .055% of the next $500 million of such average daily
net assets and .045% of the average daily net assets allocated
to Institutional 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 year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER
AGENT, PNC Bank, National Association ("PNC Bank"), whose principal
DIVIDEND offices are located at 1600 Market Street, Philadelphia, Penn-
DISBURSING sylvania 19103, serves as the Portfolios' custodian and PFPC,
AGENT AND whose principal offices are located at 400 Bellevue Parkway,
CUSTODIAN Wilmington, Delaware 19809, serves as their transfer agent and
dividend disbursing agent.
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 BlackRock, Inc. and the
Administrators, 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 informa-
tion and of printing and distributing prospectuses and state-
ments of additional information to existing shareholders, ex-
penses relating to shareholder reports, shareholder meetings
and proxy solicitations, insurance premiums, the expense of in-
dependent pricing services, and other expenses which are not
expressly assumed by BlackRock, Inc. or the Fund's service
providers under their agreements with the Fund. Any general ex-
penses of the Fund that do not belong to a particular invest-
ment portfolio will be allocated among all investment portfo-
lios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
23.
<PAGE>
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HOW ARE SHARES PURCHASED AND REDEEMED?
- -------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by BDI
as distributor (the "Distributor"). BDI 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 BDI, 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. Institutional Shares are offered to institutional
investors, including registered investment advisers with a minimum investment
of $500,000 and individuals with a minimum investment of $2,000,000.
Institutional Shares are sold at their net asset value per share next deter-
mined after an order is received by PFPC. Shares may be purchased on any Busi-
ness Day. A "Business Day" is any weekday that the New York Stock Exchange
(the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open
for business.
Purchase orders for each Portfolio except the U.S. Treasury Money Market Port-
folio may be placed by telephoning PFPC at (800) 441-7450 not later than 12:00
noon (Eastern Time) on a Business Day. Orders received before 12:00 noon
(Eastern Time) will be executed at 12:00 noon (Eastern Time). If payment for
an order is not received by 4:00 p.m. (Eastern Time), the order will be can-
celled and notice thereof will be given to the investor placing the order. Or-
ders received after 12:00 noon (Eastern Time) will not be accepted.
Purchase orders for the U.S. Treasury Money Market Portfolio may be placed by
telephoning PFPC at (800) 441-7450 no later than 4:00 p.m. (Eastern Time) on a
Business Day. Orders received before 12:00 noon (Eastern Time) will be exe-
cuted at 12:00 noon (Eastern Time); orders received after 12:00 noon (Eastern
Time) but before 4:00 p.m. (Eastern Time) will be executed at 4:00 p.m. (East-
ern Time). If payment for an order is not received by 4:00 p.m. (Eastern
Time), the order will be cancelled and notice thereof will be given to the in-
vestor placing the order. Orders will not be accepted after 4:00 p.m. (Eastern
Time). Under certain circumstances, the Fund may reject large individual pur-
chase orders received after 12:00 noon (Eastern Time).
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also,
in the discretion of the Fund, be made in the form of securities that are 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. The Fund does not accept third party checks for initial or subsequent
investments.
The Fund may in its discretion waive or modify the minimum investment amount,
may reject any order for Institutional Shares and may suspend and resume the
sale of shares of any 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
redemption order. The Fund, the Administrators and the Distributor will employ
reason-
24.
<PAGE>
- --------------------------------------------------------------------------------
able procedures to confirm that instructions communicated by telephone are gen-
uine. The Fund and its service providers will not be liable for any loss, lia-
bility, cost or expense for acting upon telephone instructions that are reason-
ably believed to be genuine in accordance with such procedures. While the Fund
intends to use its best efforts to maintain each Portfolio's net asset value
per share at $1.00, the proceeds paid upon redemption may be more or less than
the amount invested depending upon the net asset value of an Institutional
Share at the time of redemption.
Payment for redeemed shares for which a redemption order is received by PFPC
before 12:00 noon (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming institution on the same Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received between 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) or
on a day when the Fund's custodian is closed is normally wired in Federal funds
on the next Business Day following redemption on which the Fund's custodian is
open for business. The Fund reserves the right to wire redemption proceeds
within seven days after receiving a redemption order if, in the judgment of
BlackRock, Inc., an earlier payment could adversely affect a Portfolio. No
charge for wiring redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may redeem Institutional Shares in any Portfolio account if the ac-
count balance drops below $5,000 as the result of redemption requests and the
shareholder does not increase the balance to at least $5,000 on thirty days'
written notice.
The Fund may also suspend the right of redemption or postpone the date of pay-
ment upon redemption for such periods as are permitted under the 1940 Act, and
may redeem shares involuntarily or make payment for redemption in securities or
other property when determined appropriate in light of the Fund's responsibili-
ties under the 1940 Act. See "Purchase and Redemption Information" in the
Statement of Additional Information for examples of when such redemption might
be appropriate.
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.
25.
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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 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on each
Business Day by dividing the value of all securities and other assets owned by
a Portfolio that are allocated to its Institutional Shares, less the liabili-
ties charged to its Institutional Shares, by the number of its Institutional
Shares that are outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share for pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Shareholders are entitled to dividends and distributions arising from the net
income and capital gains, if any, earned on investments held by the Portfolio
in which they invest. Each Portfolio's net income is declared daily as a divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time) do not receive div-
idends for that day, while shareholders of each Portfolio whose redemption or-
ders are received after 12:00 noon (Eastern Time) do receive dividends for that
day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing by the shareholder, within five business days after the end of the month.
Net short-term capital gains, if any, will be distributed at least annually.
The period for which dividends are payable and the time for payment are subject
to change by the Fund's Board of Trustees. The Portfolios do not expect to re-
alize net long-term capital gains.
Dividends are reinvested in additional full and fractional Institutional Shares
of the same Portfolio which pays the dividends, unless a shareholder elects to
receive dividends in cash. Such election, or any revocation thereof, must be
made in writing to PFPC, and will become effective with respect to dividends
paid after receipt by PFPC.
26.
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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 (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise exempt,
will pay income or capital gains taxes on distributions (except distributions
that are "exempt interest dividends" or are treated as a return of capital),
whether the distributions are paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain regardless of the length of time a
shareholder holds the shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
Each Municipal Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns for
informational purposes and in two circumstances such amounts, while exempt from
regular Federal income tax, are taxable to persons subject to alternative mini-
mum and environmental taxes. First, "exempt interest dividends" derived from
certain private activity bonds generally will constitute an item of tax prefer-
ence for taxpayers in determining alternative minimum tax liability. Second,
all "exempt interest dividends" must be taken into account by corporate taxpay-
ers in determining certain adjustments for alternative minimum tax purposes. In
addition, investors should be aware of the possibility of state and local al-
ternative minimum or minimum income tax liability on interest from private ac-
tivity bonds. Shareholders who are recipients of Social Security Act or Rail-
road Retirement Act benefits should note that "exempt interest dividends" will
be taken into account in determining the taxability of their benefit payments.
Each Municipal Portfolio will determine annually the percentages of its net in-
vestment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions from net investment income during that year and may differ
significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of such dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
tion, shareholders who are non-resident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to differ-
ent Federal income tax treatment. Future legislative or administrative changes
or court decisions may materially affect the tax consequences of investing in
the Portfolios. For additional information concerning the tax treatment of div-
idends and distributions by the states listed below, including certain restric-
tions applicable to such treatment, see "Taxes" in the Statement of Additional
Information.
NEW JERSEY TAXES. It is anticipated that the New Jersey Municipal Money Market
Portfolio will qualify as a "qualified investment fund" and as a result, sub-
stantially all distributions paid by the New Jersey Municipal Money Market
Portfolio will not be subject to the New Jersey personal income tax. A quali-
fied investment fund is an investment company or trust registered with the Se-
curities and Exchange Commission, or any
27.
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series of such investment company or trust, which for the calendar year in
which the distribution is paid: (a) has no investments other than interest-
bearing obligations, obligations issued at a discount, and cash and cash
items, including receivables, and financial options, futures, forward con-
tracts, or other similar financial instruments related to interest-bearing ob-
ligations, obligations issued at a discount or bond indexes related thereto;
and (b) has at least 80% of the aggregate principal amount of all of its in-
vestments, excluding financial options, futures, forward contracts, or other
similar financial instruments related to interest-bearing obligations, obliga-
tions issued at a discount or bond indexes related thereto to the extent such
instruments are authorized by the regulated investment company rules of the
Code, cash and cash items, which cash items shall include receivables, in New
Jersey State-Specific Obligations or U.S. Government Obligations.
In accordance with New Jersey law as currently in effect, distributions paid
by a qualified investment fund are excluded from personal income tax to the
extent that the distributions are attributable to interest or gains from New
Jersey State--Specific Obligations or to interest or gains from direct U.S.
Government Obligations. New Jersey State--Specific Obligations are obligations
issued by or on behalf of New Jersey or any county, municipality, or other po-
litical subdivision of New Jersey. U.S. Government Obligations are obligations
which are statutorily free from tax under the laws of the United States. Dis-
tributions by a qualified investment fund from most other sources will be sub-
ject to the New Jersey personal income tax. Shares of the New Jersey Municipal
Money Market Portfolio are not subject to property taxation by New Jersey.
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 in-
come tax base for purposes of computing the Corporation Business Tax. Further-
more, any gain upon the redemption or sale of shares by a corporate share-
holder is also included in the net income tax base for purposes of computing
the Corporation Business Tax.
NORTH CAROLINA TAXES. Interest received in the form of dividends from the
North Carolina Municipal Money Market Portfolio is exempt from North Carolina
state income tax to the extent the distributions represent interest on direct
obligations of the U.S. Government or North Carolina State-Specific Obliga-
tions. Distributions derived from interest earned on obligations of political
subdivisions of Puerto Rico, Guam and the U.S. Virgin Islands, including the
governments thereof and their agencies, instrumentalities and authorities, are
also exempt from North Carolina state income tax. Distributions paid out of
interest earned on obligations that are merely backed or guaranteed by the
U.S. Government (e.g., GNMAs, FNMAs), on repurchase agreements collateralized
by U.S. Government securities or on obligations of other states (which the
Portfolio may acquire and hold for temporary or defensive purposes) are not
exempt from North Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of certain obligations of the
State of North Carolina or its subdivisions that were issued before July 1,
1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will
be subject to North Carolina income tax.
OHIO TAXES. Individuals and estates that are subject to Ohio personal income
tax or municipal or school district income taxes in Ohio will not be subject
to such taxes on distributions from the Ohio Municipal Money Market Portfolio
to the extent that such distributions are properly attributable to interest on
Ohio State-Specific Obligations or obligations issued by the U.S. Government,
its agencies, instrumentalities or territories (if the interest on such obli-
gations is exempt from state income taxation under the laws of the United
States). Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Municipal Money Market
Portfolio in their net income base for purposes of calculating their Ohio cor-
poration franchise tax liability to the extent that such distributions either
constitute exempt-interest dividends for Federal income tax purposes or are
properly attributable to interest on Ohio State-Specific Obligations or the
U.S. obligations described above provided, in the case of U.S. territorial ob-
ligations, such interest is excluded from gross income for federal income tax
purposes. However, shares of the Ohio Municipal Money Market Portfolio will be
included in a corporation's net worth base for purposes of
28.
<PAGE>
- --------------------------------------------------------------------------------
calculating the Ohio corporation franchise tax. Distributions properly attrib-
utable 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 corporation franchise tax. This dis-
cussion of Ohio taxes assumes that the Ohio Municipal Money Market Portfolio
will continue to qualify as a regulated investment company as defined in the
Code and that 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.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to interest
realized by the Pennsylvania Municipal Money Market Portfolio from Pennsylvania
State-Specific Obligations is not taxable to individuals, estates or trusts un-
der the Personal Income Tax; to corporations under the Corporate Net Income
Tax; nor to individuals under the Philadelphia School District Net Investment
Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other dis-
position by the Portfolio of Pennsylvania State-Specific Obligations is taxable
under the Personal Income Tax and the Corporate Net Income Tax, but such income
is not taxable under the School District Tax.
This discussion does not address the extent, if any, to which shares of the
Pennsylvania Municipal Money Market Portfolio, and interest and gain earned by
the Portfolio, are subject to, or included in the measure of, special taxes im-
posed by the Commonwealth of Pennsylvania on banks and other financial institu-
tions or with respect to any privilege, excise, franchise or other tax imposed
on business entities not discussed above (including the Corporate Capital
Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are not sub-
ject to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania State-Specific Obligations and Federal
obligations (if the interest on such obligations is exempt from state and local
taxation under the laws of the United States).
VIRGINIA TAXES. Dividends paid by the Virginia Municipal Money Market Portfolio
and derived from interest on obligations of the Commonwealth of Virginia or of
any political subdivision or instrumentality of the Commonwealth or derived
from interest or dividends on obligations of the United States excludable from
Virginia taxable income under the laws of the United States, which obligations
are issued in the exercise of the borrowing power of the Commonwealth or the
United States and are backed by the full faith and credit of the Commonwealth
or the United States, will generally be exempt from the Virginia income tax.
Dividends derived from interest on debt obligations of certain territories and
possessions of the United States (those issued by Puerto Rico, the Virgin
Islands and Guam) will also be exempt from the Virginia income tax. Dividends
are derived from interest on debt obligations other than those described above
will be subject to the Virginia income tax even though it may be excludable
from gross income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. Capital gains distrib-
uted to shareholders derived from Virginia obligations issued pursuant to spe-
cial Virginia enabling legislation which provides a specific exemption for such
gains will be exempt from Virginia income tax.
The Virginia Department of Taxation has adopted a policy of allowing sharehold-
ers to exclude from their Virginia taxable income the exempt portion of distri-
butions from a regulated investment company even though the shareholders re-
ceive distributions monthly but receive reports substantiating the exempt por-
tion of such distributions at less frequent intervals. Accordingly, if the
Portfolio receives taxable income, the Portfolio must determine the portion of
income that is exempt from Virginia income tax and provide such information to
the shareholders in accordance with the foregoing so that the shareholders may
exclude from Virginia taxable income the exempt portion of the distribution
from the Portfolio.
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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight investment portfolios. Each Money Market Portfo-
lio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Institutional Shares of the eight money market portfo-
lios described herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, certain administrative/servicing
fees and amounts payable under the Fund's Distribution and Service Plan. Be-
cause of these "class expenses", the performance of a Portfolio's Institutional
Shares is expected to be higher than the performance of the Portfolio's Service
Shares, and the performance of both the Institutional Shares and Service Shares
of a Portfolio is expected to be higher than the performance of the Portfolio's
three classes of Investor Shares. The performance of each class of Investor
Shares may be different. The Fund offers various services and privileges in
connection with its Investor Shares that are not generally offered in connec-
tion with its Institutional and Service Shares, including an automatic invest-
ment plan, automatic withdrawal plan and checkwriting. For further information
regarding the Fund's Service or Investor Share classes, contact PFPC at (800)
441-7764 (Service Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
30.
<PAGE>
- --------------------------------------------------------------------------------
HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
Each Portfolio may advertise its "yield", "effective yield" and total return
for Institutional Shares. These performance figures are based on historical
earnings and are not intended to indicate future performance. "Yield" refers to
the income generated by an investment in a Portfolio's Institutional Shares
over a seven-day period. This income is then "annualized." That is, the amount
of income generated by the investment during that week is assumed to be gener-
ated each week over a 52-week period and is shown as a percentage of the in-
vestment. "Effective yield" is calculated similarly but, when annualized, the
income earned by an investment in a Portfolio's Institutional Shares is assumed
to be reinvested. The "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment. A Mu-
nicipal Portfolio's "tax equivalent yield" may also be quoted, which shows the
level of taxable yield needed to produce an after-tax equivalent to the Portfo-
lio's tax-free yield for Institutional Shares.
The performance of Institutional Shares of a Portfolio may be compared to the
performance of mutual funds with similar investment objectives and to relevant
indices, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the yield of Institutional Shares of a Portfolio may be
compared to data prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. and Weisenberger Investment Company Service. Performance in-
formation may also include evaluations of the Portfolios published in nation-
ally recognized ranking services, and information as reported by financial pub-
lications such as Business Week, Fortune, Institutional Investor, Money Maga-
zine, Forbes, Barron's, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
31.
<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 BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888- 8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 5PM, 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.blackrock.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
BlackRock Funds BlackRock 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>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Mid-Cap Growth Equity Micro-Cap Equity
International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity
Small Cap Value Equity International Small Cap Equity
Index Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 1998
- --------------------------------------------------------------------------------
THE MONEY MARKET 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?............... 5
What Are The Portfolios?..................................... 12
What Additional Investment Policies And Risks Apply?......... 15
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 19
Who Manages The Fund?........................................ 20
How Are Shares Purchased And Redeemed?....................... 23
What Special Purchase And Redemption Procedures May Apply?... 25
How Is Net Asset Value Calculated?........................... 26
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 27
How Are Fund Distributions Taxed?............................ 28
How Is The Fund Organized?................................... 31
How Is Performance Calculated?............................... 32
How Can I Get More Information?.............................. 33
</TABLE>
This Prospectus sets forth concisely information about the Black-
Rock FundsSM (the "Fund") money market Portfolios (the "Portfo-
lios") that a prospective investor needs to know before invest-
ing. Please keep it for future reference. A Statement of Addi-
tional Information dated January 28, 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 that has been filed with the SEC.
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. THERE CAN BE NO ASSURANCE THAT THE PORTFOLIOS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
The New Jersey, North Carolina, Ohio, Pennsylvania and Virginia
Municipal Money Market Portfolios may invest a significant per-
centage of their assets in a single issuer and, therefore, in-
vestments in these Portfolios may be riskier than an investment
in other types of money market funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE STATE-SPECIFIC MUNICIPAL PORTFOLIOS LISTED
ABOVE ARE INTENDED ONLY FOR RESIDENTS OF THE RESPECTIVE STATES INDICATED.
2.
<PAGE>
- --------------------------------------------------------------------------------
THE MONEY MARKET PORTFOLIOS OF BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 portfolios and has
been structured to include many different investment styles
across the spectrum of money market investments so that invest-
ors may participate across multiple disciplines in order to
seek their long-term financial goals.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
The Money Market Portfolios of BLACKROCK FUNDS consist of eight
short-term investment alternatives. Two of these Portfolios in-
vest solely in taxable instruments, and six of these Portfolios
invest in tax-exempt instruments. A detailed description of
each Portfolio begins on page 12.
BLACKROCK
PORTFOLIO LIPPER PEER GROUP
MONEY MARKET Money Market Instrument Funds
U.S. TREASURY U.S. Treasury Money
MONEY MARKET Market Funds
MUNICIPAL MONEY Tax-Exempt Money Market
MARKET Funds
NJ MUNICIPAL NJ Tax-Exempt Money
MONEY MARKET Market Funds
NC MUNICIPAL Other States Tax-Exempt
MONEY MARKET Money Market Funds
OH MUNICIPAL Ohio Tax-Exempt Money
MONEY MARKET Market Funds
PA MUNICIPAL PA Tax-Exempt Money
MONEY MARKET Market Funds
VA MUNICIPAL Other States Tax-Exempt
MONEY MARKET Money Market Funds
UNDERSTANDING This Prospectus has been crafted to provide detailed, accurate
THE and comprehensive information on the BlackRock Portfolios. We
BLACKROCK intend this document to be an effective tool as you explore
MONEY MARKET different directions in money market investing.
PORTFOLIOS
CONSIDERING There can be no assurance that any mutual fund will achieve its
THE RISKS IN investment objective, or that any Portfolio will be able to
MONEY MARKET maintain a stable net asset value of $1.00 per share. Certain
INVESTING Portfolios may invest in U.S. dollar-denominated instruments of
foreign issuers or municipal securities backed by the credit of
foreign banks, which may be subject to risks in addition to
those inherent in U.S. investments. Each state-specific munici-
pal Portfolio will concentrate in the securities of issuers lo-
cated in a particular state, and is non-diversified, which
means that its performance may be dependent upon the 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?"
For information on how to purchase and redeem shares of the
INVESTING IN Portfolios, see "How Are Shares Purchased And Redeemed?" and
THE "What Special Purchase And Redemption Procedures May Apply?"
BLACKROCK
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 for the fiscal year ended September 30, 1997 as a percentage
of average daily net assets. The figures shown for each Portfolio have been re-
stated to reflect current expenses and fee waivers. An example based on the
summary is also shown.
<TABLE>
<CAPTION>
NEW NORTH
U.S. JERSEY CAROLINA OHIO PENNSYLVANIA VIRGINIA
TREASURY MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL MUNICIPAL
MONEY MONEY MONEY MONEY MONEY MONEY MONEY MONEY
MARKET MARKET MARKET MARKET MARKET MARKET MARKET MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ANNUAL PORTFOLIO
OPERATING EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory fees (after fee
waivers)(/1/) .19% .18% .15% .09% .06% .11% .16% .02%
Other operating expenses .53 .53 .57 .60 .54 .58 .56 .58
---- ---- ---- ---- ---- ---- ------ ----
Administration fees
(after
fee waivers)(/1/) .15 .16 .18 .18 .16 .18 .18 .15
Shareholder servicing
fee .15 .15 .15 .15 .15 .15 .15 .15
Other expenses .23 .22 .24 .27 .23 .25 .23 .28
--- ---- ---- ---- ---- ---- ------ ----
Total Portfolio
operating expenses
(after fee
waivers)(/1/) .72% .71% .72% .69% .60% .69% .72% .60%
==== ==== ==== ==== ==== ==== ====== ====
</TABLE>
(1) Without waivers, advisory fees would be .42% for the Money Market Portfo-
lio, .44% for the U.S. Treasury Money Market Portfolio and .45% for each of
the other Portfolios and administration fees would be .15% for the Money
Market Portfolio, .16% for the U.S. Treasury Money Market Portfolio and
.18% for each of the other Portfolios. BlackRock, Inc. and the Portfolios'
administrators are under no obligation to waive or continue waiving their
fees, but have informed the Fund that they expect to waive fees as neces-
sary to maintain the Portfolios' total operating expenses during the re-
mainder of the current fiscal year at the levels set forth in the table.
Without waivers, "Other operating expenses" would be .52%, .55%, .57%,
.60%, .60%, .58%, .56% and .62%, respectively, and "Total Portfolio operat-
ing expenses" would be .94%, .99%, 1.02%, 1.05%, 1.05%, 1.03%, 1.01% and
1.07%, respectively.
EXAMPLE
An investor in Service Shares would pay the following expenses on a $1,000 in-
vestment assuming (1) a 5% annual return, and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Money Market Portfolio $ 7 $23 $40 $89
U.S. Treasury Money Market Portfolio 7 23 40 88
Municipal Money Market Portfolio 7 23 40 89
New Jersey Municipal Money Market
Portfolio 7 22 38 86
North Carolina Municipal Money
Market Portfolio 6 19 33 75
Ohio Municipal Money Market
Portfolio 7 22 38 86
Pennsylvania Municipal Money Market
Portfolio 7 23 40 89
Virginia Municipal Money Market
Portfolio 6 19 33 75
</TABLE>
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 foregoing Table and Example are intended to assist investors in understand-
ing the expenses the Portfolios pay. Investors bear these expenses either di-
rectly or indirectly. They do not reflect any charges that may be imposed by
affiliates of the Portfolios' investment adviser or other institutions directly
on their customer accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE IN-
VESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND OPERATING
EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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
Portfolio's independent accountant. This financial information
should be read together with those financial statements. Fur-
ther information about the performance of the Portfolios is
available in the Fund's annual shareholder reports. Both the
Statement of Additional Information and the annual shareholder
reports may be obtained from the Fund free of charge by calling
(800) 441-7764.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR YEAR 10/4/89/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0499 0.0503 0.0534 0.0333 0.0274 0.0391 0.0645 0.0778
Net realized gain (loss)
on investments - - - - - - - - - - - - - - - -
---------- ---------- ---------- -------- -------- -------- -------- --------
Total from investment
operations 0.0499 0.0503 0.0534 0.0333 0.0274 0.0391 0.0645 0.0778
---------- ---------- ---------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0499) (0.0503) (0.0534) (0.0333) (0.0274) (0.0391) (0.0645) (0.0778)
Distributions from net
realized capital gains - - - - - - - - - - - - - - - -
---------- ---------- ---------- -------- -------- -------- -------- --------
Total distributions (0.0499) (0.0503) (0.0534) (0.0333) (0.0274) (0.0391) (0.0645) (0.0778)
---------- ---------- ---------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ======== ======== ======== ======== ========
Total return 5.11% 5.15% 5.48% 3.37% 2.77% 4.05% 6.64% 8.07%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $1,610,315 $1,575,064 $1,194,017 $575,948 $415,328 $838,012 $637,076 $628,075
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.61% 0.59% 0.57% 0.51% 0.59% 0.61% 0.62% 0.62%/2/
Before
advisory/administration
fee waivers 0.94% 0.95% 0.94% 0.92% 0.70% 0.66% 0.67% 0.70%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.99% 5.00% 5.35% 3.35% 2.73% 3.86% 6.45% 7.83%/2/
Before
advisory/administration
fee waivers 4.66% 4.64% 4.98% 2.95% 2.62% 3.81% 6.40% 7.75%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
5.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
U.S. TREASURY MONEY MARKET 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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0485 0.0489 0.0525 0.0331 0.0269 0.0394 0.0627 0.0697
Net realized gain (loss)
on investments - - - - - - - - - - - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 0.0485 0.0489 0.0525 0.0331 0.0269 0.0394 0.0627 0.0697
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0485) (0.0489) (0.0525) (0.0331) (0.0269) (0.0394) (0.0627) (0.0697)
Distributions from net
realized capital gains - - - - - - - - - - - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.0485) (0.0489) (0.0525) (0.0331) (0.0269) (0.0394) (0.0627) (0.0697)
-------- -------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ========
Total return 4.93% 5.00% 5.38% 3.36% 2.72% 4.01% 6.46% 7.29%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $836,151 $955,454 $550,959 $372,883 $185,400 $160,269 $180,776 $146,148
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.61% 0.59% 0.57% 0.52% 0.60% 0.62% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 0.99% 0.99% 0.98% 0.97% 0.73% 0.67% 0.70% 0.70%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 4.85% 4.84% 5.27% 3.42% 2.68% 3.91% 6.27% 7.62%/2/
Before
advisory/administration
fee waivers 4.47% 4.45% 4.85% 2.97% 2.55% 3.86% 6.22% 7.57%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
6.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR YEAR YEAR 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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------- -------- ------- --------
Income from investment
operations
Net investment income 0.0307 0.0309 0.0334 0.0219 0.0205 0.0281 0.0438 0.0486
Net realized gain (loss)
on investments - - - - - - - - - - - - - - - -
-------- -------- -------- -------- ------- -------- ------- --------
Total from investment
operations 0.0307 0.0309 0.0334 0.0219 0.0205 0.0281 0.0438 0.0486
-------- -------- -------- -------- ------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0307) (0.0309) (0.0334) (0.0219) (0.0205) (0.0281) (0.0438) (0.0486)
Distributions from net
realized capital gains - - - - - - - - - - - - - - - -
-------- -------- -------- -------- ------- -------- ------- --------
Total distributions (0.0307) (0.0309) (0.0334) (0.0219) (0.0205) (0.0281) (0.0438) (0.0486)
-------- -------- -------- -------- ------- -------- ------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======= ======== ======= ========
Total return 3.11% 3.10% 3.39% 2.20% 2.10% 2.85% 4.47% 4.97%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $327,910 $261,617 $265,629 $133,358 $93,937 $125,152 $89,312 $112,108
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.61% 0.59% 0.57% 0.51% 0.61% 0.63% 0.65% 0.65%/2/
Before
advisory/administration
fee waivers 1.02% 1.03% 1.01% 0.99% 0.72% 0.68% 0.70% 0.70%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.06% 3.08% 3.35% 2.18% 2.02% 2.78% 4.40% 5.31%/2/
Before
advisory/administration
fee waivers 2.65% 2.64% 2.91% 1.71% 1.91% 2.73% 4.35% 5.26%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
7.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO+
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
PERIOD PERIOD PERIOD
YEAR 2/1/96 3/1/95 FISCAL YEAR FISCAL YEAR FISCAL YEAR 7/1/91/1/
ENDED THROUGH THROUGH ENDED ENDED ENDED TO
9/30/97 9/30/96 1/31/96 02/28/95 02/28/94 02/28/93 02/28/92
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income 0.0293 0.0187 0.0300 0.0200 0.0200 0.0200 0.0200
Net realized gain (loss)
on investments - - - - - - - - - - - - - -
-------- ------- ------- ------- ------- ------- -------
Total from investment
operations 0.0293 0.0187 0.0300 0.0200 0.0200 0.0200 0.0200
-------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0293) (0.0187) (0.0300) (0.0200) (0.0200) (0.0200) (0.0200)
Distributions from net
realized capital gains - - - - - - - - - - - - - -
-------- ------- ------- ------- ------- ------- -------
Total distributions (0.0293) (0.0187) (0.0300) (0.0200) (0.0200) (0.0200) (0.0200)
-------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= ======= ======= =======
Total return 2.96% 1.89% 3.23% 2.46% 1.79% 2.19% 3.53%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $101,294 $68,139 $56,958 $43,610 $39,408 $38,836 $35,005
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.61% 0.59%/2/ 0.70%/2/ 0.63% 0.65% 0.73% 0.47%/2/
Before
advisory/administration
fee waivers 1.05% 1.08%/2/ 0.74%/2/ 0.70% 0.72% 0.76% 0.62%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 2.93% 2.82%/2/ 3.17%/2/ 2.46% 1.77% 2.17% 3.44%/2/
Before
advisory/administration
fee waivers 2.49% 2.33%/2/ 3.13%/2/ 2.39% 1.70% 2.14% 3.29%/2/
</TABLE>
+ The Portfolio commenced operations on July 1, 1991 as the New Jersey Munici-
pal Money Market Fund, a separate investment portfolio (the "Predecessor New
Jersey Municipal Money Market Portfolio") of Compass Capital Group, which was
organized as a Massachusetts business trust. On January 13, 1996, the assets
and liabilities of the Predecessor New Jersey Municipal Money Market Portfo-
lio were transferred to this Portfolio, and were combined with the assets of
a pre-existing portfolio of investments maintained by the Fund.
/1/Commencement of operations of share class.
/2/Annualized.
8.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO
<CAPTION>
FOR THE FOR THE
PERIOD PERIOD
YEAR YEAR 11/01/94/4/ 4/29/94/1/ YEAR
ENDED ENDED THROUGH THROUGH ENDED
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0304 0.0308 0.0305 0.0099 0.0317
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- -------- --------
Total from investment
operations 0.0304 0.0308 0.0305 0.0099 0.0317
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0304) (0.0308) (0.0305) (0.0099) (0.0317)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- -------- --------
Total distributions (0.0304) (0.0308) (0.0305) (0.0099) (0.0317)
-------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return 3.08% 3.12% 3.11% 0.99% 3.22%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 23,704 $ 7,463 $ 1,841 $ - - /3/ $ 5,244
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.60% 0.55% 0.55%/2/ 0.36%/2/ 0.48%
Before
advisory/administration
fee waivers 1.05% 1.04% 1.08%/2/ 1.02%/2/ 1.07%
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.04% 3.06% 3.34%/2/ 2.54%/2/ 3.12%
Before
advisory/administration
fee waivers 2.59% 2.56% 2.81%/2/ 1.87%/2/ 2.53%
</TABLE>[/R]
/1/Commencement of operations of share class.
/2/Annualized.
/3/There were no Service Shares outstanding as of September 30, 1994.
/4/Reissuance of shares.
9.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
OHIO MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 6/1/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income 0.0310 0.0316 0.0333 0.0225 0.0074
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- -------- --------
Total from investment
operations 0.0310 0.0316 0.0333 0.0225 0.0074
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0310) (0.0316) (0.0333) (0.0225) (0.0074)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- -------- --------
Total distributions (0.0310) (0.0316) (0.0333) (0.0225) (0.0074)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return 3.15% 3.21% 3.38% 2.27% 0.75%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $ 58,160 $ 45,525 $ 49,857 $ 44,066 $ 15,239
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.61% 0.59% 0.57% 0.40% 0.23%/2/
Before
advisory/administration
fee waivers 1.03% 1.05% 1.03% 1.04% 0.96%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.10% 3.17% 3.35% 2.29% 2.23%/2/
Before
advisory/administration
fee waivers 2.68% 2.71% 2.89% 1.65% 1.50%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
FOR THE
PERIOD
YEAR YEAR YEAR YEAR 6/11/93/1/
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 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------- --------
Income from investment
operations
Net investment income 0.0302 0.0304 0.0325 0.0221 0.0074
Net realized gain (loss)
on investments - - - - - - - - - -
-------- -------- -------- ------- --------
Total from investment
operations 0.0302 0.0304 0.0325 0.0221 0.0074
-------- -------- -------- ------- --------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.0302) (0.0304) (0.0325) (0.0221) (0.0074)
Distributions from net
realized capital gains - - - - - - - - - -
-------- -------- -------- ------- --------
Total distributions (0.0302) (0.0304) (0.0325) (0.0221) (0.0074)
-------- -------- -------- ------- --------
NET ASSET VALUE AT END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======= ========
Total return 3.06% 3.04% 3.33% 2.24% 0.74%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of
period (in thousands) $234,472 $224,197 $147,739 $60,560 $ 8,919
Ratios of expenses to
average net assets
After
advisory/administration
fee waivers 0.61% 0.59% 0.57% 0.42% 0.32%/2/
Before
advisory/administration
fee waivers 1.01% 1.01% 0.99% 0.99% 1.20%/2/
Ratios of net investment
income to average net
assets
After
advisory/administration
fee waivers 3.01% 3.02% 3.29% 2.31% 2.42%/2/
Before
advisory/administration
fee waivers 2.61% 2.59% 2.87% 1.75% 1.54%/2/
</TABLE>
/1/Commencement of operations of share class.
/2/Annualized.
10.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
(FOR A SERVICE SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO
<CAPTION>
FOR THE
PERIOD
YEAR YEAR 10/11/94/1/
ENDED ENDED THROUGH
9/30/97 9/30/96 9/30/95
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from investment operations
Net investment income 0.0317 0.0318 0.0330
Net realized gain (loss) on investments - - - - - -
-------- -------- --------
Total from investment operations 0.0317 0.0318 0.0330
-------- -------- --------
LESS DISTRIBUTIONS
Distributions from net investment income (0.0317) (0.0318) (0.0330)
Distributions from net realized capital
gains - - - - - -
-------- -------- --------
Total distributions (0.0317) (0.0318) (0.0330)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return 3.22% 3.25% 3.35%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in thousands) $ 5,244 $ 14,968 $ 821
Ratios of expenses to average net assets
After advisory/administration fee waivers 0.48% 0.45% 0.40%/2/
Before advisory/administration fee waivers 1.07% 1.12% 1.25%/2/
Ratios of net investment income to average
net assets
After advisory/administration fee waivers 3.12% 3.05% 3.50%/2/
Before advisory/administration fee waivers 2.53% 2.38% 2.65%/2/
</TABLE>[/R]
/1/Commencement of operations of share class.
/2/Annualized.
/3/There were no Service Shares outstanding as of September 30, 1994.
/4/Reissuance of shares.
11.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
MONEY MARKET The investment objective of the Money Market Portfolio is to
PORTFOLIO provide as high a level of current interest income as is con-
sistent with maintaining liquidity and stability of princi-
pal. The Portfolio may invest in a broad range of short-term,
high quality, U.S. dollar-denominated instruments, such as
government, bank, commercial and other obligations, that are
available in the money markets. In particular, the Portfolio
may invest in:
(A) U.S. dollar-denominated obligations issued or supported
by the credit of U.S. or foreign banks or savings insti-
tutions with total assets in excess of $1 billion (in-
cluding obligations of foreign branches of such banks);
(B) high quality commercial paper and other obligations is-
sued or guaranteed by U.S. and foreign corporations and
other issuers rated (at the time of purchase) A-2 or
higher by Standard & Poor's Ratings Group ("S&P"), Prime-
2 or higher by Moody's Investors Service, Inc.
("Moody's"), Duff 2 or higher by Duff & Phelps Credit Co.
("D&P"), F-2 or higher by Fitch Investors Service, Inc.
("Fitch") or TBW-2 or higher by Thomson BankWatch, Inc.
("TBW"), as well as high quality corporate bonds rated
(at the time of purchase) AA or higher by S&P, D&P, Fitch
or TBW or Aa or higher by Moody's;
(C) unrated notes, paper and other instruments that are of
comparable quality as determined by the Portfolio's sub-
adviser under guidelines established by the Fund's Board
of Trustees;
(D) asset-backed securities (including interests in pools of
assets such as mortgages, installment purchase obliga-
tions and credit card receivables);
(E) securities issued or guaranteed as to principal and in-
terest by the U.S. Government or by its agencies or in-
strumentalities and related custodial receipts;
(F) dollar-denominated securities issued or guaranteed by
foreign governments or their political subdivisions,
agencies or instrumentalities;
(G) guaranteed investment contracts issued by highly-rated
U.S. insurance companies;
(H) securities issued or guaranteed by state or local govern-
mental bodies; and
(I) repurchase agreements relating to the above instruments.
U.S. TREASURY The investment objective of the U.S. Treasury Money Market
MONEY MARKET Portfolio is to provide as high a level of current interest
PORTFOLIO income as is consistent with maintaining liquidity and sta-
bility of principal. It pursues this objective by investing
exclusively in short-term bills, notes and other obligations
issued or guaranteed by the U.S. Treasury and repurchase
agreements relating to such obligations.
MUNICIPAL The investment objective of the Municipal Money Market Port-
PORTFOLIOS folio is to provide as high a level of current interest in-
come exempt from Federal income taxes as is consistent with
maintaining liquidity and stability of principal. It pursues
this objective by investing substantially all of its assets
in short-term obligations issued by or on behalf of states,
territories and possessions of the United States, the Dis-
trict of Columbia, and their political subdivisions, agen-
cies, instrumentalities and authorities ("Municipal Obliga-
tions").
12.
<PAGE>
- --------------------------------------------------------------------------------
The investment objective of the New Jersey Municipal Money Mar-
ket Portfolio, North Carolina Municipal Money Market Portfolio,
Ohio Municipal Money Market Portfolio, Pennsylvania Municipal
Money Market Portfolio and Virginia Municipal Money Market
Portfolio (the "State-Specific Municipal Portfolios") is, for
each Portfolio, to seek as high a level of current income ex-
empt from Federal, and to the extent possible, state income tax
of the specific state in which a Portfolio concentrates, as is
consistent with maintaining liquidity and stability of princi-
pal.
The Municipal Money Market Portfolio and the State-Specific Mu-
nicipal Portfolios (together, the "Municipal Portfolios") seek
to achieve their investment objectives by primarily investing
in:
(A) fixed and variable rate notes and similar debt instruments
rated MIG-2, VMIG-2 or Prime-2 or higher by Moody's, SP-2
or A-2 or higher by S&P, AA or higher by D&P or F-2 or
higher by Fitch;
(B) tax-exempt commercial paper and similar debt instruments
rated Prime-2 or higher by Moody's, A-2 or higher by S&P,
Duff 2 or higher by D&P or F-2 or higher by Fitch;
(C) municipal bonds rated Aa or higher by Moody's or AA or
higher by S&P, D&P or Fitch;
(D) unrated notes, paper or other instruments that are of com-
parable quality as determined by the Portfolios' sub-ad-
viser under guidelines established by the Fund's Board of
Trustees; and
(E) municipal bonds and notes which are guaranteed as to prin-
cipal and interest by the U.S. Government or an agency or
instrumentality thereof or which otherwise depend directly
or indirectly on the credit of the United States.
During normal market conditions, at least 80% of each Municipal
Portfolio's net assets will be invested in securities which are
Municipal Obligations. In addition, under normal conditions
each State-Specific Municipal Portfolio intends to invest at
least 65% of its net assets in Municipal Obligations of issuers
located in the particular state indicated by its name ("State-
Specific Obligations"). The Municipal Money Market Portfolio
intends, on the other hand, to invest less than 25% of its to-
tal assets in Municipal Obligations of issuers located in the
same state. During temporary defensive periods, each Municipal
Portfolio may invest without limitation in obligations that are
not Municipal Obligations and may hold without limitation
uninvested cash reserves.
Each State-Specific Portfolio may invest without limitation in
private activity bonds the interest on which is an item of tax
preference for purposes of the Federal alternative minimum tax
("AMT Paper"). The Municipal Money Market Portfolio may invest
up to 20% of its total assets in AMT Paper when added together
with any taxable investments held by the Portfolio. Interest on
AMT Paper that is received by taxpayers subject to the Federal
alternative minimum tax is taxable.
Each Municipal Portfolio may invest 25% or more of its assets
in Municipal Obligations the interest on which is paid solely
from revenues of similar projects. To the extent a Portfolio's
assets are invested in Municipal Obligations payable from the
revenues of similar projects or are invested in private activ-
ity bonds, the Portfolio will be subject to the peculiar risks
presented by the laws and economic conditions relating to such
projects and bonds to a greater extent than it would be if its
assets were not so invested.
13.
<PAGE>
- -------------------------------------------------------------------------------
QUALITY, All securities acquired by the Portfolios will be determined
MATURITY AND at the time of purchase by the Portfolios' sub-adviser, un-
DIVERSIFICATION der guidelines established by the Fund's Board of Trustees,
to present minimal credit risks and will be "Eligible Secu-
rities" as defined by the SEC. Eligible Securities are (a)
securities that either (i) have short-term debt ratings at
the time of purchase in the two highest rating categories by
at least two unaffiliated nationally recognized statistical
rating organizations ("NRSROs") (or one NRSRO if the secu-
rity is rated by only one NRSRO), or (ii) are comparable in
priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated
(including securities of issuers that have long-term but not
short-term ratings) but are of comparable quality as deter-
mined in accordance with guidelines approved by the Board of
Trustees.
Each Portfolio is managed so that the average maturity of
all instruments held by it (on a dollar-weighted basis) will
not exceed 90 days. In no event will a Portfolio purchase
securities which mature more than 397 days from the date of
purchase (except for certain variable and floating rate in-
struments and securities collateralizing repurchase agree-
ments). Securities in which the Portfolios invest may not
earn as high a level of income as longer term or lower qual-
ity securities, which generally have greater market risk and
more fluctuation in market value.
The Money Market, U.S. Treasury Money Market and Municipal
Money Market Portfolios are classified as diversified port-
folios, and the State-Specific Municipal Portfolios are
classified as non-diversified portfolios, under the Invest-
ment Company Act of 1940 (the "1940 Act"). Investment re-
turns on a non-diversified portfolio typically are dependent
upon the performance of a smaller number of securities rela-
tive to the number held in a diversified portfolio. Conse-
quently, the change in value of any one security may affect
the overall value of a non-diversified portfolio more than
it would a diversified portfolio. In addition, because the
State-Specific Municipal Portfolios concentrate their in-
vestments in obligations of issuers located in particular
states, investments in these Portfolios may be riskier than
an investment in other Money Market funds.
14.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ADDITIONAL INVESTMENT POLICIES AND RISKS APPLY?
- --------------------------------------------------------------------------------
CORPORATE AND BANK OBLIGATIONS. To the extent consistent with their investment
objectives, the Portfolios may invest in debt obligations of domestic or for-
eign corporations and banks, and may acquire commercial obligations issued by
Canadian corporations and Canadian counterparts of U.S. corporations, as well
as Europaper, which is U.S. dollar-denominated commercial paper of a foreign
issuer. Bank obligations may include certificates of deposit, notes, bankers'
acceptances and fixed time deposits. These obligations may be general obliga-
tions of the parent bank or may be limited to the issuing branch or subsidiary
by the terms of the specific obligation or by government regulation. The Money
Market Portfolio may also make interest-bearing savings deposits in commercial
and savings banks in amounts not in excess of 5% of its total assets. The obli-
gations of foreign issuers may involve certain risks in addition to those of
domestic issuers, including higher transaction costs, less complete financial
information, less stringent regulatory requirements and less market liquidity.
Commercial paper issues include securities issued by corporations without reg-
istration under the Securities Act of 1933 (the "1933 Act") in reliance on the
exemption in Section 3(a)(3), and commercial paper issued in reliance on the
so-called "private placement" exemption in Section 4(2) ("Section 4(2) paper").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws in that any resale must similarly be made in an exempt transaction. Sec-
tion 4(2) paper is normally resold to other institutional investors through or
with the assistance of investment dealers which make a market in Section 4(2)
paper, thus providing liquidity.
U.S. GOVERNMENT OBLIGATIONS. To the extent consistent with their investment ob-
jectives, the Portfolios may also purchase obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities. Obligations of cer-
tain agencies and instrumentalities of the U.S. Government are backed by the
full faith and credit of the United States. Others are backed by the right of
the issuer to borrow from the U.S. Treasury or are backed only by the credit of
the agency or instrumentality issuing the obligation.
MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal Obliga-
tions are "general obligation" securities and "revenue" securities. General ob-
ligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue se-
curities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being fi-
nanced. Revenue securities include private activity bonds which are not payable
from the unrestricted revenues of the issuer. Consequently, the credit quality
of private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved. Municipal Obligations may also in-
clude "moral obligation" bonds, which are normally issued by special purpose
public authorities. If the issuer of moral obligation bonds is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
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
15.
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property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that is not yet as marketable as
more conventional securities.
Each Municipal Portfolio may acquire "stand-by commitments" with respect to
Municipal Obligations held by it. Under a stand-by commitment, a dealer agrees
to purchase at the Portfolio's option specific Municipal Obligations at a
specified price. The acquisition of a stand-by commitment may increase the
cost, and thereby reduce the yield, of the Municipal Obligation to which such
commitment relates.
The amount of information regarding the financial condition of issuers of Mu-
nicipal Obligations may be less extensive than the information for public cor-
porations, and the secondary market for Municipal Obligations may be less liq-
uid than that for taxable obligations. Accordingly, the ability of a Portfolio
to buy and sell Municipal Obligations may, at any particular time with respect
to any particular securities, be limited. In addition, Municipal Obligations
purchased by the Portfolios include obligations backed by letters of credit
and other forms of credit enhancement issued by domestic and foreign banks, as
well as other financial institutions. Changes in the credit quality of these
institutions could cause loss to a Municipal Portfolio and affect its share
price.
The Municipal Portfolios may invest in tax-exempt derivative securities relat-
ing to Municipal Obligations, including tender option bonds, participations,
beneficial interests in trusts and partnership interests.
Opinions relating to the validity of Municipal Obligations and to the exemp-
tion of interest thereon from Federal or state income tax are rendered by
counsel to the respective issuers or sponsors at the time of issuance. The
Fund and its service providers will rely on such opinions and will not review
independently the underlying proceedings relating to the issuance of Municipal
Obligations or the bases for such opinions.
MORTGAGE-RELATED SECURITIES. Although under normal market conditions they do
not expect to do so, each Portfolio may invest in mortgage-related securities
issued by the U.S. Government or its agencies or instrumentalities or issued
by private companies. Mortgage-related securities may include collateralized
mortgage obligations ("CMOs") issued by the Federal National Mortgage Associa-
tion, the Federal Home Loan Mortgage Corporation or other U.S. Government
agencies or instrumentalities or issued by private companies. In periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During these periods, the reinvestment of prepayment proceeds by the particu-
lar Portfolio will generally be at lower rates than the rates on the prepaid
obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS. Each Portfolio may purchase rated and
unrated variable and floating rate instruments, which may have a stated matu-
rity in excess of 13 months but will, in any event, permit a Portfolio to de-
mand payment of the principal of the instrument at least once every 13 months
upon not more than thirty days' notice (unless the instrument is guaranteed by
the U.S. Government or an agency or instrumentality thereof). These instru-
ments may include variable amount master demand notes that permit the indebt-
edness thereunder to vary in addition to providing for periodic adjustments in
the interest rate. Issuers of unrated variable and floating rate instruments
must satisfy the same criteria as set forth above for the particular Portfo-
lio. 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 securities from
broker-dealers and financial institutions subject to the seller's agreement to
repurchase them at an agreed-upon time and price ("repurchase agreements").
The securities held subject to a repurchase agreement may have stated maturi-
ties exceeding 13 months, so long as the repurchase agreement itself matures
in less than 13 months. Default by or bankruptcy of the seller would expose
the Portfolio to possible loss because of adverse market action or delays in
connection with the disposition of the underlying obligations.
16.
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GUARANTEED INVESTMENT CONTRACTS. The Money Market Portfolio may make limited
investments in guaranteed investment contracts ("GICs") issued by highly rated
U.S. insurance companies. Under these contracts, the Portfolio makes cash con-
tributions to a deposit fund of the insurance company's general account. The
insurance company then credits interest to the Portfolio on a monthly basis,
which is based on an index (such as the Salomon Brothers CD Index), but is
guaranteed not to be less than a certain minimum rate. The Money Market Portfo-
lio does not expect to invest more than 5% of its net assets in GICs at any
time during the current fiscal year.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase se-
curities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a Port-
folio to purchase or sell particular securities with payment and delivery tak-
ing place at a future date (perhaps one or two months later), and permit a
Portfolio to lock in a price or yield on a security it owns or intends to pur-
chase, regardless of future changes in interest rates 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.
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.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may enter into reverse repurchase
agreements for temporary purposes (such as to obtain cash to meet redemption
requests when the liquidation of portfolio securities is deemed disadvantageous
or inconvenient). A reverse repurchase agreement involves a sale by a Portfolio
of securities that it holds concurrently with an agreement by the Portfolio to
repurchase the same securities at an agreed-upon price and date. Reverse repur-
chase agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price of the securities the Portfolio is
obligated to repurchase.
INVESTMENT COMPANIES. In connection with the management of their daily cash po-
sitions, the Portfolios may invest in securities issued by other investment
companies which invest in short-term, high quality debt securities and which
determine their net asset value per share based on the amortized cost or penny-
rounding method of valuation. Securities of other investment companies will be
acquired by a Portfolio within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's ex-
penses, including advisory fees. These expenses would be in addition to the ad-
visory fees and other expenses the Portfolio bears directly in connection with
its own operations.
UNINVESTED CASH RESERVES. Each Portfolio may hold uninvested cash reserves
pending investment during temporary defensive periods or if, in the opinion of
the Portfolios' sub-adviser, suitable obligations are unavailable. During nor-
mal market periods, no more than 20% of a Portfolio's assets will be held
uninvested. Uninvested cash reserves will not earn income.
ILLIQUID SECURITIES. No Portfolio will invest more than 10% of the value of its
net assets in securities that are illiquid. Variable and floating rate instru-
ments that cannot be disposed of within seven days, GICs, 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 10% limit. Each
Portfolio may purchase securities which are not registered under 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 the sub-adviser
17.
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determines that an adequate trading market exists for the securities. This in-
vestment practice could have the effect of increasing the level of illiquidity
in a Portfolio during any period that qualified institutional buyers become un-
interested in purchasing these restricted securities.
STATE-SPECIFIC MUNICIPAL PORTFOLIOS--ADDITIONAL RISK CONSIDERATIONS. The con-
centration of investments by the State-Specific Municipal Portfolios in State-
Specific Obligations raises special investment considerations. Changes in the
economic condition and governmental policies of a state and its political sub-
divisions could adversely affect the value of a Portfolio's shares. Certain
matters relating to some of the states in which the State-Specific Municipal
Portfolios invest are described below. For further information, see "Special
Consideration Regarding State-Specific Obligations" in the Statement of Addi-
tional Information.
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 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 six years the
State rates were below the national rates (4.9% versus 5.4% in 1996). 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-
Specific Obligations held in the Portfolio or the ability of particular obli-
gors to make timely payments of debt service on (or lease payments relating to)
those obligations.
Pennsylvania. Although the General Fund of the Commonwealth (the principal op-
erating fund of the Commonwealth) experienced deficits in fiscal 1990 and 1991,
tax increases and spending decreases resulted in surpluses the following five
years. As of June 30, 1996, the General Fund has a surplus of $635.2 million. A
relatively high proportion of persons 65 and older in the Commonwealth, court
ordered increases in healthcare reimbursement rates and higher correctional
program costs place increased pressures on the tax resources of the Common-
wealth and its municipalities. The Commonwealth's debt burden remains moderate.
Employment growth has shifted to the trade and service sectors, with losses in
more high-paid manufacturing positions. A new governor took office in January
1995, but the Commonwealth has continued to show fiscal restraint.
18.
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WHAT ARE THE PORTFOLIOS' FUNDAMENTAL INVESTMENT LIMITATIONS?
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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 and related repur-
chase agreements) if more than 5% of its total assets will be invested in
the securities of any one issuer, except that up to 25% of a Portfolio's
total assets may be invested without regard to this 5% limitation;
(2) invest 25% or more of its total assets in one or more issuers conducting
their principal business activities in the same industry, except that the
Money Market Portfolio will invest at least 25% of its total assets in ob-
ligations of issuers in the banking industry or instruments secured by such
obligations except during temporary defensive periods;
(3) borrow money except for temporary purposes in amounts up to one-third of
the value of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not
make any additional investments; and
(4) in the case of the Municipal Money Market Portfolio, invest less than 80%
of its net assets in instruments the interest on which is exempt from regu-
lar Federal income tax and not subject to the Federal alternative minimum
tax ("AMT"), except during defensive periods or during periods of unusual
market conditions; and
(5) in the case of each State-Specific Municipal Portfolio, invest less than
80% of its net assets in instruments the interest on which is exempt from
regular Federal income tax (including instruments which are subject to
AMT), except during defensive periods or during periods of unusual market
conditions.
Restriction 1 does not apply to the State-Specific Municipal Portfolios. In-
stead, as a non-fundamental investment restriction, each State-Specific Munici-
pal Portfolio will not hold any securities (except U.S. Government securities
and related repurchase agreements) that would cause, at the end of any tax
quarter, more than 5% of its total assets to be invested in securities of any
one issuer, except that up to 50% of a Portfolio's total assets may be invested
without regard to this limitation so long as no more than 25% of the Portfo-
lio's total assets are invested in any one issuer (except U.S. Government secu-
rities and related repurchase agreements).
In accordance with current SEC regulations, the Money Market Portfolio intends,
as a non-fundamental policy, to limit its investments in the securities of any
single issuer (other than U.S. Government securities and related repurchase
agreements) to not more than 5% of the value of its total assets at the time of
purchase, except that 25% of the value of its total assets may be invested in
any one issuer for a period of up to three business days. The Money Market
Portfolio will also limit its investments in Eligible Securities that are not
in the highest rating category as determined by two NRSROs (or one NRSRO if the
security is rated by only one NRSRO) or, if unrated, are not of comparable
quality, to 5% of its total assets, with investments in any one such issuer be-
ing limited to no more than 1% of its total assets or $1 million, whichever is
greater, measured at the time of purchase.
The investment limitations stated above are applied at the time investment se-
curities are purchased.
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 the Fund's Board of Trustees. The following per-
sons currently serve on the Board:
William O. Albertini--Executive Vice President and Chief Fi-
nancial Officer of Bell Atlantic Global Wireless.
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.
INVESTMENT
ADVISER AND The Adviser to BlackRock Funds is BlackRock, Inc. BlackRock,
SUB-ADVISER Inc. (formerly PNC Asset Management Group, Inc.) was orga-
nized in 1994 to perform advisory services for investment
companies, and has its principal offices at 1600 Market
Street, 29th Floor, Philadelphia, Pennsylvania 19103. Black-
Rock, Inc. is an indirect wholly-owned subsidiary of PNC Bank
Corp., a multi-bank holding company. PNC Institutional Man-
agement Corporation ("PIMC"), an affiliate of BlackRock,
Inc., serves as each Portfolio's sub-adviser. PIMC's princi-
pal business address is 400 Bellevue Parkway, Wilmington,
Delaware 19809.
As adviser, BlackRock, Inc. is responsible for the overall
investment management of the Portfolios. As sub-adviser, PIMC
is responsible for the day-to-day management of the Portfo-
lios, and generally makes all purchase and sale investment
decisions for the Portfolios. PIMC also provides research and
credit analysis. Portfolio transactions for a Portfolio may
be directed through broker/dealers who sell Fund shares, sub-
ject to the requirements of best execution.
THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-
dollar fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services,
BlackRock, Inc. and PIMC are entitled to fees, computed daily
on a Portfolio-by-Portfolio basis and payable monthly, at the
annual rates set forth below. All sub-advisory fees payable
to PIMC are paid by BlackRock, Inc., and do not represent an
extra charge to the Portfolios.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR EACH PORTFOLIO
(BEFORE WAIVERS)
<TABLE>
<CAPTION>
AVERAGE DAILY NET INVESTMENT SUB-ADVISORY
ASSETS ADVISORY FEE FEE
<S> <C> <C>
first $1 billion .450% .400%
$1 billion--$2 billion .400 .350
$2 billion--$3 billion .375 .325
greater than $3 billion .350 .300
</TABLE>
20.
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For the twelve months ended September 30, 1997, the Portfolios
paid investment advisory fees at the following annual rates
(expressed as a percentage of average daily net assets) after
voluntary fee waivers: Money Market Portfolio, .09%; U.S. Trea-
sury Money Market Portfolio, .08%; Municipal Money Market Port-
folio, .06%; Ohio Municipal Money Market Portfolio, .06%; Penn-
sylvania Municipal Money Market Portfolio, .07%; North Carolina
Municipal Money Market Portfolio, .06%; and Virginia Municipal
Money Market Portfolio, .00% and New Jersey Municipal Money
Market Portfolio, .06%.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC"), and BlackRock Distribu-
tors, Inc. ("BDI") (the "Administrators") serve as the Fund's
co-administrators. BlackRock, Inc. and PFPC are indirect whol-
ly-owned subsidiaries of PNC Bank Corp. BDI 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 relating to
the maintenance of financial records and fund accounting. As
compensation for these services, BlackRock, Inc. 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 BDI 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 av-
erage daily net assets of each Portfolio in excess of $1 bil-
lion and (ii) .065% of the first $500 million of the average
daily net assets allocated to Service Shares of each Portfolio,
.055% of the next $500 million of such average daily net assets
and .045% 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 adminis-
tration fees from a Portfolio.
For information about the operating expenses the Portfolios
paid for the most recent fiscal year, see "What Are The Ex-
penses Of The Portfolios?"
TRANSFER
AGENT, PNC Bank, National Association ("PNC Bank"), whose principal
DIVIDEND offices are located at 1600 Market Street, Philadelphia, Penn-
DISBURSING sylvania 19103, serves as the Portfolios' custodian and PFPC,
AGENTAND whose principal offices are located at 400 Bellevue Parkway,
CUSTODIAN Wilmington, Delaware 19809, serves as their transfer agent and
dividend disbursing agent.
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 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
21.
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to Service Shares beneficially owned by customers or the in-
formation necessary for sub-accounting; and providing other
similar services. In consideration for payment of a separate
shareholder servicing fee of up to .15% (on an annualized
basis) of the average 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 customer inquiries relating to the
services performed by the Institution and to customer inqui-
ries 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 each Portfo-
lio before dividends and distributions are paid. Expenses
include, but are not limited to, fees paid to BlackRock,
Inc. and the Administrators, transfer agency and custodian
fees, trustee fees, taxes, interest, professional fees,
shareholder servicing and processing fees, fees and expenses
in registering and 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 pro-
spectuses and statements of additional information to exist-
ing 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 BlackRock,
Inc. 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 allo-
cated among all investment portfolios by or under the direc-
tion of the Board of Trustees in a manner the Board deter-
mines to be fair and equitable.
22.
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HOW ARE SHARES PURCHASED AND REDEEMED?
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DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by BDI
as distributor (the "Distributor"). BDI 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. The Plan permits
BDI, 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 appli-
cable 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 partici-
pants 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 Arrangements" 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 Fund during the first quarter of 1996. Service Shares will
normally be held of record by Institutions or in the names of nominees of In-
stitutions. Share purchases are normally effected through a customer's account
at an Institution through procedures established in connection with the re-
quirements of the account. In these cases, confirmations of share purchases and
redemptions will be sent to the Institutions. Beneficial ownership of shares
will be recorded by the Institutions and reflected in the account statements
provided by such Institutions to their customers. Investors wishing to purchase
shares should contact their Institutions.
Service Shares are sold at the net asset value per share next determined after
an order is received by PFPC Inc. ("PFPC"), the Fund's transfer agent. Shares
may be purchased by Institutions on any Business Day. A "Business Day" is any
weekday that the New York Stock Exchange (the "NYSE") and the Federal Reserve
Bank of Philadelphia (the "FRB") are open for business.
Purchase orders for each Portfolio except the U.S. Treasury Money Market Port-
folio may be placed by telephoning PFPC at (800) 441-7450 no later than 12:00
noon (Eastern Time) on a Business Day. Orders received before 12:00 noon (East-
ern Time) will be executed at 12:00 noon (Eastern Time). If payment for such
orders is not received by 4:00 p.m. (Eastern Time), the order will be cancelled
and notice thereof will be given to the Institution placing the order. Orders
received after 12:00 noon (Eastern Time) will not be accepted.
Purchase orders for the U.S. Treasury Money Market Portfolio may be placed by
telephoning PFPC at (800) 441-7450 no later than 4:00 p.m. (Eastern Time) on a
Business Day. Orders received before 12:00 noon (Eastern Time) will be executed
at 12:00 noon (Eastern Time); orders received after 12:00 noon (Eastern Time)
but before 4:00 p.m. (Eastern Time) will be executed at 4:00 p.m. (Eastern
Time). If payment for such orders is not received by 4:00 p.m. (Eastern Time),
the order will be cancelled and notice thereof will be given to the Institution
placing the order. Orders will not be accepted after 4:00 p.m. (Eastern Time).
Under certain circumstances, the Fund may reject large individual purchase or-
ders received after 12:00 noon (Eastern Time).
Payment for Service Shares must normally be made only in Federal funds or other
funds immediately available to the Fund's custodian. Payment may also, in the
discretion of the Fund, be made in the form of securities that are permissible
investments for the respective Portfolios. For further information, see the
Statement of Additional Information. The minimum initial investment is $5,000;
however, Institutions may set a higher minimum for their customers. There is no
minimum subsequent investment requirement. The Fund does not accept third party
checks for initial or subsequent investments.
23.
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The Fund may in its discretion waive or modify the minimum investment amount,
may reject any order for Service Shares and may suspend and resume the sale of
shares of any 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 the redemption proceeds on a
timely basis. In the case of shareholders holding share certificates, the cer-
tificates must accompany the redemption request.
Institutions may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The Fund, the Administrators and the
Distributor will employ reasonable procedures to confirm that instructions com-
municated by telephone are genuine. The Fund and its service providers will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such
procedures. While the Fund intends to use its best efforts to maintain each
Portfolio's net asset value per share at $1.00, the proceeds paid upon redemp-
tion may be more or less than the amount invested depending upon the net asset
value of a Service Share at the time of redemption.
Payment for redeemed shares for which a redemption order is received by PFPC
before 12:00 noon (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming Institution on the same Business Day, provided
that the Fund's custodian is also open for business. Payment for redemption or-
ders received between 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) or
on a day when the Fund's custodian is closed is normally wired in Federal funds
on the next Business Day following redemption on which the Fund's custodian is
open for business. The Fund reserves the right to wire redemption proceeds
within seven days after receiving a redemption order if, in the judgment of
BlackRock, Inc., an earlier payment could adversely affect a Portfolio. No
charge for wiring redemption payments is imposed by the Fund, although Institu-
tions may charge their customer accounts for redemption services. Information
relating to such redemption services and charges, if any, should be obtained by
customers from their Institution.
During periods of substantial economic or market change, telephone redemptions
may be difficult to complete. Redemption requests may also be mailed to PFPC at
400 Bellevue Parkway, Wilmington, DE 19809.
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.
24.
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WHAT SPECIAL PURCHASE AND REDEMPTION PROCEDURES MAY APPLY?
- --------------------------------------------------------------------------------
PURCHASES. Purchase orders may be placed through PFPC. The minimum investment
is $100. Purchases through the Automatic Investment Plan described below are
subject to a lower purchase minimum. The name of the Portfolio with respect to
which shares are purchased must appear on the check or Federal Reserve Draft.
Investors may also wire Federal funds in connection with the purchase of
shares. The wire instructions must include the name of the Portfolio, class of
the Portfolio, the name of the account registration, and the shareholder ac-
count number. Before wiring any funds, however, an investor must call PFPC at
(800) 441-7762 in order to confirm the wire instructions. Purchase orders for
shares of the Portfolios that are in proper form are executed at their net as-
set value per share next determined after receipt by the Fund; however, orders
will not be executed until payments not made in Federal funds are converted to
Federal funds (which normally occurs within two Business Days of receipt) un-
less a creditworthy financial institution undertakes to pay for an order in
Federal funds by 4:00 p.m. (Eastern Time) the same Business Day an order is
placed. Under certain circumstances, the Fund may reject large individual pur-
chase orders received after 12:00 noon. The Fund may in its discretion reject
any order for shares.
The Portfolios offer an Automatic Investment Plan ("AIP") whereby an investor
in shares of a Portfolio may arrange for periodic investments in that Portfolio
through automatic deductions from a checking or savings account by completing
the AIP Application Form. The minimum pre-authorized investment amount is $50.
REDEMPTIONS. Shareholders may redeem for cash some or all of their shares of
the Portfolios at any time by sending a written redemption request in proper
form to BlackRock Funds c/o PFPC Inc., P.O. Box 8907, Wilmington, Delaware
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. The Fund re-
serves 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.
25.
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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 BlackRock Funds c/o PFPC,
P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so. The Fund, the Administrators and the Distributor will em-
ploy reasonable procedures to confirm that instructions communicated by tele-
phone are genuine. The Fund, the Administrators and the Distributor will not
be liable for any loss, liability, cost or expense for acting upon telephone
instructions reasonably believed to be genuine in accordance with such proce-
dures.
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
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.
Persons who were shareholders of an investment portfolio of Compass Capital
Group of Funds at the time of the portfolio's combination with The PNC Fund(R)
may also purchase and redeem Service Shares of the same Portfolio and for the
same account in which they held shares on that date through the procedures de-
scribed in this section.
HOW IS NET ASSET VALUE CALCULATED?
- -------------------------------------------------------------------------------
Net asset value is calculated separately for Service Shares of each Portfolio
as of 12:00 noon (Eastern Time) and 4:00 p.m. (Eastern Time) on each Business
Day by dividing the value of all securities and other assets owned by a Port-
folio that are allocated to its Service Shares, less the liabilities charged
to its Service Shares, by the number of Service Shares outstanding.
Each Portfolio seeks to maintain a net asset value of $1.00 per share for pur-
poses of purchases and redemptions, and values its portfolio securities based
on the amortized cost method of valuation described in the Statement of Addi-
tional Information under "Valuation of Shares." A Portfolio may use a pricing
service, bank or broker/dealer to value its securities.
26.
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HOW FREQUENTLY ARE DIVIDENDS AND DISTRIBUTIONS MADE TO INVESTORS?
- --------------------------------------------------------------------------------
Shareholders are entitled to dividends and distributions arising from the net
income and capital gains, if any, earned on investments held by the Portfolio
in which they invest. Each Portfolio's net income is declared daily as a divi-
dend. Shareholders whose purchase orders are executed at 12:00 noon (Eastern
Time), 4:00 p.m. (Eastern Time) for the U.S. Treasury Money Market Portfolio,
receive dividends for that day. On the other hand, shareholders whose redemp-
tion orders have been received by 12:00 noon (Eastern Time) do not receive div-
idends for that day, while shareholders of each Portfolio whose redemption or-
ders are received after 12:00 noon (Eastern Time) do receive dividends for that
day.
Dividends are paid monthly by check, or by wire transfer if requested in writ-
ing by the shareholder, within five business days after the end of the month.
Net short-term capital gains, if any, will be distributed at least annually.
The period for which dividends are payable and the time for payment are subject
to change by the Fund's Board of Trustees. The Portfolios do not expect to re-
alize net long-term capital gains.
Dividends are reinvested in additional full and fractional Service Shares of
the same Portfolio which pays the dividends, unless a shareholder elects to re-
ceive dividends in cash. Such election, or any revocation thereof, must be made
in writing to PFPC, and will become effective with respect to dividends paid
after receipt by PFPC.
27.
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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 (the "Code"). If
a Portfolio qualifies, it generally will be relieved of Federal income tax on
amounts distributed to shareholders, but shareholders, unless otherwise ex-
empt, will pay income or capital gains taxes on distributions (except distri-
butions that are "exempt interest dividends" or are treated as a return of
capital), whether the distributions are paid in cash or reinvested in addi-
tional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be
taxed to shareholders as long-term capital gain regardless of the length of
time a shareholder holds the shares. All other distributions, to the extent
taxable, are taxed to shareholders as ordinary income.
Each Municipal Portfolio intends to pay substantially all of its dividends as
"exempt interest dividends." However, taxpayers are required to report the re-
ceipt of "exempt interest dividends" on their Federal income tax returns for
informational purposes and in two circumstances such amounts, while exempt
from regular Federal income tax, are taxable to persons subject to alternative
minimum and environmental taxes. First, "exempt interest dividends" derived
from certain private activity bonds generally will constitute an item of tax
preference for taxpayers in determining alternative minimum tax liability.
Second, all "exempt interest dividends" must be taken into account by corpo-
rate taxpayers in determining certain adjustments for alternative minimum tax
purposes. In addition, investors should be aware of the possibility of state
and local alternative minimum or minimum income tax liability on interest from
private activity bonds. Shareholders who are recipients of Social Security Act
or Railroad Retirement Act benefits should note that "exempt interest divi-
dends" will be taken into account in determining the taxability of their bene-
fit payments.
Each Municipal Portfolio will determine annually the percentages of its net
investment income which are exempt from the regular Federal income tax, which
constitute an item of tax preference for Federal alternative minimum tax pur-
poses, and which are fully taxable. These percentages will apply uniformly to
all distributions from net investment income during that year and may differ
significantly from the actual percentages for any particular day.
The Fund will send written notices to shareholders annually regarding the tax
status of distributions made by each Portfolio. Dividends declared in October,
November or December of any year payable to shareholders of record on a speci-
fied date in those months will be deemed to have been received by the share-
holders on December 31 of such year, if the dividends are paid during the fol-
lowing January.
This is not an exhaustive discussion of applicable tax consequences, and in-
vestors may wish to contact their tax advisers concerning investments in the
Portfolios. Except as discussed below, dividends paid by each Portfolio may be
taxable to investors under state or local law as dividend income even though
all or a portion of such dividends may be derived from interest on obligations
which, if realized directly, would be exempt from such income taxes. In addi-
tion, shareholders who are non-resident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships may be subject to dif-
ferent Federal income tax treatment. Future legislative or administrative
changes or court decisions may materially affect the tax consequences of in-
vesting in the Portfolios. For additional information concerning the tax
treatment of dividends and distributions by the states listed below, including
certain restrictions applicable to such treatment, see "Taxes" in the State-
ment of Additional Information.
NEW JERSEY TAXES. It is anticipated that the New Jersey Municipal Money Market
Portfolio will qualify as a "qualified investment fund" and as a result, sub-
stantially all distributions paid by the New Jersey Municipal Money Market
Portfolio will not be subject to the New Jersey personal income tax. A quali-
fied investment fund is an investment company or trust registered with the Se-
curities and Exchange Commission, or any series of such investment company or
trust, which for the calendar year in which the distribution is paid: (a)
28.
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has no investments other than interest-bearing obligations, obligations issued
at a discount, and cash and cash items, including receivables, and financial
options, futures, forward contracts, or other similar financial instruments re-
lated to interest-bearing obligations, obligations issued at a discount or bond
indexes related thereto; and (b) has at least 80% of the aggregate principal
amount of all of its investments, excluding financial options, futures, forward
contracts, or other similar financial instruments related to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto
to the extent such instruments are authorized by the regulated investment com-
pany rules of the Code, cash and cash items, which cash items shall include re-
ceivables, in New Jersey State-Specific Obligations or U.S. Government Obliga-
tions.
In accordance with New Jersey law as currently in effect, distributions paid by
a qualified investment fund are excluded from personal income tax to the extent
that the distributions are attributable to interest or gains from New Jersey
State--Specific Obligations or to interest or gains from direct U.S. Government
Obligations. New Jersey State--Specific Obligations are obligations issued by
or on behalf of New Jersey or any county, municipality, or other political sub-
division of New Jersey. U.S. Government Obligations are obligations which are
statutorily free from tax under the laws of the United States. Distributions by
a qualified investment fund from most other sources will be subject to the New
Jersey personal income tax. Shares of the New Jersey Municipal Money Market
Portfolio are not subject to property taxation by New Jersey.
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.
NORTH CAROLINA TAXES. Interest received in the form of dividends from the North
Carolina Municipal Money Market Portfolio is exempt from North Carolina state
income tax to the extent the distributions represent interest on direct obliga-
tions of the U.S. Government or North Carolina State-Specific Obligations. Dis-
tributions derived from interest earned on obligations of political subdivi-
sions of Puerto Rico, Guam and the U.S. Virgin Islands, including the govern-
ments thereof and their agencies, instrumentalities and authorities, are also
exempt from North Carolina state income tax. Distributions paid out of interest
earned on obligations that are merely backed or guaranteed by the U.S. Govern-
ment (e.g., GNMAs, FNMAs), on repurchase agreements collateralized by U.S. Gov-
ernment securities or on obligations of other states (which the Portfolio may
acquire and hold for temporary or defensive purposes) are not exempt from North
Carolina state income tax.
Any distributions of net realized gain earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of certain obligations of the
State of North Carolina or its subdivisions that were issued before July 1,
1995 will also be exempt from North Carolina income tax to the Portfolio's
shareholders. Distributions of gains earned by the North Carolina Municipal
Money Market Portfolio on the sale or exchange of all other obligations will be
subject to North Carolina income tax.
OHIO TAXES. Individuals and estates that are subject to Ohio personal income
tax or municipal or school district income taxes in Ohio will not be subject to
such taxes on distributions from the Ohio Municipal Money Market Portfolio to
the extent that such distributions are properly attributable to interest on
Ohio State-Specific Obligations or obligations issued by the U.S. Government,
its agencies, instrumentalities or territories (if the interest on such obliga-
tions is exempt from state income taxation under the laws of the United
States). Corporations that are subject to the Ohio corporation franchise tax
will not have to include distributions from the Ohio Municipal Money Market
Portfolio in their net income base for purposes of calculating their Ohio cor-
poration franchise tax liability to the extent that such distributions either
constitute exempt-interest dividends for Federal income tax purposes or are
properly attributable to interest on Ohio State-Specific Obligations or the
U.S. obligations described above provided, in the case of U.S. territorial ob-
ligations, such interest is excluded from gross income for federal income tax
purposes. However, shares of the Ohio Municipal Money Market Portfolio will be
included in a corporation's net worth base for purposes of calculating the Ohio
corporation franchise tax. Distributions properly attributable to gain on the
sale, ex -
29.
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change or other disposition of Ohio State-Specific Obligations will not be
subject to the Ohio personal income tax, or municipal or school district in-
come taxes in Ohio and will not be included in the net income base of the Ohio
corporation franchise tax. Distributions attributable to other sources will be
subject to the Ohio personal income tax and the Ohio corporation franchise
tax. This discussion of Ohio taxes assumes that the Ohio Municipal Money Mar-
ket Portfolio will continue to qualify as a regulated investment company as
defined in the Code and that at all times at least 50% of the value of the to-
tal assets of the Portfolio consists of Ohio State-Specific Obligations or
similar obligations of other states or their subdivisions.
PENNSYLVANIA TAXES. Income received by a shareholder attributable to interest
realized by the Pennsylvania Municipal Money Market Portfolio from Pennsylva-
nia State-Specific Obligations is not taxable to individuals, estates or
trusts under the Personal Income Tax; to corporations under the Corporate Net
Income Tax; nor to individuals under the Philadelphia School District Net In-
vestment Income Tax ("School District Tax").
Income received by a shareholder attributable to gain on the sale or other
disposition by the Portfolio of Pennsylvania State-Specific Obligations is
taxable under the Personal Income Tax and the Corporate Net Income Tax, but
such income is not taxable under the School District Tax.
This discussion does not address the extent, if any, to which shares of the
Pennsylvania Municipal Money Market Portfolio, and interest and gain earned by
the Portfolio, are subject to, or included in the measure of, special taxes
imposed by the Commonwealth of Pennsylvania on banks and other financial in-
stitutions or with respect to any privilege, excise, franchise or other tax
imposed on business entities not discussed above (including the Corporate Cap-
ital Stock/Foreign Franchise Tax.)
Shareholders of the Pennsylvania Municipal Money Market Portfolio are not sub-
ject to the Pennsylvania County Personal Property Tax to the extent that the
Portfolio is comprised of Pennsylvania State-Specific Obligations and Federal
obligations (if the interest on such obligations is exempt from state and lo-
cal taxation under the laws of the United States).
VIRGINIA TAXES. Dividends paid by the Virginia Municipal Money Market Portfo-
lio and derived from interest on obligations of the Commonwealth of Virginia
or of any political subdivision or instrumentality of the Commonwealth or de-
rived from interest or dividends on obligations of the United States excluda-
ble from Virginia taxable income under the laws of the United States, which
obligations are issued in the exercise of the borrowing power of the Common-
wealth or the United States and are backed by the full faith and credit of the
Commonwealth or the United States, will generally be exempt from the Virginia
income tax. Dividends derived from interest on debt obligations of certain
territories and possessions of the United States (those issued by Puerto Rico,
the Virgin Islands and Guam) will also be exempt from the Virginia income tax.
Dividends derived from interest on debt obligations other than those described
above will be subject to the Virginia income tax even though it may be exclud-
able from gross income for Federal income tax purposes.
Generally, dividends distributed to shareholders by the Portfolio and derived
from capital gains will be taxable to the shareholders. Capital gains distrib-
uted to shareholders derived from Virginia obligations issued pursuant to spe-
cial Virginia enabling legislation which provides a specific exemption for
such gains will be exempt from Virginia income tax.
The Virginia Department of Taxation has adopted a policy of allowing share-
holders to exclude from their Virginia taxable income the exempt portion of
distributions from a regulated investment company even though the shareholders
receive distributions monthly but receive reports substantiating the exempt
portion of such distributions at less frequent intervals. Accordingly, if the
Portfolio receives taxable income, the Portfolio must determine the portion of
income that is exempt from Virginia income tax and provide such information to
the shareholders in accordance with the foregoing so that the shareholders may
exclude from Virginia taxable income the exempt portion of the distribution
from the Portfolio.
30.
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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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in thirty-eight investment portfolios. Each Money Market Portfo-
lio offers five separate classes of shares--Institutional Shares, Service
Shares, Investor A Shares, Investor B Shares and Investor C Shares. This pro-
spectus relates only to Service Shares of the eight money market portfolios de-
scribed herein.
Shares of each class bear their pro rata portion of all operating expenses paid
by a Portfolio, except transfer agency fees, certain administrative/servicing
fees and amounts payable under the Fund's Distribution and Service Plan. Be-
cause of these "class expenses," the performance of a Portfolio's Institutional
Shares is expected to be higher than the performance of the Portfolio's Service
Shares, and the performance of both the Institutional Shares and Service Shares
of a Portfolio is expected to be higher than the performance of the Portfolio's
three classes of Investor Shares. The performance of each class of Investor
Shares may be different. The Fund offers various services and privileges in
connection with its Investor Shares that are not generally offered in connec-
tion with its Institutional and Service Shares, including an automatic invest-
ment plan, automatic withdrawal plan and checkwriting. For further information
regarding the Fund's Institutional or Investor Share classes, contact PFPC at
(800) 441-7764 (Institutional Shares) or (800) 441-7762 (Investor Shares).
Each share of a Portfolio has a par value of $.001, represents an interest in
that Portfolio and is entitled to the dividends and distributions earned on
that Portfolio's assets as are declared in the discretion of the Board of
Trustees. The Fund's shareholders are entitled to one vote for each full share
held and proportionate fractional votes for fractional shares held, and will
vote in the aggregate and not by class, except where otherwise required by law
or as determined by the Board of Trustees. The Fund does not currently intend
to hold annual meetings of shareholders for the election of trustees (except as
required under the 1940 Act). For a further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
On January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp.
31.
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HOW IS PERFORMANCE CALCULATED?
- --------------------------------------------------------------------------------
Each Portfolio may advertise its "yield", "effective yield" and total return
for Service Shares. These performance figures are based on historical earnings
and are not intended to indicate future performance. "Yield" refers to the in-
come generated by an investment in a Portfolio's Service Shares over a seven-
day period. This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. "Ef-
fective yield" is calculated similarly but, when annualized, the income earned
by an investment in a Portfolio's Service Shares is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. A Municipal Portfolio's "tax
equivalent yield" may also be quoted, which shows the level of taxable yield
needed to produce an after-tax equivalent to the Portfolio's tax-free yield for
Service Shares.
The performance of Service Shares of a Portfolio may be compared to the perfor-
mance of mutual funds with similar investment objectives and to relevant indi-
ces, as well as to ratings or rankings prepared by independent services or
other financial or industry publications that monitor the performance of mutual
funds. For example, the yield of Service Shares of a Portfolio may be compared
to data prepared by Lipper Analytical Services, Inc., CDA Investment Technolo-
gies, Inc. and Weisenberger Investment Company Service. Performance information
may also include evaluations of the Portfolios published in nationally recog-
nized ranking services, and information as reported by financial publications
such as Business Week, Fortune, Institutional Investor, Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature.
Performance quotations for shares of a Portfolio represent past performance and
should not be considered as representative of future results. The yield of any
investment is generally a function of portfolio quality and maturity, type of
investment and operating expenses. Yields will fluctuate and are not necessar-
ily representative of future results. Any fees charged by affiliates of the
Portfolios' investment adviser or other institutions directly to their custom-
ers' accounts in connection with investments in the Portfolios will not be in-
cluded in the Portfolios' calculations of yield and performance.
32.
<PAGE>
- --------------------------------------------------------------------------------
HOW CAN I GET MORE INFORMATION?
- --------------------------------------------------------------------------------
Below is a brief description of how investors can easily access information
about the BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
33.
<PAGE>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Mid-Cap Growth Equity Micro-Cap Equity
International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity
Small Cap Value Equity International Small Cap Equity
Index Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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 28, 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?..................... 4
What Are The Portfolios' Financial Highlights?............... 5
What Are The Portfolios?..................................... 6
What Are The Differences Among The Portfolios?............... 7
What Types Of Securities Are In The Portfolios?.............. 8
What Are The Portfolios' Fundamental Investment
Limitations?................................................ 9
What Additional Investment Policies And Risks Apply?......... 10
Who Manages The Fund?........................................ 19
How Are Shares Purchased And Redeemed?....................... 22
How Is Net Asset Value Calculated?........................... 24
How Frequently Are Dividends And Distributions Made To
Investors?.................................................. 24
How Are Fund Distributions Taxed?............................ 25
How Is The Fund Organized?................................... 26
How Is Performance Calculated?............................... 27
How Can I Get More Information?.............................. 28
</TABLE>
This Prospectus sets forth concisely information about the Low
Duration Bond, Core Bond and Intermediate Bond Portfolios of
BlackRock FundsSM (the "Fund") that a prospective investor needs
to know before investing. Please keep it for future reference. A
Statement of Additional Information dated January 28, 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 Information, 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 information 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
BLACKROCK FUNDS
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 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.
Effective January 31, 1998, the Fund has changed its name from
Compass Capital Funds SM to BlackRock Funds SM.
This Prospectus describes three diversified portfolios of
BlackRock 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 6.
BLACKROCK PERFORMANCE LIPPER PEER GROUP
PORTFOLIO BENCHMARK
LOW DURATION Merrill 1-3 Short-Intermediate
BOND Year Treasury Investment Grade Debt
Index
CORE BOND Lehman Intermediate Investment
Aggregate Grade Debt
Index
INTERMEDIATE Lehman Intermediate Investment
BOND Brothers Grade Debt
Intermediate
Government/Corporate
Index
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.
CONSIDERING
THE RISKS IN There can be no assurance that any mutual fund will achieve its
BOND investment objective. The Portfolios may purchase mortgage-re-
INVESTING lated, asset-backed, foreign, stripped and illiquid securities;
enter into repurchase and reverse repurchase agreements and en-
gage in leveraging, which is a speculative technique; 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?"
INVESTING IN For information on how to purchase and redeem shares of the
THE Portfolios, see "How Are Shares Purchased And Redeemed?"
BLACKROCK
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% .27%
Other operating expenses (after fee
waivers)(/1/) .18 .18 .18
Administration fees .12 .12 .12
Other expenses .06 .06 .06
------ ---- ------
Total Portfolio operating expenses
(after fee waivers)(/1/) .40% .40% .45%
====== ==== ======
</TABLE>
(1) Without waivers, advisory fees would be .50% and administration fees would
be .23% for each Portfolio. BlackRock, Inc. and the administrators are un-
der no obligation 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 op-
erating expenses" would be .81% for each Portfolio. "Total Portfolio oper-
ating expenses" do not include interest that may be paid in the current
fiscal year by the Portfolios in connection with their investment opera-
tions.
EXAMPLE
An investor in BlackRock Shares would pay the following expenses on a $1,000
investment assuming (1) a 5% annual return, and (2) redemption at the end of
each time period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Low Duration Bond Portfolio $ 4 $13 $22 $51
Core Bond Portfolio 4 13 22 51
Intermediate Bond Portfolio 5 14 N/A N/A
</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>
6/3/97 5/1/97
THROUGH THROUGH
9/30/97 9/30/97
LOW
DURATION BOND CORE BOND
PORTFOLIO PORTFOLIO
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.82 $ 9.57
------- -------
Net investment income 0.19 0.26
Net realized and unrealized gain or loss on
investments 0.07 0.24
------- -------
Total from investment operations 0.26 0.50
------- -------
LESS DISTRIBUTIONS
Distributions from net investment income (0.19) (0.25)
Distributions from net realized capital
gains -- --
------- -------
Total dividends and distributions (0.19) (0.25)
------- -------
NET ASSET VALUE, END OF PERIOD $ 9.89 $ 9.82
======= =======
Total investment return/2/ 2.68% 5.30%
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.40/2/,/3/ 0.40/2/,/3/
Excluding waivers 0.73/2/ 0.69/2/
Net investment income 6.58/2/ 6.70/2/
Excluding waivers 6.25/2/ 6.41/2/
SUPPLEMENTAL DATA:
PORTFOLIO TURNOVER 371% 441%
NET ASSETS, END OF PERIOD (IN THOUSANDS) $68,300 $48,139
</TABLE>
/1/Commencement of investment operations of share class.
/2/Annualized.
/3/Including interest expense, ratios would have been 1.01% and 0.56% for the
fiscal period ended September 30, 1997 for Low Duration Bond and Core Bond,
respectively.
5.
<PAGE>
- --------------------------------------------------------------------------------
WHAT ARE THE PORTFOLIOS?
- --------------------------------------------------------------------------------
The BLACKROCK FUND Family consists of 32 portfolios and has
been structured to include many different investment styles
across the spectrum of fixed income investments so that in-
vestors may participate across multiple disciplines in order
to seek their long-term financial goals.
This Prospectus describes three bond portfolios of BLACKROCK
FUNDS--the Low Duration Bond, Core Bond and Intermediate 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 Index Spectrum
Intermediate Lehman Brothers 5-10 Years Investment Grade BBB
Bond Intermediate Spectrum
Government/Corporate Index
</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 HIGH SECURITIES/
TREASURIES AGENCIES/1/ MBS/2/ MBS/2/ CORP. ABS/3/ YIELD CURRENCY MUNICIPALS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Low Duration Bond Yes Yes Yes Elig. Elig. Elig. Elig. Elig. Elig.
Core Bond Yes Yes Yes Elig. Yes Yes No Elig. Elig.
Intermediate Bond Yes Yes Yes Elig. Yes Yes No No Elig.
</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" by Moody's or "BBB" by S&P are generally
considered to be investment grade although they have speculative characteris-
tics. 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 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.
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. 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?"
11.
<PAGE>
- --------------------------------------------------------------------------------
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 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.
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, no more than 20% of its total
assets are invested in non-investment grade debt securities, and such securi-
ties are rated "B" or higher at the time of purchase by at least one major rat-
ing agency.
While generally providing greater income and opportunity for gain, non-invest-
ment grade debt securities may be subject to greater risks than securities
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. 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.
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. Investors in high yield securities have a lower degree of protec-
tion with respect to principal and interest payments than do investors in
higher rated securities due to the reduced creditworthiness of high yield is-
suers. During an economic downturn, a substantial period of rising interest
rates or a recession, highly leveraged issuers of high yield securities may ex-
perience 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 dis-
rupt 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 re-
covery 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,
due to the market's relative youth and growth the trading
12.
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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 condi-
tion of a particular issuer. In addition, 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 anal-
ysis. Additionally, prices for high yield securities may be affected by legis-
lative and regulatory developments. These developments could adversely affect a
Portfolio's net asset value and investment practices, the secondary market for
high yield securities,the financial condition of issuers of these securities
and the value and liquidity of outstanding high yield securities, especially in
a thinly traded market.
The Low Duration Bond Portfolio may invest in securities rated "B" and above or
determined by the sub-adviser to be of comparable quality. Securities which are
rated "BB" by S&P and "Ba" by Moody's have speculative characteristics with re-
spect to capacity to pay interest and repay principal. Securities which are
rated "B" generally lack characteristics of a desirable investment and assur-
ance of interest and principal payments over any long period of time may be
small. For a description of securities ratings, see Appendix A in the Statement
of Additional Information. Adverse business, financial or economic conditions
will likely impair capacity or willingness to pay interest and principal. 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 costs attributable to
investing in the high yield markets are usually higher for several reasons,
such as higher investment research costs and higher commission costs. For more
information regarding non-investment grade securities, see "Investment Poli-
cies--Non-Investment Grade Securities" in the Statement of Additional Informa-
tion.
FOREIGN INVESTMENTS. The Low Duration Bond Portfolio may invest up to 20% of
its total assets and the Core Bond Portfolio up to 10% of its total assets in
debt securities of foreign issuers on either a currency hedged or unhedged ba-
sis, and may hold from time to time various foreign currencies pending invest-
ment or conversion into U.S. dollars. Some of these instruments 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 cur-
rency 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 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.
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 Devel-
13.
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opment Bank, European Investment Bank, and European Economic Community; (c)
debt obligations of foreign banks and bank holding companies; (d) debt obliga-
tions of domestic banks and corporations issued in foreign currencies; (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 se-
curities.
To maintain greater flexibility, a Portfolio may invest in instruments which
have the characteristics of futures contracts. These instruments may take a va-
riety of forms, such as debt securities with interest or principal payments de-
termined by reference to the value of a currency or commodity at a future point
in time. The risks of such investments could reflect the risks of investing in
futures, currencies and securities, including volatility 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. 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.
14.
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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 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 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 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) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular securi-
ties, 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 Corporation. A Portfolio will not purchase put and call op-
tions when the aggregate premiums on outstanding options exceed 5% of its net
assets at the time of purchase, and will not write options on more than 25% of
the value of its net assets (measured at the time an option is written). Op-
tions trading is a highly specialized activity that entails greater than ordi-
nary investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clear-
ing Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts for hedging pur-
poses or to maintain liquidity. The value of a Portfolio's contracts may equal
or exceed 100% of its total assets, although a Portfolio will not purchase or
sell a futures contract unless immediately afterwards the aggregate amount of
margin deposits on its existing futures positions plus the amount of premiums
paid for related futures options entered into for other than bona fide hedging
purposes is 5% or less of its net assets.
Futures contracts obligate a Portfolio, at maturity, to take or make delivery
of certain securities, the cash value of a securities index or a stated quan-
tity of a foreign currency. A Portfolio may sell a futures contract in order to
offset an expected decrease in the value of its portfolio positions that might
otherwise result from a market decline or currency exchange fluctuation. A
Portfolio may do so either to hedge the value of its securities portfolio as a
whole, or to protect against declines occurring prior to sales of securities in
the value of the securities to be sold. In addition, a Portfolio may utilize
futures contracts in anticipation of changes in the composition of its holdings
or in currency exchange rates.
A Portfolio may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Portfolio purchases an option
on a futures contract, it has the right to assume a position as a
15.
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purchaser or a seller of a futures contract at a specified exercise price dur-
ing the option period. When a 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 a Portfolio's position in a futures contract or re-
lated 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 a Portfolio and the price of the futures contract or option;
(b) possible lack of a liquid secondary market for a futures contract and the
resulting inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; (d)
the sub-adviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors;
and (e) the possibility that the counterparty will default to the performance
of its obligations. For further discussion of risks involved with domestic and
foreign futures and options, see the Statement of Additional Information.
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 the market value of the loaned securities. A Portfolio may
not make such loans in excess of 33 1/3% of the value of its total assets. Se-
curities loans 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 in-
terest 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
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 Port-
folio. 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.
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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 repurchase agreements involve the risks that the interest income earned
in the investment of the proceeds will be less than the interest expense, that
the market value of the securities sold by a Portfolio may decline below the
price of the securities the Portfolio is obligated to repurchase and that the
securities may not be returned to the Portfolio. During the time a reverse re-
purchase agreement is outstanding, a Portfolio will maintain a segregated ac-
count with the Fund's custodian containing cash, U.S. Government or other ap-
propriate liquid securities having a value at least equal to the repurchase
price. A Portfolio's reverse repurchase agreements, together with any other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its to-
tal assets. In addition, 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
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collateralizing those securities may have different prepayment histories than
those sold. During the period between the sale and repurchase, a Portfolio will
not be entitled to receive interest and principal payments on the securities
sold. Proceeds of the sale will be invested in additional instruments for the
Portfolio, and the income from these investments will generate income for the
Portfolio. If such income does not exceed the income, capital appreciation and
gain or loss that would have been realized on the securities sold as part of
the dollar roll, the use of this technique will diminish the investment perfor-
mance 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 custo-
dian cash, U.S. Government securities or other liquid securities having a value
equal to the repurchase price (including accrued interest) and will subse-
quently monitor the account to ensure that its value is maintained. A Portfo-
lio's dollar rolls, together with its reverse repurchase agreements and other
borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its to-
tal 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.
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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 Global Wireless.
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 BlackRock Funds is BlackRock, Inc. Each of
the Portfolios is managed by a specialized portfolio manager
who is a member of BlackRock, Inc.'s fixed income portfolio
management affiliate, 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>
BLACKROCK 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 since 1988;
Portfolio co-manager since June 1997.
Robert Michele, CFA; 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;
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>
BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) 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. BlackRock, Inc.
is an indirect wholly-owned subsidiary of PNC Bank Corp., a
multi-bank holding company.
As adviser, BlackRock, Inc. is responsible for the overall in-
vestment management of the Portfolios. As sub-adviser, Black-
Rock is responsible for the day-to-day management of the Port-
folios, and generally makes all purchase and sale investment
decisions for the Portfolios. BlackRock also provides research
and credit analysis.
19.
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THE AFFILIATE SUB-ADVISERS OF BLACKROCK, INC. ARE:
. BlackRock Financial Management, Inc.: Domestic and non-
dollar fixed income.
. PNC Equity Advisors: Growth equity.
. Provident Capital Management: Value equity.
. CastleInternational Asset Management: International
equity.
. PIMC: Money market.
For their investment advisory and sub-advisory services,
BlackRock, Inc. 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 Portfo-
lios?", with respect to certain Portfolios, BlackRock, Inc.
and the sub-adviser intend to waive a portion of their fees
during the current fiscal year. All sub-advisory fees are
paid by BlackRock, Inc., 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 Du-
ration Bond and Core Bond Portfolios paid investment advi-
sory fees, after voluntary fee waivers, at the annual rates
of .22% and .22% of their respective average daily net as-
sets.
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
the Fund's distributor, subject to the requirements of best
execution.
ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distribu-
tors, Inc. ("BDI") (the "Administrators") serve as the
Fund's co-administrators. BlackRock, Inc. and PFPC are indi-
rect wholly-owned subsidiaries of PNC Bank Corp. BDI 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, fund ac-
counting and servicing relating to investments in BlackRock
Shares. As compensation for these services, BlackRock, Inc.
is entitled to receive a fee, computed daily and payable
monthly, at an annual rate of .03% of each Portfolio's aver-
age daily net assets. PFPC and BDI are entitled to receive a
combined fee, computed daily and payable monthly, at an ag-
gregate 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 as-
sets and .065% of the average daily net assets of each Port-
folio 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
million 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 Administrators may waive some or all of their adminis-
tration fees from a Portfolio.
20.
<PAGE>
- --------------------------------------------------------------------------------
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
AGENT, PNC Bank, whose principal offices are located at 1600 Market
DIVIDEND Street, Philadelphia, Pennsylvania 19103, serves as the Portfo-
DISBURSING lios' custodian and PFPC, whose principal offices are located
AGENT AND at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
CUSTODIAN their transfer agent and dividend disbursing agent.
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 BlackRock, Inc. and the
Administrators, 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 informa-
tion and of printing and distributing prospectuses and state-
ments of additional information to existing shareholders, ex-
penses relating to shareholder reports, shareholder meetings
and proxy solicitations, insurance premiums, the expense of in-
dependent pricing services, and other expenses which are not
expressly assumed by BlackRock, Inc. or the Fund's service
providers under their agreements with the Fund. Any general ex-
penses of the Fund that do not belong to a particular invest-
ment portfolio will be allocated among all investment portfo-
lios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
21.
<PAGE>
- -------------------------------------------------------------------------------
HOW ARE SHARES PURCHASED AND REDEEMED?
- -------------------------------------------------------------------------------
DISTRIBUTOR. Shares of the Portfolios are offered on a continuous basis by BDI
as distributor (the "Distributor"). BDI 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 BDI, 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 sponsor-
ship 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 "In-
vestment Advisory, Administration, Distribution and Servicing Arrangements" 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 in-
vestment 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. (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
received by PFPC after 4:00 p.m. (Eastern Time) are priced on the following
Business 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. The Fund does not accept third
party checks for initial or subsequent investments. For further information,
see the Statement of Additional Information.
The Fund may in its discretion waive or modify the minimum investment amount,
may reject any order for BlackRock Shares and may suspend and resume the sale
of shares of any Portfolio at any time.
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
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 BlackRock, Inc., an
earlier payment could adversely affect a Portfolio. No charge for wiring re-
demption payments is imposed by the Fund.
22.
<PAGE>
- --------------------------------------------------------------------------------
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.
23.
<PAGE>
- --------------------------------------------------------------------------------
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.
24.
<PAGE>
- --------------------------------------------------------------------------------
HOW ARE FUND DISTRIBUTIONS TAXED?
- --------------------------------------------------------------------------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Portfolio
qualifies, it generally will be relieved of Federal income tax on amounts dis-
tributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), whether the distributions are paid in cash or
reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be taxed
to shareholders as long-term capital gain, regardless of the length of time a
shareholder holds shares. All other distributions, to the extent taxable, are
taxed to shareholders as ordinary income.
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.
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. 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.
25.
<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. The Declaration of Trust authorizes the Board of Trustees to classify and
reclassify any unissued shares into one or more classes of shares. Pursuant to
this authority, the Trustees have authorized the issuance of an unlimited num-
ber of shares in 38 investment portfolios. Each Portfolio 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 Portfo-
lio 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional in-
vestors, and may be deemed a controlling person of the Fund under the 1940 Act.
PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding company.
26.
<PAGE>
- --------------------------------------------------------------------------------
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 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 BlackRock 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 BlackRock 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 In-
vestment 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 attached to
this Prospectus. Performance information may also include evaluations of the
Portfolios and their BlackRock Shares published by nationally recognized rank-
ing 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 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 re-
turn 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 in-
vestment 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
BlackRock Shares will not be included in the Portfolio's performance calcula-
tions.
27.
<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 BlackRock Funds.
<TABLE>
<CAPTION>
FUND INFORMATION HOURS AVAILABLE PHONE INFORMATION
<S> <C> <C>
INTERNAL 9 AM to 6 PM, E.S.T. toll-free 888-8BLACKROCK
WHOLESALERS/BROKER-DEALER Monday through Friday toll-free 888-825-2257
SUPPORT:
PORTFOLIO MANAGERS 24 Hours, 7 days a week toll-free 800-FUTURE4
COMMENTARY: toll-free 800-388-8734
(Audio recording updated
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 REDEMPTIONS: 8:30 to 5 PM, E.S.T. toll-free 800-441-7450
Monday through Friday
WORLD WIDE WEB:
Access general fund 24 Hours, 7 days a week http://www.blackrock.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
BlackRock Funds BlackRock Funds
c/o PFPC Inc. c/o PFPC Inc.
P.O. Box 8907 400 Bellevue Parkway
Wilmington, DE 19899-8907 Wilmington, DE 19809
</TABLE>
28.
<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
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 January 20, 1998, the composition
of the Lehman Brothers Aggregate Index
is:
58% allocation to Treasury and government
securities
15% allocation to mortgage-backed
securities
27% 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.
Index
</TABLE>
29.
<PAGE>
BLACKROCK FUNDS
THE BLACKROCK FUNDS
BlackRock Funds is a leading mutual fund company currently managing in excess
of $14 billion in 32 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
Large Cap Value Equity Select Equity
Mid-Cap Growth Equity Micro-Cap Equity
International Equity
Mid-Cap Value Equity International Emerging Markets
Small Cap Growth Equity International Small Cap Equity
Index Equity
Small Cap Value Equity
STOCK & BOND PORTFOLIO
- --------------------------------------------------------------------------------
Balanced
BOND PORTFOLIOS
- --------------------------------------------------------------------------------
Low Duration Bond Government Income
Intermediate Government Bond Managed Income
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>
COMPASS CAPITAL FUNDS/SM/
(INSTITUTIONAL SHARES OF
BLACKROCK STRATEGIC PORTFOLIO I
AND
BLACKROCK STRATEGIC PORTFOLIO II)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM PROSPECTUS CAPTION
-------------- ------------------
<S> <C> <C>
PART A
1. Cover page............................ Cover Page
2. Synopsis.............................. Summary of Expenses
3. Condensed Financial Information....... Not Applicable
4. General Description of Registrant..... Cover Page; Investment Objective
and Policies; Eligible
Investments; Portfolio
Techniques, Instruments and
Risks; Organization
5. Management of the Fund................ Management of the Fund
5A. Management's Discussion of Fund
Performance.......................... Not Applicable
6. Capital Stock and Other Securities.... Cover Page; Dividends and
Distributions; Taxes;
Organization
7. Purchase of Securities Being Offered.. Purchases and Redemptions;
Dividends and Distributions; Net
Asset Value
8. Redemption or Repurchase.............. Purchases and Redemptions
9. Pending Legal Proceedings............. Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER
FORM N-1A STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION
----------- -----------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Miscellaneous
13(a),(b),(c) Investment Objective and Policies; Investment Restrictions
13(d) Portfolio Transactions
14(a) Trustees And Officers
14(b) Trustees and Officers
14(c) Trustees And Officers
15(a) Miscellaneous
15(b) Miscellaneous
15(c) Trustees And Officers
Investment Advisory, Administration, Distribution and Servicing
16 Arrangements
17(a) Portfolio Transactions
17(b) Not Applicable
17(c) Portfolio Transactions
17(d) Not Applicable
17(e) Portfolio Transactions
18(a) Additional Information Concerning Shares
18(b) Not Applicable
19(a) Purchase And Redemption Information
19(b) Valuation Of Portfolio Securities
19(c) Purchase And Redemption Information
20 Taxes
Investment Advisory, Administration, Distribution And Servicing
21(a) Arrangements
21(b) Not Applicable
21(c) Not Applicable
22(a) Not Applicable
22(b) 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>
BLACKROCK STRATEGIC PORTFOLIO I
BLACKROCK STRATEGIC PORTFOLIO II
INSTITUTIONAL INVESTMENT PORTFOLIOS OFFERED
BY BLACKROCK FUNDS/SM/
PROSPECTUS
JANUARY 28, 1998
<PAGE>
BLACKROCK STRATEGIC PORTFOLIO I
BLACKROCK STRATEGIC PORTFOLIO II
This Prospectus relates to BlackRock Strategic Portfolio I and BlackRock
Strategic Portfolio II (the "Portfolios"), two separate investment portfolios
offered by BlackRock Funds/SM/ (the "Fund") to the separate account clients of
BlackRock Financial Management, Inc. ("BlackRock"). Each Portfolio seeks to
maximize total return through investment in a portfolio of investment grade
fixed income securities of foreign and U.S. issuers denominated in foreign
currencies, baskets of foreign currencies and the U.S. dollar.
This Prospectus describes concisely the information about the Portfolios
that you should consider before investing. Please read and keep it for future
reference. More information about the Portfolios is contained in a Statement of
Additional Information dated January 28, 1998 that has been filed with the
Securities and Exchange Commission (the "SEC"). The Statement of Additional
Information, as supplemented from time to time, can be obtained free upon
request by calling 1-800-422-6538, and is incorporated by reference into this
Prospectus. The SEC maintains a Web site at http://www.sec.gov that contains
the Statement of Additional Information, material incorporated by reference, and
other information regarding the Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION, OR ANY OTHER BANK AND SHARES ARE
NOT INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE
PORTFOLIOS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
AMOUNT INVESTED.
January 28, 1998
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<PAGE>
SUMMARY OF EXPENSES
Below is a summary of the annual operating expenses expected to be incurred by
the Portfolios after fee waivers for the current fiscal year as a percentage of
average daily net assets. An example based on the summary is also shown.
<TABLE>
<CAPTION>
BLACKROCK STRATEGIC BLACKROCK STRATEGIC
PORTFOLIO I PORTFOLIO II
------------------- -------------------
<S> <C> <C>
ANNUAL PORTFOLIO OPERATING
EXPENSES (AS A PERCENTAGE
OF AVERAGE NET ASSETS)
Advisory fees
____ (after fee waivers)/(1)/ .00% .00%
Other operating expenses
____ (after fee waivers)/(1)/ .26% .26%
---- ----
Administrative fees .10% .10%
Other expenses .16% .16%
---- ----
Total Portfolio operating
expenses (after fee
waivers)/(1)/ .26% .26%
==== ====
</TABLE>
(1) Without waivers, advisory fees would be .20% and administration fees would
be .23% for each Portfolio. The Portfolios' investment adviser and
administrators are under no obligation to waive fees or reimburse expenses,
but have informed the Fund that they expect to do so during the current
fiscal year. "Other operating expenses" in the Table are based on
estimated amounts for the current fiscal year. Without waivers, "Other
operating expenses" would be .39% and .39%, respectively, and "Total
Portfolio operating expenses" would be .59% and .59%, respectively.
EXAMPLE
Based on the foregoing Table, an investor in the Portfolios 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> <C>
BlackRock Strategic Portfolio I $3 $8
BlackRock Strategic Portfolio II 3 8
</TABLE>
The foregoing Table and Example are intended to assist investors in
understanding the costs and expenses that an investor in the Portfolios will
bear either directly or indirectly. They do not
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<PAGE>
reflect any charges that may be imposed by BlackRock directly on its customer
accounts in connection with investments in the Portfolios.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN. INFORMATION ABOUT THE
ACTUAL PERFORMANCE OF THE PORTFOLIOS WILL BE CONTAINED IN THE PORTFOLIOS' FUTURE
ANNUAL REPORTS TO SHAREHOLDERS, WHICH MAY BE OBTAINED WITHOUT CHARGE WHEN THEY
BECOME AVAILABLE.
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<PAGE>
THE PORTFOLIOS
BlackRock Strategic Portfolio I and BlackRock Strategic Portfolio II (the
"Portfolios") are non-diversified portfolios within the BlackRock Fund group
designed for the separate account clients of BlackRock Financial Management,
Inc. ("BlackRock"), the Portfolios' investment adviser (the "Adviser").
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio seeks to maximize total return through investment in a portfolio
of investment grade fixed income securities of foreign and U.S. issuers
denominated in foreign currencies, baskets of foreign currencies and the U.S.
dollar. Under normal market conditions, each Portfolio expects to invest a
significant portion of its assets in securities denominated in foreign
currencies or baskets of foreign currencies. U.S. dollar investments will be
utilized primarily for hedging purposes, to conform to U.S. tax diversification
regulations, or for temporary defensive purposes.
BlackRock Strategic Portfolio I will generally maintain a U.S. dollar-weighted
average duration between 0 and 8 years and will invest in securities across the
entire maturity spectrum. BlackRock Strategic Portfolio II will generally
maintain a U.S. dollar-weighted average duration between 0 and 6 years and may
invest in securities across the entire maturity spectrum, though it will tend to
emphasize securities that on average have shorter durations than those utilized
in BlackRock Strategic Portfolio I.
Under normal conditions, each Portfolio intends to hedge its exposure to foreign
currencies such that no more than 25% of the Portfolio's net assets are exposed
to all currencies other than the U.S. dollar.
No assurance can be provided that a Portfolio will achieve its investment
objective. A Portfolio's investment objective and the policies stated in this
Prospectus may be changed by the Fund's Board of Trustees without shareholder
approval. The Portfolios have, however, also adopted certain fundamental
investment limitations that are set forth in the Statement of Additional
Information and 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).
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<PAGE>
ELIGIBLE INVESTMENTS
The Portfolios may invest in the following types of securities, which may be
issued by domestic or foreign entities and denominated in U.S. dollars or
foreign currencies: securities issued or guaranteed by the U.S. Government and
its agencies or instrumentalities ("U.S. Government Obligations"); obligations
issued or guaranteed by a foreign government, or any of its political
subdivisions, authorities, agencies or instrumentalities; obligations of
international agencies or supranational organizations; Brady bonds; bank
obligations, including certificates of deposit, fixed time deposits, notes and
bankers' acceptances; corporate debt securities, including convertible
securities and corporate commercial paper; preferred stock; structured notes and
loan participations; repurchase agreements; mortgage-backed and asset-backed
securities; and obligations issued or guaranteed by a state or local government.
These securities may be publicly or privately offered and may have fixed,
variable or floating rates of interest.
The Portfolios may buy or sell interest rate futures contracts, options on
interest rate futures contracts, interest rate caps and floors, and options on
fixed income securities, and may enter into interest rate swap transactions.
The Portfolios may also engage in foreign currency exchange transactions by
means of buying or selling foreign currencies on a spot basis, entering into
foreign currency forward contracts and swaps, and buying or selling foreign
currency options, foreign currency futures, and options on foreign currency
futures.
The debt securities and counterparties of each of the Portfolios will, at the
time of investment, be rated investment grade by at least one nationally
recognized statistical rating organization ("NRSRO") or, if unrated by those
rating organizations, will be determined by the Adviser to be of comparable
credit quality at the time of investment or will be U.S. Government Obligations.
In the case of short-term investments, the Portfolios' assets will be rated in
the highest rating category by at least one NRSRO or, if unrated by any NRSRO,
will be determined by the Adviser to be of comparable credit quality at the time
of investment or will be U.S. Government Obligations. Securities rated BBB or
Baa are generally considered to be investment grade although they have
speculative characteristics. If a security's ratings are reduced by all rating
services below the minimum rating that is permitted for a Portfolio, the Adviser
will consider whether the Portfolio should continue to hold the security. See
Appendix A to the Statement of Additional Information for a description of the
securities ratings mentioned above.
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<PAGE>
PORTFOLIO TECHNIQUES, INSTRUMENTS AND RISKS
A brief description of the portfolio techniques, instruments and risks
applicable to the Portfolios is provided below. Further information is set
forth in the Statement of Additional Information.
PORTFOLIO SECURITIES GENERALLY. Investment by the Portfolios 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 interest in foreign
currencies, the value of a Portfolio 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
addition, changes in government administrations or economic or monetary policies
in the U.S. or abroad could result in appreciation or depreciation of portfolio
securities and could favorably or adversely affect a Portfolio's operations. In
general, less information is publicly available with respect to foreign issuers
than is available with respect to U.S. companies. Most foreign companies are
also not subject to the uniform accounting and financial reporting requirements
applicable to issuers in the United States. While the volume of transactions in
foreign securities markets has increased in recent years, it remains appreciably
below that of the U.S. securities markets. Accordingly, a Portfolio's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in U.S. securities. In addition, there is generally less
government supervision and regulation of securities exchanges, brokers and
issuers in foreign countries than in the United States.
The Portfolios intend to invest primarily in obligations of issuers based in
developed countries. Each Portfolio may, however, invest up to a maximum of 20%
of its total assets in obligations of issuers based in emerging market countries
subject to the same credit quality restrictions as other investments.
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
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<PAGE>
European Economic Community; (c) debt obligations of foreign banks and bank
holding companies; (d) debt obligations of domestic banks and corporations
issued in foreign currencies; (e) debt obligations denominated in baskets of
foreign currencies, such as the European Currency Unit (ECU); and (f) foreign
corporate debt securities and commercial paper. Such securities may include
loan participations and assignments, convertible securities, preferred stock,
Brady bonds and zero-coupon securities.
Subject to the limitation stated above regarding investments in emerging market
countries, each Portfolio may invest more than 25% of its total assets in the
securities of issuers located in a single country. Investments of 25% or more
of a Portfolio's total assets in a particular country will make the Portfolio's
performance more dependent upon the political and economic circumstances of a
particular country than a mutual fund that is more widely diversified among
issuers in different countries.
The value of fixed income securities held by the Portfolios can generally be
expected to vary inversely with changes in prevailing interest rates. Fixed
income securities with longer maturities, which tend to produce higher yields,
are subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities. The Portfolios are not restricted to any
maximum or minimum time to maturity in purchasing individual portfolio
securities, and the average maturity of a Portfolio's assets will vary based
upon the Adviser's assessments of economic and market conditions. As stated
above, the Portfolios will seek to maintain a duration within broad, though
specified, limits. A Portfolio's duration is a measure of its price
sensitivity, including expected cash flows and prepayments on its securities
holdings under a wide range of interest rate scenarios. In computing the
duration of a Portfolio, the Adviser will estimate the duration of obligations
that are subject to prepayment or redemption by the issuer taking into account
the influence of interest rates on prepayments and coupon flows. The Adviser
may use various techniques to lengthen or shorten the duration of a Portfolio,
including the acquisition of debt obligations at a premium or discount, interest
rate swaps and interest rate futures and related options. There can be no
assurance that the Adviser's estimation of a Portfolio's duration will be
accurate or that the duration of a Portfolio will always be within the limits
designated above.
Emerging market countries in which the Portfolios may invest are located in the
Asia-Pacific region, Eastern Europe, Latin and South America and Africa.
Political and economic structures in many of such countries may be undergoing
significant evolution and rapid development, and such countries may lack the
social,
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<PAGE>
political and economic stability characteristic 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 described above, including the risks
of nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the value of
investments in these countries and the availability to the Portfolios of
additional investments in emerging market countries. The small size and
inexperience of the securities markets in certain of these countries and the
limited volume of trading in securities in these countries may make investments
in the countries illiquid and more volatile than investments in Japan or most
Western European countries. There may be little financial or accounting
information available with respect to issuers located in certain emerging
markets countries, and it may be difficult to assess the value or prospects of
an investment in such issuers.
NON-DIVERSIFIED STATUS. Each Portfolio is classified as a non-diversified
portfolio under the Investment Company Act of 1940 (the "1940 Act"). Investment
returns on a non-diversified portfolio typically are dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio. Consequently, the change in value of any one security
may affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In conformance with applicable tax requirements each
Portfolio will not invest in securities (except U.S. Government securities
within the meaning of the Internal Revenue Code of 1986) that would cause, at
the end of any tax quarter (plus any additional grace period), more than 5% of
its total assets to be invested in securities of any one issuer, except that up
to 50% of a Portfolio's total assets may be invested without regard to this
limitation so long as no more than 25% of the Portfolio's total assets are
invested in the securities of any one issuer (except U.S. Government securities
as so defined).
CURRENCY HEDGING TRANSACTIONS. Under normal conditions, each Portfolio intends
to hedge its exposure to foreign currencies such that no more than 25% of the
Portfolio's net assets are exposed to all currencies other than the U.S. dollar.
For this purpose, assets that are subject to proxy hedging transactions as
described below are considered to be assets that are not exposed to foreign
currencies.
Each Portfolio may enter into spot and forward foreign currency exchange
contracts and currency swaps, and may purchase and sell foreign currency futures
contracts, options on foreign currency futures contracts and exchange traded and
over-the-counter
-8-
<PAGE>
("OTC") options on currencies to hedge the currency exchange risk associated
with its assets or obligations denominated in foreign currencies or baskets of
foreign currencies. A Portfolio may also engage in proxy hedging transactions.
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. 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. Each 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.
In addition, subject to the limitation on foreign currency exposure stated
above, each Portfolio may enter into currency transactions to seek to increase
total return when the Advisor believes the transactions are in furtherance of a
Portfolio's investment objective. In connection with their currency
transactions, the Portfolios will segregate cash, U.S. Government securities or
other liquid assets, or will otherwise cover their position in accordance with
the applicable requirements of the SEC.
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.
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
Mortgage Association ("GNMA") are supported by the United States' full faith and
credit; others such as those of the Federal National Mortgage Association
("FNMA") and the Student Loan Marketing Association are supported by the right
of the issuer to borrow from the Treasury; others such as those of the Federal
Farm Credit Banks or the Federal Home Loan Mortgage Corporation ("FHLMC") are
supported only by the credit of the instrumentality. No assurance can be given
that the U.S. Government will provide financial support to U.S. Government-
sponsored agencies or instrumentalities if it is not obligated to do so by law.
CORPORATE AND BANK OBLIGATIONS. The Portfolios may invest in debt obligations
of domestic or foreign corporations and banks.
-9-
<PAGE>
Bank obligations may include certificates of deposit, notes, bankers'
acceptances and fixed time deposits. These obligations may be general
obligations of the parent bank or may be limited to the issuing branch or
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.
MUNICIPAL OBLIGATIONS. When deemed advisable by the Adviser, the Portfolios may
invest in obligations issued by a state or local government ("Municipal
Obligations"). Municipal Obligations include general obligation securities that
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest, and revenue securities that 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. Municipal Obligations also include "moral obligation"
bonds, which are normally issued by special purpose public authorities, and
participation certificates in a lease, an installment purchase contract or a
conditional sales contract ("lease obligations") entered into by a state or
political subdivision to finance the acquisition or construction of equipment,
land or facilities. Dividends paid by the Portfolios that are derived from
income earned on Municipal Obligations will not be tax-exempt.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES. The Portfolios may purchase
securities that are secured or backed by residential or commercial mortgages as
well as other assets (e.g., automobile loans and credit card receivables).
Issuers of these mortgage-related and asset-backed securities include both
governmental and private issuers. Mortgage-related securities include, but are
not limited to, guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, 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-
related 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 with different relative payment rights, and
each with a specified fixed or floating interest rate and a final distribution
date.
Non-mortgage asset-backed securities may present certain risks that are not
presented by mortgage-related securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
For example,
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<PAGE>
credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and Federal consumer credit laws. In
addition, the trustee for the holders of the automobile receivables may not have
an effective security interest in all of the obligations backing such
receivables.
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 normally may be prepaid by the
issuer at any time because the underlying assets (i.e., loans) generally may be
prepaid by the borrowers at any time. In periods of falling interest rates, the
rate of prepayments tends to increase, and in periods of rising interest rates,
prepayments tend to slow. Because of these and other reasons, an asset-backed
security's total return and maturity may be difficult to predict precisely, and
a change in the rate of expected prepayments may result in a loss to a Portfolio
on its investment.
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.
LOAN PARTICIPATIONS AND OTHER STRUCTURED SECURITIES. The Portfolios may
purchase participation interests in debt securities from foreign and domestic
financial institutions. A participation interest gives a Portfolio an undivided
interest in the security in the proportion that the participation interest bears
to the total principal amount of the security. Participation interests may have
fixed, floating or variable rates of interest. The Portfolios intend only to
purchase participations from an entity or syndicate, and do not intend to serve
as co-lenders in any participations. It is possible that a participation
interest might be deemed to be an extension of credit by a Portfolio to the
issuing financial institution that is not a direct interest in the credit of the
obligor of the underlying security and is not directly entitled to the
protection of any collateral security provided by such obligor. In that event,
the ability of the Portfolio to obtain repayment might depend on the issuing
financial institution.
The Portfolios also may purchase other types of structured securities, including
zero coupon bonds, which are normally
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<PAGE>
issued at a significant discount from face value and do not provide for periodic
interest payments, as well as instruments that have interest rates that reset
inversely to changing short-term rates and/or have imbedded interest rate floors
and caps that require the issuer to pay an adjusted interest rate if market
rates fall below or rise above a specified rate.
In addition, 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 obligations. These
securities, 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"). The Portfolios also may purchase
"stripped" securities that evidence ownership in the future interest payments or
principal payments on obligations of foreign governments.
Many of the instruments described above represent relatively recent innovations,
and the trading market for these instruments is less developed than the markets
for traditional types of securities. It is uncertain how these instruments will
perform under different economic and interest-rate scenarios. Because certain
of these instruments are leveraged, their market values may be more volatile
than other types of instruments and may present greater potential for capital
gain or loss. On the other hand, the imbedded option features of certain
instruments could limit the amount of appreciation a Portfolio can realize on
its investment, could cause a Portfolio to hold a security it might otherwise
sell or could force the sale of a security at inopportune times or for prices
that do not reflect current market value. The possibility of default by the
issuer or the issuer's credit provider may be greater for these instruments than
for other types of instruments. In some cases it may be difficult to determine
the fair value of a derivative instrument because of a lack of reliable
objective information.
INTEREST RATE SWAPS, FLOORS AND CAPS AND CURRENCY SWAPS. The Portfolios may
enter into interest rate swaps and may purchase or sell interest rate caps and
floors. The Portfolios expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of their
holdings, as a duration management technique or to protect against an in crease
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
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interest, e.g., an exchange of floating rate payments for fixed rate payments.
The purchase of an interest rate cap entities the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
In order to protect against currency rate fluctuations, the Portfolios also may
enter into currency swaps. Currency swaps involve the exchange of the rights of
a Portfolio and another party to make or receive payments in specified
currencies.
OPTIONS AND FUTURES CONTRACTS. 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 cross-hedging, or for the purpose of earning
additional income which may be deemed speculative. 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) the item which is the
subject of the option at a stated exercise price for a specific period of time.
These options may relate to particular securities, financial instruments,
foreign currencies, securities indices or the yield differential between two
securities, and may or may not be listed on a securities exchange and may or may
not be issued by the Options Clearing Corporation. Options trading is a highly
specialized activity that entails greater than ordinary investment risks. In
addition, unlisted options are not subject to the protections afforded
purchasers of listed options issued by the Options Clearing Corporation, which
performs the obligations of its members if they default.
To the extent consistent with its investment objective, each Portfolio may also
invest in futures contracts and options on futures contracts. 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 quantity of a
foreign currency. A Portfolio may sell a futures contract in order to offset an
expected decrease in the value of its portfolio positions that might otherwise
result from a market decline or currency exchange fluctuation. A Portfolio may
do so either to hedge the value of its securities portfolio as a whole, or to
protect against declines occurring prior to sales of securities in the value of
the securities to be sold. In addition, a Portfolio may utilize futures
contracts in anticipation of changes in the composition of its holdings or in
currency exchange rates.
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<PAGE>
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
obligated to sell or buy a futures contract if the option is exercised. In
connection with a Portfolio's position in a futures contract or related option,
the Portfolio will segregate 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
instruments 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
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 Appendix B in the Statement of Additional
Information.
The Portfolios intend to comply with the regulations of the Commodity Futures
Trading Commission ("CFTC") exempting the Portfolios from registration as a
"commodity pool operator." Consistent with those regulations, the value of a
Portfolio's contracts may equal or exceed 100% of its total assets; however, 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.
CONVERTIBLE SECURITIES AND PREFERRED STOCK. The Portfolios may, from time to
time, invest in convertible securities. Convertible securities acquired by the
Portfolios may include convertible bonds and convertible preferred stock, and
will be subject to the same rating requirements as a Portfolio's investments in
other fixed income securities. The Portfolios ordinarily will sell units of
common stock received upon conversion. The Portfolios may also purchase non-
convertible preferred stock when deemed to be in furtherance of a Portfolio's
investment objective.
SECURITIES LENDING. A Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending
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<PAGE>
agreements will require that the loans be secured by collateral in cash, U.S.
Government securities or irrevocable bank letters of credit maintained on a
current basis equal in value to at least the market value of the loaned
securities. A Portfolio may not make such loans in excess of 33 1/3% of the
value of its total assets. 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.
REPURCHASE AGREEMENTS. Each Portfolio may agree to purchase debt securities
from financial institutions subject to the seller's agreement to repurchase such
securities 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
authorized 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 decline in value suffered by the Portfolio's securities. Borrowings
may be made through reverse repurchase agreements under which a Portfolio sells
portfolio securities to financial institutions such as banks and broker-dealers
and agrees to repurchase them at a particular date and price. The Portfolios
may use 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
repurchase agreements may be regarded as leveraging and, therefore, speculative.
Reverse repurchase agreements involve the risks that the interest income earned
in the investment of the proceeds will be less than the interest expense, that
the market value of the securities sold by a Portfolio may decline below the
price of the securities the Portfolio is obligated to repurchase and that the
securities may not be returned to the Portfolio. During the time a reverse
repurchase agreement is outstanding, a Portfolio will segregate cash, U.S.
Government or other appropriate liquid assets 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 may borrow
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<PAGE>
up to an additional 5% of its total assets for temporary purposes.
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.
During the period between the sale and repurchase, a Portfolio will not be
entitled to receive interest and principal payments on the securities sold.
Proceeds of the sale will be invested in additional instruments for the
Portfolio, and the income from these investments will generate income for the
Portfolio. This use of dollar rolls may be regarded as leveraging and,
therefore, speculative. If the income earned from the investment of the
proceeds of the transaction 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 segregate with its custodian cash, U.S. Government
securities or other liquid assets having a value equal to the repurchase price
(including accrued interest) and will subsequently monitor the account to ensure
that its value is maintained. A Portfolio's dollar rolls, together with its
reverse repurchase agreements and other borrowings, will not exceed, in the
aggregate, 33 1/3% of the value of its total assets.
Dollar roll transactions involve the risk that the market value of the
securities a Portfolio is required to purchase may decline below the agreed upon
repurchase price of those securities. If the broker/dealer to whom a Portfolio
sells securities becomes insolvent, the Portfolio's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar rolls
may depend upon the Adviser's ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully
employed.
INVESTMENT COMPANIES. Each Portfolio may invest in securities issued by other
investment companies within the limits prescribed by the 1940 Act. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses,
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<PAGE>
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. Instruments that cannot be disposed
of within seven days, and repurchase agreements and time deposits that do not
provide for payment within seven days after notice, without taking a reduced
price, are subject to this 15% limit. Each Portfolio may purchase securities
which are not registered under the Securities Act of 1933 (the "1933 Act") but
which can be sold to "qualified institutional buyers" in accordance with Rule
144A under the 1933 Act. These securities will not be considered illiquid so
long as it is determined by the Adviser 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 uninterested in purchasing these
restricted securities.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS. Each Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
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 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 may exceed 25% of
the value of its total assets.
SHORT SALES. The Portfolios may make short sales of securities. A short sale is
a transaction in which a Portfolio sells a security it does not own in
anticipation that the market price of that security will decline. The
Portfolios may make short sales both as a form of hedging to offset potential
declines in long positions in similar securities and in order to maintain
portfolio flexibility. During the period of a short sale, a Portfolio will
segregate on a daily basis cash, U.S. Government securities or other permissible
liquid assets at such a level that (a) the segregated amount will equal the
current value of the security sold short and (b) the segregated amount will not
be less than the market value of the security at the time it was sold short.
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<PAGE>
PORTFOLIO TURNOVER RATES. A Portfolio's annual portfolio turnover rate will not
be a factor preventing a sale or purchase when the 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. The Adviser
expects to allocate a portion of its separate account clients' portfolios to the
Portfolios when it believes that the securities in which the Portfolios invest
present favorable risk-reward characteristics. During other periods,
investments by the separate accounts in the Portfolios may be redeemed. This
activity may produce higher than normal portfolio turnover which may result in
increased transaction costs to the Portfolios. As of the date of this
Prospectus, under normal market conditions the annual portfolio turnover rate of
each Portfolio is not expected to exceed 400%.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES. The business and affairs of the Fund are managed under the
direction of its Board of Trustees. The following individuals serve as trustees
of the Funds:
William O. Albertini--Executive Vice President and Chief Financial
Officer of Bell Atlantic Global Wireless.
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 at The Wharton School, University of
Pennsylvania.
David R. Wilmerding, Jr.--Chairman of Gee, Wilmerding & Associates,
Inc.
ADVISER. The Portfolios' investment adviser is BlackRock Financial Management,
Inc. ("BlackRock") (the "Adviser"). The Adviser's principal business address is
345 Park Avenue, New York, New York 10154. Since 1995, BlackRock has been a
wholly-owned indirect subsidiary of PNC Bank, N.A., one of the
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<PAGE>
largest banks in total assets in the United States. BlackRock provides asset
management services with respect to U.S. and foreign fixed income instruments.
As adviser, BlackRock is responsible for the day-to-day management of the
Portfolios, and generally makes all purchase and sale decisions regarding the
investments made by the Portfolios. BlackRock also provides research and credit
analysis as well as certain other services. Investment decisions are made by
BlackRock's Investment Strategy Committee and no one person is primarily
responsible for making recommendations to that committee. BlackRock currently
serves as investment adviser to institutional and individual investors in the
United States and overseas through several funds and separately managed accounts
with total assets in excess of $41 billion. For its investment advisory services
to the Portfolios, the Adviser is entitled to a fee, computed daily for each
Portfolio and payable monthly, at the annual rate of .20% of each Portfolio's
average daily net assets. From time to time, the Adviser may waive some or all
of its advisory fee from a Portfolio.
ADMINISTRATORS. BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors,
Inc. ("BDI") (the "Administrators") serve as the Portfolios' co-administrators.
BlackRock, Inc. and PFPC are indirect wholly-owned subsidiaries of PNC Bank
Corp. BDI is a wholly-owned subsidiary of Provident Distributors, Inc. ("PDI").
The outstanding stock of PDI is owned by its officers.
The Administrators generally assist the Portfolios in all aspects of their
administration and operation, including matters relating to the maintenance of
financial records, fund accounting and the servicing of investors in the
Portfolios. As compensation for these services, BlackRock, Inc. 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 BDI are entitled to receive
a combined administration fee, computed daily and payable monthly, at the annual
rate of .20% of the first $500 million of each Portfolio's average daily net
assets, .18% of the next $500 million of each Portfolio's average daily net
assets and .16% of the average daily net assets 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.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN. PNC Bank, whose
principal offices are located at 1600 Market Street, Philadelphia, Pennsylvania
19103, serves as the Portfolios' custodian and PFPC, whose principal offices are
located at 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as their
transfer agent and dividend disbursing agent.
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<PAGE>
EXPENSES. Expenses are deducted from the total income of each Portfolio before
dividends and distributions are paid. Expenses include, but are not limited to,
fees paid to BlackRock and the Administrators, transfer agency and custodian
fees, trustee fees, taxes, interest, professional fees, fees and expenses in
registering 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, insurance
premiums, the expense of independent pricing services, and other expenses which
are not expressly assumed by the Adviser or the Portfolios' service providers
under their agreements for the Portfolios. 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.
The expense ratios of the Portfolios can be expected to be higher than those of
portfolios investing primarily in domestic securities. The costs attributable
to investing abroad are usually higher for several reasons, including higher
investment research costs, higher foreign custody costs, higher commission costs
and additional costs arising from delays in settlements of transactions
involving foreign securities.
PURCHASES AND REDEMPTIONS
DISTRIBUTOR. BDI serves as distributor of the Portfolios' shares (the
"Distributor"). BDI maintains its principal offices at Four Falls Corporate
Center, 6th Floor, West Conshohocken, Pennsylvania 19428-2961.
PURCHASE OF SHARES. Shares of the Portfolios are offered to the separate
account clients of the Adviser.
Shares are sold at their net asset value per share next computed after an order
is received by PFPC. Orders received by PFPC by 3:00 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 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 3:00 p.m. (Eastern Time) are priced on the following
Business Day.
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<PAGE>
There is no minimum initial or subsequent investment requirement. Payment for
shares must normally be made in Federal funds or other funds immediately
available to the Portfolios' custodian. Payment may also, in the discretion of
the Portfolios, 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 Portfolios may in their discretion reject any order for shares.
REDEMPTION OF SHARES. Redemption orders for shares may be placed 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 Portfolios,
the Administrators and the Distributor will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. The Portfolios
and their 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 3:00 p.m. (Eastern Time) on a Business Day is normally made in Federal
funds wired to the redeeming shareholder on the next Business Day, provided that
the Portfolios' custodian is also open for business. Payment for redemption
orders received after 3:00 p.m. (Eastern Time) or on a day when the Portfolios'
custodian is closed is normally wired in Federal funds on the next Business Day
following redemption on which the Portfolios' custodian is open for business.
The Portfolios reserve the right to wire redemption proceeds within seven days
after receiving a redemption order if, in the judgment of the Adviser, an
earlier payment could adversely affect a Portfolio. No charge for wiring
redemption payments is imposed by the Portfolios.
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 Portfolios may also suspend the right of redemption or postpone the date of
payment 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 Portfolios'
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be
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<PAGE>
appropriate. The Fund reserves the express right to redeem shares of each
Portfolio involuntarily at any time if the Fund's Board of Trustees determines,
in its sole discretion, that failure to do so may have adverse consequences to
the holders of shares in the Portfolio. Upon such redemption the holders of
shares so redeemed shall have no further right with respect thereto other than
to receive payment of the redemption price.
NET ASSET VALUE
The net asset value for each Portfolio is determined as of 3:00 p.m. (Eastern
Time) by dividing the total value of the Portfolio's investments and other
assets, less any liabilities, by the number of total outstanding shares of that
Portfolio.
Each Portfolio will compute its net asset value once daily on days that the New
York Stock Exchange is open for trading, except on days on which no orders to
purchase or redeem have been received. Notwithstanding whether any orders to
purchase or redeem have been received or whether the New York Stock Exchange is
open for business, the net asset value will be calculated on the last day of
each month.
Most securities held by a Portfolio are priced based on their market value as
determined by reported sales prices or the mean between their bid and asked
prices. Portfolio securities which are traded primarily 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 direction 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 Adviser under the supervision of the Board
of Trustees determines such method does not represent fair value.
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<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Dividends for each Portfolio will be declared daily on shares held of record at
3:00 p.m. (Eastern Time). Over the course of a year, substantially all of a
Portfolio's 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 not later than 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.
All dividends and distributions will be reinvested automatically at net asset
value in additional shares of the same Portfolio, unless cash payment is
requested.
TAXES
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
distributed 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), regardless of whether the distributions are
paid in cash or reinvested in additional shares.
Distributions paid out of a Portfolio's "net capital gain" (i.e., the excess of
----
net long-term capital gain over net short-term capital loss), if any, will be
taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds the shares. All other distributions, to the extent
taxable, are taxed to shareholders as ordinary income.
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
specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying shares on or just before the record date for a
distribution should be aware that the amount of the forthcoming distribution
payment, although in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the redemption or
transfer of shares depending upon their tax basis and their price at the time of
redemption or transfer.
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<PAGE>
This is not an exhaustive discussion of applicable tax consequences, and
investors 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 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, future
legislative or administrative changes or court decisions may materially affect
the tax consequences of investing in a Portfolio. Shareholders who are non-
resident alien individuals, foreign trusts or estates, foreign corporations or
foreign partnerships may be subject to different U.S. Federal income tax
treatment.
ORGANIZATION
The Fund was organized as a Massachusetts business trust on December 22, 1988
and is registered under the 1940 Act as an open-end management investment
company. Effective January 31, 1998, the Fund has changed its name from Compass
Capital Funds/SM/ to BlackRock Funds/SM/. The Declaration of Trust authorizes
the Board of Trustees to classify and reclassify any unissued shares into one or
more classes of shares. Pursuant to this authority, the Trustees have
authorized the issuance of an unlimited number of shares in thirty-eight
investment portfolios, some of which offer multiple classes of shares to
investors. This prospectus relates only to the two Portfolios described herein,
each of which offers a single class of shares -- Institutional Shares.
Each share of a Portfolio has a par value of $.001, represents a pro rata
interest in that Portfolio with each other share of the same class and is
entitled to the dividends and distributions earned on that Portfolio's assets as
are declared in the discretion of the Board of Trustees. The Fund's
shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held, and will vote in the aggregate and
not by investment portfolio or 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 January 23, 1998, PNC Bank held of record approximately 77% of the Fund's
outstanding shares, as trustee on behalf of individual and institutional
investors, and may be deemed a controlling person of the Fund under the 1940
Act. PNC Bank is a
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<PAGE>
subsidiary of PNC Bank Corp., a multi-bank holding company.
PERFORMANCE
Performance information for 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 shares of a 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 a Portfolio with respect to its shares are reinvested in
shares.
A Portfolio's yield is computed by dividing the Portfolio's net income per share
during a 30-day (or one month) period by the net asset value per share on the
last day of the period and analyzing the result on a semi-annual basis.
Performance quotations 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 shares, when
redeemed, may be worth more or less than their original cost. Any fees charged
directly to the customer accounts of the Adviser in connection with investments
in a Portfolio will not be included in the Portfolio's performance calculations.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be directed to BlackRock at 212-754-5560.
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<PAGE>
BLACKROCK STRATEGIC PORTFOLIO I
BLACKROCK STRATEGIC PORTFOLIO II
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Summary of Expenses........................................................ 2
The Portfolios............................................................. 4
Investment Objective and Policies.......................................... 4
Eligible Investments....................................................... 5
Portfolio Techniques, Instruments and Risks................................ 6
Management of the Fund..................................................... 18
Purchases and Redemptions.................................................. 20
Net Asset Value............................................................ 22
Dividends and Distributions................................................ 22
Taxes...................................................................... 23
Organization............................................................... 24
Performance................................................................ 24
Shareholder Inquiries...................................................... 25
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
Prospectus
January 28, 1998
<PAGE>
COMPASS CAPITAL FUNDS/SM/
(INSTITUTIONAL SHARES OF THE
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A ITEM PROSPECTUS CAPTION
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<S> <C> <C>
PART A
1. Cover page............................ Cover Page
2. Synopsis.............................. Expense Table
3. Condensed Financial Information....... Financial Highlights
4. General Description of Registrant..... Cover Page; Investment Policies;
Description of Shares
5. Management of the Fund................ Management
5A. Management's Discussion of Fund
Performance.......................... Not Applicable
6. Capital Stock and Other Securities.... Cover Page; Dividends and
Distributions; Description of
Shares
7. Purchase of Securities Being Offered.. Purchase and Redemption of Shares;
Dividends and Distributions Net
Asset Value
8. Redemption or Repurchase.............. Purchase and Redemption of
Shares--Redemption of Shares
9. Pending Legal Proceedings............. Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER
FORM N-1A STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION
----------- -----------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Miscellaneous
13(a),(b),(c) Investment Objective and Policies; Investment Restrictions
13(d) Portfolio Transactions
14(a) Trustees And Officers
14(b) Trustees And Officers
14(c) Trustees And Officers
15(a) Miscellaneous
15(b) Miscellaneous
15(c) Trustees And Officers
Investment Advisory, Administration, Distribution and Servicing
16 Arrangements
17(a) Portfolio Transactions
17(b) Not Applicable
17(c) Portfolio Transactions
17(d) Not Applicable
17(e) Portfolio Transactions
18(a) Additional Information Concerning Shares
18(b) Not Applicable
19(a) Purchase And Redemption Information
19(b) Valuation Of Portfolio Securities
19(c) Purchase And Redemption Information
20 Taxes
Investment Advisory, Administration, Distribution And Servicing
21(a) Arrangements
21(b) Not Applicable
21(c) Not Applicable
22(a) Not Applicable
22(b) Performance Information
23 Financial Statements
</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>
THE MULTI-SECTOR MORTGAGE
SECURITIES PORTFOLIO III
BlackRock Funds/SM/ (the "Fund") consists of 35 investment portfolios.
This Prospectus relates to shares ("Institutional Shares" or "Shares")
representing interests in the Multi-Sector Mortgage Securities Portfolio III
(the "Portfolio"). The Portfolio seeks to provide a total rate of return before
fees and expenses over rolling twelve-month periods that exceeds the total rate
of return of the Salomon Broad Investment Grade Index over the same periods by
at least 1.60% on an annualized basis. The securities in which the Portfolio
may invest include, but are not limited to, Commercial and Residential Mortgage-
Backed Securities, collateralized mortgage obligations, real estate mortgage
investment conduits, adjustable rate mortgages and U.S. Treasury and agency
securities. The Portfolio will maintain a dollar-weighted average credit
quality of at least BBB/Baa2, with U.S. Government securities being assigned a
AAA rating.
INVESTMENTS IN THE PORTFOLIO MAY INCLUDE SECURITIES HAVING A CREDIT QUALITY
BELOW INVESTMENT GRADE. SUCH SECURITIES, ALSO CALLED "JUNK BONDS," ARE
CONSIDERED TO BE SPECULATIVE AND MAY BE SUBJECT TO SPECIAL RISKS, INCLUDING A
GREATER RISK OF LOSS OF PRINCIPAL AND NON-PAYMENT OF INTEREST. SEE "DESCRIPTION
OF SECURITIES -- LOWER RATED SECURITIES" AND "RISK FACTORS".
Institutional Shares of the Portfolio are sold at net asset value to
institutional investors ("Institutions").
This Prospectus sets forth concisely information that a prospective
investor needs to know before investing. Please keep it for future reference.
A Statement of Additional Information ("SAI") currently dated January 28, 1998,
as revised from time to time, has been filed with the Securities and Exchange
Commission (the "SEC"). The current Statement of Additional Information may be
obtained free of charge from the Fund by calling (800) 422-6538. The Statement
of Additional Information, as it may be supplemented from time to time, is
incorporated by reference in this Prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund that
has been filed with the SEC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY
<PAGE>
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES ARE NOT
INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
PROSPECTUS January 28, 1998
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<PAGE>
INTRODUCTION
________________________________________________________________________________
The Fund is an open-end management investment company which currently
consists of 35 investment portfolios, of which only the Portfolio is described
in this Prospectus.
PORTFOLIO MANAGEMENT
BlackRock Financial Management, Inc. ("BlackRock" or the "Adviser") serves
as investment adviser to the Portfolio. The investment adviser is an indirect
wholly-owned subsidiary of PNC Bank Corp.
THE ADMINISTRATORS
BlackRock, Inc., PFPC Inc. ("PFPC") and BlackRock Distributors, Inc.
("BDI") serve as the Fund's administrators (collectively, the
"Administrators").
THE DISTRIBUTOR
BlackRock Distributors, Inc. (the "Distributor") serves as the Fund's
distributor.
CERTAIN RISK FACTORS TO CONSIDER
An investment in the Portfolio is subject to certain investment
considerations, as set forth in detail under "Investment Policies." As with
other mutual funds, there can be no assurance that the Portfolio will achieve
its investment objective. The following are some of these considerations. The
Portfolio may invest in both Commercial Mortgage-Backed Securities and
Residential Mortgage-Backed Securities. The Portfolio may invest in lower
credit quality securities, which are commonly referred to as "junk bonds." The
Portfolio is classified as non-diversified under the Investment Company Act of
1940 (the "1940 Act"). The Portfolio (subject to limitations described herein)
may use various other investment management techniques that also involve special
considerations including purchasing illiquid securities, engaging in hedging
transactions, selling listed and over-the-counter covered call options, making
forward commitments, entering into repurchase agreements, purchasing securities
on a when-issued basis, entering into interest rate swaps and purchasing or
selling interest rate caps and floors. For further discussion of these
practices and the associated risks and special considerations, see "Description
of Securities," "Other Investment Practices" and "Risk Factors."
-3-
<PAGE>
EXPENSE TABLE
ANNUAL PORTFOLIO OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory fees/(a)/......................................... .25%
Other expenses (after expense reimbursements)/(b)/......... .12%
----
Total Portfolio operating expenses/(b)/.................... .37%
====
_____________
(a) BlackRock reserves the right in its sole discretion to reduce the
advisory fee charged to the Portfolio.
(b) BlackRock has agreed to cap the "Other expenses" for the Portfolio at
this level for the current fiscal year. Without fee waivers and
expense reimbursements, "Other expenses" would be .26% and "Total
Portfolio Operating expenses" would be .51%.
EXAMPLE
An investor in Institutional Shares would pay the following expenses on a
$1,000 investment in Shares of the Portfolio, assuming (1) 5% annual return, and
(2) redemption at the end of each time period:
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
Multi-Sector Mortgage Securities
Portfolio III.................... $4 $12 $21 $47
The foregoing Expense Table and Example are intended to assist investors in
understanding the Portfolio's estimated annual operating expenses with respect
to Institutional Shares based on the level of such expenses during its most
recent fiscal period ended September 30, 1997. Investors bear these expenses
either directly or indirectly. See "Financial Highlights--Background,"
"Management," "Purchase and Redemption of Shares" and "Description of Shares"
for a more complete description of shareholder transaction expenses and
operating expenses. The Expense Table and Example do not reflect any charges
that may be imposed by Institutions directly on their customer accounts in
connection with investments in the Portfolio. In addition to the compensation
itemized above, certain broker-dealers and/or their salespersons may receive
certain compensation for the sale and distribution of shares or for services to
the Portfolio. For additional information regarding such compensation, see
"Investment Advisory, Administration, Distribution and Servicing Arrangements"
in the Statement of Additional Information.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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<PAGE>
FINANCIAL HIGHLIGHTS
________________________________________________________________________________
BACKGROUND
The Portfolio commenced investment operations on October 6, 1994 as a
separate investment portfolio (the "Predecessor Portfolio") of The BFM
Institutional Trust Inc., which was organized as a Maryland corporation. On
April 26, 1996, the assets and liabilities of the Predecessor Portfolio were
transferred to the Portfolio, which had no prior operating history. The
Predecessor Portfolio also received investment advisory services from BlackRock.
The following financial information has been derived from the financial
statements incorporated by reference into the Statement of Additional
Information and has been audited by the Portfolio's independent accountant.
Additional information about the performance of the Portfolio is contained in
the Portfolio's annual report. Both the Statement of Additional Information and
the Portfolio's annual report may be obtained from the Fund free of charge by
calling the number on the front cover of this Prospectus. During the period
shown, the Portfolio offered one class of shares to institutional investors.
<TABLE>
<CAPTION>
THE MULTI-SECTOR
MORTGAGE SECURITIES
PORTFOLIO III
----------------------------------------------------------------
Year Six Nine Months October 6,
Ended Months Ended 1994/(a)/
September Ended March 31, 1996 Through
--------------
30, 1997 September June 30, 1995
-------- --------- --------------
30, 1996
--------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $1,016.08 $1,019.41 $1,068.11 $1,000.00
Net investment income (b) 73.74 38.33 61.37 55.81
Net realized and unrealized gain
(loss) on investments.............. 49.82 (3.33) (9.06) 68.11
--------- --------- --------- ---------
Net increase
from investment operations........ 123.56 35.00 52.31 123.92
--------- --------- --------- ---------
Dividends from net investment income (73.74) (38.33) (61.37) (55.81)
---------
Distributions from net realized
capital gains..................... (9.53) -- (39.64) --
--------- --------- --------- ---------
Total dividends and distributions (83.27) (38.33) (101.01) (55.81)
--------- --------- ---------
Net asset value, end of period 1,056.37 $1,016.08 $1,019.41 $1,068.11
========= ========= ========= =========
TOTAL INVESTMENT RETURN (c) 12.67% 3.53% 5.02% 12.78%
RATIOS TO AVERAGE NET ASSETS:
Expenses (b)(d) 0.37% 0.37% .037% 0.37%
Net investment income (b)(d) 7.13% 7.60% 7.77% 7.54%
SUPPLEMENTAL DATA:
Average net assets (in thousands) $ 129,382 $ 119,550 $115,362 $ 103,332
Portfolio turnover
Net assets, end of period (in 52% 24% 119% 215%
thousands) $ 121,251 $ 121,738 $117,569 $ 112,810
</TABLE>
________________________________________________________________________________
-5-
<PAGE>
(a) Commencement of investment operations.
(b) The Adviser waived fees amounting to $45,000, $85,659, $3,652 and $56,269
for the periods ended September 30, 1997, September 30, 1996, March 31,
1996 and June 30, 1995, respectively. Net investment income would have
been $70.58, $37.38, $61.37 and $55.28 on a per share basis for the periods
ended September 30, 1997, September 30, 1996, March 31, 1996 and June 30,
1995, respectively, in the absence of fee waivers. The ratio of net
operating expenses to average net assets would have been .62%, 0.51%, 0.37%
and 0.45% for the periods ended September 30, 1997, September 30, 1996,
March 31, 1996 and June 30, 1995, respectively, in the absence of fee
waivers. The net investment ratios would have been 6.88%, 7.45%, 7.76% and
7.46%, for the periods ended September 30, 1997, September 30, 1996, March
31, 1996 and June 30, 1995, respectively, in the absence of fee
waivers.
(c) Total investment return is calculated assuming a purchase of common stock
at net asset value per share on the first day and a sale at net asset value
per share on the last day of the period reported. Dividends are assumed,
for purposes of this calculation, to be reinvested at the net asset value
per share on the payment date.
(d) Annualized.
The information above represents audited operating performance based on an
average share of common stock outstanding, total investment return, ratios
to average net assets and other supplemental data, for each of the periods
indicated. This information has been determined based upon financial
information provided in the financial statements.
-6-
<PAGE>
INVESTMENT POLICIES
________________________________________________________________________________
The following describes briefly the investment objective and policies of
the Portfolio. Certain instruments and techniques discussed in this section are
described in greater detail later in this Prospectus and in the Statement of
Additional Information ("SAI").
THE ADVISER'S ANALYSIS OF OPPORTUNITIES IN THE COMMERCIAL AND RESIDENTIAL
MORTGAGE-BACKED SECURITIES MARKETS
Commercial and non-agency Residential Mortgage-Backed Securities are among
the highest yielding, call protected, domestic, fixed-income securities across
all rating categories. Under current market conditions, the Adviser believes
that investments in non-agency mortgage securities (which include Commercial and
non-agency Residential Mortgage-Backed Securities) provide attractive investment
opportunities. This is due to several factors, including the developing nature
of the Commercial and non-agency Residential Mortgage-Backed Securities markets,
the restructuring of the real estate loans underlying non-agency mortgage
securities, the infusion of capital to the real estate market and the Adviser's
expectation of no further significant deterioration of real estate property
values.
The construction boom of the early 1980's resulted in the oversupply of
developed commercial and residential real estate. This oversupply led to high
vacancy rates and, coupled with declining rental rates, led to a decline in real
estate values in the late 1980's and early 1990's. Real estate loans originated
in the early and mid-1980's were issued during a period of higher real estate
values. The subsequent rise in delinquencies and losses for lenders has led to
new mortgage origination standards which incorporate less optimistic assumptions
concerning rent growth and occupancy. Mortgages originated during this period
of higher values may be restructured or renegotiated to reflect current market
conditions. The resulting non-agency mortgage securities have underlying loans
with LTV ratios that the Adviser believes more accurately reflect current market
values and allow the Adviser to better assess credit exposure.
Many sophisticated investors have recently become active participants in
the commercial real estate market, which has brought new equity into these types
of investments. The increased issuance of real estate investment trusts
("REITs") has been another source of new equity. The Adviser believes that this
infusion of equity, combined with more conservative real estate valuations, as
well as the dislocation of traditional
-7-
<PAGE>
lenders provides a strong foundation for the continued issuance of Commercial
and non-agency Residential Mortgage-Backed Securities.
The Adviser expects that a recovery of the real estate market in general
would have a positive effect on investments in non-agency Mortgage-Backed
Securities. Market indicators are beginning to show positive trends, with
declines in commercial mortgage delinquencies and defaults. Additionally, the
second quarter of 1993 brought the first positive quarterly total return on real
estate investments in two years, as measured by the Russell-NCREIF Index, which
tracks the performance of U.S. commercial real estate.
The Resolution Trust Corporation (the "RTC") entered the non-agency
Mortgage-Backed Securities market as a significant participant by securitizing
non-agency mortgage loans in June of 1991, packaging certain mortgages it
acquired as receiver of failed savings and loans. The RTC, in addition to other
entities, has securitized commercial and non-agency residential mortgages,
aggregating in excess of $22 billion of Commercial Mortgage-Backed Securities
and $200 billion of Residential Mortgage-Backed Securities created from January,
1987 to December, 1992. As a result of the significant decline in real estate
values in the U.S. in the late 1980's and early 1990's and in conjunction with
their efforts to improve the creditworthiness of financial institutions,
regulators such as the National Association of Insurance Commissioners (the
"NAIC") and the Bank for International Settlements (the "BIS") set more
stringent capital requirements for assets including real estate holdings. These
requirements have led traditional real estate leaders largely to withdraw from
lending to real estate borrowers and to seek a secondary market outlet for these
mortgage loans and for real estate borrowers to seek financing from non-
traditional lenders. The Adviser believes that, as a result, banks and
insurance companies will increasingly take advantage of the secondary market to
dispose of real estate holdings and borrowers will utilize the capital markets
as a major source of financing.
The Adviser believes that the establishment by rating agencies of
standardized rating criteria has helped further the development of the secondary
market for commercial and non-agency residential Mortgage-Backed Securities.
Unlike the securitization of traditional residential mortgages, which are
eligible for principal and interest guarantees from government agencies such as
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"), the securitization of commercial and non-agency residential mortgages
may require other forms of credit enhancement, including the senior/subordinated
security structure, reserve funds and third-party letters of credit. The
senior/subordinated structure
-8-
<PAGE>
was developed in the 1980's to create a senior security which would be highly
rated and attractive to a wide range of investors. The subordinated security,
which was designed to absorb credit losses on the underlying mortgages and
therefore reduce the exposure of senior securities from such losses, was
generally either retained by the issuer or sold to a sophisticated investor in a
negotiated transaction. In the current environment, the subordinated securities
are further segmented into a hierarchy of loss positions. This allows many
different classes of securities to be created, with varying degrees of credit
exposure, prepayment exposure and potential total return.
Based on investor demand for certain securities (which depends in part on a
combination of rating, yield spread and maturity) the issuer of a
senior/subordinated structure typically works closely with the rating agencies
to determine the credit support levels required to achieve the desired rating
for each security class. The specific structure created dictates the priority
for the allocation of available cash flows on the underlying mortgages. The
senior classes generally receive the first available cash flows of both interest
and principal, while the subordinated classes typically receive only interest
until the senior and higher ranked subordinated classes are paid down. Any
principal losses experienced on the underlying properties are generally absorbed
first by the equity holder and then by the cash reserve fund and letters of
credit, if any are present in the structure, and then by the "first loss"
subordinated security holder to the extent of its principal balance and then by
the next subordinated classes, in order of their respective position in the
structure.
The Adviser believes that the development of the secondary market for
Commercial and non-agency Residential Mortgage-Backed Securities has created
significant opportunities for investing in the lower-rated and non-rated classes
of these securities. Furthermore, the Adviser believes that there is sufficient
liquidity in this secondary market for the Portfolio to accomplish its
investment objectives. The Adviser believes that many of the lower-rated and
non-rated Commercial Mortgage-Backed Securities are subject to less prepayment
risk than is the case with Residential Mortgage-Backed Securities because of
structural features of the underlying mortgage loans and the fact that they are
entitled to repayment only after more senior classes are paid. Such securities
therefore offer an opportunity for attractive yields, which the Adviser believes
more than compensates investors for assuming the credit risk associated with
such securities. The Adviser believes this sector of the Mortgage-Backed
Securities market is likely to realize expansion similar to that which the
agency residential Mortgage-Backed Securities market experienced in the late
1980's, where the
-9-
<PAGE>
earlier investors benefitted greatly as the market improved and expanded.
INVESTMENT OBJECTIVE
The Portfolio's investment objective is to seek to provide a total rate of
return before fees and expenses over rolling twelve-month periods that exceeds
the total return of the Salomon Broad Investment Grade Index over the same
periods by at least 1.60% on an annualized basis. The Portfolio will not invest
in Asset-Backed Securities, bank or corporate debt securities other than money
market instruments, or non-rated securities (other than U.S. Government
securities), and will maintain a dollar-weighted average credit quality of at
least BBB by Standard & Poor's Ratings Group, Division of McGraw Hill ("S&P"),
Duff & Phelps Inc. ("D&P") or Fitch Investors Service ("Fitch") or Baa2 by
Moody's Investors Service, Inc. ("Moody's"), with U.S. Government securities
being assigned a AAA rating. The Portfolio will maintain a targeted duration
within 20% shorter or longer than the then current duration of the Salomon Broad
Investment Grade Index. Duration is a measure of the expected life of a fixed
income security on a present value basis and is indicative of a security's price
"volatility" or "risk" associated with changes in interest rates. The Portfolio
seeks to meet its objective by investing in a range of agency and non-agency
Mortgage-Backed Securities, including primarily senior and subordinated tranches
of residential, commercial, multi-family and agricultural mortgage securities.
The securities in which the Portfolio may invest include, but are not limited
to, collateralized mortgage obligations, real estate mortgage investment
conduits, adjustable rate mortgages and U.S. Treasury and agency securities.
The Portfolio will limit to 20% of net assets its investments in U.S. Government
securities that are not also Mortgage-Backed Securities. The Portfolio may
invest in lower rated securities. Such securities are commonly referred to as
"junk bonds" and have a higher risk of default of principal and interest.
During temporary defensive periods and in order to keep cash on hand fully
invested, the Portfolio may invest in money market instruments.
In determining which Mortgage-Backed Securities the Portfolio will
purchase, the Adviser will consider, among other factors, the following:
characteristics of the underlying mortgage loan, including LTV and debt service
coverage ratio, loan seasoning, and refinancing risk; characteristics of the
underlying property, including diversity of the loan pool, occupancy and
leasing, and competitiveness in the pertinent market; economic, environmental
and local considerations; deal structure, including historical performance of
the originator, subordination percentages and reserve fund balances; and
structural participants such as administrators and servicers.
-10-
<PAGE>
In addition to examining the relative value of the investments, the
Adviser's disciplined approach to investments for the Portfolio will include
considerable interaction with rating agencies, extensive review of due diligence
by underwriters and rating agencies, confirmation of debt service coverage
ratios and stress testing of security cash flows. The Adviser also will select
investments which will vary the Portfolio by underlying property types,
geographic regions and industry exposure. In this regard, the Portfolio will not
purchase any Commercial Mortgage-Backed Security ("CMBS") if, giving effect
thereto, (i) the net assets of the Portfolio constituting CMBS that are directly
or indirectly secured by or payable out of cash flow from the same pool of
collateral would increase and would account for more than 10% of the Portfolio's
net assets, or (ii) the net assets of the Portfolio attributable to CMBS backed
by the same pool of collateral would increase and the Portfolio would own more
than 25% of the currently outstanding principal amount of CMBS that are directly
or indirectly secured by or payable out of cash flow from the same pool of
collateral. In addition, the Portfolio will not, except during any three-month
period after any month in which its net assets have increased by more than 30%,
purchase any CMBS if, giving effect thereto, (i) the net assets of the Portfolio
constituting CMBS that are directly or indirectly secured by or payable out of
cash flow from properties located within a single state of the U.S. would
increase and would account for more than 25% of the Portfolio's net assets or
(ii) the net assets of the Portfolio constituting CMBS that are directly or
indirectly secured by or payable out of cash flow from office properties would
increase and would account for more than 33%, or from hotel and motel properties
would increase and would account for more than 20%, or from any one of multi-
family, cooperative, industrial and warehouse, retail and shopping mall, mobile
home park, nursing home and senior living center or hospital properties would
increase and would account for more than 75% of the Portfolio's net assets, or
(iii) the net assets of the Portfolio constituting particular issuances of CMBS
that are directly or indirectly secured by or payable out of cash flow from
single properties would increase and would account for more than 50% of the
Portfolio's net assets. For the foregoing purpose, a CMBS will be considered to
be secured by or payable out of the cash flow from a property only in the
proportion that the outstanding principal amount of the mortgage loan relating
to such property and backing such security bears to the sum of the outstanding
principal amount of all mortgage loans backing such security. If the Portfolio's
asset composition in any of the foregoing categories subsequently exceeds 110%
of the related percentage limitation for any reason, the Portfolio will take
such action as may be necessary so that within 60 days after the occurrence of
such excess the relevant percentage limitation is again satisfied. The Portfolio
will not invest in any issuance of Mortgage-Backed Securities more than 5% of
the principal
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<PAGE>
amount of the collateral of which at the time of issuance is single-family
residential and agricultural properties in the aggregate.
INVESTMENT RESTRICTIONS
The Portfolio has also adopted a number of fundamental investment
restrictions which may not be changed without the approval of the Portfolio's
outstanding voting securities. The SAI sets forth these restrictions in full.
In addition, the Portfolio's investment objective is fundamental and may not be
changed without such shareholder approval.
The Portfolio has also adopted several non-fundamental portfolio investment
limitations. The Portfolio will not modify any of its non-fundamental portfolio
investment limitations without providing at least 60 days prior written notice
of such modification to its shareholders.
DESCRIPTION OF SECURITIES
The following describes certain types of securities in which the Portfolio
may invest:
COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial Mortgage-Backed Securities are generally multi-class debt or
pass-through securities backed by a mortgage loan or pool of mortgage loans
secured by commercial property, such as industrial and warehouse properties,
office buildings, retail space and shopping malls, multi-family properties and
cooperative apartments, hotels and motels, nursing homes, hospitals, senior
living centers and agricultural property. The commercial mortgage loans that
underlie Commercial Mortgage-Backed Securities have certain distinct
characteristics. Commercial mortgage loans are generally not amortizing or not
fully amortizing. At their maturity date, repayment of the remaining principal
balance or "balloon" is due and is repaid through the attainment of an
additional loan or sale of the property. Unlike most single family residential
mortgages, commercial real property loans often contain provisions which
substantially reduce the likelihood that such securities will be prepaid. The
provisions generally impose significant prepayment penalties on loans and, in
some cases, there may be prohibitions on principal prepayments for several years
following origination. This difference in prepayment exposure is significant
due to extraordinarily high levels of refinancing of traditional residential
mortgages experienced over the past years as mortgage rates reached 25 year
lows. Assets underlying Commercial Mortgage-Backed Securities may relate to
only a few properties or to a single property. See "Risk Factors."
-12-
<PAGE>
Commercial Mortgage-Backed Securities have been issued in public and
private transactions by a variety of public and private issuers. Non-
governmental entities that have issued or sponsored Commercial Mortgage-Backed
Securities offerings include owners of commercial properties, originators of and
investors in mortgage loans, savings and loan associations, mortgage banks,
commercial banks, insurance companies, investment banks and special purpose
subsidiaries of the foregoing. The Portfolio may from time to time purchase
Commercial Mortgage-Backed Securities directly from issuers in negotiated
transactions or from a holder of such Commercial Mortgage-Backed Securities in
the secondary market.
Commercial Mortgage-Backed Securities generally are structured to protect
the senior class investors against potential losses on the underlying mortgage
loans. This is generally provided by the subordinated class investors, which
may be included in the Portfolio, by taking the first loss if there are defaults
on the underlying commercial mortgage loans. Other protection, which may
benefit all of the classes, including the subordinated classes in which the
Portfolio intends to invest, may include issuer guarantees, reserve funds,
additional subordinated securities, cross-collateralization, over-
collateralization and the equity investors in the underlying properties.
By adjusting the priority of interest and principal payments on each class
of a given Commercial Mortgage-Backed Security, issuers are able to issue senior
investment grade securities and lower rated or non-rated subordinated securities
tailored to meet the needs of sophisticated institutional investors. In
general, subordinated classes of Commercial Mortgage-Backed Securities are
entitled to receive repayment of principal only after all required principal
payments have been made to more senior classes and have subordinate rights as to
receipt of interest distributions. Such subordinated classes are subject to a
substantially greater risk of nonpayment than are senior classes of Commercial
Mortgage-Backed Securities. Even within a class of subordinate securities, most
Commercial Mortgage-Backed Securities are structured with a hierarchy of levels
(or "loss positions"). Loss positions are the order in which non-recoverable
losses of principal are applied to the securities within a given structure. For
instance, a first loss subordinate security will absorb any principal losses
before any higher loss position subordinate security. This type of structure
allows a number of classes of securities to be created with varying degrees of
credit exposure, prepayment exposure and potential total return.
Subordinated classes of Commercial Mortgage-Backed Securities have more
recently been structured to meet specific investor preferences and issuer
constraints and have different
-13-
<PAGE>
priorities for cash flow and loss absorption. As previously discussed, from a
credit perspective, they are structured to absorb any credit-related losses
prior to the senior class. The principal cash flow characteristics of
subordinated classes are designed to be among the most stable in the Mortgage-
Backed Securities market, the probability of prepayment being much lower than
with traditional Residential Mortgage-Backed Securities. This characteristic is
primarily due to the structural feature that directs the application of
principal payments first to the senior classes until they are retired before the
subordinated classes receive any prepayments. While this serves to enhance the
credit protection of the senior classes, it produces subordinated classes with
more stable average lives. Subject to the applicable provisions of the 1940 Act,
there are no limitations on the classes of Commercial Mortgage-Backed Securities
in which the Portfolio may invest. Accordingly, in certain circumstances, the
Portfolio may recover proportionally less of its investment in a Commercial
Mortgage-Backed Security than the holders of more senior classes of the same
Commercial Mortgage-Backed Security.
The rating assigned to a given issue and class of Commercial Mortgage-
Backed Securities is a product of many factors, including the structure of the
security, the level of subordination, the quality and adequacy of the
collateral, and the past performance of the originators and servicing companies.
The rating of any Commercial Mortgage-Backed Security is determined to a
substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the LTV ratio of
the pooled properties. The amount of the securities issued in any one rating
category is determined by the rating agencies after a rigorous credit rating
process which includes analysis of the issuer, servicer and property manager, as
well as verification of the LTV and debt service coverage ratios. LTV ratios
may be particularly important in the case of commercial mortgages because most
commercial mortgage loans provide that the lender's sole remedy in the event of
a default is against the mortgaged property, and the lender is not permitted to
pursue remedies with respect to other assets of the borrower. Accordingly,
loan-to-value ratios may, in certain circumstances, determine the amount
realized by the holder of the Commercial Mortgaged-Backed Security.
RESIDENTIAL MORTGAGE-BACKED SECURITIES
The Portfolio also expects to invest in Residential Mortgage-Backed
Securities that are Mortgage-Backed Securities representing participation
interests in pools of single-family residential mortgage loans originated by
private mortgage originators. Traditionally, Residential Mortgage-Backed
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<PAGE>
Securities were issued by governmental agencies such as Fannie Mae, Freddie Mac
and Ginnie Mae. The Portfolio intends to invest in those securities issued by
nongovernmental agencies as well as governmental agencies. Nongovernmental
entities that have issued or sponsored Residential Mortgage-Backed Securities
offerings include savings and loan associations, mortgage banks, insurance
companies, investment banks and special purpose subsidiaries of the foregoing.
Residential Mortgage-Backed Securities, similar to Commercial Mortgage-Backed
Securities, have been issued using a variety of structures, including multi-
class structures featuring senior and subordinated classes.
While single-family residential loans do not typically have prepayment
penalties or restrictions, as commercial mortgage loans often do, Residential
Mortgage-Backed Securities are often structured so that subordinated classes may
be locked out of prepayments for a period of time. However, in a period of
extremely rapid prepayments, during which senior classes may be retired faster
than expected, the subordinated classes may receive unscheduled payments of
principal and would have average lives that, while longer than the average lives
of the senior classes, would be shorter than originally expected.
The types of agency and non-agency Commercial and Residential Mortgage-
Backed Securities in which the Portfolio may invest shall include, but not be
limited to, the following securities:
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio may invest in Mortgage-Backed Securities
issued by agencies or instrumentalities of the U.S. Government including GNMA,
FNMA and FHLMC. The U.S. Government or the issuing agency guarantees the
payment of interest and principal on these securities. However, the guarantees
do not extend to the securities' yield or value, nor do the guarantees extend to
the yield or value of the Portfolio's shares. These securities are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the security,
net of certain fees. See "Mortgage-Backed Securities" in the SAI.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage pass-
through securities and are issued by originators of and investors in mortgage
loans, including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing. These securities usually are
backed either by GNMA, FNMA or FHLMC certificates or by a pool of fixed rate or
adjustable rate mortgage loans. Securities which are backed by a pool of fixed
rate or adjustable rate mortgage loans generally are structured with one or more
-15-
<PAGE>
types of credit enhancement. See "Types of Credit Enhancement" in the SAI.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates ("ARMs"). ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index. See "Adjustable Rate Mortgage
Securities" in the SAI.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but also
may be collateralized by whole loans or private mortgage pass-through securities
(collectively, "Mortgage Assets"). Multi-class pass-through securities are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multi-class pass-
through certificates. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multi-class pass-
through securities. CMOs may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of CMOs or multi-class pass-
through securities may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC"). See "Collateralized Mortgage Obligations and Multi-Class
Pass-Through Securities" in the SAI.
MISCELLANEOUS. The Portfolio may from time to time purchase in the
secondary market certain mortgage pass-through securities packaged and master
serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage
Securities Corp. succeeded to rights and duties of Sears Mortgage) or mortgage-
related securities containing loans or mortgages originated by PNC Bank or its
affiliates. It is possible that under some circumstances, PNC Mortgage
Securities Corp. or its affiliates could have interests that are in conflict
with the holders of these mortgage-backed securities, and such holders could
have rights against PNC Mortgage Securities Corp. or its affiliates.
LOWER RATED SECURITIES. The Mortgage-Backed Securities in which the
Portfolio may invest may be lower rated (i.e., have a credit quality below
investment grade) subordinated classes.
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Investments in such lower rated securities are subject to special risks,
including a greater risk of loss of principal and non-payment of interest. An
investor should carefully consider the following factors before purchasing
shares of the Portfolio. The Portfolio (i) will not invest in securities (other
than U.S. Government securities) that are not rated at least B by S&P, D&P or
Fitch or B2 by Moody's at the time of investment; (ii) will not invest in
securities (other than U.S. Government securities) not rated by at least one of
the foregoing organizations at the time of investment; (iii) will not invest
more than 12.5% of its assets in securities that are rated below BB-/Ba3 by any
of the foregoing organizations; and (iv) will not invest more than 25% of its
assets in securities that are rated below BBB-/Baa3 by any of the foregoing
organizations. In the case of short-term money market instruments and short-term
commingled funds the applicable rating requirement will be A2/P2. Split rated
securities will be accounted for at the lower rating. If any security held in
its portfolio is downgraded such that the Portfolio would not be able at that
time to make an investment in such security, the Portfolio will sell such
security within 30 days after such downgrade. The Portfolio will maintain a
dollar-weighted average credit quality of at least BBB/Baa2, with U.S.
Government securities assigned a AAA rating. In order to calculate the average
credit quality of the Portfolio, the Portfolio will assign sequential numbers to
each of the 20 rating categories from AAA to D, multiply the value of each
instrument by the rating equivalent number assigned to its lowest rating, sum
all of such products, divide the aggregate by the net asset value of the
Portfolio and convert the number back to its equivalent rating symbol.
Generally, lower rated securities offer a higher return potential than
higher rated securities but involve greater volatility of price and greater risk
of loss of income and principal, including the possibility of default or
bankruptcy of the issuers of such securities. Lower rated securities will
likely have large uncertainties or major risk exposure to adverse conditions and
are predominately speculative. The occurrence of adverse conditions and
uncertainties would likely reduce the value of securities held by the Portfolio,
with a commensurate effect on the value of the Portfolio's shares. While the
market values of lower rated securities tend to react less to fluctuations in
interest rate levels than do those of higher rated securities, the market values
of certain of these securities also tend to be more sensitive to changes in
economic conditions than higher rated securities. In addition, lower rated
securities generally present a higher degree of credit risk. The Portfolio may
incur additional expenses to the extent that it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings.
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Securities which are rated BB by S&P, D&P and Fitch and Ba by Moody's have
speculative characteristics with respect to capacity to pay interest and repay
principal. Securities which are rated B generally lack characteristics of a
desirable investment and assurance of interest and principal payments over any
long period of time may be small. A general description of the bond ratings of
Moody's, S&P, D&P and Fitch is set forth in Appendix A to the Prospectus.
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. Ratings may from time to time change, positively or
negatively, to reflect developments regarding the issuer's financial condition.
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 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 Adviser's own credit analysis
than in the case of mutual funds investing in higher-rated securities.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Portfolio will invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Portfolio may invest in securities issued by agencies of
the U.S. Government or instrumentalities of the U.S. Government, including, but
not limited to, GNMA, FNMA and FHLMC securities. Obligations of GNMA, the
Farmers Home Administration and the Export-Import Bank are backed by the "full
faith and credit" of the United States. In the case of securities not backed by
the "full faith and credit" of the United States, the Portfolio must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment. Such securities include obligations issued by FNMA and FHLMC, each
of which may borrow from the U.S. Treasury to meet its obligations, although the
U.S. Treasury is under no obligation to lend to FNMA or FHLMC. GNMA, FNMA and
FHLMC investments by the Portfolio may also include pass-through securities,
CMOs and certain other Mortgage-Backed Securities.
BANK AND CORPORATE DEBT SECURITIES
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The Portfolio may not invest in bank or corporate debt securities except
that it may invest in money market instruments for temporary defensive purposes
and in order to keep cash on hand fully invested. Such instruments include but
are not limited to notes, certificates of deposit, bankers' acceptances and
commercial paper.
FLOATING RATE AND INDEX OBLIGATIONS
The Portfolio may invest in debt securities with interest payments or
maturity values that are not fixed, but float in conjunction with an underlying
index or price. These securities may be backed by U.S. Government or corporate
issuers, or by collateral such as mortgages. In certain cases, a change in the
underlying index or price may have a leveraging effect on the periodic coupon
payments, creating larger possible swings in the prices of such securities than
would be expected when taking into account their maturities alone. The indices
and prices upon which such securities can be based include interest rates,
currency rates and commodities prices. However, the Portfolio will not invest
in any instrument whose value is computed based on a multiple of the change in
price or value of an asset or an index of or relating to assets in which the
Portfolio could not invest.
Floating rate securities pay interest according to a coupon which is reset
periodically. This reset mechanism may be formula based, or reflect the passing
through of floating interest payments on an underlying collateral pool. The
coupon is usually reset daily, weekly, monthly, quarterly or semi-annually, but
other schedules are possible. Floating rate obligations generally exhibit a low
price volatility for a given stated maturity or average life because their
coupons adjust with changes in interest rates. If their underlying index is not
an interest rate, or the reset mechanism lags the movement of rates in the
current market, greater price volatility may be experienced.
Index securities pay a fixed rate of interest, but have a maturity value
that varies by formula, so that when the obligation matures a gain or loss is
realized. The risk of index obligations depends on the volatility of the
underlying index, the coupon payment and the maturity of the obligation.
ILLIQUID SECURITIES
Illiquid securities are subject to legal or contractual restrictions on
disposition or lack an established secondary trading market. The sale of
restricted and illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
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exchanges or in the over-the-counter markets. Restricted securities may sell at
a price lower than similar securities that are not subject to restrictions on
resale. The Portfolio may purchase certain restricted securities up to 15% of
its net assets eligible for sale to qualified institutional buyers as
contemplated by Rule 144A under the Securities Act of 1933 and may treat such
securities as being liquid if the Adviser determines, pursuant to procedures
adopted by the Trust's Board of Trustees, that a sufficient secondary market
does exist for such securities. See the SAI for a further discussion of illiquid
securities.
OTHER INVESTMENT PRACTICES.
DURATION MANAGEMENT AND OTHER MANAGEMENT TECHNIQUES
As a basic element of its overall investment strategy the Portfolio intends
to use a variety of other investment management techniques and instruments. A
more complete description of such techniques is contained in the SAI. The
Portfolio may purchase and sell futures contracts, enter into various interest
rate transactions such as swaps, caps and floors and may purchase and sell
exchange-listed and over-the-counter put and call options on securities,
financial indices and futures contracts (collectively, "Additional Investment
Management Techniques"). These Additional Investment Management Techniques may
be used for duration management and other risk management to attempt to protect
against possible changes in the market value of the Portfolio resulting from
trends in the debt securities markets and changes in interest rates, to protect
the Portfolio's unrealized gains in the value of its securities holdings, to
facilitate the sale of such securities for investment purposes and to establish
a position in the securities markets as a temporary substitute for purchasing
particular securities. There is no particular strategy that requires use of one
technique rather than another as the decision to use any particular strategy or
instrument is a function of market conditions and the composition of the
portfolio. See Appendix B "General Characteristics and Risks of Additional
Investment Management Techniques."
Additional Investment Management Techniques present certain risks. With
respect to hedging and risk management, the variable degree of correlation
between price movements of hedging instruments and price movements in the
position being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Portfolio's position. In addition,
certain instruments and markets may not be liquid in all circumstances. As a
result, in volatile markets, the Portfolio may not be able to close out a
transaction without incurring losses substantially greater than the initial
deposit. Although the contemplated use of these instruments predominantly
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for hedging should tend to minimize the risk of loss due to a decline in the
value of the position, at the same time they tend to limit any potential gain
which might result from an increase in the value of such position. The ability
of the Portfolio to successfully utilize Additional Investment Management
Techniques will depend on the Adviser's ability to predict pertinent market
movements and sufficient correlations, which cannot be assured. Finally, the
daily deposit requirements in futures contracts that the Portfolio has sold
create an ongoing greater potential financial risk than do options transactions,
where the exposure is limited to the cost of the initial premium. Losses due to
the use of Additional Investment Management Techniques will reduce net asset
value.
In selecting counterparties for OTC hedging and risk management
transactions, the Portfolio will adhere to the following minimum ratings: (i)
with respect to an OTC derivative instrument with a remaining nominal maturity
of six months or less, a Moody's Derivative Counterparty Rating of A3; (ii) with
respect to an OTC derivative instrument with a remaining maturity of more than
six months, a Moody's Derivative Counterparty Rating of AA3. If the
counterparty does not have a Moody's counterparty rating, then either the
Moody's or S&P long-term securities rating of A3/A- (with respect to category
(i) above) or Aa3/AA-(with respect to category (ii) above) may be used as a
substitute. In addition, all such counterparties must have a minimum short-term
rating of A-1 by Moody's and P-1 by S&P. If a counterparty drops below the
minimum ratings, then the Portfolio will seek to unwind existing agreements with
such counterparty in a cost-effective manner and will be prohibited from
entering into new agreements with the counterparty so long as the counterparty's
rating is below the relevant minimum.
The principal risks relating to the use of futures contracts and other
Additional Investment Management Techniques are: (a) less than perfect
correlation between the prices of the instrument and the market value of the
securities in the Portfolio's holdings; (b) possible lack of a liquid secondary
market for closing out a position in such instruments; (c) losses resulting from
interest rate or other market movements not anticipated by the Adviser; and (d)
the obligation to meet additional variation margin or other payment
requirements, all of which could result in the Portfolio being in a worse
position than if such techniques had not been used. See Appendix B "General
Characteristics and Risks of Additional Investment Management Techniques" and
the Statement of Additional Information for further information.
The Portfolio may also purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
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terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date outside the normal course of
settlement for securities of that type. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Portfolio will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. If the
Portfolio disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss. At the time the Portfolio enters into a
transaction on a when-issued or forward commitment basis, it will segregate with
its custodian cash or other liquid debt securities with a value not less than
the value of the when-issued or forward commitment securities. The value of
these assets will be monitored daily to ensure that their marked to market value
will at all times equal or exceed the corresponding obligations of the
Portfolio. There is always a risk that the securities may not be delivered and
that the Portfolio may incur a loss. Settlements in the ordinary course, which
typically occur monthly for mortgage-related securities, are not treated by the
Portfolio as when-issued or forward commitment transactions and accordingly are
not subject to the foregoing restrictions.
REPURCHASE AGREEMENTS
The Portfolio may invest temporarily, without limitation, in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the Portfolio from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed upon date. These
agreements may be made with respect to any of the securities in which the
Portfolio is authorized to invest. Repurchase agreements may be characterized as
loans secured by the underlying securities and will be entered into in
accordance with the requirements of the SEC. The Portfolio will not enter into
any repurchase agreement with respect to securities other than U.S. Government
securities and mortgage-backed securities. The value of the collateral for such
repurchase agreement marked-to-market at the end of each business day will be at
least equal to the amount of the repurchase agreement. The Portfolio will not
enter into any repurchase agreement the term of which exceeds 90 days.
RISK FACTORS
COMMERCIAL MORTGAGE-BACKED SECURITIES AND RESIDENTIAL MORTGAGE-BACKED
SECURITIES. Investments in Commercial Mortgage-Backed Securities involve the
credit risks of delinquency and default. Delinquency refers to interruptions in
the payment of interest and principal. Default refers to the potential for
unrecoverable principal loss from the sale of foreclosed property. These risks
include the risks inherent in
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the commercial mortgage loans which support such Commercial Mortgage-Backed
Securities and the risks associated with direct ownership of real estate. This
may be especially true in the case of Commercial Mortgage-Backed Securities
secured by, or evidencing an interest in, a relatively small or less diverse
pool of commercial mortgage loans. The factors contributing to these risks
include the effects of general and local economic conditions on real estate
values, the conditions of specific industry segments, the ability of tenants to
make lease payments and the ability of a property to attract and retain tenants,
which in turn may be affected by local conditions such as oversupply of space or
a reduction of available space, the ability of the owner to provide adequate
maintenance and insurance, energy costs, government regulations with respect to
environmental, zoning, rent control and other matters, and real estate and other
taxes.
While the credit quality of the Commercial Mortgage-Backed Securities in
which the Portfolio may invest will reflect the perceived likelihood of future
cash flows to meet operating expenses and cash flow requirements, the underlying
commercial properties may not be able to continue to generate income to meet
their operating expenses and cash flow requirements (mainly debt service, lease
payments, capital expenditures, taxes, maintenance, insurance and tenant
improvements) as a result of any of the factors mentioned above. Consequently,
the obligors under commercial mortgages may be unable to make payments of
interest in a timely fashion, increasing the risk of default on a related
Commercial Mortgage-Backed Security. In addition, the repayment of the
commercial mortgage loans underlying Commercial Mortgage-Backed Securities will
typically depend upon the future availability of financing and the stability of
real estate property values.
The commercial mortgage loans that underlie Commercial Mortgage-Backed
Securities have certain distinct characteristics. Commercial mortgage loans are
generally not amortizing or not fully amortizing. At their maturity date,
repayment of the remaining principal balance or "balloon" is due and is repaid
through the attainment of an additional loan or sale of the property. Most
commercial mortgage loans are nonrecourse obligations of the borrower, meaning
that the sole remedy of the lender in the event of a default is to foreclose
upon the collateral. As a result, in the event of default by a borrower,
recourse may be had only against the specified property pledged to secure the
loan and not against the borrower's other assets. If borrowers are not able or
willing to refinance or dispose of the property to pay the principal balance due
at maturity, payments on the subordinated classes of the related Commercial
Mortgage-Backed Security are likely to be adversely affected. The ultimate
extent of the loss, if any, to the subordinated classes may only be determined
after the foreclosure of the
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mortgage encumbering the property and, if the mortgagee takes title to the
property, upon liquidation of the property. Factors such as the title of the
property, its physical condition and financial performance, as well as
governmental disclosure requirements with respect to the condition of the
property, may make a third party unwilling to purchase the property at a
foreclosure sale or for a price sufficient to satisfy the obligations with
respect to the related Commercial Mortgage-Backed Securities. The condition of a
property may deteriorate during foreclosure proceedings. Certain obligors on
underlying mortgages may become subject to bankruptcy proceedings, in which case
the amount and timing of amounts due under the related Commercial Mortgage-
Backed Securities may be materially adversely affected.
In general, any losses on a given Commercial Mortgage-Backed Security will
be absorbed first by the equity holder, then by a cash reserve fund or letter of
credit, if any, and then by the "first loss" subordinated security to the extent
of its principal balance. Because the Portfolio intends to invest in
subordinated classes of Commercial Mortgage-Backed Securities, there can be no
assurances that in the event of default and the exhaustion of equity support,
the reserve fund and any debt classes junior to those in which the Portfolio
invests, the Portfolio will be able to recover all of its investment in the
securities it purchases. In addition, if the underlying mortgage portfolio has
been overvalued by the originator, or if mortgage values subsequently decline,
the Portfolio may hold the "first loss" position in certain Commercial Mortgage-
Backed Securities ahead of the more senior debt holders, which may result in
significant losses. Many of the lower-rated Commercial Mortgage-Backed
Securities are subject to less prepayment risk than in the case of Residential
Mortgage-Backed Securities because of structural features of the underlying
mortgage loans and the fact that they are entitled to repayment only after more
senior classes are paid.
Investments in Residential Mortgage-Backed Securities involve the credit
risks that affect interest and principal cash flows similar to the credit risks
of Commercial Mortgage-Backed Securities discussed above, as well as the
prepayment risks associated with the possibility that prepayments of principal
generally may be made at any time without penalty. Prepayment rates are
influenced by changes in current interest rates and a variety of economic,
geographic, social and other factors. Changes in the rate of prepayments on a
Residential Mortgage-Backed Security may change the yield to maturity of the
security and amounts available for reinvestment from such securities by the
Portfolio are likely to be greater during periods of relatively low or declining
interest rates and therefore are likely to be reinvested at lower interest rates
than during a period of relatively high interest rates. This prepayment effect
has been particularly pronounced in recent
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years as borrowers have refinanced higher interest rate mortgages into lower
interest rate mortgages available in the marketplace. Because the Portfolio
expects to invest in subordinated Residential Mortgage-Backed Securities, the
prioritization of cash flows from mortgages under the Residential Mortgage-
Backed Securities in favor of the senior classes generally reduces this
prepayment risk.
INVESTING IN LOWER CREDIT QUALITY SECURITIES. An investor should recognize
that the lower-rated Commercial and Residential Mortgage-Backed Securities in
which the Portfolio may invest have speculative characteristics. The prices of
lower credit quality securities, which are commonly referred to as "junk bonds,"
have been found to be less sensitive to interest rate changes than more highly
rated investments, but more sensitive to adverse economic downturns or
individual issuer developments. Securities rated lower than B by S&P and
Moody's, including bonds rated as low as D by S&P or C by Moody's, can be
regarded as having extremely poor prospects of ever attaining any real
investment standing and may be in default with payment of interest and/or
repayment of principal in arrears. A projection of an economic downturn or the
advent of a recession, for example, could cause a decline in the price of lower
credit quality securities because the advent of a recession could lessen the
ability of obligors of mortgages underlying Commercial Mortgage-Backed
Securities and Residential Mortgage-Backed Securities to make principal and
interest payments. In such event, existing credit supports and any first loss
positions may be insufficient to protect against loss of principal.
Issuers of lower rated securities are often in the growth stage of their
development and/or involved in a reorganization or takeover. The companies are
often highly leveraged (have a significant amount of debt relative to
shareholders' equity) and may not have available to them more traditional
financing methods, thereby increasing the risk associated with acquiring these
types of securities. In some cases, obligations with respect to lower rated
securities 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.
The secondary markets for lower rated securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for lower
rated securities are concentrated in relatively few market makers and
participants in the markets are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for these 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
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condition of a particular issuer. Under certain economic and/or market
conditions, the Portfolio may have difficulty disposing of certain lower rated
securities 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
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 lower rated securities are available only from a
limited number of dealers, and such quotations may not be the actual prices
available for a purchase or sale.
The markets for lower rated securities 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 these securities may be affected by legislative and regulatory developments.
These developments could adversely affect the Portfolio's net asset value and
investment practices, the secondary market, the financial condition of issuers
of these securities and the value and liquidity of outstanding securities,
especially in a thinly traded market. For example, federal legislation
requiring the divestiture by federally insured savings and loan associations of
their investments in lower rated bonds and limiting the deductibility of
interest by certain corporate issuers of these bonds adversely affected the
market in recent years.
When the secondary market for lower rated 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
the Portfolio's securities, and judgment plays a more important role in
determining such valuations. Increased illiquidity, in combination with the
relative youth and growth of the market for such securities, also may affect the
ability of the Portfolio to dispose of such securities at a desirable price.
Additionally, if the secondary markets for lower rated securities contract due
to adverse economic conditions or for other reasons, certain of the Portfolio's
liquid securities may become illiquid and the proportion of the Portfolio's
assets invested in illiquid securities may significantly increase.
The costs attributable to investing in lower rated securities are usually
higher for several reasons, such as higher investment research costs and higher
commission costs.
NON-DIVERSIFIED STATUS. The Portfolio has registered as a "non-
diversified" investment company which enables it to invest more than 5% of its
assets in the obligations of any single issuer, subject only to the
diversification requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). As a result of its ability to concentrate its
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investments in the obligations of a smaller number of issuers, the Portfolio may
be more susceptible than a more widely diversified fund to any single economic,
political or regulatory occurrence.
ILLIQUID SECURITIES. Liquidity of a security relates to the ability to
easily dispose of securities and the price to be obtained, and does not
necessarily relate to the credit risk or likelihood of receipt of cash at
maturity. Illiquid securities may trade at a discount from comparable, more
liquid investments. The Commercial Mortgage-Backed Securities which the
Portfolio intends to acquire may be less marketable and in some instances will
be considered illiquid by the Portfolio under applicable standards because of
the absence of registration under the federal securities laws, contractual
restrictions on transfer or the small size of the issue (relative to the issues
of comparable interests).
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PORTFOLIO TURNOVER
The Portfolio has no fixed policy with respect to portfolio turnover. The
Portfolio does not expect to trade in securities for short-term gain. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Portfolio will pay commissions in
connection with its options and futures transactions, the other securities in
which the Portfolio invests are generally traded on a "net" basis with dealers
acting as principals for their own account without a stated commission.
Nevertheless, high portfolio turnover may involve correspondingly greater
brokerage commissions and other transaction costs which will be borne directly
by the Portfolio. It is expected that the annual portfolio turnover rate for
the Portfolio will not exceed 400%, excluding securities having a maturity of
one year or less. Higher portfolio turnover results in increased Portfolio
expenses, including brokerage commissions, dealer mark-ups and other transaction
commissions, costs on the sale of securities and on reinvestment in other
securities. BlackRock will monitor the tax status of the Portfolio under the
Code during any period in which the annual turnover rate of the Portfolio
exceeds 100%.
MANAGEMENT
________________________________________________________________________________
BOARD OF TRUSTEES
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees. The Statement of Additional Information contains the
name of each trustee and certain background information.
ADVISER
BlackRock (formerly BlackRock Financial Management L.P.) was organized in
1988. On February 28, 1995, BlackRock Financial Management L.P. sold its
business to PNC Bank, National Association ("PNC Bank"). The principal business
address of BlackRock is 345 Park Avenue, New York, NY 10154. BlackRock, now a
wholly-owned indirect subsidiary of PNC Bank Corp., provides asset management
services with respect to U.S. and foreign fixed income instruments. As adviser,
BlackRock is responsible for the day-to-day management of the Portfolio,
and
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generally makes all purchase and sale decisions regarding the investments made
by the Portfolio. BlackRock also provides research and credit analysis as well
as certain other services. BlackRock currently serves as investment adviser to
institutional and individual investors in the United States and overseas through
several funds and separately managed accounts with total assets in excess of $41
billion.
Keith Anderson and Mark S. Warner are the persons primarily responsible for
the day-to-day management of the Portfolio's investments.
Keith Anderson is a Managing Director at BlackRock Financial Management,
and co-head of the Portfolio Management Group. In addition, Mr. Anderson co-
chairs the Investment Strategy Committee and he is a member of the firm's
Management Committee. Mr. Anderson has primary responsibility for managing
client portfolios and for acting as a specialist in the government and mortgage
sectors. His areas of expertise include Treasuries, agencies, futures, options,
swaps and a wide range of traditional and non-traditional mortgage securities.
Mr. Anderson has been a co-manager of the Portfolio since its inception.
Prior to founding BlackRock in 1988, Mr. Anderson was a Vice President in
Fixed Income Research at The First Boston Corporation. Mr. Anderson joined
First Boston in 1987 as a mortgage securities and derivative products strategist
working with institutional money managers. From 1983 to 1987, Mr. Anderson was
a Vice President and Portfolio Manager at Criterion Investment Management
Company where he had primary responsibility for a $2.8 billion fixed income
portfolio and was an integral part of the firm's portfolio management team.
Mr. Anderson has published numerous articles on fixed income strategies,
including two articles in The Handbook of Fixed Income Options: "Scenario
-------------------------------------
Analysis and the Use of Options in Total Return Portfolio Management" and
"Measuring, Interpreting, and Applying Volatility within the Fixed Income
Market." Mr. Anderson received a Bachelor of Science in Economics and Finance
from Nichols College in 1981 and an M.B.A. from Rice University in 1983.
Mark S. Warner, CFA, is a Vice President of BlackRock with primary
responsibility for managing client portfolios. Mr. Warner specializes in
investing in the commercial mortgage and non-agency residential mortgage
sectors. Mr. Warner has been a co-manager of the Portfolio since July 1996.
Prior to joining BlackRock in 1993, Mr. Warner was a director in the
Capital Markets Unit of the Prudential Mortgage Capital Company. Mr. Warner
joined the Prudential Mortgage Capital Company in 1987, and was initially
responsible for
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asset/liability strategies for the $7 billion participating annuity segment.
Mr. Warner joined Prudential's Commercial Real Estate Division in 1989, where he
was responsible for the sale of commercial whole loans, purchases of private
placement mortgage-backed securities and securitization opportunities within the
Prudential's $25 billion non-residential portfolio. Between 1989 and 1993, Mr.
Warner successfully structured and executed securitization of approximately $2
billion of non-residential mortgages. Mr. Warner previously worked in the fixed
income department at PaineWebber.
Mr. Warner earned a B.A. degree in political science from Columbia
University in 1983 and an M.B.A. degree in finance and marketing from Columbia
Business School in 1987. Mr. Warner received his Chartered Financial Analyst
designation in 1993.
For the services provided and expenses assumed by it, BlackRock is entitled
to receive from the Portfolio a fee computed daily and payable monthly at an
annualized rate of .25% of the Portfolio's average daily net assets. From time
to time BlackRock may waive all or any portion of its advisory fee for and may
reimburse expenses of the Portfolio. The Adviser has advised the Fund that it
will cap the Portfolio's expenses (other than advisory fees) at no more than
.12% of average net assets for the current fiscal year. See "Introduction--
Expense Table."
Since its commencement of operations, the Portfolio has paid investment
advisory fees at the annual rate of .25% of the Portfolio's average daily net
assets.
ADMINISTRATORS
BlackRock, Inc., whose principal business address is 1600 Market Street,
Philadelphia, Pennsylvania 19103, PFPC, whose principal business address is 400
Bellevue Parkway, Wilmington, Delaware 19809 and BDI, whose principal business
address is Four Falls Corporate Center, 6th Floor, West Conshohocken, PA 19428-
2961, serve as the Fund's co-administrators. BlackRock, Inc. and PFPC are
indirect wholly-owned subsidiaries of PNC Bank Corp. BDI 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 relating to the maintenance of
financial records and fund accounting. As compensation for these services,
BlackRock, Inc. is entitled to receive a fee, computed daily and payable
monthly, at an annual rate of .03% of the Portfolio's average daily net assets,
and PFPC and BDI are entitled to receive a combined fee,
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computed daily and payable monthly, at an annual rate of .20% of the first $500
million of the Portfolio's average daily net assets, .18% of the next $500
million of the Portfolio's average daily net assets, and .16% of the Portfolio's
average daily net assets in excess of $1 billion. From time to time the
Administrators may waive all or any portion of the administration fees for the
Portfolio.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN
PNC Bank, whose principal business address is 1600 Market Street,
Philadelphia, PA 19103, serves as the Fund's custodian and PFPC serves as the
Fund's transfer agent and dividend disbursing agent.
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to BlackRock and the Administrators, transfer agency fees,
fees and expenses of officers and trustees who are not affiliated with BlackRock
or the Distributor or any of their affiliates, taxes, interest, legal fees,
custodian fees, auditing fees, certain fees and expenses in registering and
qualifying the Portfolio and its Shares for distribution under Federal and state
securities laws, expenses of preparing prospectuses and statements of additional
information and of printing and distributing prospectuses and statements of
additional information to existing shareholders, the expense of reports to
shareholders, shareholders' meetings and proxy solicitations, fidelity bond and
trustees and officers liability insurance premiums, the expense of using
independent pricing services and other expenses which are not expressly assumed
by BlackRock or the Administrators under their respective agreements with the
Fund. Any general expenses of the Fund that are not readily identifiable as
belonging to a particular investment portfolio will be allocated among all
investment portfolios by or under the direction of the Board of Trustees in a
manner the Board determines to be fair and equitable.
PORTFOLIO TRANSACTIONS
The Portfolio's adviser may consider a number of factors in determining
which brokers to use in purchasing or selling portfolio securities. These
factors, which are more fully discussed in the Statement of Additional
Information, include, but are not limited to, research services, sales of shares
of the Fund, the reasonableness of commissions and quality of services and
execution. Brokerage transactions for the Portfolio may be directed through
registered broker/dealers ("Authorized Dealers")
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who have entered into dealer agreements with the Distributor, subject to the
requirements of best execution.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered open-end investment company continuously
engaged in the issuance of its shares, and prohibit banks generally from
underwriting securities, but such banking laws and regulations do not prohibit
such a holding company or affiliate or banks generally from acting as investment
adviser, administrator, transfer agent or custodian to such an investment
company, or from purchasing shares of such company as agent for and upon the
order of customers. PNC Bank, BlackRock, BlackRock, Inc., PFPC and Institutions
that are banks or bank affiliates are subject to such banking laws and
regulations. In addition, state securities laws on this issue may differ from
the interpretations of Federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of its Shares, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operations with respect to its Shares. It is not
anticipated, however, that any change in the Fund's method of operations would
affect its net asset value per share or result in a financial loss to any
investor.
PURCHASE AND REDEMPTION OF SHARES
________________________________________________________________________________
DISTRIBUTOR
Shares of the Portfolio are offered on a continuous basis for the Fund by
the distributor, BlackRock Distributors, Inc. (the "Distributor"). The
Distributor is a registered broker/dealer with 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 the Portfolio's Shares.
However, the Plan permits BDI, BlackRock, the Administrators and other companies
that receive fees from the Fund to make payments relating to
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<PAGE>
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 Arrangements" in the Statement of
Additional Information.
PURCHASE OF SHARES
Shares of the Portfolio are offered without a sales load on a continuous
basis to Institutions at the net asset value per share of the Portfolio next
computed after an order and payment are received in proper form by PFPC.
Dividends will commence accruing on that day. Shares may be purchased on any
Business Day. A "Business Day" is any weekday that the New York Stock Exchange
(the "NYSE") and the Federal Reserve Bank of Philadelphia (the "FRB") are open
for business. Purchase orders may be transmitted by telephoning PFPC at (800)
441-7379. The Fund may in its discretion reject any order for Shares.
Payment for Shares may be made only in Federal funds or other funds
immediately available to the Fund's custodian. Normally, payments for Shares
should be received by PFPC no later than 12:00 Noon (Eastern Time). The minimum
initial investment by an Institution is $50 million. There is no minimum
subsequent investment.
REDEMPTION OF SHARES
Redemption orders may be transmitted to PFPC by telephone at (800) 441-
7379. Shares are redeemed at the net asset value per share of the Portfolio
next determined after PFPC's receipt of the redemption request in proper order,
and dividends will not accrue after the day on which the redemption is
effectuated. THE FUND, THE ADMINISTRATORS AND THE DISTRIBUTOR WILL EMPLOY
REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS COMMUNICATED BY TELEPHONE ARE
GENUINE. THE FUND AND ITS SERVICE PROVIDERS WILL NOT BE LIABLE FOR ANY LOSS,
LIABILITY, COST OR EXPENSE FOR ACTING UPON TELEPHONE INSTRUCTIONS THAT ARE
REASONABLY BELIEVED TO BE GENUINE IN ACCORDANCE WITH SUCH PROCEDURES.
The date on which a redemption request is received will be the date
specified if the redemption request specifies a particular date in the future
for its effectiveness. The Fund expects to pay all redemption requests made
with at least thirty (30) days' advance notice in cash. Redemption requests in
excess
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<PAGE>
of $250,000 by any single shareholder from the Portfolio within any three-month
period may be paid in kind unless the Fund has received at least thirty (30)
days' advance notice and will be paid in kind if the redeeming shareholder so
requests and such payment will not adversely affect other shareholders.
Shareholders who receive redemptions in kind will incur additional expense and
delay in disposing of such securities and the value of such securities may
decline during the disposition period.
If a proper redemption request is received prior to 12:00 noon (Eastern
time) on any Business Day payment of the redemption price will ordinarily be
wired to the shareholder's bank on the first business day subsequent to the 30-
day advance notice redemption request in the case of the Portfolio. If the
request is received after 12:00 noon (Eastern time) payment will ordinarily be
wired to the shareholder's bank within two Business Days subsequent to the 30-
day advance notice redemption request. Redemption proceeds will be sent by wire
only to the bank named on the shareholder's application form. A shareholder may
change the wire instructions on the application form by writing to PFPC with an
appropriate signature guarantee.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. If an Institution is unable to
contact PFPC by telephone, the Institution may also deliver the redemption
request to PFPC by mail at 400 Bellevue Parkway, Wilmington, DE 19809.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
Shares) for such periods as are permitted under the 1940 Act. The Fund may also
redeem Shares involuntarily or make payment for redemption in securities or
other property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act. See "Purchase and Redemption Information"
in the Statement of Additional Information for examples of when such redemption
might be appropriate.
NET ASSET VALUE
________________________________________________________________________________
The net asset value for the Portfolio is calculated as of the close of
trading on the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by
adding the value of all its securities, cash and other assets, subtracting the
liabilities and dividing by the total number of Shares outstanding. The net
asset value per Share of the Portfolio is determined independently of the Fund's
other portfolios.
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<PAGE>
The value of securities held by the Portfolio is based upon market
quotations or, if market quotations are not readily available, the securities
are valued at fair value as determined in good faith by or under the direction
of the Fund's Board of Trustees.
The Portfolio may use a pricing service, bank or broker/dealer experienced
in such matters to value the Portfolio's securities. A more detailed discussion
of net asset value and security valuation is contained in the Statement of
Additional Information.
DIVIDENDS AND DISTRIBUTIONS
________________________________________________________________________________
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
holders of Institutional Shares is reduced by accrued expenses directly
attributable to the Portfolio and the general expenses of the Fund prorated to
the Portfolio on the basis of its relative net assets. All distributions are
reinvested at net asset value in the form of additional full and fractional
Shares of the Portfolio unless an Institution elects otherwise. Such election,
or any revocation thereof, must be made in writing to PFPC, and will become
effective with respect to dividends paid after its receipt by PFPC. The net
investment income of the Portfolio is declared daily. All such dividends are
paid not later than ten days after the end of each month and within seven days
after redemption of all of a shareholder's Shares in the Portfolio. Net
realized capital gains (including net short-term capital gains), if any, will be
distributed by the Portfolio at least annually.
TAXES
________________________________________________________________________________
The following discussion is only a brief summary of some of the important
tax considerations generally affecting the Portfolio and its shareholders and is
not intended as a substitute for careful tax planning. Accordingly, investors
in the Portfolio should consult their tax advisers with specific reference to
their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long as
the Portfolio qualifies for this tax treatment, it generally will be relieved of
Federal income tax on amounts distributed to shareholders, but shareholders,
unless otherwise exempt, will pay income or capital
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<PAGE>
gains taxes on amounts so distributed (except distributions that are treated as
a return of capital), regardless of whether such distributions are paid in cash
or reinvested in additional Shares.
Distributions paid out of the "net capital gain" (the excess of net long-
term capital gain over net short-term capital loss), if any, of the Portfolio
will be taxed to shareholders as long-term capital gain, regardless of the
length of time a shareholder has held his Shares and whether such gain was
reflected in the price paid for the Shares. All other distributions, to the
extent they are taxable, are taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on a
specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, provided the dividends are paid during
January of the following year.
A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Portfolio Shares depending upon the tax
basis of such Shares and their price at the time of redemption, transfer or
exchange.
Future legislative or administrative changes or court decisions may
materially affect the tax consequences of investing in the Portfolio.
Shareholders are also urged to consult their tax advisers concerning the
application of state and local income taxes to investments in the Fund which may
differ from the Federal income tax consequences described above. Shareholders
who are nonresident alien individuals, foreign trusts or estates, foreign
corporations or foreign partnerships may be subject to different U.S. Federal
income tax treatment and should consult their tax advisers.
DESCRIPTION OF SHARES
________________________________________________________________________________
The Fund was organized as a Massachusetts business trust on December 22,
1988 and is registered under the 1940 Act as an open-end management investment
company. Effective January 31, 1998, the Fund has changed its name from Compass
Capital Funds/SM/ to BlackRock Funds/SM/. The Declaration of Trust authorizes
the Board of Trustees to classify and reclassify any unissued shares into one or
more classes of shares. Pursuant to such authority, the Board of Trustees has
authorized the issuance of an unlimited number of shares in 38 investment
portfolios. This Prospectus describes the Institutional Shares
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of the Multi-Sector Mortgage Securities Portfolio III, which is classified as a
non-diversified company under the 1940 Act. For information regarding other
portfolios of the Fund, contact the Distributor by phone at (800) 998-7633 or at
the address listed in "Purchase and Redemption of Shares--Distributor."
Each share of the Portfolio has a par value of $.001, represents an equal
proportionate interest in the Portfolio and is entitled to such dividends and
distributions earned on the Portfolio's assets as are declared in the discretion
of the Board of Trustees. The Fund's shareholders are entitled to one vote for
each full share held and proportionate fractional votes for fractional shares
held, and will vote in the aggregate and not by class, except where otherwise
required by law or as determined by 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 January 23, 1998, PNC Bank held of record approximately 77% of the
Fund's outstanding shares, as trustee on behalf of individual and institutional
investors, and may be deemed a controlling person of the Fund under the 1940
Act. PNC Bank is a subsidiary of PNC Bank Corp., a multi-bank holding
company.
OTHER INFORMATION
________________________________________________________________________________
REPORTS AND INQUIRIES
Shareholders will receive unaudited semi-annual financial statements and
annual financial statements audited by independent accountants. Shareholder
inquiries should be addressed to the Fund c/o PFPC, P.O. Box 8950, Wilmington,
Delaware 19885-9628, toll-free (800) 441-7764 (in Delaware call collect (302)
791-1104).
PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the Portfolio
may be quoted in advertisements or in communications to Institutions. Total
return will be calculated on an average annual total return basis for various
periods. Average annual total return reflects the average annual percentage
change in value of an investment in Shares of the Portfolio over the measuring
period. Total return may also be calculated on an aggregate total return basis.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return
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<PAGE>
assume that dividends and capital gain distributions made by the Portfolio
during the period relating to Shares are reinvested in Shares.
The yield of Shares of the Portfolio is computed based on the net income of
the Portfolio allocated to such Shares during a 30-day (or one month) period,
which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares during
a 30-day (or one month) period by the net asset value per share on the last day
of the period and annualizing the result on a semi-annual basis.
Performance data of Shares of the Portfolio may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
In addition, certain indexes may be used to illustrate historic performance of
select asset classes. For example, the total return and/or yield of Shares of
the Portfolio may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and with the performance of the Salomon Broad Investment Grade Index,
the T-Bill Index and the "stocks, bonds and inflation index" published annually
by Ibbotson Associates. Performance information may also include evaluations of
the Portfolio and their Shares published by nationally recognized ranking
services and information as reported by financial publications such as Business
Week, Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The
Wall Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of the Portfolio over a particular period of
time, the Portfolio may provide certain other information demonstrating
hypothetical investment returns. Such information may include, but is not
limited to, illustrating the compounding effects of a dividend in a dividend
reinvestment plan.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that a shareholder's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a
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stated period of time. Shareholders should remember that performance is
generally a function of the kind and quality of the instruments held in the
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by brokers or other institutions directly to their customer
accounts in connection with investments in Shares will not be included in the
Portfolio's calculations of yield and total return.
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APPENDIX A
The following summarizes the ratings used for debt securities:
DESCRIPTION OF MOODY'S BOND RATINGS:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aa" group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
A-1
<PAGE>
(P)...- When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.
DESCRIPTION OF S&P BOND RATINGS:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B -- Debt has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
A-2
<PAGE>
CCC -- Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The "CCC" rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "B" or "B-" rating.
CC -- The rating "CC" typically is applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
C -- The rating "C" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
CI - The rating "CI" is reserved for income bonds on which no
interest is being paid.
D -- Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Standard & Poor's letter ratings may be modified by the addition
of a plus or minus sign, which is used to show relative standing within the
major rating categories, except in the AA, CC, C, CI and D categories.
DESCRIPTION OF DUFF & PHELPS' BOND RATINGS:
AAA - Bonds rated AA are of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
AA -- Bonds rated AA have high credit quality with strong protection
factors. Risk is modest.
A -- Bonds rated A have average but adequate protection factors. Risk
factors are greater and more variable in times of economic stress than AA or AA.
BBB -- Bonds rated BBB exhibit below average protection factors, but
still considered sufficient for prudent investment. Considerable variability in
risk is present during economic cycles.
BB -- Bonds rated BB are below investment grade, but deemed likely to
meet obligations when due.
A-3
<PAGE>
B -- Bonds rated B are below investment grade and possessing risk that
obligations will not be met when due.
CCC -- Bonds rated CCC are well below investment grade. They may be
in default or have considerable uncertainty as to timely payment of principal,
interest or preferred dividends.
DD -- Bonds rated DD are defaulted debt obligations.
Duff & Phelps' letter ratings may be modified by the addition of a
plus or minus sign, which is used to show relative standing within the major
rating categories, except in the AA, CCC and DD categories.
DESCRIPTION OF FITCH BOND RATINGS:
AAA -- Bonds rated AA are considered investment grade and of the
highest quality. The ability to pay interest and principal is exceptionally
strong and unlikely to be affected by reasonably foreseeable events.
AA -- Bonds rated AA are considered investment grade and very high
credit quality.
A -- Bonds rated A are considered investment grade and of high credit
quality. The ability to pay interest and principal is strong, but may be
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB -- Bonds rated BBB are considered investment grade and
satisfactory credit quality. The likelihood that these bonds will fall below
investment grade, however, is higher than for bonds with higher ratings.
BB -- Bonds rated BB are considered speculative. The ability to pay
interest and principal may be affected over time by adverse economic changes.
B -- Bonds rated B are considered highly speculative. While bonds in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the issuer's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC -- Bonds rated CCC have certain identifiable characteristics
which, if not remedied, may lead to default.
CC -- Bonds rated CC are minimally protected. Default seems probable
over time.
C -- Bonds rated C are in imminent default in payments of interest or
principal.
A-4
<PAGE>
DDD, DD and D -- Bonds rated in any of these categories are in default
on interest and/or principal payments.
Fitch's letter ratings may be modified by the addition of a plus or
minus sign, which is used to show relative standing within the major rating
categories, except in the AAA category.
A-5
<PAGE>
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS OF
ADDITIONAL INVESTMENT MANAGEMENT TECHNIQUES
In order to manage the risk of its securities portfolio, including
duration management, or to enhance income or gain as described above, the
Portfolio will engage in Additional Investment Management Techniques. The
Portfolio will engage in such activities in the Adviser's discretion, and may
not necessarily be engaging in such activities when movements in interest rates
that could affect the value of the assets of the Portfolio occur. The
Portfolio's ability to pursue certain of these strategies may be limited by
applicable regulations of the CFTC and the federal income tax requirements
applicable to regulated investment companies.
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Portfolio may purchase and sell put and call options on securities
and indices. A put option gives the purchaser of the option the right to sell
and the writer the obligation to buy the underlying security at the exercise
price during the option period. The Portfolio may also purchase and sell
options on stock indices ("index options"). Index options are similar to
options on securities except that, rather than taking or making delivery of
securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option if
the level of the stock index upon which the option is based is greater, in the
case of a call, or less, in the case of a put, than the exercise price of the
option. The purchase of a put option on a debt security could protect the
Portfolio's holdings in a security or a number of securities against a
substantial decline in the market value. A call option gives the purchaser of
the option the right to buy and the seller the obligation to sell the underlying
security or index at the exercise price during the option period or for a
specified period prior to a fixed date. The purchase of a call option on a
security could protect the Portfolio against an increase in the price of a
security that it intended to purchase in the future. In the case of either put
or call options that it has purchased, if the option expires without being sold
or exercised, the Portfolio will experience a loss in the amount of the option
premium plus any related commissions. When the Portfolio sells put and call
options, it receives a premium as the seller of the option. The premium that
the Portfolio receives for selling the option will serve as a partial hedge, in
the amount of the option premium, against changes in the value of the securities
in its portfolio. During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price of the option if the value of the
underlying security increases, but has retained the risk of loss should the
price of the underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium
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<PAGE>
received on the sale of the option. The Portfolio is authorized to purchase and
sell exchange listed options and over-the-counter options ("OTC Options") which
are privately negotiated with the counterparty. Listed options are issued by
the Options Clearing Corporation ("OCC") which guarantees the performance of the
obligations of the parties to such options.
The Portfolio's ability to close out its position as a purchaser or
seller of an exchange-listed put or call option is dependent upon the existence
of a liquid secondary market on option exchanges. Among the possible reasons
for the absence of a liquid secondary market on an exchange are: (i)
insufficient trading interest in certain options; (ii) restrictions on
transactions imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options or
underlying securities; (iv) interruption of the normal operations on an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been listed by the OCC as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms. OTC
Options are purchased from or sold to dealers, financial institutions or other
counterparties which have entered into direct agreements with the Portfolio.
With OTC Options, such variables as expiration date, exercise price and premium
will be agreed upon between the Portfolio and the counterparty, without the
intermediation of a third party such as the OCC. If the counterparty fails to
make or take delivery of the securities underlying an option it has written, or
otherwise settle the transaction in accordance with the terms of that option as
written, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction. As the Portfolio must rely on the
credit quality of the counterparty rather than the guarantee of the OCC, it will
only enter into OTC Options with counterparties with the highest long-term
credit ratings, and with primary United States government securities dealers
recognized by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to
the hours during which the underlying securities are traded. To the extent that
the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
FUTURES CONTRACTS AND RELATED OPTIONS
CHARACTERISTICS. The Portfolio may sell financial futures contracts
or purchase put and call options on such futures as a hedge against anticipated
interest rate changes or other market movements. The sale of a futures contract
creates an obligation by the Portfolio, as seller, to deliver the
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specific type of financial instrument called for in the contract at a specified
future time for a specified price. Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right in return for the premium paid to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put).
MARGIN REQUIREMENTS. At the time a futures contract is purchased or
sold, the Portfolio must allocate cash or securities as a deposit payment
("initial margin"). It is expected that the initial margin that the Portfolio
will pay may range from approximately 1% to approximately 5% of the value of the
securities or commodities underlying the contract. In certain circumstances,
however, such as periods of high volatility, the Portfolio may be required by an
exchange to increase the level of its initial margin payment. Additionally,
initial margin requirements may be increased generally in the future by
regulatory action. An outstanding futures contract is valued daily and the
payment in cash of "variation margin" may be required, a process known as
"marking to the market." Transactions in listed options and futures are usually
settled by entering into an offsetting transaction, and are subject to the risk
that the position may not be able to be closed if no offsetting transaction can
be arranged.
LIMITATIONS ON USE OF FUTURES AND OPTIONS ON FUTURES. The Portfolio's
use of futures and options on futures will in all cases be consistent with
applicable regulatory requirements and in particular the rules and regulations
of the CFTC. Under such regulations the Portfolio currently may enter into such
transactions without limit for bona fide hedging purposes, including risk
management and duration management and other portfolio strategies.
The Portfolio will not enter into a futures contract or related option
if, immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Portfolio's
liquidation value, i.e. net assets (taken at current value); provided, however,
that in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation. Also,
when required, a segregated account of cash or cash equivalents will be
maintained and marked to market in an amount equal to the market value of the
contract. The Portfolio reserves the right to comply with such different
standard as may be established from time to time by CFTC rules and regulations
with respect to the purchase or sale of futures contracts or options thereon.
SEGREGATION AND COVER REQUIREMENTS. Futures contracts, interest rate
swaps, caps, floors and collars and listed options on securities, indices and
futures contracts sold by the Portfolio are subject to segregation and coverage
requirements of either the CFTC or the SEC, with the result that, if the
Portfolio does not hold the security or futures contract underlying the
instrument, the Portfolio will be required to
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segregate on an ongoing basis with its custodian, cash, U.S. government
securities, or other liquid debt obligations in an amount at least equal to the
Portfolio's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation requirement
can result in the Portfolio maintaining securities positions it would otherwise
liquidate, segregating assets at a time when it might be disadvantageous to do
so or otherwise restrict portfolio management.
B-4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
_______________________
TABLE OF CONTENTS
<TABLE>
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Page
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Introduction.................................... 3
Financial Highlights............................ 5
Investment Policies............................. 7
Management...................................... 28
Purchase and Redemption of Shares............... 32
Net Asset Value................................. 34
Dividends and Distributions..................... 35
Taxes........................................... 35
Description of Shares........................... 36
Other Information............................... 37
Appendix A...................................... A-1
Appendix B...................................... B-1
</TABLE>
THE MULTI-SECTOR
MORTGAGE
SECURITIES
PORTFOLIO III
INSTITUTIONAL
CLASS
Prospectus
<PAGE>
INVESTMENT ADVISER January 28, 1998
BlackRock Financial Management, Inc.
New York, New York
CO-ADMINISTRATOR
BlackRock, Inc.
Philadelphia, Pennsylvania
CO-ADMINISTRATOR AND TRANSFER AGENT
PFPC Inc.
Wilmington, Delaware
CO-ADMINISTRATOR AND DISTRIBUTOR
BlackRock Distributors, Inc.
West Conshohocken, Pennsylvania
COUNSEL
Simpson Thacher & Bartlett
New York, New York
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania
<PAGE>
BLACKROCK FUNDS/SM/
(FORMERLY, COMPASS CAPITAL FUNDS/SM/)
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, 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 BlackRock 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.
<PAGE>
CONTENTS
<TABLE>
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Page
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<S> <C>
Investment Policies.................................................... 3
Special Considerations for State-Specific
Portfolios............................................................ 24
Trustees and Officers.................................................. 61
Shareholder and Trustee Liability of the Fund.......................... 72
Investment Advisory, Administration,
Distribution and Servicing Arrangements............................... 73
Expenses............................................................... 100
Portfolio Transactions................................................. 101
Purchase and Redemption Information.................................... 106
Valuation of Portfolio Securities...................................... 113
Performance Information................................................ 117
Taxes.................................................................. 146
Additional Information Concerning Shares............................... 154
Miscellaneous.......................................................... 156
Financial Statements................................................... 160
Appendix A (Description of Securities Ratings)......................... A-1
Appendix B (Description of Futures).................................... B-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUSES IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUSES AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUSES DO NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-2-
<PAGE>
INVESTMENT POLICIES
The following supplements information contained in the Prospectuses
concerning the Portfolios' investment policies. 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
repurchase price.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to purchasable
variable and floating rate instruments, the adviser or sub-adviser will consider
the earning power, cash flows and
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<PAGE>
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. Each of the Equity Portfolios of
the Fund does not intend to invest more than 5% of its net assets in variable
and floating rate instruments.
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. Each of the Equity Portfolios of the Fund
does not intend to invest more than 5% of its net assets in bank
obligations.
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
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<PAGE>
Certificates (also known as "Ginnie Maes") which are guaranteed as to the timely
payment of principal and interest by GNMA and such guarantee is backed by the
full faith and credit of the United States. GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA certificates also are supported by the authority of GNMA to borrow funds
from the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA, are not backed by or entitled to
the full faith and credit of the United States and are supported by the right of
the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of principal and interest by FNMA. Mortgage-related
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC")
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "Pcs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Banks and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
The Managed Income, Intermediate Government, Low Duration Bond,
Intermediate Bond, Government Income, International Bond, Core Bond, Tax-Free
Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income and Ohio Tax-
Free Income Portfolios (the "Bond Portfolios") and the Balanced Portfolio may
invest in multiple class pass-through securities, including collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduit
("REMIC") pass-through or participation certificates ("REMIC Certificates").
These multiple class securities may be issued by U.S. Government agencies or
instrumentalities, including FNMA and FHLMC, or by trusts formed by private
originators of, or investors in, mortgage loans. In general, CMOs and REMICs
are debt obligations of a legal entity that are collateralized by, and multiple
class pass-through securities represent direct ownership interests in, a pool of
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.
-5-
<PAGE>
Investors may purchase beneficial interests in CMOs and REMICs, which are known
as "regular" interests or "residual" interests. The residual in a CMO or REMIC
structure generally represents the interest in any excess cash flow remaining
after making required payments of principal of and interest on the CMOs or
REMICs, as well as the related administrative expenses of the issuer. Residual
interests generally are junior to, and may be significantly more volatile than,
"regular" CMO and REMIC interests. The Portfolios do not currently intend to
purchase residual interests.
Each class of CMOs or REMIC Certificates, often referred to as a "tranche,"
is issued at a specific adjustable or fixed 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
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<PAGE>
Certificates"), even though all other principal payments and prepayments of the
Mortgage Assets are then required to be applied to one or more other classes of
the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes.
FNMA REMIC Certificates are issued and guaranteed as to timely distribution
of principal and interest by FNMA. In addition, FNMA will be obligated to
distribute on a timely basis to holders of FNMA REMIC Certificates required
installments of principal and interest and to distribute the principal balance
of each class of REMIC Certificates in full, whether or not sufficient funds are
otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("Pcs"). Pcs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by FHLMC and placed in
a PC pool. With respect to principal payments on Pcs, FHLMC generally
guarantees ultimate collection of all principal of the related mortgage loans
without offset or deduction. FHLMC also guarantees timely payment of principal
on certain Pcs, referred to as "Gold Pcs."
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
----
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a
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<PAGE>
prepayment rate that is slower than expected may have the opposite effect of
increasing yield to maturity. Conversely, if an asset-backed security is
purchased at a discount, faster than expected prepayments may increase, while
slower than expected prepayments may decrease, yield to maturity. The
relationship between prepayments and interest rates may give some high-yielding
asset-backed securities less potential for growth in value than conventional
bonds with comparable maturities.
In general, the collateral supporting non-mortgage 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 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. Each of the Equity Portfolios of the Fund does
not intend to invest more than 5% of its net assets in U.S. Government
obligations.
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. Each of the Equity Portfolios of the
Fund does not intend to invest more than 5% of its net assets in supranational
organization obligations.
LEASE OBLIGATIONS. The Portfolios may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
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<PAGE>
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 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
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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.
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. Each of the Equity Portfolios of the Fund does not intend to invest more
than 5% of its net assets in commercial paper.
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).
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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 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 use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, a Portfolio will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, a
Portfolio's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that a Portfolio may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, a Portfolio may suffer a loss
to the extent proceeds from the sale of the underlying securities are less than
the repurchase price.
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
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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 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."
See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.
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 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
rating (based on rating agencies' evaluation of the likelihood of repayment)
necessitates offering a higher coupon and yield on its issues when selling them
to investors who may
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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 securities 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.
While the market values of high yield securities tend to react less to
fluctuations 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 companies are often highly leveraged (have a significant amount
of debt relative to shareholders' equity) and may not have available to them
more traditional financing methods, thereby increasing the risk associated with
acquiring these types of securities. In some cases, obligations with respect to
high yield securities 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, investors 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
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 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.
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The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants 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 conditions, a Portfolio may have difficulty disposing of certain high
yield securities 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 actual 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 investment
practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value and liquidity of
outstanding high yield securities, especially in a thinly traded market. For
example, 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 adversely 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
contract due to adverse economic conditions or for other reasons, certain of a
Portfolio's liquid securities may become illiquid
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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 payments, but have a greater vulnerability to default than higher
rated securities. Adverse business, financial or economic conditions will
likely impair capacity 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 analysis than in the case of mutual funds investing in higher-rated
securities. For a description of these ratings, see Appendix A.
In selecting non-investment grade securities, the sub-adviser considers
factors such as those relating to the creditworthiness of issuers, the ratings
and performance of the securities, the protections afforded the securities 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
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 Portfolio 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 costs attributable to investing in the high yield markets are usually
higher for several reasons, such as higher investment research costs and higher
commission costs.
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
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future date. When a Portfolio agrees to purchase securities on this basis, the
custodian will set aside liquid assets equal to the amount of the commitment in
a separate account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case the Portfolio may be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Portfolio's commitments. It may be expected that the market value of a
Portfolio's net assets will fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase commitments than when it sets aside
cash. Because a Portfolio's liquidity and ability to manage its portfolio might
be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, each Portfolio expects that its forward commitments and
commitments to purchase when-issued or TBA securities will not exceed 25% of the
value of its total assets absent unusual market conditions.
If deemed advisable as a matter of investment strategy, a Portfolio may
dispose of or renegotiate a commitment after it has been entered into, and may
sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a taxable capital gain or loss.
When a Portfolio engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Portfolio starting on the day the
Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.
RIGHTS OFFERINGS AND WARRANTS TO PURCHASE. Each equity Portfolio (except
the Index Master Portfolio) and the Balanced Portfolio may participate in rights
offerings and may purchase warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares of
the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of rights or warrants involves the risk that a Portfolio could lose the purchase
value of a 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
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to the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. A Portfolio will not invest more than 5% of
its net assets, taken at market value, in warrants, or more than 2% of its net
assets, taken at market value, in warrants not listed on the New York or
American Stock Exchanges. Warrants acquired by a Portfolio in units or attached
to other securities are not subject to this restriction.
FOREIGN CURRENCY TRANSACTIONS. Forward foreign currency exchange contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow a
Portfolio to establish a rate of exchange for a future point in time. A
Portfolio may use forward foreign currency exchange contracts to hedge against
movements in the value of foreign currencies (including the "ECU" used in the
European Community) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A Portfolio may
enter into forward foreign currency exchange contracts when deemed advisable by
its adviser or sub-adviser under two circumstances. First, when entering into a
contract for the purchase or sale of a security, a Portfolio may enter into a
forward foreign currency exchange contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
Second, when a Portfolio's adviser or sub-adviser anticipates that a
particular foreign currency may decline relative to the U.S. dollar or other
leading currencies, in order to reduce risk, the Portfolio may enter into a
forward contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. With respect to any forward foreign currency
contract, it will not generally be possible to match precisely the amount
covered by that contract and the value of the securities involved due to the
changes in the values of such securities resulting from market movements between
the date the forward contract is entered into and the date it matures. In
addition, while forward contracts may offer protection from losses resulting
from declines in the value of a particular foreign currency, they also limit
potential gains which might result from increases in the value of such currency.
A Portfolio will also incur costs in connection with forward foreign currency
exchange contracts and conversions of foreign currencies and U.S. dollars.
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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 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
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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.
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
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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.
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
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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.
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
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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,
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.
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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
receive. Because currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. A Portfolio will not enter into any interest rate or currency swap
unless the unsecured commercial paper, senior debt or claims paying ability of
the other party is rated either "A" or "A-1" or better by S&P, Duff & Phelps or
Fitch, or "A" or "P-1" or better by Moody's.
A Portfolio will enter into currency or interest rate swap, cap and floor
transactions only with institutions deemed the creditworthy by the Portfolio's
adviser or sub-adviser. If there is a default by the other party to such a
transaction, a
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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 accurate. 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 each invest most of its net assets in securities
issued by or on
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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 1996 is 11,173,000.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
six years the State rates were below the national rates (4.9% versus 5.4% in
1996). 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
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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.
The 1992-93 biennium presented significant challenges to State finances.
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 Budget Stabilization Fund ("BSF", a cash and budgetary management fund)
to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in
light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed a FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF; and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions, including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF
fund balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF.
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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. The significant 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.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100
million was transferred for elementary and secondary school computer network
purposes and $30 million to a new State transportation infrastructure fund.
Approximately $400.8 million served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. The 1996-97 biennium-ending GRF
fund balance was $834.9 million. Of that, $250 million goes to school building
construction and renovation, $94 million to the school computer network, $44.2
million for school textbooks and instructional materials and a distance learning
program, and $34 million to the BSF (which had a December 30, 1997 balance of
$862.7 million), with the $263 million balance to a State income tax reduction
fund.
The GRF appropriations act for the current 1997-98 biennium was passed on
June 25, 1997 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.
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 approved from 1921 to date (the latest
adopted in 1995), Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At December 30, 1997, $948 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
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highway bonds, and the following: (a) up to $100 million of obligations for coal
research and development may be outstanding at any one time ($30.9 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 ($826.8 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 ($90.9 million outstanding, with no
more than $50 million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending 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 authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million outstanding 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 December 30, 1997.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially
from program revenues.)
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not
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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 119 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 Ohio Supreme Court
has recently concluded that aspects of the system (including basic operating
assistance and the loan program referred to below) are unconstitutional, and
ordered the State to provide for and fund a system complying with the Ohio
Constitution, staying its order for a year (to March 1998) to permit time for
responsive corrective actions. A small number of the State's 612 local school
districts have in any year required special assistance to avoid year-end
deficits. A program has provided 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 $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), $87.2 million for 20 districts in fiscal
year 1996 (including $42.1 million for one), and $113.2 million for 12 districts
in 1997 (including $90 million to one for restructuring its prior loans).
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. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
24 cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated (one village is in preliminary "fiscal watch" status). As
of January 5, 1998, the 1996 school district "fiscal emergency" provision had
been applied to five districts, and ten were on preliminary "fiscal watch"
status.
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At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Constitution has since 1934 limited to 1%
of true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN PENNSYLVANIA 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
1987 through 1996, and has a high proportion of persons 65 or older. The
Commonwealth is highly urbanized, with almost 79% of the 1990 census population
residing in metropolitan statistical areas. The two largest metropolitan
statistical areas, those containing the Cities of Philadelphia and Pittsburgh,
together comprise approximately 44% of the Commonwealth's total population.
The Commonwealth utilizes the fund method of accounting and over 150 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
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funding for education, public health and welfare and transportation.
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, 1996, the General
Fund had a surplus of $635.2 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. Trial of the state case was
completed in September 1997 and a decision is pending; and (d) both the
Commonwealth and the City of Philadelphia are involved in cases currently before
the Pennsylvania Supreme Court 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") experienced severe financial
difficulties during the early 1990's which impaired its access to public credit
markets. The City experienced a
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series of General Fund deficits for fiscal years 1988 through 1992. Legislation
was enacted in 1991 to create an Intergovernmental Cooperation Authority (the
"Authority") to provide deficit reduction financing and fiscal oversight for
Philadelphia. In order for the Authority to issue bonds on behalf of the City,
the City and the Authority entered into an intergovernmental cooperation
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 May 20, 1997. The unaudited balance of
the City's General Fund as of June 30, 1997 was approximately $120.0
million.
The Authority's power to issue further bonds to finance capital projects or
deficit expired on December 31, 1994, and its power to issue debt to finance a
cash flow deficit expired December 31, 1996. Its ability to refund outstanding
bonds is unrestricted. The Authority had $1,102.4 million in special revenue
bonds outstanding as of June 30, 1997.
Most recently, Moody's has rated the long-term general obligation bonds of
the Commonwealth "Aa3," Standard & Poor's has rated such bonds "AA-" and Fitch
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
bond 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.
Fiscal year 1996 ended with a positive General Fund balance of
approximately $573.4 million. An additional $153.1 million was available from a
reserved fund balance. Of this aggregate amount, $77.3 million was reserved in
the Savings Reserve (bringing the total reserve to $500.9 million) and $130.0
million was reserved in the Reserve for Repair and Renovation of State
Facilities (bringing the total reserve to $151.3 million after prior
withdrawals). An additional $47.1 million was transferred to a newly-created
Clean Water Management Trust Fund, $39.5 million was reserved in a Capital
Improvement Reserve, and $26.2 million was transferred to newly-created Federal
Retiree Refund and Administration Accounts, leaving an unreserved General Fund
balance at June 30, 1996 of approximately $406.1 million.
Fiscal year 1997 ended with a positive General Fund balance of
approximately $874.8 million. Along with additional reserves, $135 million was
reserved in the Reserve for Repair and Renovation of State Facilities, in
addition to a supplemental reserve of $39.3 million for repairs and renovations
(bringing the total reserve to $221.2 million after prior withdrawals). An
additional $49.4 million was transferred to the Clean Water Management Trust
Fund (bringing the total reserve to $49.4 million after prior withdrawals) and
$115 million and $156 million were reserved in newly-created Disaster Relief and
Intangible Tax Refund Reserves, respectively. The Disaster Relief Reserve was
used to cover disaster relief funds spent during fiscal year 1997. An
additional $61 million was reserved for the State to acquire the shares of the
North Carolina Railroad Company not held by the State. No additional amounts
were transferred to the Savings Reserve for the year (the existing balance of
$500.9 million having met the statutory reserve requirements). After additional
reserves, the unreserved General Fund balance at the end of fiscal year 1997 was
approximately $318.7 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, 1996 and 1997 was $1,422.1
million and $1,703.9 million, respectively.
On August 28, 1997, the North Carolina General Assembly adopted the
biennium budget for 1997 to 1999. The $11.4 billion budget for fiscal year 1998
included a 7.6% increase in spending over the fiscal year 1997 budget.
Highlights of the new budget
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included increased spending for education, with $181 million in funding for
teacher pay raises averaging 6.5% and $92 million to implement the newly-enacted
Excellent Schools Act, which raises teacher salaries to the national average
over four years and requires teachers at low-performing schools to pass
competency tests. Money was also reserved for schools that achieve or surpass
academic goals, school technology funds, new school buses, staff development
programs, community college job training programs, and other education purposes.
The General Assembly also passed a welfare reform program, adopted a streamlined
process for cleaning up brownfields for reuse as industrial and commercial
sites, and cut the North Carolina sales tax on food by 1% beginning in
1998.
The General Assembly adjusted downward the General Fund appropriation
support for the continuation budgets by $425.4 million and $242.2 million in
fiscal years 1998 and 1998, respectively, and authorized continuation funding of
$10,439.4 million for fiscal year 1998 and $10,957.5 million for fiscal year
1999. The adjustments included reductions of expenditures resulting from
supporting revenues sources being reclassified from tax and nontax revenues to
departmental receipts, increases in departmental receipts and federal receipts,
reductions of projected operating costs, and other efficiencies and savings.
Increases of $798.7 million for fiscal year 1998 and $574.5 million for fiscal
year 1999 were approved for operating budgets.
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 July 1997, North Carolina ranked
tenth among the states in non-agricultural employment and eighth in
manufacturing employment. The Commission estimated North Carolina's seasonally
adjusted unemployment rate in November 1997 to be 3.5% of the labor force, as
compared with an unemployment rate of 4.6% nationwide.
The following are certain cases pending in which the State of North
Carolina faces the risk of either a loss of revenue or an unanticipated
expenditure which, in the opinion of the North Carolina Department of State
Treasurer, would not materially
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adversely affect the State's ability to meet its financial obligations:
1. Swanson v. State of North Carolina and Patton v. State of North
Carolina -- State Tax Refunds - Federal Retirees. In Davis v. Michigan (1989),
-----------------
the United States Supreme Court ruled that a Michigan income tax statute which
taxed federal retirement benefits while exempting those paid by state and local
governments violated the constitutional doctrine of intergovernmental tax
immunity. At the time of the Davis decision, North Carolina law contained
-----
similar exemptions in favor of state and local retirees. Those exemptions were
repealed prospectively, beginning with the 1989 tax year. All public pension and
retirement benefits are now entitled to a $4,000 annual exclusion.
Following Davis, federal retirees filed a class action suit in federal
-----
court in 1989 seeking damages equal to the North Carolina income tax paid on
federal retirement income by the class members (Swanson). 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
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retirement benefits (Patton). 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 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. Should plaintiffs
- ------
prevail in Bailey, such a result, the Federal retirees allege, would reestablish
the disparity of treatment between State and Federal pension income that was
held unconstitutional in Davis. The North Carolina Attorney General believes
-----
that sound legal authority and arguments support the denial of this claim.
Potential refunds and interest are estimated to be $585.09 million for the
period through fiscal year 1997. Until this matter is resolved, any additional
potential refunds and interest will continue to accrue.
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, which
appeal is pending in the North Carolina Supreme Court.
Potential refunds and interest are estimated to be $287.56 million for the
period through fiscal year 1997. Until this matter is resolved, any additional
potential refunds and interest will continue to accrue. Furthermore, if the
order of
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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. The North Carolina Attorney General's
Office believes that sound legal arguments support the State's position on the
merits.
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. In March 1997, North Carolina issued
$450 million of the authorized school bonds (Public School Building Bonds). In
November 1997, North Carolina issued $250 million of the authorized highway
bonds (Highway Bonds). The offering of the remaining $2.05 billion of these
authorized bonds is anticipated to occur over the next two-five years.
Currently, Moody's, S&P and Fitch rate North Carolina general obligation
bonds "Aaa," "AAA," and "AAA," respectively. See Appendix A.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN VIRGINIA 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 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
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impact on Virginia relative to its size than any state other than Alaska and
Hawaii.
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 previous forecasts
exceed expected revenues in subsequent forecasts. The Revenue Stabilization
Fund consists of an amount not to exceed 10 percent of Virginia's average annual
tax revenues derived from taxes on income and retail sales for the three
preceding fiscal years.
General Fund revenues are principally comprised of direct taxes. In recent
fiscal years, most of the total tax revenues have been derived from five major
taxes imposed by Virginia on individual and fiduciary income, sales and use,
corporate income, public service corporations and premiums of insurance
companies.
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 annually 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 Committee
provides its recommendations on the prudent use of such obligations to the
Governor and the General Assembly.
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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.
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.
Section 9(d) provides that the restrictions of Section 9 are not applicable
to any obligation incurred by
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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 repayment of debt issued by the Virginia Public Building Authority, the
Virginia Port Authority, the Virginia College Building Authority Equipment
Leasing Program and the Innovative Technology Authority is 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 are 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 that are secured by a portion of
the Transportation Trust Fund.
Virginia is involved in numerous leases that are subject to appropriation
of funding by the General Assembly. Virginia also finances the acquisition of
certain personal property and equipment through installment purchase agreements.
Bonds issued by the Virginia Housing Development Authority, the Virginia
Resources Authority and the Virginia Public School Authority are designed to be
self-supporting from their individual loan programs. A portion of the Virginia
Housing Development Authority and Virginia Public School Authority bonds and all
of the Virginia Resources Authority bonds are secured in part by a moral
obligation pledge of Virginia. Should the need arise, Virginia may consider
funding deficiencies in the respective debt service reserves for such moral
obligation debt. To date, none of these authorities has advised Virginia that
any such deficiencies exist.
Local government in Virginia 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.
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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 Supreme Court of Virginia rendered its decision
in Harper, reversing the judgment of the trial court, entering final judgment in
favor of the taxpayers, and directing that the amounts unlawfully collected be
refunded with statutory interest. Virginia issued refund checks on November 9,
1995, and interest stopped accruing as of November 3, 1995. The cost of
refunding all Virginia income taxes paid on Federal government pensions for
taxable years 1985, 1986, 1987 and 1988 to Federal government pensioners who
opted out of the settlement was approximately $78.7 million, including interest
earnings.
The total cost of refunding all Virginia income taxes paid on Federal
pensions on account of the settlement (approximately $316.2 million) and the
judgment ($78.7 million) is approximately $394.9 million, of which $266.4
million ($124.5 million in respect of the settlement and the entire $78.7
million in respect of the judgment and $63.2 million in fiscal year 1997) has
been paid, leaving $128.5 million payable in respect of the settlement --
approximately $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
Virginia Aaa, and Standard & Poor's has rated such bonds AAA. There can be no
assurance that the economic conditions on which these ratings are based will
continue or that particular bond issues may not be adversely affected by changes
in economic or political conditions.
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SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN NEW JERSEY STATE-SPECIFIC
OBLIGATIONS. The following information constitutes only a brief summary, does
not purport to be a complete description and is largely based on information
drawn from official statements relating to securities offerings of New Jersey
municipal obligations available as of the date of this Statement of Additional
Information. The accuracy and completeness of the information contained in such
offering statements has not been independently verified.
State Finance/Economic Information. New Jersey is the ninth largest
state in population and the fifth smallest in land area. With an average of
1,077 people per square mile, it is the most densely populated of all the
states. New Jersey's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. Historically, New Jersey's average per
capita income has been well above the national average, and in 1996 New Jersey
ranked second among the states in per capita personal income ($31,053).
By the beginning of the national recession (which officially started
in July 1990 according to the National Bureau of Economic Research),
construction activity had already been declining in New Jersey for nearly two
years. The onset of recession caused an acceleration of New Jersey's job losses
in construction and manufacturing, as well as an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities,
trucking and warehousing.
Reflecting the economic downturn, the rate of unemployment in New
Jersey rose from 3.6% during the first quarter of 1989 to a recessionary peak of
8.5% during 1992. Since then, the unemployment rate fell to an average of 6.2%
in 1996 and 5.5% for the six month period from January 1997.
For the recovery period as a whole, May 1992 to June 1997, service-
producing employment in New Jersey has expanded by 283,500 jobs. In the
manufacturing sector, employment losses slowed between 1992 and 1994. During
1995 and 1996, however, manufacturing job losses increased slightly to 10,100
and 13,900 respectively, reflecting a slowdown in national manufacturing
production activity. Conditions have slowly improved in the construction
industry, where employment has risen by 18,600 since its low in May 1992.
New Jersey's Budget and Appropriation System. New Jersey operates on a
fiscal year ending on June 30. The General Fund is the fund into which all New
Jersey revenues not otherwise restricted by statute are deposited and from which
appropriations are made. The largest part of the total financial operations of
New Jersey is accounted for in the General Fund, which includes
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revenues received from taxes and unrestricted by statute, most federal revenues,
and certain miscellaneous revenue items. The Appropriation Acts enacted by the
New Jersey Legislature and approved by the Governor provide the basic framework
for the operation of the General Fund. The undesignated General Fund balance at
year end for fiscal year 1994 was $1,264.6 million, for fiscal year 1995 was
$950.2 million and for fiscal year 1996 was $882.2 million. For fiscal year
1997, the undesignated balance in the General Fund was $1,078.3 million, subject
to change upon completion of the year-end audit. The estimated undesignated
balance for fiscal year 1998 is $553.5 million, based on the amounts contained
in the fiscal year 1998 Appropriations Acts. The fund balances are available for
appropriation in succeeding fiscal years.
During the course of the fiscal year, the Governor may take steps to
reduce State expenditures if it appears that revenues have fallen below those
originally anticipated. There are additional means by which the Governor may
ensure that the State does not incur a deficit. Under the State Constitution, no
supplemental appropriation may be enacted after adoption of an appropriations
act except where there are sufficient revenues on hand or anticipated, as
certified by the Governor, to meet such appropriation.
General Obligation Bonds. New Jersey finances capital projects
primarily through the sale of its general obligation bonds. These bonds are
backed by the full faith and credit of New Jersey. Tax revenues and certain
other fees are pledged to meet the principal and interest payments required to
pay the debt fully.
The aggregate outstanding general obligation bonded indebtedness of
New Jersey as of June 30, 1997 was $3.437 billion. The appropriation for the
debt service obligation on outstanding indebtedness is $483.7 million for fiscal
year 1998.
In addition to payment from bond proceeds, capital construction can
also be funded by appropriation of current revenues on a pay-as-you-go basis.
For fiscal year 1998, the amount appropriated to this purpose is $516.0
million.
Tax and Revenue Anticipation Notes. In fiscal year 1992 New Jersey
initiated a program under which it issued tax and revenue anticipation notes to
aid in providing effective cash flow management to fund balances which occur in
the collection and disbursement of the General Fund and Property Tax Relief Fund
revenues. There are presently $800 million of tax and revenue anticipation notes
outstanding. These notes mature on June 15, 1998. Such notes constitute special
obligations of New Jersey payable solely from moneys on deposit in the General
Fund and Property Tax Relief Fund and legally available for such payment.
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Lease Financing. New Jersey has entered into a number of leases
relating to the financing of certain real property and equipment. New Jersey
leases the Richard J. Hughes Justice Complex in Trenton from the Mercer County
Improvement Authority (the "MCIA"). Under the lease agreements with the New
Jersey Economic Development Authority (the "EDA"), New Jersey leases (i) office
buildings that house the New Jersey Division of Motor Vehicles, New Jersey
Network, a branch of the United States Postal Service and a parking facility,
(ii) approximately 13 acres of real property and certain infrastructure
improvements thereon located in the city of Newark, (iii) certain energy saving
equipment which shall be installed in various buildings around New Jersey and
(iv) the New Jersey Performing Arts Center Facility in the City of Newark. New
Jersey also leases several office buildings, facilities and improvements from
the New Jersey Building Authority (the "NJBA"). Rental payments under each of
the foregoing leases are sufficient to pay debt service on the related bonds
issued by MCIA, EDA and NJBA, and in each case are subject to annual
appropriation by the New Jersey Legislature.
Beginning in April 1984, New Jersey, acting through the Director of
the Division of Purchase and Property, entered into a series of lease purchase
agreements which provide for the acquisition of equipment, services and real
property to be used by various departments and agencies of New Jersey. To date,
New Jersey has completed eleven lease purchase agreements which have resulted in
the issuance of Certificates of Participation totaling $749,350,000. The
agreements relating to these transactions provide for semi-annual rental
payments. New Jersey's obligation to pay rentals due under these leases is
subject to annual appropriations being made by the New Jersey Legislature.
State Supported School and County College Bonds. Legislation provides
for future appropriations for New Jersey aid to local school districts equal to
debt service on a maximum principal amount of $280,000,000 of bonds issued by
such local school districts for construction and renovation of school facilities
and for New Jersey aid to counties equal to debt service on up to $80,000,000 of
bonds issued by counties for construction of county college facilities. The New
Jersey Legislature is not legally bound to make such future appropriations, but
has done so to date on all outstanding obligations issued under these laws.
"Moral Obligation" Financing. The authorizing legislation for certain
New Jersey entities provides for specific budgetary procedures with respect to
certain obligations issued by such entities. Pursuant to such legislation, a
designated official is required to certify any deficiency in a debt service
reserve fund maintained to meet payments of principal of and interest on the
obligations, and a New Jersey appropriation in
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the amount of the deficiency is to be made. However, the New Jersey Legislature
is not legally bound to make such an appropriation. Bonds issued pursuant to
authorizing legislation of this type are sometimes referred to as "moral
obligation" bonds. There is no statutory limitation on the amount of "moral
obligation" bonds which may be issued by eligible New Jersey entities. As of
June 30, 1997, outstanding "moral obligation" bonded indebtedness issued by New
Jersey entities totaled $614,324,305 and maximum annual debt service subject to
"moral obligation" is $67,502,366.04.
Higher Education Assistance Authority. The Higher Education Assistance
Authority ("HEAA") has issued $149,996,064 aggregate principal amount of revenue
bonds. It is anticipated that the HEAA's revenues will be sufficient to cover
debt service on its bonds.
New Jersey Housing and Mortgage Finance Agency. Neither the New Jersey
Housing and Mortgage Finance Agency nor its predecessors, the New Jersey Housing
Finance Agency and the New Jersey Mortgage Finance Agency, have had a deficiency
in a debt service reserve fund which required New Jersey to appropriate funds to
meet its "moral obligation". It is anticipated that this agency's revenues will
continue to be sufficient to cover debt service on its bonds.
South Jersey Port Corporation. New Jersey has periodically provided
the South Jersey Port Corporation (the "Port Corporation") with funds to cover
all debt service and property tax requirements, when earned revenues are
anticipated to be insufficient to cover these obligations. For calendar years
1986 through 1997, New Jersey has made appropriations totaling $49,560,536.25
which covered deficiencies in revenues of the Port Corporation, for debt service
and property tax payments.
New Jersey Sports and Exposition Authority. On March 2, 1992, the New
Jersey Sports and Exposition Authority (the "Sports Authority") issued
$147,490,000 in New Jersey guaranteed bonds and defeased all previously
outstanding New Jersey guaranteed bonds of the Sports Authority. New Jersey
officials have stated the belief that the revenue of the Sports Authority will
be sufficient to provide for the payment of debt service on these obligations
without recourse to New Jersey's guarantee.
Legislation enacted in 1992 authorizes the Sports Authority to issue
bonds for various purposes payable from New Jersey appropriations. Pursuant to
this legislation, the Sports Authority and the New Jersey Treasurer have entered
into an agreement (the "State Contract") pursuant to which the Sports Authority
will undertake certain projects, including the refunding of certain outstanding
bonds of the Sports Authority,
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and the New Jersey Treasurer will credit to the Sports Authority Fund amounts
from the General Fund sufficient to pay debt service and other costs related to
the bonds. The payment of all amounts under the State Contract is subject to and
dependent upon appropriations being made by the New Jersey Legislature. As of
June 30, 1997 there are approximately $458,890,000 aggregate principal amount of
Sports Authority bonds outstanding, the debt service on which is payable from
amounts credited to the Sports Authority Fund pursuant to the State
Contract.
New Jersey Transportation Trust Fund Authority. In July 1984, New
Jersey created the New Jersey Transportation Trust Fund Authority (the "TTFA"),
an instrumentality of New Jersey organized and existing under the New Jersey
Transportation Trust Fund Authority Act of 1984, as amended (the "TTFA Act") for
the purpose of funding a portion of New Jersey's share of the cost of
improvements to New Jersey's transportation system. Pursuant to the TTFA Act,
the TTFA, the New Jersey Treasurer and the Commissioner of Transportation
executed a contract (the "TTFA Contract") which provides for the payment of
these revenues to the TTFA. The payment of all such amounts is subject to and
dependent upon appropriations being made by the New Jersey Legislature and there
is no requirement that the Legislature make such appropriation. On May 30, 1995,
the New Jersey Legislature amended the TTFA Act to provide, among other things,
for (i) the issuance of debt in an aggregate principal amount in excess of the
statutory debt limitation in effect prior to the enactment of the 1995
amendments, (ii) an increase in the amount of revenues available to the TTFA and
(iii) broadening the scope of transportation projects.
Pursuant to the Act, the aggregate principal amount of TTFA's bonds,
notes or other obligations outstanding at any one time may not exceed $700
million plus amounts carried over from prior fiscal years. These bonds are
special obligations of the TTFA payable from payments made by New Jersey
pursuant to the TTFA Contract.
Economic Recovery Fund Bonds. Legislation enacted during 1992 by New
Jersey authorizes the EDA to issue bonds for various economic development
purposes. Pursuant to that legislation, EDA and the New Jersey Treasurer have
entered into an agreement (the "ERF Contract") through which EDA has agreed to
undertake the financing of certain projects and the New Jersey Treasurer has
agreed to credit to the Economic Recovery Fund from the General Fund amounts
equivalent to payments due to New Jersey under an agreement with the Port
Authority of New York and New Jersey. The payment of all amounts under the ERF
Contract is subject to and dependent upon appropriations being made by the New
Jersey Legislature.
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Counties and Municipalities. New Jersey law also regulates the
issuance of debt by local units. The Local Budget Law limits the amount of tax
anticipation notes that may be issued by local units and requires the repayment
of such notes within 120 days of the end of the fiscal year (six months in the
case of the counties) in which issued. The Local Bond Law (N.J.S.A. 4OA:2-1 I.)
governs the issuance of bonds and notes by the local units. No local unit is
permitted to issue bonds for the payment of current expenses (other than Fiscal
Year Adjustment Bonds described more fully below). Local units may not issue
bonds to pay outstanding bonds, except for refunding purposes, and then only
with the approval of the Local Finance Board. Local units may issue bond
anticipation notes for temporary periods not exceeding in the aggregate
approximately ten years from the date of first issue. The debt that any local
unit may authorize is limited to a percentage of its equalized valuation basis,
which is the average of the equalized value of all taxable real property and
improvements within the geographic boundaries of the local unit, as annually
determined by the Director of the Division of Taxation, for each of the three
most recent years. In the calculation of debt capacity, the Local Bond Law and
certain other statutes permit the deduction of certain classes of debt
("statutory deductions") from all authorized debt of the local unit ("gross
capital debt") in computing whether a local unit has exceeded its statutory debt
limit. Statutory deductions from gross capital debt consist of bonds or notes
(i) authorized for school purposes by a regional school district or by a
municipality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations set
forth in the School Bond Law (as hereinafter defined); (ii) authorized for
purposes which are self-liquidating, but only to the extent permitted by the
Local Bond Law; (iii) authorized by a public body other than a local unit the
principal of and interest on which is guaranteed by the local unit, but only to
the extent permitted by law; (iv) that are bond anticipation notes; (v) for
which provision for payment has been made; or (vi) authorized for any other
purpose for which a deduction is permitted by law. Authorized net capital debt
(gross capital debt minus statutory deductions) is limited to 3.5 percent of the
equalized valuation basis in the case of municipalities and 2 percent of the
equalized valuation basis in the case of counties. The debt limit of a county or
municipality, with certain exceptions, may be exceeded only with the approval of
the Local Finance Board.
State Pension Funding Bonds. Legislation enacted in June 1997
authorizes the EDA to issue bonds to pay a portion of New Jersey's unfunded
accrued pension liability for New Jersey's retirement systems (the "Unfunded
Accrued Pension Liability"), which, together with amounts derived from the
revaluation of the pension assets pursuant to companion legislation enacted at
the same time, will be sufficient to fully fund the Unfunded Accrued
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Pension Liability. On June 30, 1997 the EDA issued $2,803,042,498.56 aggregate
principal amount of State Pension Funding Bonds, Series 1997A-1997C. The EDA and
the New Jersey Treasurer have entered into an agreement which provides for the
payment to the EDA of monies sufficient to pay debt service on the bonds. Such
payments are subject to and dependent upon appropriations being made by the New
Jersey Legislature.
School District Bonds. School district bonds and temporary notes are
issued in conformity with N.J.S.A. 18A:24-1 et seq. (the "School Bond Law").
Although school districts are exempted from the 5 percent down payment provision
generally applied to bonds issued by municipalities and counties, they are
subject to debt limits (which vary depending on the type of school system
provided) and to New Jersey regulation of their borrowing. The debt limitation
on school district bonds depends upon the classification of the school district,
but may be as high as 4 percent of the average equalized valuation basis of the
constituent municipality. In certain cases involving school districts in cities
with populations exceeding 100,000, the debt limit is 8 percent of the average
equalized valuation basis of the constituent municipality, and in cities with
populations in excess of 80,000 the debt limit is 6 percent of the aforesaid
average equalized valuation.
School District Lease Purchase Financings. In 1982, school districts
were given an alternative to the traditional method of bond financing capital
improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the "Lease Purchase Law"). The
Lease Purchase Law permits school districts to acquire a site and school
building through a lease purchase agreement with a private lessor corporation.
The lease purchase agreement does not require voter approval. The rent payments
attributable to the lease purchase agreement are subject to annual appropriation
by the school district and are required, pursuant to N.J.A.C. 6:22A- 1.2(h), to
be included in the annual current expense budget of the school district.
Furthermore, the rent payments attributable to the lease purchase agreement do
not constitute debt of the school district and therefore do not impact on the
school district's debt limitation. Lease purchase agreements in excess of five
years require the approval of the Commissioner and the Local Finance Board.
Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c.38 and
c.39) which provides for the issuance by municipalities and school districts of
"qualified bonds". Whenever a local board of education or the governing body of
a municipality determines to issue bonds, it may file an application with the
Local Finance Board and, in the case of a local board of education, the
Commissioner, to qualify bonds pursuant to P.L. 1976, c.38 or c.39. Upon
approval of such an application and after receipt of a certificate stating the
name
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and address of the paying agent for such bonds, the maturity schedule, interest
rates and payment dates, the New Jersey Treasurer shall, in the case of
qualified bonds for school districts, withhold from the school aid payable to
such municipality or school district and, in the case of qualified bonds for
municipalities, withhold from the amount of business personal property tax
replacement revenues, gross receipts tax revenues, municipal purposes tax
assistance fund distributions, New Jersey urban aid, New Jersey revenue sharing,
and any other funds appropriated as New Jersey aid and not otherwise dedicated
to specific municipal programs, payable to such municipalities, an amount
sufficient to cover debt service on such bonds. These "qualified bonds" are not
direct, guaranteed or moral obligations of New Jersey, and debt service on such
bonds will be provided by New Jersey only if the above-mentioned appropriations
are made by New Jersey. Total outstanding indebtedness for "qualified bonds"
consisted of $224,492,700 by various school districts as of June 30, 1995 and
$903,760,316 by various municipalities as of June 30, 1995.
New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve
Act (N.J.S.A. 18A:56-17 et seq.) establishes a school bond reserve within the
constitutionally dedicated Fund for the Support of Free Public Schools. Under
this law the reserve is maintained at an amount equal to 1.5 percent of the
aggregate outstanding bonded indebtedness of counties, municipalities or school
districts for school purposes (exclusive of bonds whose debt service is provided
by New Jersey appropriations), but not in excess of monies available in such
fund. If a municipality, county or school district is unable to meet payment of
the principal of or interest on any of its school bonds, the trustee of the
school bond reserve will purchase such bonds at the face amount thereof or pay
the holders thereof the interest due or to become due. At June 30, 1995, the
book value of the Fund's assets aggregated $88,736,798 and the reserve, computed
as of June 30, 1995, amounted to $38,811,015. There has never been an occasion
to call upon this fund. New Jersey provides support of certain bonds of
counties, municipalities and school districts through various statutes.
Local Financing Authorities. The Local Authorities Fiscal Control Law
(N.J.S.A. 40A:5A-1 et seq.) provides for state supervision of the fiscal
operations and debt issuance practices of independent local authorities and
special taxing districts by the New Jersey Department of Community Affairs. The
Local Authorities Fiscal Control Law applies to all autonomous public bodies
created by counties or municipalities, which are empowered to issue bonds, to
impose facility or service charges, or to levy taxes in their districts. This
encompasses most autonomous local authorities (sewerage, municipal utilities,
parking, pollution control, improvement, etc.) and special taxing districts
(fire, water, etc.). Authorities which are subject to differing New
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Jersey or federal financial restrictions are exempted, but only to the extent of
that difference.
Financial control responsibilities over local authorities and special
districts are assigned to the Local Finance Board and the Director of the
Division of Local Government Services. The Local Finance Board exercises
approval power over the creation of new authorities and special districts as
well as their dissolution. The Local Finance Board also reviews, conducts public
hearings and issues findings and recommendations on any proposed project
financing of an authority or district, and on any proposed financing agreement
between an municipality or county and an authority or special district. The
Local Finance Board prescribes minimum audit requirements to be followed by
authorities and special districts in the conduct of their annual audits. The
Director reviews and approves annual budgets of authorities and special
districts.
Litigation. At any given time, there are various numbers of claims and
cases pending against the State of New Jersey, New Jersey agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1 et
seq.). New Jersey does not formally estimate its reserve representing potential
exposure for these claims and cases. New Jersey is unable to estimate its
exposure for these claims and cases.
New Jersey routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against New Jersey must be preceded
by a notice of claim, which affords New Jersey the opportunity for a six-month
investigation prior to the filing of any suit against it. At any given time,
there are various numbers of claims and cases pending against the University of
Medicine and Dentistry and its employees, seeking recovery of monetary damages
that are primarily paid out of the Self Insurance Reserve Fund created pursuant
to the New Jersey Tort Claims Act. An independent study estimated an aggregate
potential exposure of $90,800,000 for tort and medical malpractice claims
pending as of June 30, 1997. In addition, at any given time, there are various
numbers of contract and other claims against the University of Medicine and
Dentistry, seeking recovery of monetary damages or other relief which, if
granted, would require the expenditure of funds. New Jersey is unable to
estimate its exposure for these claims.
Other lawsuits presently pending or threatened in which New Jersey has the
potential for either a significant loss of revenue or a significant
unanticipated expenditures include the following:
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New Jersey Education Association v. State of New Jersey challenging
amendments enacted in 1994 affecting the funding of the Teachers Pension and
Annuity Fund, the Public Employees' Retirement System, the Police and Fireman's
Retirement System, the State Police Retirement System and the Judicial
Retirement System. The matter was stayed pending the adoption of the
Appropriations Act for Fiscal Year 1998 and has been closed on a stipulation of
dismissal entered by the court upon consent of all the parties with no payment
made by any of the parties.
County of Passaic v. State of New Jersey the County of Passaic, Passaic
County Utilities Authority and Passaic County Pollution Control Financing
Authority alleged tort and contract claims against New Jersey and the New Jersey
Department of Environmental Protection associated with a resource recovery
facility which the plaintiffs had once planned to build. The complaint alleged
$30 million in damages for an alleged violation of a 1984 consent order
concerning the construction of the resource recovery facility. The court granted
New Jersey's motion for summary judgment and the appellate division affirmed on
October 17, 1997. The time for filing of a petition for recertification has
elapsed.
Interfaith Community Organization v. Shinn, a suit filed by a coalition of
churches and church leaders in Hudson County against the Governor, the
Commissioners of the Department of Environmental Protection and the Department
of Health, concerning chromium contamination in Liberty State Park in Jersey
City.
American Trucking Associations, Inc. and Tri-State Motor Transit Co. v.
State of New Jersey challenging the constitutionality of annual hazardous and
solid waste licensure fees collected by the Department of Environmental
Protection, seeking permanent injunction enjoining future collection of fees and
refund of all renewal fees, fines and penalties collected.
Abbott v. Burke, a decision by the New Jersey Supreme Court on July 12,
1994 requires that a funding formula be enacted by December 31, 1996 which would
close the spending gap between poor urban school districts and wealthy suburban
school districts by fiscal year 1998. On December 20, 1996, the Comprehensive
Education Improvement and Financing Act ("CEIFA") was enacted. On January 6,
1997 the Education Law Center filed a motion in aid of litigant's rights with
the New Jersey Supreme Court requesting, in part, relief in the form of 100%
spending parity or state aid in the amount of approximately $200 million to be
redistributed to the special needs school districts. On May 14, 1997, the
Supreme Court held the CEIFA unconstitutional as applied to 28 districts and
ordered New Jersey to appropriate additional funds beginning with the 1997-98
school year so that each district would be able to spend at the average of the
wealthy suburban districts and remanded to the Superior Court to
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oversee a study and report of the Commission of Education on the special
education needs and facilities of those districts.
Affiliated FM Insurance Company v. State of New Jersey, an action by
certain members of the New Jersey Property-Liability Insurance Guaranty
Association challenging the constitutionality of assessments used for the Market
Transition Fund and seeking repayment of assessments paid since 1990.
In the Matter of the 1997 Assessment Made by the New Jersey Property
Liability Insurance Guaranty Association Pursuant to N.J.S.A. 17:30A-4, in a
case related to the case above, the American Insurance Association and the
Alliance of American Insurers filed an appeal of an administrative action
seeking an emergent stay of their obligation to pay assessments to the New
Jersey Property-Liability Insurance Guaranty Association. The plaintiffs allege
that the assessment of $160 million per calendar year is without statutory
authority. On July 28, 1997, the court denied the plaintiffs' application for
emergent relief and denied New Jersey's motion for summary disposition.
C.F. v. Fauver, a class action in federal district court by prisoners with
serious mental disorders who are confined within the facilities of the New
Jersey Department of Corrections seeking injunctive relief in the form of
changes to the manner in which the mental health services are provided to
inmates.
Cleary v. Waldman, the plaintiffs claim that the Medicare Catastrophic
Coverage Act, providing funds to spouses of institutionalized individuals
sufficient funds to live in the community, requires that a certain system be
used to provide the funds and another system is being used instead. Estimate of
exposure if the court were to find for the plaintiffs are in the area of $50
million per year from both New Jersey and Federal sources combined. Plaintiffs
motion for a preliminary injunction was denied and is being appealed.
United Hospitals v. State of New Jersey, 18 New Jersey hospitals are
challenging the Medicaid reimbursements made since February 1995 claiming that
New Jersey failed to comply with certain federal requirements, the reimbursement
regulations are arbitrary, capricious and unreasonable, rates were incorrectly
calculated, the hospitals were denied due process, the Medicaid reimbursement
provisions violate the New Jersey Constitution, and Medicaid State Plan was
violated by the New Jersey Department of Human Services implementation of
hospital rates in 1995 and 1996.
Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Incorporated, the
plaintiff is suing Mirage Resorts and New Jersey in an attempt to enjoin their
efforts to build a highway and tunnel funded by Mirage Resorts and $55 million
in bonds collateralized by future casino obligations, claiming that the
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project violates the New Jersey Constitution provision that requires all
revenues the state receives from gaming operations to benefit the elderly and
disabled. The plaintiff also claims (i) the failure to disclose this
constitutional infirmity is a material omission within the meaning of Rule 10b-5
of the Securities and Exchange Act of 1934, (ii) the defendants have sought to
avoid the requirements of the Clean Water Act, Clean Air Act, Federal Highway
Act and the New Jersey Coastal Area Facility Review Act. On May 1, 1997, the
federal district court granted the defendants' motion to dismiss and appeal is
pending in the Third Circuit. In a related action, State of New Jersey v. Trump
Hotels & Casino Resorts, Inc., New Jersey filed a declaratory judgment action
seeking a declaration that the use of certain funds New Jersey statutory
provisions existed that permitted use of certain funds to be used for other
purposes than the elderly or disabled. Declaratory judgment was entered in favor
of New Jersey on May 14, 1997 and the matter is now in the Appellate
Division.
United Alliance v. State of New Jersey, plaintiffs allege that the Casino
Reinvestment Development Authority funding mechanisms are illegal including the
gross receipts tax, the parking tax, and the Atlantic City fund. This matter has
been placed on the inactive list. Five additional cases have been filed in
opposition to the road and tunnel project which also contain related challenges:
Bryant v. New Jersey Department of Transportation, Merolla and Brady v. Casino
Reinvestment Development Authority, Middlesex County v. Casino Reinvestment
Development Authority, Gallagher v. Casino Reinvestment Development Authority
and George Harms v. State of New Jersey. Summary judgment has been granted in
favor of the New Jersey or its agencies in Merolla, Middlesex and Gallagher but
the plaintiffs have filed an appeal.
Blecker v. State of New Jersey, a class action filed on behalf of providers
of Medicare Part B services to Qualified Medicare Beneficiaries seeking
reimbursement for Medicare co-insurance and deductibles not paid by the New
Jersey Medicaid program from 1988 to February 10, 1995. Plaintiffs claim a
breach of contract and violation of federal civil rights laws. Arguments on the
State's motions to dismiss and for summary judgment are expected to take place
in late November or in December 1997.
Spadoro v. New Jersey Economic Development Authority, the plaintiff
challenges the funding of New Jersey's accrued unfunded liability on the State's
pension funds through $2,803,042,498.56 in bonds issued by the New Jersey
Economic Development Authority and authorized by the Pension Bond Financing Act
of 1997. This suit is a second attempt by the plaintiff who claims that
resolution authorizing the issuance of bonds was invalid because (i) the State
Treasurer and other ex officio members of the
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Authority had a conflict of interest, (ii) the actions of the Authority violated
the public policy of the State, and (iii) there were various procedural defects
in the conduct of the meeting. Oral argument on the defendants' motion for
summary judgment is scheduled for January 8, 1998.
Camden County Energy Recovery Associates v. New Jersey Department of
Environmental Protection, the plaintiff owns and operates a resource facility in
Camden County and has filed suit seeking to have the solid waste reprocurement
process halted to clarify bid specification. The court did not halt the bid
process but did require clarifications. Co-defendant Pollution Control Financing
Authority of Camden County counterclaimed, seeking reformation of the contract
between it and the plaintiff and cross-claimed against New Jersey for
contribution and indemnification.
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
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such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of one-
third of the value of the Portfolio's total assets at the time of such
borrowing. No Portfolio will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Portfolio's investment practices are not deemed to
be pledged for purposes of this limitation.
3) Each of the Municipal Money Market, U.S. Treasury Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal
Money Market Portfolios may not purchase securities which would cause 25% or
more of the value of its total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal business
activities in the same industry. The Money Market Portfolio, on the other hand,
may not purchase any securities which would cause, at the time of purchase, less
than 25% of the value of its total assets to be invested in the 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.
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5) The Municipal Money Market Portfolio will invest at least 80% of its
net assets in instruments the interest on which is exempt from regular Federal
income tax and is not an item of tax preference for purposes of Federal
alternative minimum tax, except during defensive periods or during periods of
unusual market conditions.
NON-MONEY MARKET PORTFOLIOS:
Each of the Non-Money Market Portfolios (other than the Ohio Tax-Free
Income, Pennsylvania Tax-Free Income and New Jersey Tax-Free Income Portfolios)
may not:
1) Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the value of
the Portfolio's total assets would (taken at current value) be invested in the
securities of such issuer, or more than 10% of the issuer's outstanding voting
securities would be owned by the Portfolio or the Fund, except that up to 25% of
the value of the Portfolio's total assets may (taken at current value) be
invested without regard to these limitations. For purposes of this limitation, a
security is considered to be issued by the entity (or entities) whose assets and
revenues back the security. A guarantee of a security shall not be deemed to be
a security issued by the guarantors when the value of all securities issued and
guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of
the value of the Portfolio's total assets.
Each of the Non-Money Market Portfolios may not:
2) Purchase any securities which would cause 25% or more of the value of
the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued (as defined in Investment Limitation No. 1 above) or
guaranteed by the United States, any state, territory or possession of the
United States, the District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, and (ii) repurchase agreements
secured by the instruments described in clause (i); (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(c) utilities will be divided according to their services; for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry.
Each Non-Money Market Portfolio (other than the Managed Income,
Intermediate Government Bond, Low Duration Bond,
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Intermediate Bond, Government Income, International Bond, Core Bond and Balanced
Portfolios) may not:
3) Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of one-
third of the value of the Portfolio's total assets at the time of such
borrowing. No Portfolio will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Portfolio's investment practices are not deemed to
be pledged for purposes of this limitation.
None of the Managed Income, Intermediate Government Bond, 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,
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consolidation, reorganization or acquisition of assets or where otherwise
permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except to the extent that the purchase of obligations
directly from the issuer thereof, or the disposition of securities, in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options on futures contracts and, in
the case of the International Bond Portfolio, currencies.
5. Purchase securities of companies for the purpose of exercising
control.
6. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Portfolio's transactions in futures contracts and related options or
a Portfolio's sale of securities short against the box, and (b) a 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.
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Although the foregoing investment limitations would permit the Money Market
Portfolios to invest in options, futures contracts and options on futures
contracts, and to sell securities short against the box, those Portfolios do not
currently intend to trade in such instruments or engage in such transactions
during the next twelve months (except to the extent a portfolio security may be
subject to a "demand feature" or "put" as permitted under SEC regulations for
money market funds). Prior to making any such investments, a Money Market
Portfolio would notify its shareholders and add appropriate descriptions
concerning the instruments and transactions to its Prospectus.
INDEX MASTER PORTFOLIO:
The investment limitations of the Index Master Portfolio, the Portfolio in
which the Index Equity Portfolio invests all of its investable assets, are
separate from those of the Index Equity Portfolio. The Index Master Portfolio
may not:
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;
-59-
<PAGE>
7. Invest more than 10% of the value of its total assets in illiquid
securities which include certain restricted securities, repurchase agreements
with maturities of greater than seven days, and other illiquid investments;
8. Engage in the business of underwriting securities issued by
others;
9. Invest for the purpose of exercising control over management of any
company;
10. Invest its assets in securities of any investment company, except in
connection with a merger, acquisition of assets, consolidation or
reorganization;
11. Invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation;
12. Acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value of its total assets would
be invested in securities of companies within such industry;
13. Write or acquire options (except as described in (1) above) or
interests in oil, gas or other mineral exploration, leases or development
programs;
14. Purchase warrants; however, it may acquire warrants as a result of
corporate actions involving its holdings of other equity securities;
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
-60-
<PAGE>
Trust and DFA will continue to monitor the liquidity of Rule 144A
securities.
For purposes of (12) above, utility companies will be divided according to
their services; e.g., gas, gas transmission, electric and gas, electric, water
and telephone will each be considered a separate industry.
Because the structure of the Index Master Portfolio is based on the
relative market capitalizations of eligible holdings, it is possible that the
Index Master Portfolio might include at least 5% of the outstanding voting
securities of one or more issuers. In such circumstances, the Trust and the
issuer would be deemed "affiliated persons" under the Investment Company Act of
1940, and certain requirements of the Act regulating dealings between affiliates
might become applicable.
TRUSTEES AND OFFICERS
THE FUND
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
William O. Albertini Trustee Executive Vice President
Bell Atlantic Global and Chief Financial
Wireless Officer since August,
1717 Arch Street 1997, Bell Atlantic
29th Floor East Global Wireless (global
Philadelphia, PA 19103 wireless communications);
Age: 55 Executive Vice President,
Chief Financial Officer
and Director from
February 1995-August
1997, Vice President and
Chief 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.;
</TABLE>
-61-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
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.
Raymond J. Clark1 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 from 1996-
1997.
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
</TABLE>
____________________
1. This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-62-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
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, 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: 51 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
</TABLE>
-63-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
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: 62 (investment advisers)
since February 1989;
Director, Beaver
Management Corporation;
Managing General
Partner, Chestnut Street
Exchange Fund; 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
BlackRock, Inc. Secretary Capital Group, Inc. since
345 Park Avenue 1995; Managing Director
New York, NY 10154 of BlackRock Financial
Age: 31 Management, Inc. since
1993; prior to 1993, Vice
President of BlackRock
Financial Management,
Inc.
Ellen L. Corson Assistant Vice President and
PFPC Inc. Treasurer Director of Mutual Fund
103 Bellevue Parkway Accounting and Adminis-
Wilmington, DE 19809 tration, PFPC Inc. since
Age: 33 November 1997; Assistant
Vice President, PFPC Inc.
from March 1997 to
November 1997; Senior
Accounting Officer, PFPC
Inc. from March 1993 to
March 1997.
</TABLE>
-64-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Brian P. 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 BlackRock, Inc.
(formerly PNC Asset Management Group, Inc.) or BlackRock Distributors, Inc.
("BDI" 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
BlackRock, Inc. or the Distributor are reimbursed for any expenses incurred in
attending meetings of the Board of Trustees or any committee thereof. No
officer, director or employee of BlackRock, Inc., 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"), BDI (collectively with PFPC and BlackRock, Inc., 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 class 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 COMPLEX/1/
NAME OF PERSON, FROM PART OF FUND BENEFITS UPON PAID TO
POSITION REGISTRANT EXPENSES RETIREMENT TRUSTEES
- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
</TABLE>
-65-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Anthony M. $52,300 N/A N/A (3)/2/ $64,300
Santomero, Vice
Chairman of the
Board
David R. Wilmerding, $61,050 N/A N/A (3)/2/ $73,050
Jr., Chairman of the
Board
William O. $43,550 N/A N/A (1)/2/ $43,550
Albertini, Trustee
Raymond J. Clark, $43,550 N/A N/A (1)/2/ $43,550
Trustee
Robert M. Hernandez, $43,550 N/A N/A (1)/2/ $43,550
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.
-66-
<PAGE>
THE TRUST
The names, addresses and dates of birth 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 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, CA and Chairman-Chief Executive Officer and Director
Birthdate: Executive Officer of all DFA Entities, except
12/2/46 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 Chicago.
Birthdate: Director, DFA Investment
9/22/47 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
Birthdate: of Economics, Graduate School of
1/19/39 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, Lexecon Inc.
(economics, law, strategy, and
finance consulting).
</TABLE>
-67-
<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
Birthdate: Investment Dimensions Group
5/27/43 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. Miller Trustee Robert R. McCormick
Chicago, IL Distinguished Service Professor
Birthdate: Emeritus, Graduate School of
5/16/23 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. Scholes Trustee Limited Partner, Long-Term
Greenwich, CT Capital Management L.P. (money
Birthdate:7/1/42 manager). Frank E. Buck
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>
-68-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Trustee, Chairman Chairman-Chief Investment
Rex A. and Chief Officer and Director of all DFA
Sinquefield* Investment Officer Entities, except Dimensional
Santa Monica, CA Fund Advisors Ltd., of which he
Birthdate: is Chairman, Chief Executive
9/7/44 Officer and Director.
</TABLE>
*Interested
Trustee of the
Trust.
_____________
-69-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation During
Trustees Position with Trust Last Five Years
- -------- ------------------- ---------------
<S> <C> <C>
Arthur Barlow Vice President Vice President of all DFA
Santa Monica, CA Entities.
Birthdate:
11/7/55
Truman Clark Vice President Vice President of all DFA
Santa Monica, CA Entities. Consultant until
Birthdate: October 1995 and Principal and
4/8/41 Manager of Product Development,
Wells Fargo Nikko Investment
Advisors from 1990-1994.
Maureen Connors Vice President Vice President of all DFA
Santa Monica, CA Entities.
Birthdate:
11/17/36
Robert Deere Vice President Vice President of all DFA
Santa Monica, CA Entities.
Birthdate:
10/8/57
Irene R. Diamant Vice President, Vice President and Secretary of
Santa Monica, CA Secretary all DFA Entities, except
Birthdate: Dimensional Fund Advisors Ltd.,
7/16/50 for which she is Vice President.
Eugene Fama, Jr. Vice President Vice President of all DFA
Santa Monica, CA Entities.
Birthdate:
1/21/61
Kamyab Hashemi- Vice President, Vice President, Controller and
Nejad, Controller and Assistant Treasurer of all DFA
Santa Monica, CA Assistant Treasurer Entities.
Birthdate:
1/22/61
Stephen P. Vice President Managing Director, ANB
Manus, Investment Management and Trust
Santa Monica, Company from 1985-1993;
CA President, ANB Investment
Birthdate: Management and Trust Company
12/26/50 from 1993-1997. Vice President
of all DFA Entities.
Karen McGinley, Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Birthdate:
3/10/66
Catherine L. Vice President and Associate, Morrison & Foerster,
Newell, Assistant Secretary LLP from 1989-1996. Vice
Santa Monica, President of all DFA Entities.
CA
Birthdate:
5/7/64
</TABLE>
-70-
<PAGE>
<TABLE>
<S> <C> <C>
David Plecha Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Birthdate:
10/26/61
George Sands Vice President Vice President of all DFA
Santa Monica, CA Entities.
Birthdate:
2/8/56
Michael T. Vice President, Vice President, Chief Financial
Scardina Chief Financial Officer, and Treasurer of all
Santa Monica, CA Officer, and DFA Entities.
Birthdate: Treasurer
10/12/55
Jeanne C. Executive Vice Executive Vice President of all
Sinquefield, President DFA Entities.
Ph.D.
Santa Monica, CA
Birthdate:
12/2/46
Scott Thornton, Vice President Vice President of all DFA
Santa Monica, Entities.
CA
Birthdate:
3/1/63
Weston Vice President Vice President of all DFA
Wellington, Entities. Vice President,
Santa Monica, Director of Research, LPL
CA Financial Services, Inc.
Birthdate:
3/1/51
</TABLE>
Rex A. Sinquefield, Trustee, Chairman and Chief Investment Officer of the Trust
and Jeanne C. Sinquefield, Executive Vice President of the Trust, are husband
and wife.
Set forth below is a table listing, for each trustee of the Trust entitled
to receive compensation, the compensation received from the Trust during the
fiscal year ended November 30, 1997 and the total compensation received from all
four registered investment companies for
-71-
<PAGE>
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 COMPLEX1
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.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract,
_____________________
1 A Trust Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
-72-
<PAGE>
debt, tort, claim, damage, judgment or decree arising out of or connected with
the administration or preservation of the trust property or the conduct of any
business of the Fund; and that no trustee shall be personally liable to any
person for any action or failure to act except by reason of his own bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties as a
trustee. With the exception stated, the Declaration of Trust provides that a
trustee is entitled to be indemnified against all liabilities and expenses
reasonably incurred by him in connection with the defense or disposition of any
proceeding in which he may be involved or with which he may be threatened by
reason of his being or having been a trustee, and that the Fund will indemnify
officers, representatives and employees of the Fund to the same extent that
trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
Advisory and Sub-Advisory Agreements. The advisory and sub- advisory
services provided by BlackRock, Inc., 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,
BlackRock, Inc. may from time to time voluntarily waive its advisory fees with
respect to a Portfolio and may voluntarily reimburse the Portfolios for
expenses.
BlackRock, Inc., a wholly-owned indirect subsidiary of PNC Bank Corp.,
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, 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. From January 1, 1996 through January 12, 1996 (February 12,
1996 with respect to the predecessor portfolio of the International Bond
Portfolio): (i) BlackRock, Inc. 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)
-73-
<PAGE>
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, International Emerging Markets and
International Small Cap Equity Portfolios pursuant to Sub- Advisory Agreements.
PIMC renders sub-advisory services to the Money Market, U.S. Treasury Money
Market, Municipal Money Market, Ohio Municipal Money Market, Pennsylvania
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market and New Jersey Municipal Money Market Portfolios pursuant
to Sub-Advisory Agreements. BlackRock renders sub-advisory services to the
Balanced, Managed Income, Intermediate Government Bond, Tax-Free Income, Ohio
Tax-Free Income, Pennsylvania Tax- Free Income, Low Duration Bond, Intermediate
Bond, New Jersey Tax-Free Income, Core Bond, 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, Small Cap Growth
Equity and Micro-Cap 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 BlackRock, Inc., 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- 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
-74-
<PAGE>
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.
Under the relevant Advisory Contracts, BlackRock, Inc., 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,
BlackRock, Inc., 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
-75-
<PAGE>
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 BlackRock, Inc., PIMC, PCM, PEAC, BlackRock or CastleInternational, as the
case may be. BlackRock, Inc., 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 BlackRock, Inc. advisory fees, and BlackRock,
Inc. waived advisory fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers Reimbursements
- --------------------------------------------------------------- --------------- ------- --------------
<S> <C> <C> <C>
Money Market................................................... $2,648,951 $8,355,021 $ 0
U.S. Treasury Money Market..................................... 865,528 3,842,169 0
Municipal Money Market......................................... 247,591 1,482,338 0
New Jersey Municipal Money Market.............................. 67,821 483,238 0
North Carolina Municipal Money Market.......................... 94,458 602,236 0
Ohio Municipal Money Market.................................... 66,919 434,972 0
Pennsylvania Municipal Money Market............................ 378,571 2,048,282 0
Virginia Municipal Money Market................................ 4,280 267,307 18,025
Low Duration Bond.............................................. 599,206 517,845 0
Intermediate Government Bond................................... 462,943 308,628 0
Intermediate Bond.............................................. 973,237 648,825 0
Core Bond...................................................... 1,040,492 1,005,843 0
Government Income.............................................. 465 84,527 47,550
Managed Income................................................. 2,629,559 1,126,954 0
International Bond............................................. 220,526 12,573 0
Tax-Free Income................................................ 158,143 123,004 0
Pennsylvania Tax-Free Income................................... 268,228 178,819 0
New Jersey Tax-Free Income..................................... 254,415 179,069 0
Ohio Tax-Free Income........................................... 10,355 43,390 0
Large Cap Value Equity......................................... 6,487,065 480,085 0
Large Cap Growth Equity........................................ 3,718,080 233,396 0
Mid-Cap Value Equity........................................... 499,380 4,043 0
Mid-Cap Growth Equity.......................................... 499,026 4,087 0
</TABLE>
-76-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Small Cap Value Equity......................................... 2,036,977 6,910 0
Small Cap Growth Equity........................................ 3,169,739 32,560 0
International Equity........................................... 4,101,006 556,548 0
International Small Cap Equity................................. 0 0 0
International Emerging Markets................................. 1,786,671 152,118 0
Select Equity.................................................. 2,562,623 154,197 0
Balanced....................................................... 1,486,866 92,278 0
</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
PORTFOLIOS (AFTER WAIVERS) WAIVERS REIMBURSEMENTS
- ---------- -------------- ---------- --------------
<S> <C> <C> <C>
Money Market $321,268 $1,818,401 $0
Municipal Money Market 46,804 304,226 0
U.S. Treasury Money Market 114,639 745,150 0
Ohio Municipal Money Market 11,052 71,841 0
Pennsylvania Municipal Money Market 64,257 417,675 0
North Carolina Municipal Money 11,026 71,666 0
Market
Virginia Municipal Money Market 0 7,024 0
Managed Income 520,724 223,168 0
Government Income 0 17,234 0
Tax-Free Income 3,933 11,137 0
Intermediate Government Bond 114,345 130,122 0
Ohio Tax-Free Income 723 10,100 0
Pennsylvania Tax-Free Income 43,145 37,663 0
Intermediate Bond 136,544 119,059 0
Large Cap Value Equity 829,764 147,027 0
Large Cap Growth Equity 361,240 95,914 0
Small Cap Growth Equity 304,284 23,327 0
Select Equity 369,071 97,791 0
Index Equity 4,647 88,292 0
Small Cap Value Equity 320,588 24,942 0
International Equity 697,319 127,354 0
International Emerging Markets 144,937 11,380 0
Balanced 201,642 53,929 0
</TABLE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio), the
Fund paid BlackRock, Inc. (PIMC in the case of the Index Equity Portfolio)
advisory fees, and BlackRock, Inc. (PIMC in the case of the Index Equity
Portfolio) waived advisory fees and reimbursed expenses, as follows:
-77-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After 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>
-78-
<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
Portfolios (After Waivers) Waivers Reimbursements
- ---------- --------------- -------------- --------------
<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 Income/1/ 0 37,256 11,980
</TABLE>
/1/ For the period from commencement of operations (October 3, 1994) through
September 30, 1995.
For the 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, BlackRock, Inc. paid sub-advisory fees to the specified
Portfolios' sub-advisers, after waivers, and such sub-advisers waived sub-
advisory fees as follows:
-79-
<PAGE>
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers
- ---------- --------------- --------------
<S> <C> <C>
Money Market $1,300,023 $9,370,873
U.S. Treasury Money Market 577,321 3,631,808
Municipal Money Market 212,376 1,325,338
New Jersey Municipal Money Market 75,204 414,553
North Carolina Municipal Money Market 81,568 536,785
Ohio Municipal Money Market 62,070 384,055
Pennsylvania Municipal Money Market 298,167 1,859,027
Virginia Municipal Money Market 350 241,044
Low Duration Bond 36,930 745,005
Intermediate Government Bond 14,450 525,649
Intermediate Bond 15,164 1,120,194
Core Bond 104,500 1,327,935
Government Income 0 59,494
Managed Income 86,420 2,542,897
International Bond 79,789 89,738
Tax-Free Income 48,652 148,151
Pennsylvania Tax-Free Income 34,191 278,742
New Jersey Tax-Free Income 26,000 277,439
Ohio Tax-Free Income 38,606 0
Large Cap Value Equity 583,448 4,590,272
Large Cap Growth Equity 172,041 2,701,759
Mid-Cap Value Equity 15,821 413,497
Mid-Cap Growth Equity 15,422 413,851
Small Cap Value Equity 383,789 1,102,690
Small Cap Growth Equity 725,498 1,603,447
International Equity 269,395 3,456,696
International Small Cap Equity 0 727
International Emerging Markets 107,739 1,598,368
Select Equity 105,481 1,870,387
Balanced 297,047 851,422
</TABLE>
-80-
<PAGE>
For the period from October 1, 1995 through January 4, 1996, PIMC paid sub-
advisory fees to the specified Portfolios' sub-advisers, after waivers, and such
sub-advisers waived sub-advisory fees as follows:
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- --------- -------
<S> <C> <C>
Money Market $0 $235,363
Municipal Money Market 0 38,613
U.S. Treasury Money Market 0 94,577
Ohio Municipal Money Market 0 9,118
Pennsylvania Municipal Money 0 53,013
Market
North Carolina Municipal Money 0 9,096
Market
Virginia Municipal Money Market 0 773
Managed Income 497,581 82,654
Government Income 0 12,063
Tax-Free Income 3,693 9,207
Intermediate Government 73,585 97,542
Bond
Ohio Tax-Free Income 3,258 4,318
Pennsylvania Tax-Free Income 24,323 32,242
Intermediate Bond 76,937 101,986
Large Cap Value Equity 213,057 0
Large Cap Growth Equity 333,722 0
Small Cap Growth Equity 239,156 0
Select Equity 340,809 0
Index Equity 12,385 73,920
Small Cap Value Equity 252,237 0
International Equity 659,738 0
International Emerging Markets 137,559 0
Balanced 186,567 0
</TABLE>
For the period from January 5, 1996 (February 1, 1996 in the case of the
New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios;
February 13, 1996 in the case of the International Bond Portfolio; and April 1,
1996 in the case of the Core Bond and Low Duration Bond Portfolios) through
September 30, 1996 (June 1, 1996 in the case of the Index Equity Portfolio),
BlackRock, Inc. (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:
-81-
<PAGE>
<TABLE>
<CAPTION>
FEES PAID
(AFTER
PORTFOLIOS WAIVERS) WAIVERS
- ---------- ---------- -------
<S> <C> <C>
Money Market $1,443,913 $5,342,421
Municipal Money Market 158,382 897,064
U.S. Treasury Money Market 694,221 3,095,647
Ohio Municipal Money Market 32,275 182,796
Pennsylvania Municipal Money
Market 240,350 1,361,445
North Carolina Municipal Money 45,997 260,560
Market
Virginia Municipal Money Market 0 160,601
New Jersey Municipal Money 32,663 149,411
Market
Managed Income 1,488,836 248,415
Government Income 0 36,973
Tax-Free Income 95,609 50,559
Intermediate Government 412,698 2,499
Bond
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:
-82-
<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 265,674 398,511
Bond
Ohio Tax-Free Income 0 29,431
Pennsylvania Tax-Free Income 112,727 96,566
Intermediate Bond 239,611 235,136
Large Cap Value Equity 2,060,105 543,074
Large Cap Growth Equity 630,015 236,255
Small Cap Growth Equity 449,727 100,084
Select Equity 502,871 188,576
Index Equity 30,772 286,654
Small Cap Value Equity 831,324 83,132
International Equity 1,913,286 478,322
Balanced 467,464 175,299
Virginia Municipal Money Market 0 9,451
International Emerging Markets 227,610 45,924
Government Income/1/ 0 26,079
</TABLE>
/1/ Commenced operations October 3, 1994.
For the 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 $160,156, respectively. The Index Equity
Portfolio did not invest in the Index Master Portfolio until June 2, 1996.
The predecessor portfolio to the New Jersey Tax-Free Income Portfolio was
advised by Midlantic Bank from July 1, 1991 through December 31, 1995, and by
BlackRock from January 1, 1996 through January 12, 1996. For the period from
January 1, 1996 through January 12, 1996, the predecessor portfolio to the New
Jersey Tax-Free Income Portfolio paid $20,165 in advisory fees to BlackRock. For
the period from March 1, 1995 through December
-83-
<PAGE>
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 BlackRock, Inc.
$12,779 in investment advisory fees, and BlackRock, Inc. waived $8,520 in
investment advisory fees. During the period from January 13, 1996 through
January 31, 1996, BlackRock, Inc. 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 BlackRock,
Inc. 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 BlackRock, Inc.,
and BlackRock, Inc. waived advisory fees and reimbursed expenses totalling $0
and $0, respectively. For the period from February 1, 1996 through February 12,
1996, BlackRock, Inc. 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 BlackRock, Inc..
For the period from January 1, 1996 through January 31, 1996, BlackRock, Inc.
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
-84-
<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 BlackRock, Inc. $182,709 in investment advisory fees, and BlackRock, Inc.
waived $121,806 in investment advisory fees. During the period from January 13,
1996 through March 31, 1996, BlackRock, Inc. 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 BlackRock, Inc. $149,488 in investment advisory fees, and
BlackRock, Inc. waived $99,659 in investment advisory fees. During the period
from January 13, 1996 through March 31, 1996, BlackRock, Inc. 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. BlackRock, Inc., PFPC and BDI serve as the
Fund's co-administrators pursuant to administration agreements (collectively,
the "Administration Agreement"). PFPC and BDI have agreed to maintain office
facilities for the Fund; furnish the Fund with statistical and research data,
clerical, accounting, and bookkeeping services;
-85-
<PAGE>
provide and supervise the operation of an automated data processing system to
process purchase and redemption orders; provide information and distribute
written communications to shareholders; handle shareholder problems and calls;
research issues raised by financial intermediaries relating to investments in a
Portfolio's shares; review and provide advice with respect to communications for
a Portfolio's shares; monitor the investor programs that are offered in
connection with a Portfolio's shares; provide oversight and related support
services that are intended to ensure the delivery of quality service to the
holders of the Portfolio's shares; and provide certain other services required
by the Fund. As stated in the Prospectuses, the Administrators may from time to
time voluntarily waive administration fees with respect to a Portfolio and may
voluntarily reimburse the Portfolios for expenses.
BlackRock, Inc. serves as an Administrator to the Fund pursuant to a Co-
Administration Agreement. Under the Co- Administration Agreement, BlackRock,
Inc. 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 BlackRock, Inc., PFPC and BDI
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. The Index Equity Portfolio
bears its pro rata portion of the Index Master Portfolio's administrative
services expenses.
From February 1, 1993 until January 13, 1996, PFPC and Provident
Distributors, Inc. ("PDI") served as co-administrators
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<PAGE>
to the Fund. From December 1, 1995 to January 28, 1998, Compass Capital Group,
Inc. ("CCG") served as Co-Administrator to the Fund. BlackRock, Inc. became Co-
Administrator to the Fund on January 28, 1998. For the purposes of the Following
Fee information CCG is also considered an "Administrator".
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
fees (after waivers), and the Administrators waived combined administration fees
and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
Portfolios (After Waivers) Waivers Reimbursements
- ---------- --------------- ------- --------------
<S> <C> <C> <C>
Money Market.............................................. $3,006,036 $161,687 0
U.S. Treasury Money Market................................ 1,391,777 83,462 0
Municipal Money Market.................................... 510,438 66,205 0
New Jersey Municipal Money Market......................... 134,020 49,666 0
North Carolina Municipal Money Market..................... 149,859 81,039 0
Ohio Municipal Money Market............................... 136,900 30,397 0
Pennsylvania Municipal Money Market....................... 701,182 105,262 0
Virginia Municipal Money Market........................... 13,709 76,820 0
Low Duration Bond......................................... 266,343 180,478 0
Intermediate Government Bond.............................. 136,304 172,324 0
Intermediate Bond......................................... 359,159 291,462 0
Core Bond................................................. 628,096 188,359 0
Government Income......................................... 910 33,087 0
Managed Income............................................ 696,869 755,201 0
International Bond........................................ 56,066 28,697 0
Tax-Free Income........................................... 36,907 75,552 0
Pennsylvania Tax-Free Income.............................. 84,673 94,146 0
New Jersey Tax-Free Income................................ 77,981 95,412 0
Ohio Tax-Free Income...................................... 9,942 11,556 0
Large Cap Value Equity.................................... 2,173,719 195,769 0
Large Cap Growth Equity................................... 1,146,084 247,130 0
Mid-Cap Value Equity...................................... 106,481 19,571 0
Mid-Cap Growth Equity..................................... 106,838 19,149 0
Small Cap Value Equity.................................... 713,311 29,928 0
Small Cap Growth Equity................................... 1,156,894 0 0
International Equity...................................... 1,149,080 68,733 0
International Small Cap Equity............................ 0 0 0
International Emerging Markets............................ 379,822 596 0
Select Equity............................................. 794,449 189,515 0
Index Equity.............................................. 134,085 549,869 0
Balanced.................................................. 501,727 72,507 0
</TABLE>
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:
-87-
<PAGE>
<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 waived combined administration fees
and reimbursed expenses, as follows:
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<PAGE>
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- --------- ------- --------------
<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>
-89-
<PAGE>
For the year or periods ended September 30, 1995, the Fund paid PFPC
and PDI combined administration fees (after waivers), and PFPC and PDI waived
combined administration fees and reimbursed expenses, as follows:
<TABLE>
<CAPTION>
Fees Paid
(After
Portfolios Waivers) Waivers Reimbursements
- ---------- ---------- ------- --------------
<S> <C> <C> <C>
Money Market $1,686,008 $200,348 $0
Municipal Money Market 208,246 162,303 0
U.S. Treasury Money Market 631,041 281,107 0
Ohio Municipal Money Market 43,263 55,100 0
Pennsylvania Municipal
Money Market 322,632 200,313 0
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 244,417 135,117 0
Bond
Ohio Tax-Free Income 0 16,817 8,950
Pennsylvania Tax-Free
Income 68,050 51,546 0
Intermediate Bond 139,960 131,323 0
Large Cap Value Equity 1,083,967 187,474 0
Large Cap Growth Equity 360,966 72,170 0
Small Cap Growth Equity 238,595 36,310 0
Select Equity 288,666 57,058 0
Index Equity 96,814 316,163 0
Small Cap Value Equity 359,637 97,592 0
International Equity 689,601 107,601 0
Balanced 216,630 104,752 0
Virginia Municipal Money
Market 0 28,354 11,986
International Emerging
Markets 41,383 8,350 0
Government Income1 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
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<PAGE>
respect 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, which has its principal offices at 400 Bellevue Parkway,
Wilmington, DE 19809 and is 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 value of outstanding BlackRock Shares in each Portfolio, plus per account
fees and disbursements. For its services under the Transfer Agency
-92-
<PAGE>
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 BlackRock, Inc. 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 BlackRock, Inc. fees for the
provision of personal services to shareholders and the processing and
administration of shareholder accounts. BlackRock, Inc., 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
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<PAGE>
vote of a majority of the outstanding shares of such class and by a majority of
the 12b-1 Trustees; and (v) while the Plan remains in effect, the selection and
nomination of the Fund's trustees who are not "interested persons" of the Fund
shall be committed to the discretion of the Fund's non-interested trustees.
The Plan is terminable as to any class of shares without penalty at any
time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of
a majority of the shares of such class.
With respect to Investor A Shares, the front-end sales charge and the
distribution fee payable under the Plan (at a maximum annual rate of .10% of the
average daily net asset value of each Portfolio's outstanding Investor A Shares)
are used to pay commissions and other fees payable to Service Organizations and
other broker/dealers who sell Investor A Shares.
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 BDI, BlackRock, Inc., 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, BlackRock, Inc. and
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<PAGE>
their affiliates may pay financial institutions, broker/dealers and/or their
salespersons certain compensation for the sale and distribution of shares of the
Fund or for services to the Fund. These payments ("Additional Payments") would
be in addition to the payments by the Fund described in the Fund's Prospectuses
and this Statement of Additional Information for distribution and shareholder
servicing and processing, and would also be in addition to the sales commissions
payable to dealers as set forth in the Prospectuses for Investor Shares. These
Additional Payments may take the form of "due diligence" payments for a dealer's
examination of the Portfolios and payments for providing extra employee training
and information relating to Portfolios; "listing" fees for the placement of the
Portfolios on a dealer's list of mutual funds available for purchase by its
customers; "finders" or "referral" fees for directing investors to the Fund;
"marketing support" fees for providing assistance in promoting the sale of the
Funds' shares; and payments for the sale of shares and/or the maintenance of
share balances. In addition, the Distributor, BlackRock, Inc. 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, BlackRock, Inc. 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, BlackRock, Inc. 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, BlackRock, Inc. 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
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<PAGE>
shareholders of record. In consideration for payment of a service fee of up to
.25% (on an annualized basis) of the average daily net asset value of the
Investor A, Investor B and Investor C Shares owned beneficially by their
Customers and .15% (on an annualized basis) of the average daily net asset value
of the Service Shares beneficially owned by their Customers, 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
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<PAGE>
servicing and shareholder processing fees under the Portfolios' current
plans:
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor A Shares Fees Servicing Fees Processing Fees
- ------------------------------ ------------ -------------- ---------------
<S> <C> <C> <C>
Money Market.............................................. N/A $459,377 $275,626
U.S. Treasury Money Market................................ N/A 47,849 28,709
Municipal Money Market.................................... N/A 7,046 4,227
New Jersey Municipal Money Market......................... N/A 67,930 40,758
North Carolina Municipal Money Market..................... N/A 498 299
Ohio Municipal Money Market............................... N/A 22,520 13,512
Pennsylvania Municipal Money Market....................... N/A 252,489 151,493
Virginia Municipal Money Market........................... N/A 1,213 728
Low Duration Bond......................................... N/A 2,253 1,352
Intermediate Government Bond.............................. N/A 12,926 7,756
Intermediate Bond......................................... N/A 2,420 1,452
Core Bond................................................. N/A 2,091 1,255
Government Income......................................... N/A 8,699 5,219
Managed Income............................................ N/A 27,512 16,507
International Bond........................................ N/A 1,173 704
Tax-Free Income........................................... N/A 11,481 6,888
Pennsylvania Tax-Free Income.............................. N/A 79,632 47,779
New Jersey Tax-Free Income................................ N/A 2,089 1,254
Ohio Tax-Free Income...................................... N/A 5,927 3,556
Large Cap Value Equity.................................... N/A 82,231 49,339
Large Cap Growth Equity................................... N/A 47,342 28,405
Mid-Cap Value Equity...................................... N/A 1,270 762
Mid-Cap Growth Equity..................................... N/A 1,556 934
Small Cap Value Equity.................................... N/A 60,827 36,496
Small Cap Growth Equity................................... N/A 87,777 52,666
International Equity...................................... N/A 50,243 30,146
International Small Cap Equity............................ N/A 12 7
International Emerging Markets............................ N/A 8,082 4,849
Select Equity............................................. N/A 23,489 14,093
Index Equity.............................................. N/A 45,703 27,422
Balanced.................................................. N/A 177,097 106,258
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor B Shares Fees Servicing Fees Processing Fees
- ------------------------------ ------------ -------------- ---------------
<S> <C> <C> <C>
Money Market.............................................. $286 $1,276 $0
U.S. Treasury Money Market................................ 0 0 0
Municipal Money Market.................................... 0 0 0
New Jersey Municipal Money Market......................... 30 89 0
North Carolina Municipal Money Market..................... 0 0 0
Ohio Municipal Money Market............................... 0 0 0
Pennsylvania Municipal Money Market....................... 0 0 0
Virginia Municipal Money Market........................... 0 0 0
Low Duration Bond......................................... 102 119 72
Intermediate Government Bond.............................. 103 121 73
Intermediate Bond......................................... 0 0 0
Core Bond................................................. 10,005 14,857 8,914
Government Income......................................... 42,389 59,913 35,948
Managed Income............................................ 10 80 48
International Bond........................................ 1,150 1,564 938
Tax-Free Income........................................... 1,279 1,735 1,041
Pennsylvania Tax-Free Income.............................. 32,624 46,409 27,846
New Jersey Tax-Free Income................................ 1,253 1,998 1,193
Ohio Tax-Free Income...................................... 1,336 1,989 1,193
Large Cap Value Equity.................................... 32,130 49,211 29,527
Large Cap Growth Equity................................... 14,820 22,498 13,499
Mid-Cap Value Equity...................................... 1,677 3,223 1,934
Mid-Cap Growth Equity..................................... 1,798 3,619 2,171
Small Cap Value Equity.................................... 14,589 21,446 12,868
Small Cap Growth Equity................................... 60,450 84,056 50,434
International Equity...................................... 12,419 18,209 10,926
International Small Cap Equity............................ 0 0 0
International Emerging Markets............................ 2,514 4,040 2,424
Select Equity............................................. 17,090 29,568 17,741
Index Equity.............................................. 60,788 78,885 47,331
Balanced.................................................. 42,515 64,488 38,693
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Investor C Shares Fees Servicing Fees Processing Fees
- ------------------------------ ------------ -------------- ---------------
<S> <C> <C> <C>
Money Market.............................................. $645 $1,225 $0
U.S. Treasury Money Market................................ 0 0 0
Municipal Money Market.................................... 2 5 0
New Jersey Municipal Money Market......................... 0 0 0
North Carolina Municipal Money Market..................... 0 0 0
Ohio Municipal Money Market............................... 0 0 0
Pennsylvania Municipal Money Market....................... 0 0 0
Virginia Municipal Money Market........................... 0 0 0
Low Duration Bond......................................... 120 141 85
Intermediate Government Bond.............................. 79 92 55
Intermediate Bond......................................... 0 0 0
Core Bond................................................. 180 211 127
Government Income......................................... 653 750 450
Managed Income............................................ 0 0 0
International Bond........................................ 447 462 277
Tax-Free Income........................................... 0 1 1
Pennsylvania Tax-Free Income.............................. 0 0 0
New Jersey Tax-Free Income................................ 0 0 0
Ohio Tax-Free Income...................................... 0 0 0
Large Cap Value Equity.................................... 2,871 3,372 2,023
Large Cap Growth Equity................................... 186 217 130
Mid-Cap Value Equity...................................... 31 41 24
Mid-Cap Growth Equity..................................... 133 158 95
Small Cap Value Equity.................................... 1,796 2,104 1,263
Small Cap Growth Equity................................... 22,944 26,890 16,134
International Equity...................................... 147 172 103
International Small Cap Equity............................ 0 0 0
International Emerging Markets............................ 85 99 60
Select Equity............................................. 369 433 260
Index Equity.............................................. 36,025 41,362 24,817
Balanced.................................................. 95 111 67
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Distribution Shareholder Shareholder
Portfolios - Service Shares Fees Servicing Fees Processing Fees
- --------------------------- ------------ -------------- ---------------
<S> <C> <C> <C>
Money Market.............................................. N/A $2,425,112 $2,425,112
U.S. Treasury Money Market................................ N/A 1,280,124 1,280,124
Municipal Money Market.................................... N/A 493,398 493,398
New Jersey Municipal Money Market......................... N/A 141,044 141,044
North Carolina Municipal Money Market..................... N/A 15,790 15,790
Ohio Municipal Money Market............................... N/A 85,080 85,080
Pennsylvania Municipal Money Market....................... N/A 361,364 361,364
Virginia Municipal Money Market........................... N/A 15,542 15,542
Low Duration Bond......................................... N/A 127,215 127,215
Intermediate Government Bond.............................. N/A 73,283 73,283
Intermediate Bond......................................... N/A 73,197 73,197
Core Bond................................................. N/A 181,486 181,486
Government Income......................................... N/A 0 0
Managed Income............................................ N/A 320,482 320,482
International Bond........................................ N/A 10,859 10,859
Tax-Free Income........................................... N/A 63,453 63,453
Pennsylvania Tax-Free Income.............................. N/A 58,664 58,664
New Jersey Tax-Free Income................................ N/A 127,605 127,605
Ohio Tax-Free Income...................................... N/A 10,309 10,309
Large Cap Value Equity.................................... N/A 769,724 769,724
Large Cap Growth Equity................................... N/A 327,593 327,593
Mid-Cap Value Equity...................................... N/A 14,145 14,145
Mid-Cap Growth Equity..................................... N/A 14,097 14,097
Small Cap Value Equity.................................... N/A 137,408 137,408
Small Cap Growth Equity................................... N/A 249,073 249,073
International Equity...................................... N/A 256,801 256,801
International Small Cap Equity............................ N/A 0 0
International Emerging Markets............................ N/A 80,289 80,289
Select Equity............................................. N/A 208,609 208,609
Index Equity.............................................. N/A 214,177 214,177
Balanced.................................................. N/A 231,115 231,115
</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 BlackRock, Inc. and the Administrators, transfer agency
fees, fees and expenses of officers and trustees who are not affiliated with
BlackRock, Inc., the Distributor or any of their affiliates, taxes, interest,
legal fees, custodian fees, auditing fees, distribution fees, shareholder
processing fees, shareholder servicing fees, fees and expenses in registering
and qualifying the Portfolios and their shares for distribution under federal
and state securities laws, expenses of preparing prospectuses and statements of
additional information and of printing and distributing prospectuses and
statements of additional information to existing shareholders, expenses relating
to shareholder reports, shareholder meetings and proxy solicitations, fidelity
bond and trustees and officers liability
-100-
<PAGE>
insurance premiums, the expense of independent pricing services and other
expenses which are not expressly assumed by BlackRock, Inc. 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.
BlackRock, Inc., 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 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
-101-
<PAGE>
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 $1,309,867
Large Cap Growth Equity 1,033,730
Mid-Cap Value Equity 199,394
Mid-Cap Growth Equity 152,521
Small Cap Value Equity 612,318
Small Cap Growth Equity 413,189
International Equity 1,884,858
International Small Cap Equity 57,239
International Emerging Markets 570,670
Select Equity 317,435
Balanced 75,685
</TABLE>
For the year or period ended September 30, 1996, the following Portfolios
paid brokerage commissions as follows:
-102-
<PAGE>
<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 $116,563, respectively.
Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolios
will primarily engage in transactions with these dealers or deal directly with
the issuer unless a better price or execution could be obtained by using a
broker. Prices paid to a dealer with respect to both foreign and domestic
securities will generally include a "spread," which is the difference between
the prices at which the dealer is willing to purchase and sell the specific
security at the time, and includes the dealer's normal profit.
Purchases of money market instruments by a Portfolio are made from dealers,
underwriters and issuers. The Portfolios do not currently expect to incur any
brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for
-103-
<PAGE>
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 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 BlackRock, Inc., 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 BlackRock, Inc., 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.
-104-
<PAGE>
The portfolio turnover rate of a Portfolio is calculated by dividing the
lesser of a Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year. The Index Master Portfolio
ordinarily will not sell portfolio securities except to reflect additions or
deletions of stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions and, to the extent necessary, to
provide cash to pay redemptions of the Index Master Portfolio's shares.
The Fund is required to identify any securities of its regular brokers or
dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by
the Fund as of the end of its most recent fiscal year. As of September 30, 1997,
the following Portfolios held the following securities:
<TABLE>
<CAPTION>
Portfolio Security Value
--------- -------- -----
<S> <C> <C>
Money Market
Morgan Stanley & Co., Inc. Commercial Paper $ 49,402,000
Morgan Stanley & Co., Inc. Variable Rate Obligation 36,997,742
Merrill Lynch & Co. Commercial Paper 128,081,269
Lehman Brothers, Inc. Commercial Paper 49,837,542
Lehman Brothers, Inc. Variable Rate Obligation 50,000,000
U.S. Treasury Money Market
Morgan Stanley & Co., Inc. Repurchase Agreement $ 247,000,000
Greenwich Capital Repurchase Agreement 225,000,000
Goldman, Sachs & Co. Repurchase Agreement 50,000,000
Merrill Lynch & Co. Repurchase Agreement 50,000,000
Swiss Bank Corp. Repurchase Agreement 50,000,000
Low Duration Bond
Morgan Stanley & Co., Inc. Mortgage Pass-Through $ 168,166
Lehman Brothers, Inc. Corporate Bond 3,689,617
Salomon Brothers, Inc. Mortgage Pass-Through 3,065,061
Salomon Brothers, Inc. Corporate Bond 4,037,134
Intermediate Government Bond
Merrill Lynch & Co. Mortgage Pass-Through $ 4,367,211
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 1,407,311
Intermediate Bond
Salomon Brothers, Inc. Mortgage Pass-Through $ 2,117,624
Salomon Brothers, Inc. Corporate Bond 527,865
PaineWebber Jackson & Curtis, Inc. Corporate Bond 1,577,526
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 3,266,973
Merrill Lynch & Co. Mortgage Pass-Through 10,190,099
Merrill Lynch & Co. Commercial Mortgage-Backed Security 1,236,217
</TABLE>
-105-
<PAGE>
<TABLE>
<CAPTION>
Portfolio Security Value
--------- -------- -----
<S> <C> <C>
Core Bond
Salomon Brothers, Inc. Mortgage Pass-Through $ 6,900,254
Salomon Brothers, Inc. Corporate Bond 5,701,504
Goldman, Sachs & Co. Commercial Mortgage-Backed Security 2,942,012
Merrill Lynch & Co. Mortgage Pass-Through 428,155
Merrill Lynch & Co. Commercial Mortgage-Backed Security 3,397,277
Merrill Lynch & Co. Asset Backed Security 303,703
Merrill Lynch & Co. Corporate Bond 4,226,051
Government Income
Salomon Brothers, Inc. Mortgage Pass-Through $ 632,894
Managed Income
Salomon Brothers, Inc. Corporate Bond $ 2,639,323
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 1,063,281
PaineWebber Jackson & Curtis, Inc. Corporate Bond 5,004,177
HSBC Securities Corporate Bond 7,852,743
Merrill Lynch & Co. Corporate Bond 8,250,862
Merrill Lynch & Co. Commercial Mortgage-Backed Security 12,884,829
Large Cap Value Equity
Morgan Stanley & Co., Inc. Common Stock $ 29,257,111
Mid-Cap Value Equity
Donaldson, Lufkin & Jenrette Securities Corp. Common Stock $ 1,073,437
Select Equity
Morgan Stanley & Co., Inc. Common Stock $ 7,595,781
Balanced
Morgan Stanley & Co., Inc. Common Stock $ 4,941,312
Salomon Brothers, Inc. Mortgage Pass-Through 1,593,589
Salomon Brothers, Inc. Corporate Bond 316,719
PaineWebber Jackson & Curtis, Inc. Corporate Bond 1,051,684
Merrill Lynch & Co. Corporate Bond 1,006,203
Merrill Lynch & Co. Commercial Mortgage-Backed Security 2,015,045
</TABLE>
PURCHASE AND REDEMPTION INFORMATION
Computation of Public Offering Prices for Investor A Shares of the Non-
Money Market Portfolios. An illustration of the computation of the public
offering price per Investor A Share of the respective Non-Money Market
Portfolios, based on the value of such Portfolios' net assets as of September
30, 1997 follows:
TABLE
<TABLE>
<CAPTION>
Low Intermediate Intermediate Core Government
Duration Government Bond Bond Income
Brand Portfolio Bond Portfolio Portfolio Portfolio Portfolio
--------------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets..................................... $1,078,619 $5,373,962 $1,115,865 $2,440,633 $4,875,820
Outstanding Shares............................. 109,020 531,600 117,568 248,559 464,801
Net Asset Value Per Share...................... $ 9.89 $ 10.11 $ 9.49 $ 9.82 $ 10.49
</TABLE>
-106-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Maximum Sales Charge, 4.00% of offering price
(4.17% of net asset value per share)*........ .31 .42 .40 .41 .49
------ ------ ----- ------ ------
Offering to Public............................. $10.20 $10.53 $9.89 $10.23 $10.98
====== ====== ===== ====== ======
</TABLE>
_____________________
* 3.00%/3.09% for Low Duration Bond Portfolio; 4.50%/4.71% for Government
Income Portfolio.
<TABLE>
<CAPTION>
PENNSYLVANIA NEW JERSEY
MANAGED INTERNATIONAL TAX-FREE TAX-FREE TAX-FREE
INCOME BOND INCOME INCOME INCOME
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Assets..................................... $15,231,004 $1,015,272 $5,529,698 $32,899,562 $1,547,924
Outstanding Shares............................. 1,463,584 92,713 487,696 3,054,223 132,824
=========== ========== ========== =========== ==========
Net Asset Value Per Share...................... $ 10.41 $10.95 $11.34 $10.77 $11.65
Maximum Sales Charge, 4.00% of offering price
(4.17% of net asset value per share)*........ .49 .58 .47 .45 .49
----------- ---------- ---------- ----------- ----------
Offering to Public............................. $10.90 $11.53 $11.81 $11.22 $12.14
=========== ========== ========== =========== ==========
</TABLE>
_____________________
* 4.50%/4.71% for Managed Income Portfolio; 5.00%/5.26% for International
Bond Portfolio.
<TABLE>
<CAPTION>
OHIO LARGE CAP LARGE CAP MID-CAP MID-CAP
TAX-FREE VALUE GROWTH VALUE GROWTH
INCOME EQUITY EQUITY EQUITY EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
========= ========= ========= ========= =========
<S> <C> <C> <C> <C> <C>
Net Assets..................................... $2,613,993 $47,130,883 $25,574,775 $2,314,615 $2,649,715
Outstanding Shares............................. 248,893 2,690,305 1,352,284 181,200 218,185
========= ========== ========== ========= =========
Net Asset Value Per Share...................... $ 10.50 $ 17.52 $ 18.91 $ 12.77 $ 12.14
Maximum Sales Charge, 4.50% of offering price
(4.71% of net asset value per share)*........ .44 .82 .89 .60 .57
--------- ---------- ---------- --------- ---------
Offering to Public............................. $ 10.94 $ 18.34 $ 19.80 $ 13.37 $ 12.71
========= ========== ========== ========= =========
</TABLE>
_____________________
* 4.00%/4.17% for Ohio Tax-Free Income Portfolio.
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL INTERNATIONAL
SMALL CAP GROWTH INTERNATIONAL SMALL CAP EMERGING
VALUE EQUITY EQUITY EQUITY EQUITY MARKETS
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
========= ========= ========= ========= =========
<S> <C> <C> <C> <C>
Net Assets..................................... $34,031,124 $57,323,064 $22,335,232 $325,738 $4,454,003
Outstanding Shares............................. 1,684,915 2,466,020 1,533,040 32,754 463,777
========== ========== ========== ======= =========
Net Asset Value Per Share...................... $20.20 $23.25 $14.57 $9.94 $9.60
Maximum Sales Charge, 5.00% of offering price
(5.26% of net asset value per share)*........ .95 1.10 .77 .52 .51
---------- ---------- ---------- -------- ---------
Offering to Public............................. $21.15 $24.35 $15.34 $10.46 $10.11
========== ========== ========== ======== =========
</TABLE>
_____________________
* 4.50%/4.71% for Small Cap Value Equity and Small Cap Growth Equity
Portfolios.
-107-
<PAGE>
<TABLE>
<CAPTION>
SELECT INDEX
EQUITY EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
========= ========= =========
<S> <C> <C> <C>
Net Assets......................................................... $18,948,763 $33,933,239 $87,202,151
Outstanding Shares................................................. 1,082,651 1,852,190 4,785,456
========= ========= ==========
Net Asset Value Per Share.......................................... $17.50 $18.32 $18.22
Maximum Sales Charge, 4.50% of offering price (4.71% of net asset
value per share)*................................................. .82 .57 .86
---------- ---------- ----------
Offering to Public................................................. $18.32 $18.89 $19.08
========== ========== ==========
</TABLE>
_____________________
* 3.00%/3.09% for Index Equity Portfolio.
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
December 27, 1996 through September 30, 1997 in the case of the Mid-Cap Growth
Equity and Mid-Cap Value Equity Portfolios; and for the period from September
26, 1997 through September 30, 1997 in the case of the International Small Cap
Equity Portfolio) were as follows:
<TABLE>
<CAPTION>
FRONT-END
PORTFOLIOS SALES CHARGES
- ---------- -------------
<S> <C>
Low Duration Bond $ 3,758
Intermediate Government Bond 11,644
Intermediate Bond 7,367
Core Bond 39,657
Government Income 32,856
Managed Income 68,493
International Bond 29,718
Tax-Free Income 19,830
Pennsylvania Tax-Free Income 80,642
New Jersey Tax-Free Income 4,104
Ohio Tax-Free Income 5,336
Large Cap Value Equity 277,224
Large Cap Growth Equity 146,897
Mid-Cap Value Equity 55,834
Mid-Cap Growth Equity 46,954
Small Cap Value Equity 107,051
Small Cap Growth Equity 668,832
International Equity 104,956
International Small Cap Equity 0
International Emerging Markets 49,056
Select Equity 272,796
Index Equity 159,501
Balanced 223,646
</TABLE>
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:
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<PAGE>
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
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>
-109-
<PAGE>
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.
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.
-110-
<PAGE>
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 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.
-111-
<PAGE>
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.
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, when the Trustees of the
Trust determine that it would be in the best interests of the Index Master
Portfolio, 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 Index
Equity 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.
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.)
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<PAGE>
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. The Fund reserves the express right to redeem shares of each
Portfolio involuntarily at any time if the Fund's Board of Trustees determines,
in its sole discretion, that failure to do so may have adverse consequences to
the holders of shares in the Portfolio. Upon such redemption the holders of
shares so redeemed shall have no further right with respect thereto other than
to receive payment of the redemption price.
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.
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
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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 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
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<PAGE>
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 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.
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<PAGE>
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.
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
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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.
The annualized yield information for each Money Market Portfolio for
the seven-day period ended September 30, 1997 before waivers was as follows:
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<PAGE>
<TABLE>
<CAPTION>
TAX-EQUIVALENT
YIELD (ASSUMES A
FEDERAL INCOME
PORTFOLIOS YIELD EFFECTIVE YIELD TAX RATE OF 28%)
- ---------------------------------------- ------------- ---------------- -----------------
<S> <C> <C> <C>
Money Market
Institutional Shares 5.05% 5.18% 7.01%
Service Shares 4.75 4.86 6.60
Investor A Shares 4.67 4.78 6.49
Investor B Shares 3.98 4.06 5.53
Investor C Shares 3.98 4.06 5.53
U.S. Treasury Money Market
Institutional Shares 4.96% 5.08% 6.89%
Service Shares 4.66 4.77 6.47
Investor A Shares 4.49 4.59 6.24
Municipal Money Market
Institutional Shares 3.25% 3.30% 4.51%
Service Shares 2.95 2.99 4.10
Investor A Shares 2.78 2.82 3.86
Investor C Shares 2.19 2.21 3.04
New Jersey Municipal Money Market
Institutional Shares 3.02% 3.07% 4.19%
Service Shares 2.72 2.76 3.7
Investor A Shares 2.47 2.50 3.43
North Carolina Municipal Money Market
Institutional Shares 3.21% 3.26% 4.46%
Service Shares 2.91 2.95 4.04
Investor A Shares 2.74 2.78 3.81
Ohio Municipal Money Market
Institutional Shares 3.23% 3.28% 4.49%
Service Shares 2.93 2.97 4.07
Investor A Shares 2.75 2.79 3.82
Pennsylvania Municipal Money Market
Institutional Shares 3.24% 3.29% 4.50%
Service Shares 2.94 2.98 4.08
Investor A Shares 2.78 2.82 3.86
Virginia Municipal Money Market
Institutional Shares 3.15% 3.20% 4.38%
Service Shares 2.85 2.89 3.96
Investor A Shares 2.53 2.56 3.51
</TABLE>
The Investor B Class had not commenced operations as of September 30,
1997, except with respect to the Money Market Portfolio. The Investor C Class
had not commenced operations as of September 30,1997, except with respect to the
Money Market Portfolio and the Municipal Money Market Portfolio.
The annualized yield information for each Money Market Portfolio for
the seven-day period ended September 30, 1997 after waivers was as follows:
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<PAGE>
<TABLE>
<CAPTION>
TAX-EQUIVALENT
YIELD (ASSUMES A
FEDERAL INCOME
PORTFOLIOS YIELD EFFECTIVE YIELD TAX RATE OF 28%)
- ---------------------------------------- ------------- ---------------- -----------------
<S> <C> <C> <C>
Money Market
Institutional Shares 5.38% 5.52% 7.47%
Service Shares 5.08 5.21 7.06
Investor A Shares 5.00 5.12 6.94
Investor B Shares 4.31 4.40 5.99
Investor C Shares 4.31 4.40 5.99
U.S. Treasury Money Market
Institutional Shares 5.34% 5.48% 7.42%
Service Shares 5.04 5.17 7.00
Investor A Shares 4.87 4.99 6.76
Municipal Money Market
Institutional Shares 3.66% 3.73% 5.08%
Service Shares 3.36 3.42 4.67
Investor A Shares 3.19 3.24 4.43
Investor C Shares 2.60 2.63 3.61
New Jersey Municipal Money Market
Institutional Shares 3.46% 3.52% 4.81%
Service Shares 3.16 3.21 4.3
Investor A Shares 2.91 2.95 4.04
North Carolina Municipal Money Market
Institutional Shares 3.66% 3.73% 5.08%
Service Shares 3.36 3.42 4.67
Investor A Shares 3.19 3.24 4.43
Ohio Municipal Money Market
Institutional Shares 3.65% 3.72% 5.07%
Service Shares 3.35 3.41 4.65
Investor A Shares 3.17 3.22 4.40
Pennsylvania Municipal Money Market
Institutional Shares 3.64% 3.71% 5.06%
Service Shares 3.34 3.40 4.64
Investor A Shares 3.18 3.23 4.42
Virginia Municipal Money Market
Institutional Shares 3.74% 3.81% 5.19%
Service Shares 3.44 3.50 4.78
Investor A Shares 3.12 3.17 4.33
</TABLE>
The Investor B Class had not commenced operations as of September 30,
1997, except with respect to the Money Market Portfolio. The Investor C Class
had not commenced operations as of September 30, 1997, except with respect to
the Money Market Portfolio and the Municipal Money Market Portfolio.
The fees which may be imposed by institutions on their Customers are
not reflected in the calculations of yields for the Money Market Portfolios.
Yields on Institutional Shares will generally be higher than yields on Service
Shares; yields on Service Shares will generally be higher than yields on
Investor A Shares; and yields on Investor A Shares will generally be higher than
yields on Investor B Shares and Investor C Shares.
From time to time, in advertisements, sale literature, reports to
shareholders and other materials, the yields of a Money Market Portfolio's
Service, Investor A, Investor B, Investor C or Institutional Shares may be
quoted and compared to
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<PAGE>
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 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
In calculating the ending redeemable value for Investor A Shares of the
Fund's Non-Money Market Portfolios, the maximum front-end sales charge is
deducted from the initial $1,000 payment and all dividends and distributions by
the particular Portfolio are assumed to have been reinvested at net asset value
as described in the particular Prospectus on the reinvestment dates during the
period. In calculating the ending redeemable value for Investor B Shares of the
Non-Money Market Portfolios,
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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>
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
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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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<TABLE>
<CAPTION>
Investor A Shares
-----------------
Investor A Shares
Total Return (NAV)
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
---- ---- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Value Equity 04/20/92 05/02/92 37.01 27.40 21.11 18.95
Large Cap Growth Equity 11/01/89 03/14/92 33.18 26.71 17.07 13.70
Mid Cap Value Equity 12/27/96 12/27/96 N/A N/A N/A 39.03
Mid Cap Growth Equity 12/27/96 12/27/96 N/A N/A N/A 29.02
Small Cap Value Equity 04/13/92 06/02/92 46.85 24.39 21.57 19.87
Small Cap Growth Equity 09/14/93 09/15/93 15.28 35.19 N/A 25.42
International Equity 04/27/92 06/02/92 14.36 7.88 12.06 10.92
International Small Cap Equity 09/26/97 09/28/97 N/A N/A N/A (19.71)
International Emerging Markets 06/17/94 06/17/94 10.51 (2.04) N/A (0.28)
Select Equity 09/13/93 10/13/93 41.85 27.78 N/A 20.25
Index Equity 04/20/92 08/02/92 39.49 28.93 19.84 18.40
Balanced 05/14/90 05/14/90 27.93 20.45 14.42 13.73
Low Duration Bond 07/17/92 01/18/96 6.39 6.48 5.35 5.30
Intermediate Government Bond 04/20/92 05/11/92 7.87 7.28 4.97 5.89
Intermediate Bond 09/17/93 05/20/94 7.89 7.64 N/A 4.62
Core Bond 12/09/92 01/31/96 9.52 9.12 N/A 7.08
Government Income 10/03/94 10/04/94 10.48 N/A N/A 9.66
Managed Income 11/01/89 02/05/92 9.74 8.71 6.30 7.76
International Bond 07/01/91 04/22/96 11.02 12.77 9.44 9.59
Tax-Free Income 03/14/90 05/14/90 9.58 9.16 7.18 8.02
Pennsylvania Tax-Free Income 12/01/92 12/01/92 7.95 8.01 N/A 8.89
New Jersey Tax-Free Income 07/01/91 01/25/96 7.94 7.36 6.32 7.34
Ohio Tax-Free Income 12/01/92 12/01/92 8.03 8.04 N/A 5.98
<CAPTION>
Total Return (Load Adjusted)
---------------------------
Since Fund
1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Large Cap Value Equity 30.88 25.45 20.00 17.96
Large Cap Growth Equity 27.22 24.70 15.99 13.04
Mid Cap Value Equity N/A N/A N/A 30.89
Mid Cap Growth Equity N/A N/A N/A 21.46
Small Cap Value Equity 40.26 22.49 20.46 18.86
Small Cap Growth Equity 10.11 33.12 (0.92) 24.00
International Equity 8.67 6.02 10.91 9.88
International Small Cap Equity N/A N/A N/A (98.16)
International Emerging Markets 4.97 (3.70) N/A (1.83)
Select Equity 35.55 25.84 N/A 18.89
Index Equity 35.31 27.63 19.11 17.74
Balanced 22.19 18.63 13.38 13.03
Low Duration Bond 3.20 5.41 4.72 4.68
Intermediate Government Bond 3.30 5.83 4.12 5.10
Intermediate Bond 3.56 6.18 N/A 3.57
Core Bond 5.14 7.65 (0.81) 6.18
Government Income 5.52 N/A N/A 7.99
Managed Income 4.76 7.06 5.33 7.14
International Bond 5.47 10.86 8.33 8.70
Tax-Free Income 5.21 7.68 6.31 7.42
Pennsylvania Tax-Free Income 7.95 8.01 N/A 6.60
New Jersey Tax-Free Income 3.62 5.91 5.45 6.64
Ohio Tax-Free Income 3.74 6.57 N/A 5.08
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Investor B Shares
Investor B Shares
Total Return (NAV)
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
---- ---- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Value Equity 04/20/92 01/16/96 36.00 26.89 20.82 18.69
Large Cap Growth Equity 11/01/89 01/24/96 32.18 26.13 16.74 13.51
Mid Cap Value Equity 12/27/96 12/27/96 N/A N/A N/A 38.84
Mid Cap Growth Equity 12/27/96 12/27/96 N/A N/A N/A 26.60
Small Cap Value Equity 04/13/92 10/03/94 45.67 23.57 21.09 19.44
Small Cap Growth Equity 09/14/93 01/18/96 14.47 34.54 N/A 24.98
International Equity 04/27/92 10/03/94 13.63 7.16 11.62 10.52
International Small Cap Equity 09/26/97 09/26/97 N/A N/A N/A (19.71)
International Emerging Markets 06/17/94 04/25/96 9.78 (2.34) N/A (0.56)
Select Equity 09/13/93 03/27/96 40.70 27.28 N/A 19.90
Index Equity 04/20/92 02/07/96 38.31 28.43 19.56 18.14
Balanced 05/14/90 10/04/94 26.95 19.60 13.93 13.42
Low Duration Bond 07/17/92 11/18/96 5.73 6.26 5.22 6.17
Intermediate Government Bond 04/20/92 10/11/96 6.80 7.02 4.82 5.76
Intermediate Bond 09/17/93 10/01/97 7.89 7.64 N/A 4.62
Core Bond 12/09/92 03/18/96 8.71 8.72 N/A 6.83
Government Income 10/03/94 10/03/94 9.66 N/A N/A 8.90
Managed Income 11/01/89 07/15/97 9.67 8.69 6.30 7.76
International Bond 07/01/91 04/19/96 10.11 12.35 9.19 9.39
Tax-Free Income 05/14/90 07/18/96 8.77 8.83 6.97 7.88
Pennsylvania Tax-Free Income 12/01/92 10/03/94 7.12 7.22 N/A 6.14
New Jersey Tax-Free Income 07/01/91 07/02/96 7.14 7.02 6.12 7.18
Ohio Tax-Free Income 12/01/92 10/13/94 7.23 7.20 N/A 5.47
<CAPTION>
Total Return (Load Adjusted)
----------------------------
Since Fund
1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Large Cap Value Equity 29.88 25.39 20.33 18.25
Large Cap Growth Equity 26.23 24.65 16.27 13.51
Mid Cap Value Equity N/A N/A N/A 30.43
Mid Cap Growth Equity N/A N/A N/A 21.12
Small Cap Value Equity 39.14 22.11 20.61 19.00
Small Cap Growth Equity 9.32 32.95 (0.40) 24.04
International Equity 8.50 5.89 11.17 10.11
International Small Cap Equity N/A N/A N/A (98.16)
International Emerging Markets 4.84 (3.66) (0.40) (1.83)
Select Equity 34.37 25.77 (0.40) 19.00
Index Equity 32.09 26.91 19.07 17.71
Balanced 21.21 18.19 13.47 13.42
Low Duration Bond 0.97 5.01 4.80 4.76
Intermediate Government Bond 1.99 5.76 4.40 5.36
Intermediate Bond 3.03 6.37 (0.40) 3.71
Core Bond 3.82 7.43 (0.40) 6.16
Government Income 4.73 N/A N/A 7.43
Managed Income 4.73 7.40 5.87 7.76
International Bond 5.16 11.02 8.75 9.22
Tax-Free Income 3.88 7.55 6.54 7.88
Pennsylvania Tax-Free Income 2.30 5.95 (0.40) 5.48
New Jersey Tax-Free Income 2.32 5.76 5.69 7.01
Ohio Tax-Free Income 2.40 5.94 (0.40) 4.81
</TABLE>
-124-
<PAGE>
Investor C Shares
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
Investor C Shares
Total Return (NAV)
------------------
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
-------------- ------------ ------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Large Cap Value Equity 04/20/82 08/16/96 36.00 26.89 20.82 18.69
Large Cap Growth Equity 11/01/89 01/24/97 32.18 26.13 16.74 13.51
Mid Cap Value Equity 12/27/96 12/27/96 N/A N/A N/A 38.64
Mid Cap Growth Equity 12/27/96 12/27/96 N/A N/A N/A 28.60
Small Cap Value Equity 04/13/92 10/01/96 45.67 23.57 21.09 19.44
Small Cap Growth Equity 09/14/93 09/06/96 14.47 34.54 N/A 24.98
International Equity 04/27/92 12/05/96 13.63 7.16 11.62 10.52
International Small Cap Equity 09/26/97 09/26/97 N/A N/A N/A (19.71)
International Emerging Markets 06/17/94 03/21/97 9.78 (2.34) N/A (0.56)
Select Equity 09/13/93 09/27/96 40.70 27.28 N/A 19.90
Index Equity 04/20/92 08/14/96 38.31 28.43 19.56 18.14
Balanced 05/14/90 12/20/96 26.95 19.60 13.93 13.42
Low Duration Bond 07/17/92 06/03/97 5.73 6.26 5.22 5.17
Intermediate Government Bond 04/20/92 10/08/96 6.80 7.02 4.82 5.75
Intermediate Bond 09/17/93 N/A N/A N/A N/A N/A
Core Bond 12/09/92 05/01/97 8.71 8.72 N/A 8.83
Government Income 10/03/94 02/28/97 9.66 N/A N/A 8.90
Managed Income 11/01/89 N/A N/A N/A N/A N/A
International Bond 07/01/91 09/11/96 10.11 12.35 9.19 9.39
Tax-Free Income 05/14/90 02/28/97 8.77 8.83 6.97 7.88
Pennsylvania Tax-Free Income 12/01/92 N/A N/A N/A N/A N/A
New Jersey Tax-Free Income 07/01/91 N/A N/A N/A N/A N/A
Ohio Tax-Free Income 12/01/92 N/A N/A N/A N/A N/A
<CAPTION>
Total Return (Load Adjusted)
----------------------------
Since Fund
1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Large Cap Value Equity 34.64 N/A N/A N/A
Large Cap Growth Equity 30.86 N/A N/A N/A
Mid Cap Value Equity (1.00) N/A N/A 35.64
Mid Cap Growth Equity (1.00) N/A N/A 26.93
Small Cap Value Equity 44.21 N/A N/A N/A
Small Cap Growth Equity 13.33 N/A N/A N/A
International Equity 12.49 N/A N/A N/A
International Small Cap Equity (1.00) N/A N/A (61.55)
International Emerging Markets 8.68 N/A N/A N/A
Select Equity 39.29 N/A N/A N/A
Index Equity 36.93 N/A N/A N/A
Balanced 25.68 N/A N/A N/A
Low Duration Bond 4.67 N/A N/A N/A
Intermediate Government Bond 21.35 N/A N/A N/A
Intermediate Bond N/A N/A N/A N/A
Core Bond 7.62 N/A N/A N/A
Government Income 8.56 N/A N/A N/A
Managed Income N/A N/A N/A N/A
International Bond 9.01 N/A N/A N/A
Tax-Free Income 7.68 N/A N/A N/A
Pennsylvania Tax-Free Income N/A N/A N/A N/A
New Jersey Tax-Free Income N/A N/A N/A N/A
Ohio Tax-Free Income N/A N/A N/A N/A
</TABLE>
-125-
<PAGE>
Service Shares
- ----------------------------------------------
<TABLE>
<CAPTION>
Service Shares
Total Return (NAV)
------------------
Fund Inception Class Intro Since Fund
Date Date 1 Year 3 Year Ann. 5 Year Ann. Inception Ann.
-------------- ----------- ------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
00/00/00 00/00/00 00.00 00.00 00.00 (00.00)
Large Cap Value Equity 04/20/92 07/29/93 37.22 27.58 21.24 19.07
Large Cap Growth Equity 11/01/89 07/29/93 33.38 26.89 17.23 13.81
Mid Cap Value Equity 12/27/96 12/27/96 N/A N/A N/A 39.46
Mid Cap Growth Equity 12/27/96 12/27/96 N/A N/A N/A 29.44
Small Cap Value Equity 04/13/92 07/29/93 46.95 24.58 21.71 19.99
Small Cap Growth Equity 09/14/93 09/15/93 15.54 35.43 N/A 25.66
International Equity 04/27/92 07/29/93 14.52 8.03 12.19 11.03
International Small Cap Equity 09/26/97 09/26/97 N/A N/A N/A (19.71)
International Emerging Markets 06/17/94 06/17/94 10.74 (1.85) N/A (0.07)
Select Equity 09/13/93 09/15/93 42.12 27.96 N/A 20.43
Index Equity 04/20/92 07/29/93 39.58 29.08 19.96 18.51
Balanced 05/14/90 07/29/93 28.07 20.57 14.52 13.80
Low Duration Bond 07/17/92 01/12/96 6.57 6.59 5.35 5.35
Intermediate Government Bond 04/20/92 07/29/93 7.75 7.39 5.05 5.96
Intermediate Bond 09/17/93 09/23/93 8.07 7.75 N/A 4.72
Core Bond 12/09/92 01/12/96 9.71 9.24 N/A 7.15
Managed Income 11/01/89 07/29/93 9.93 8.92 6.48 7.87
International Bond 07/01/91 07/01/91 11.23 12.87 9.50 9.64
Tax-Free Income 05/14/90 07/29/93 9.77 9.37 7.35 8.14
Pennsylvania Tax-Free Income 12/01/92 07/29/93 8.10 8.18 N/A 6.69
New Jersey Tax-Free Income 07/01/91 07/01/91 8.11 7.47 6.39 7.39
Ohio Tax-Free Income 12/01/92 07/29/93 8.53 8.45 N/A 5.98
</TABLE>
-126-
<PAGE>
Institutional Shares
- -------------------------------------------------
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
--------------------
TOTAL RETURN (NAV)
------------------
FUND INCEPTION CLASS INTRO
DATE DATE 1 YEAR 3 YEAR ANN.
-------------- ----------- ------ ----------
<S> <C> <C> <C> <C>
Large Cap Value Equity 04/20/92 04/20/92 37.66 27.94
Large Cap Growth Equity 11/01/89 11/01/89 33.69 27.25
Mid Cap Value Equity 12/27/96 12/27/96 N/A N/A
Mid Cap Growth Equity 12/27/96 12/27/96 N/A N/A
Small Cap Value Equity 04/13/92 10/01/96 47.36 24.91
Small Cap Growth Equity 09/14/93 09/06/96 15.89 35.91
International Equity 04/27/92 04/27/92 14.88 8.34
International Small Cap Equity 09/26/97 09/26/97 N/A N/A
International Emerging Markets 06/17/94 06/17/94 11.16 (1.54)
Select Equity 09/13/93 09/13/93 42.50 28.33
Index Equity 04/20/92 04/20/92 39.98 29.44
Balanced 05/14/90 05/01/92 28.43 20.92
Low Duration Bond 07/17/92 07/17/92 6.89 6.78
Intermediate Government Bond 04/20/92 04/20/92 8.08 7.70
Intermediate Bond 09/17/93 09/17/93 8.40 8.06
Core Bond 12/09/92 12/09/92 10.03 9.40
Managed Income 11/01/89 11/01/89 10.25 9.22
International Bond 07/01/91 06/07/96 7.64 13.02
Tax-Free Income 05/14/90 01/21/93 10.09 9.68
Pennsylvania Tax-Free Income 12/01/92 12/01/92 8.43 8.50
New Jersey Tax-Free Income 07/01/91 10/01/97 8.11 7.47
Ohio Tax-Free Income 12/01/92 12/01/92 8.53 8.45
<CAPTION>
SINCE FUND
5 YEAR ANN. INCEPTION ANN.
----------- --------------
<S> <C> <C>
Large Cap Value Equity 21.51 19.32
Large Cap Growth Equity 17.47 13.96
Mid Cap Value Equity N/A 39.89
Mid Cap Growth Equity N/A 29.85
Small Cap Value Equity 21.98 20.24
Small Cap Growth Equity N/A 26.06
International Equity 12.45 11.28
International Small Cap Equity N/A (19.71)
International Emerging Markets N/A 0.24
Select Equity N/A 20.74
Index Equity 20.23 18.76
Balanced 14.80 13.99
Low Duration Bond 5.54 5.47
Intermediate Government Bond 5.29 6.18
Intermediate Bond N/A 5.02
Core Bond N/A 7.25
Managed Income 6.72 8.03
International Bond 9.59 9.71
Tax-Free Income 7.60 8.31
Pennsylvania Tax-Free Income N/A 6.91
New Jersey Tax-Free Income 6.39 7.39
Ohio Tax-Free Income N/A 6.22
</TABLE>
-127-
<PAGE>
*Notes
-----
Performance information presented for Investor A, Investor B,
Investor C and Service Shares of a Portfolio prior to their
introduction dates does not reflect shareholder servicing and
processing and/or distribution fees and certain other expenses
borne by these share classes which, if reflected, would reduce
the performance quoted. Performance information presented
assumes the reinvestment of dividends and distributions.
Performance information presented for Investor A, Investor B,
Investor C and Service Shares of a Portfolio prior to their
introduction as indicated in the table above is based upon
historical expenses of the predecessor class 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 BlackRock 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 Institutional Shares;
International Emerging Markets
-128-
<PAGE>
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. BlackRock, Inc. and the Portfolio's
Administrators are under no obligation to waive or continue
waiving their fees, but have informed the Fund that they
expect to waive fees as necessary to maintain each Portfolio's
total operating expenses during the remainder of the current
fiscal year at the levels set forth in the applicable
Prospectus.
Each class of the Non-Money Market Portfolios may also from time to time
include in advertisements, sales literature, communications to shareholders and
other materials a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the performance of
each class of a Non-Money Market Portfolio's shares with other performance
measures. For example, in comparing the total return of a Non-Money Market
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Standard & Poor's 500 Stock Index, EAFE, the Dow
Jones Industrial Average or the Shearson Lehman Hutton Government Corporate Bond
Index, as appropriate, a Non-Money Market Portfolio may calculate the aggregate
total return for its shares of a certain class for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
such Non-Money Market Portfolio's shares and assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. A Non-Money Market Portfolio may not, for these purposes, deduct from the
initial value invested or the ending value any amount representing front-end and
deferred sales
-129-
<PAGE>
charges charged to purchasers of Investor A, Investor B or Investor C Shares.
The Investor A, Investor B and Investor C classes of the Portfolio will,
however, disclose, if appropriate, the maximum applicable sales charges and will
also disclose that the performance data does not reflect sales charges and that
inclusion of sales charges would reduce the performance quoted.
In addition to average annual total returns, a Non-Money Market Portfolio
may quote unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns may be quoted on a before-tax or
after-tax basis and may be quoted with or without taking sales charges into
account. Excluding the sales charge from a total return calculation produces a
higher total return figure. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph or similar
illustration.
NON-MONEY MARKET PORTFOLIO YIELD. The Balanced, Managed Income, Tax-Free
Income, Intermediate Government Bond, Ohio Tax- Free Income, Pennsylvania Tax-
Free Income, New Jersey Tax-Free Income, 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)6 - 1]
cd
Where: a = dividends and interest earned during
the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on
the last day of the period.
-130-
<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 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.
-131-
<PAGE>
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 (assumes a Yield (assumes a
Federal income Federal income
Portfolio Yield tax rate of 28%) Yield tax rate of 28%)
- ------------------------------------------------------- ---------- -------------------- --------- --------------------
<S> <C> <C> <C> <C>
Low Duration Bond
Institutional Shares 5.84 % 8.11 % 5.51 % 7.65 %
Service Shares 5.53 7.68 5.20 7.22
Investor A Shares 5.36 7.44 5.03 6.99
Investor B Shares 4.60 6.39 4.27 5.93
Investor C Shares 4.60 6.39 4.27 5.93
BlackRock Shares 5.99 8.32 5.66 7.86
Intermediate Government Bond
Institutional Shares 5.96 % 8.28 % 5.65 % 7.85 %
Service Shares 5.66 7.86 5.35 7.43
Investor A Shares 5.49 7.63 5.18 7.19
Investor B Shares 4.73 6.57 4.42 6.14
Investor C Shares 4.73 6.57 4.42 6.14
Intermediate Bond
Institutional Shares 6.28 % 8.72 % 5.99 % 8.32 %
Service Shares 5.98 8.31 5.69 7.90
Investor A Shares 5.81 8.07 5.52 7.67
Core Bond
Institutional Shares 6.32 % 8.78 % 6.03 % 8.38 %
Service Shares 6.01 8.35 5.72 7.94
Investor A Shares 5.84 8.11 5.55 7.71
Investor B Shares 5.09 7.07 4.80 6.67
Investor C Shares 5.09 7.07 4.80 6.67
BlackRock Shares 6.47 8.99 6.18 8.58
Government Income
Investor A Shares 6.83 % 9.49 % 6.11 % 8.49 %
Investor B Shares 6.08 8.44 5.36 7.44
</TABLE>
-132-
<PAGE>
<TABLE>
<CAPTION>
After Waivers Before Waivers
-------------------------------- ----------------------------------
Tax-Equivalent Tax-Equivalent
Yield (assumes a Yield (assumes a
Federal income Federal income
Portfolios Yield tax rate of 28%) Yield tax rate of 28%)
- ------------------------------------------------------- ---------- -------------------- --------- --------------------
<S> <C> <C> <C> <C>
Investor C Shares 6.08 8.44 5.36 7.44
Managed Income
Institutional Shares 6.78 % 9.42 % 6.53 % 9.07 %
Service Shares 6.48 9.00 6.23 8.65
Investor A Shares 6.31 8.76 6.06 8.42
Investor B Shares 5.55 7.71 5.30 7.36
International Bond
Institutional Shares 5.29 % 7.35 % 5.19 % 7.21 %
Service Shares 4.99 6.93 4.89 6.79
Investor A Shares 4.82 6.69 4.72 6.56
Investor B Shares 4.07 5.65 3.97 5.51
Investor C Shares 4.07 5.65 3.97 5.51
Tax-Free Income
Institutional Shares 5.00 % 6.94 % 4.65 % 6.46 %
Service Shares 4.70 6.53 4.35 6.04
Investor A Shares 4.53 6.29 4.18 5.81
Investor B Shares 3.77 5.24 3.42 4.75
Investor C Shares 3.77 5.24 3.42 4.75
Pennsylvania Tax-Free Income
Institutional Shares 5.07 % 7.04 % 4.76 % 6.61 %
Service Shares 4.77 6.63 4.46 6.19
Investor A Shares 4.63 6.43 4.32 6.00
Investor B Shares 3.84 5.33 3.53 4.90
New Jersey Tax-Free Income
Service Shares 4.64 % 6.44 % 4.32 % 6.00 %
Investor A Shares 4.47 6.21 4.15 5.76
Investor B Shares 3.71 5.15 3.39 4.71
Ohio Tax-Free Income
Institutional Shares 4.84 % 6.72 % 4.33 % 6.01 %
Service Shares 4.54 6.31 4.03 5.60
Investor A Shares 4.37 6.07 3.86 5.36
Investor B Shares 3.61 5.01 3.10 4.31
</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. The Fund may demonstrate, using certain specified
hypothetical data, the compounding effect of dividend reinvestment on
investments in a Non-Money Market Portfolio.
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
-133-
<PAGE>
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, 1998.
-134-
<PAGE>
TABLE 1 - Federal Only
- ------- ------------
<TABLE>
<CAPTION>
Federal TAX-EXEMPT YIELD
1998 Taxable Marginal
Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Joint Return
$ 0- $ 25,350 $ 0- $ 42,350 15.0% 3.529% 4.118% 4.706% 5.294% 5.882% 6.471% 7.059%
$25,351- $ 61,400 $ 42,351- $102,300 28.0% 4.167% 4.861% 5.556% 6.250% 6.944% 7.639% 8.333%
$61,401- $128,100 $102,301- $155,950 31.0% 4.348% 5.072% 5.797% 6.522% 7.246% 7.971% 8.696%
$128,101- $278,450 $155,951- $278,450 36.0% 4.688% 5.469% 6.250% 7.031% 7.812% 8.594% 9.375%
Over $278,450 Over $278,450 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 1998, taxpayers with adjusted
gross income in excess of a threshold amount of approximately $124,500 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 $124,500 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
$2,700 (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 1998 is estimated to be from $124,500 to $247,000 and for married
taxpayers filing a joint return from $186,800 to $309,300. 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 1998.
-135-
<PAGE>
TABLE 2 - Federal and Pennsylvania
- ------- ------------------------
<TABLE>
<CAPTION>
Approx.
Combined
Federal
and PA TAX-EXEMPT YIELD
1998 Federal Marginal
Taxable Income Bracket Tax Rate* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Single Return Joint Return
$ 0 - $ 25,350 $ 0 - $42,350 17.380% 3.631% 4.236% 4.841% 5.447% 6.052% 6.657% 7.262%
$25,351 - $ 61,400 $ 42,351 -$102,300 30.016% 4.287% 5.001% 5.716% 6.430% 7.144% 7.859% 8.573%
$61,401 - $128,100 $102,301 -$155,950 32.932% 4.473% 5.219% 5.964% 6.710% 7.455% 8.201% 8.946%
$128,101- $278,450 $155,951 -$278,450 37.792% 4.823% 5.626% 6.430% 7.234% 8.038% 8.841% 9.645%
Over $278,450 Over $278,450 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 1998, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $124,500 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 $124,500 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 $2,700 (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 1998 is
estimated to be from $124,500 to $247,000 and for married taxpayers filing a
joint return from $186,800 to $309,300. 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 1998.
-136-
<PAGE>
TABLE 3 - Federal and Ohio
- ------- ----------------
<TABLE>
<CAPTION>
TAX EXEMPT YIELD
3 3.5 4 4.5 5 5.5 6
1998
TAXABLE FEDERAL OHIO
INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS* TAX RATE TAX RATE* RATE SINGLE RETURN
- ---------------- ----------- ----------- --------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 25,350 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
25,351- 40,000 28% 4.457% 31.21% 4.36% 5.09% 5.81% 6.54% 7.27% 8.00% 8.72%
40,001- 61,400 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
61,401- 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- 128,100 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
128,101- 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001- 278,450 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 278,450 39.6% 7.500% 44.13% 5.37% 6.26% 7.16% 8.05% 8.95% 9.84% 10.74%
</TABLE>
-137-
<PAGE>
<TABLE>
<CAPTION>
1998 FEDERAL OHIO
TAXABLE INCOME MARGINAL MARGINAL COMBINED TAXABLE EQUIVALENT YIELD
BRACKETS* TAX RATE TAX RATE* RATE JOINT RETURN
- ----------------- -------- --------- --------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 40,000 15% 4.457% 18.79% 3.69% 4.31% 4.93% 5.54% 6.16% 6.77% 7.39%
40,001 - 42,350 15% 5.201% 19.42% 3.72% 4.34% 4.96% 5.58% 6.20% 6.82% 7.45%
42,351 - 80,000 28% 5.201% 31.74% 4.40% 5.13% 5.86% 6.59% 7.33% 8.06% 8.79%
80,001 - 100,000 28% 5.943% 32.28% 4.43% 5.17% 5.91% 6.64% 7.38% 8.12% 8.86%
100,001- 102,300 28% 6.900% 32.97% 4.48% 5.22% 5.97% 6.71% 7.46% 8.21% 8.95%
102,301- 155,950 31% 6.900% 35.76% 4.67% 5.45% 6.23% 7.01% 7.78% 8.56% 9.34%
155,951- 200,000 36% 6.900% 40.42% 5.03% 5.87% 6.71% 7.55% 8.39% 9.23% 10.07%
200,001- 278,450 36% 7.500% 40.80% 5.07% 5.91% 6.76% 7.60% 8.45% 9.29% 10.14%
OVER 278,450 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 1997, due to the state having surplus
revenue, a 3.987% across the board reduction in the Ohio income tax rates for
1997 only was effected pursuant to Ohio Revised Code sections 131.44 and
5747.02. It is not yet known whether a reduction in the Ohio income tax rates
will occur in 1998. A reduction in Ohio income tax rates, such as the 1997
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 1998,
taxpayers with adjusted gross income in excess of a threshold amount of
approximately $124,500 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 $124,500
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 $2,700 (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 1998 is estimated to be from $124,500 to
$247,000 and for married taxpayers filing a joint return from $186,800 to
$309,300. 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 1998.
-138-
<PAGE>
TABLE 4 - FEDERAL AND NORTH CAROLINA
- ------- --------------------------
<TABLE>
<CAPTION>
1998 Taxable North
Income Bracket Federal Carolina Combined Federal Tax-Exempt Yield
Marginal Marginal and North Carolina
Single Return Joint Return Tax Rate Tax Rate Marginal Tax Rate* 3.0% 3.5% 4.0% 4.5%
- ------------- ------------ -------- -------- ------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 12,750 $ 0 - 21,250 15.0% 6.00% 20.100% 3.755% 4.380% 5.006% 5.632%
12,751 - 25,350 21,000 - 42,350 15.0% 7.00% 20.950% 3.795% 4.428% 5.060% 5.693%
25,351 - 60,000 42,351 - 100,000 28.0% 7.00% 33.040% 4.480% 5.227% 5.974% 6.720%
60,001 - 61,400 100,001 - 102,300 28.0% 7.75% 33.580% 4.517% 5.269% 6.022% 6.775%
61,401 - 128,100 102,301 - 155,950 31.0% 7.75% 36.348% 4.713% 5.499% 6.284% 7.070%
128,101 - 278,450 155,951 - 278,450 36.0% 7.75% 40.960% 5.081% 5.928% 6.775% 7.622%
Over 278,450 Over 278,450 39.6% 7.75% 44.281% 5.384% 6.282% 7.179% 8.076%
<CAPTION>
Single Return 5.0% 5.5% 6.0%
- ------------- ---- ---- ----
<S> <C> <C> <C>
$ 0 - 12,750 6.258% 6.884% 7.509%
12,751 - 25,350 6.325% 6.598% 7.590%
25,351 - 60,000 7.467% 8.214% 8.961%
60,001 - 61,400 7.528% 8.281% 9.033%
61,401 - 128,100 7.855% 8.641% 9.426%
128,101 - 278,450 8.469% 9.316% 10.163%
Over 278,450 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 1998, taxpayers with
adjusted gross income in excess of the threshold of approximately $124,500 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 $124,500 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
$2,700 (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 1998 is estimated to be from $124,500 to $247,000 and for married
taxpayers filing a joint return from $186,800 to $309,300. 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 1998.
-139-
<PAGE>
TABLE 5 - FEDERAL AND VIRGINIA
- ------- --------------------
<TABLE>
<CAPTION>
1998 Taxable
Income Bracket Federal Virginia Combined Federal Tax-Exempt Yield
Marginal Marginal and Virginia
Single Return Joint Return Tax Rate Tax Rate Marginal Tax Rate* 3.0% 3.5% 4.0% 4.5%
- ------------- ------------ -------- -------- ------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 25,350 $ 0 - 42,350 15.0% 5.75% 19.888% 3.745% 4.369% 4.993% 5.617%
25,351 - 61,400 42,351 - 102,300 28.0% 5.75% 32.140% 4.421% 5.158% 5.894% 6.631%
61,401 - 128,100 102,301 - 155,950 31.0% 5.75% 34.968% 4.613% 5.382% 6.151% 6.920%
128,101 - 278,450 155,951 - 278,450 36.0% 5.75% 39.680% 4.973% 5.802% 6.631% 7.460%
OVER 278,450 OVER 278,450 39.6% 5.75% 43.073% 5.270% 6.148% 7.027% 7.905%
<CAPTION>
Single Return 5.0% 5.5% 6.0%
- ------------- ---- ---- ----
<S> <C> <C> <C>
$ 0 - 22,750 6.241% 6.865% 7.489%
22,751 - 55,100 7.368% 8.105% 8.842%
55,101 - 115,000 7.688% 8.457% 9.226%
115,001 - 250,000 8.289% 9.118% 9.947%
OVER 250,000 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 1998, taxpayers with adjusted gross income in
excess of a threshold amount of approximately $124,500 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 $124,500 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 $2,700 (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 1998 is
estimated to be from $124,500 to $247,000 and for married taxpayers filing a
joint return from $186,800 to $309,300. 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 1998.
-140-
<PAGE>
Table 6 - Federal and New Jersey
- ------- ----------------------
<TABLE>
<CAPTION>
Approximate
Federal NJ Combined Federal
1998 Taxable Marginal Marginal and NJ
Income Bracket* Tax Rate Tax Rate Marginal Tax Rate 3.0% 3.5%
- --------------- -------- -------- ----------------- ---- ----
Single Return
-------------
<S>
$ 0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176%
20,001 - 25,350 15.0% 1.750% 16.488% 3.592% 4.191%
25,351 - 35,000 28.0% 1.750% 29.260% 4.240% 4.948%
35,001 - 40,000 28.0% 3.500% 30.520% 4.318% 5.037%
40,001 - 61,400 28.0% 5.525% 31.978% 4.410% 5.145%
61,401 - 75,000 31.0% 5.525% 34.812% 4.602% 5.369%
75,001 - 128,100 31.0% 6.370% 35.395% 4.643% 5.418%
128,101 - 278,450 36.0% 6.370% 40.077% 5.006% 5.841%
OVER 278,450 39.6% 6.370% 43.447% 5.305% 6.189%
<CAPTION>
1998 Taxable
Income Bracket*
- ---------------
Single Return Tax-Exempt Yield
-------------
4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
---- ---- ---- ---- ---- ---- ----
Taxable Yield - Single Return
<S> <S> <C> <C> <C> <C> <C> <C>
$ 0 - 20,000 4.773% 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 25,350 4.790% 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
25,351 - 35,000 5.655% 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
35,001 - 40,000 5.757% 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
40,001 - 61,400 5.880% 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
61,401 - 75,000 6.136% 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
75,001 - 128,100 6.191% 6.965% 7.739% 8.513% 9.287% 10.061 10.835%
128,101 - 278,450 6.675% 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 278,450 7.073% 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
Joint Return Taxable Yield - Joint Return
- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 0 - 20,000 15.0% 1.400% 16.190% 3.580% 4.176% 4.773%
20,001 - 42,350 15.0% 1.750% 16.488% 3.592% 4.191% 4.790%
42,351 - 50,000 28.0% 1.750% 29.260% 4.240% 4.948% 5.655%
50,001 - 70,000 28.0% 2.450% *29.764% 4.271% 4.983% 5.695%
70,001 - 80,000 28.0% 3.500% 30.520% 4.318% 5.037% 5.757%
80,001 - 102,300 28.0% 5.525% 31.978% 4.410% 5.145% 5.880%
102,301 - 150,000* 31.0% 5.525% 34.812% 4.602% 5.369% 6.136%
**150,001 - 151,750 36.0% 6.370% 40.077% 5.006% 5.841% 6.675%
151,751 - 278,450 36.0% 6.370% 40.077% 5.006% 5.841% 6.675%
OVER 278,450 39.6% 6.370% 43.447% 5.305% 6.189% 7.073%
<CAPTION>
Joint Return Taxable Yield - Joint Return
- ------------
<S> <C> <C> <C> <C> <C>
$ 0 - 20,000 5.369% 5.966% 6.562% 7.159% 7.756% 8.352%
20,001 - 42,350 5.388% 5.987% 6.589% 7.185% 7.783% 8.382%
42,351 - 50,000 6.361% 7.068% 7.775% 8.481% 9.189% 9.895%
50,001 - 70,000 6.407% 7.189% 7.831% 8.543% 9.255% 9.966%
70,001 - 80,000 6.471% 7.196% 7.916% 8.636% 9.355% 10.075%
80,001 - 102,300 6.616% 7.350% 8.086% 8.820% 9.556% 10.298%
102,301 - 150,000* 6.903% 7.670% 8.437% 9.204% 9.971% 10.738%
150,001 - 151,750** 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
151,751 - 278,450 7.510% 8.344% 9.178% 10.013% 10.847% 11.682%
OVER 278,450 7.957% 8.841% 9.725% 10.610% 11.494% 12.378%
</TABLE>
* The 31% Federal Taxable Income Bracket is $102,301 - $155,950.
The 5.525% New Jersey Taxable Income Bracket is $80,001 - $150,000.
** The 36% Federal Taxable income Bracket is $155,950 - $278,450.
The 6.370% New Jersey Taxable Income Bracket is $150,001 - $271,050.
-141-
<PAGE>
* The taxable income brackets applicable to New Jersey do not correspond to
the Federal taxable income brackets. The taxable income brackets presented
in this table represent the breakpoints for both the Federal and New Jersey
marginal tax rate changes. When applying these brackets, Federal taxable
income will be different than New Jersey taxable income because New Jersey
does not start with Federal taxable income in computing its own state income
tax base. No state tax credits, exemptions, or local taxes have been taken
into account in arriving at the combined marginal tax rate. The income
amount shown is income subject to Federal income tax reduced by adjustments
to income, exemptions, and itemized deductions (including the deduction for
state and local income taxes). If the standard deduction is taken for
Federal income tax purposes, the taxable equivalent yield required to equal
a specified tax-exempt yield is at least as great as that shown in the
table. It is assumed that the investor is not subject to the alternative
minimum tax. Where applicable, investors should consider that the benefit of
certain itemized deductions and the benefit of personal exemptions are
limited in the case of higher-income individuals. For 1998, taxpayers with
adjusted gross income in excess of a threshold amount of approximately
$124,500 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
$124,500 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 $2,700 (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 1998 is estimated to
be from $124,500 to $247,000, and for married taxpayers filing a joint
return from $186,800 to $309,300. 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 1998.
-142-
<PAGE>
MISCELLANEOUS. Yields on shares of a Portfolio may fluctuate daily and do
not provide a basis for determining future yields. Because such yields will
fluctuate, they cannot be compared with yields on savings account or other
investment alternatives that provide an agreed to or guaranteed fixed yield for
a stated period of time. In comparing the yield of one Portfolio to another,
consideration should be given to each Portfolio's investment policies, including
the types of investments made, lengths of maturities of the portfolio
securities, market conditions, operating expenses and whether there are any
special account charges which may reduce the effective yield. The fees which may
be imposed by Service Organizations and other institutions on their customers
are not reflected in the calculations of total returns or yields for the
Portfolios.
When comparing a Portfolio's performance to stock, bond, and money market
mutual fund performance indices prepared by Lipper or other organizations, it is
important to remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher potential
returns, they also carry the highest degree of share price volatility. Likewise,
money market funds may offer greater stability of principal, but generally do
not offer the higher potential returns from stock mutual funds.
From time to time, a Portfolio's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
Portfolios to one another in appropriate categories over specific periods of
time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. Portfolios may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolios. The Portfolios may also compare performance to that of other
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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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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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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 of the Fund has elected and intends to qualify for taxation
as a regulated investment company under 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 (i.e., investment company taxable income as that term is defined in the
Code without regard to the deduction for dividends paid) and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) that it distributes to shareholders, provided that it distributes an
amount equal to at least the sum of (a) 90% of its net investment income 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 net investment income and net tax-
exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the
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close of the taxable year will satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of each Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Each of the Money and Non-Money Market Municipal Portfolios is designed to
provide investors with tax-exempt interest income. Shares of the Money and Non-
Money Market Municipal Portfolios would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts
because such plans and accounts are generally tax-exempt and, therefore, not
only would not gain any additional benefit from the Portfolio's dividends being
tax-exempt but also such dividends would be taxable when distributed to the
beneficiary. In addition, the Money and Non-Money Market Municipal Portfolios
may not be an appropriate investment for entities which are "substantial users"
of facilities financed by private activity bonds or "related 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,
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affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.
In order for the Money and Non-Money Market Municipal Portfolios to pay
exempt interest dividends for any taxable year, at the close of each quarter of
the taxable year at least 50% of the value of each such Portfolio must consist
of exempt interest obligations. Exempt interest dividends distributed to
shareholders are not included in the shareholder's gross income for regular
Federal income tax purposes. However, gain realized by such Portfolios from the
disposition of a tax-exempt bond that was acquired after April 30, 1993 for a
price less than the principal amount of the bond is taxable to shareholders as
ordinary income to the extent of accrued market discount. Also, all shareholders
required to file a Federal income tax return are required to report the receipt
of exempt interest dividends and other exempt interest on their returns.
Moreover, while such dividends and interest are exempt from regular Federal
income tax, they may be subject to alternative minimum tax (currently imposed at
the rate of 26% (28% on the taxable excess over $175,000) or 28% in the case of
non-corporate taxpayers and at the rate of 20% in the case of corporate
taxpayers) in two circumstances. First, exempt interest dividends derived from
certain "private activity" bonds issued after August 7, 1986, generally will
constitute an item of tax preference for both corporate and non-corporate
taxpayers. Second, exempt interest dividends derived from all bonds, regardless
of the date of issue, must be taken into account by corporate taxpayers in
determining certain adjustments for alternative minimum tax purposes. Receipt of
exempt interest dividends may result in collateral Federal income tax
consequences to certain other taxpayers, including financial institutions,
property and casualty insurance companies, individual recipients of Social
Security or Railroad Retirement benefits, and foreign corporations engaged in
trade or business in the United States. Prospective investors should consult
their own tax advisors as to such consequences.
If a Money or Non-Money Market Municipal Portfolio distributes exempt
interest dividends during the shareholder's taxable year, no deduction generally
will be allowed for any interest expense on indebtedness incurred to purchase or
carry shares of such Portfolio.
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
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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 (and is expected to do so for 1998) since 1990,
the first tax year to which such requirement applied. 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 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
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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
excluding financial options, futures, forward contracts, or other similar
financial instruments related to interest-bearing obligations, obligations
issued at a discount or bond indexes related thereto to the extent such
instruments are authorized by the regulated investment company rules of the
Internal Revenue Code, cash and cash items, which cash items shall include
receivables; the Portfolios must have no investments other than interest-bearing
obligations, obligations issued at a discount, and cash and cash items
(including receivables and financial options, futures, forward contracts, or
other similar financial instruments related to interest-bearing obligations,
obligations issued at a discount or bond indexes related thereto; and the
Portfolios must satisfy certain reporting obligations and provide certain
information to shareholders.
Distributions of net investment 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 recognized by the
Portfolio will be distributed and will be taxable to its shareholders.
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Each Portfolio intends to distribute to shareholders any of its 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 attributable to net investment income from
debt securities and net realized short-term capital gain 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. Under
recently enacted legislation, long-term capital gains of individuals are taxed
at a maximum rate of 28% with respect to capital assets held for more than 12
months but less than 18 months and at a maximum rate of 20% with respect to
capital assets held for more than 18 months (10% for gains otherwise taxed at
15%). Capital gains and ordinary income of corporate taxpayers are both taxed at
a maximum nominal rate of 35%.
Investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends have been paid with
respect to such shares. For shareholders of the Non-Money Market Portfolios, any
loss incurred on the sale or exchange of a Portfolio's shares, held six months
or less, will be disallowed to the extent of exempt-interest dividends paid with
respect to such shares, and any loss not so disallowed will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
Each Non-Money Market Portfolio may engage in hedging or derivatives
transactions involving foreign currencies, forward contracts, options and
futures contracts (including options, futures and forward contracts on foreign
currencies) and short sales. Such transactions will be subject to special
provisions
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of the Code that, among other things, may affect the character of gains and
losses realized by the Portfolio (that is, may affect whether gains or losses
are ordinary or capital), accelerate recognition of income of the Portfolio and
defer recognition of certain of the Portfolio's losses. These rules could
therefore affect the character, amount and timing of distributions to
shareholders. In addition, these provisions (1) will require a Portfolio to
"mark-to-market" certain types of positions in its portfolio (that is, treat
them as if they were closed out) and (2) may cause a Portfolio to recognize
income without receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the Distribution Requirement and avoid the 4%
excise tax (described below). Each Portfolio intends to monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any option,
futures contract, forward contract or hedged investment in order to mitigate the
effect of these rules.
If a Portfolio purchases shares in a "passive foreign investment company"
(a "PFIC"), such Portfolio may be subject to U.S. federal income tax on a
portion of any "excess distribution" or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by the Portfolio to its
shareholders. Additional charges in the nature of interest may be imposed on a
Portfolio in respect of deferred taxes arising from such distributions or gains.
If a Portfolio were to invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Portfolio would be required to include in income each year a
portion of the ordinary earnings and net capital gain of the qualified electing
fund, even if not distributed to the Portfolio. Alternatively, under recently
enacted legislation, a Portfolio can elect to mark-to-market at the end of each
taxable year its shares in a PFIC; in this case, the Portfolio would recognize
as ordinary income any increase in the value of such shares, and as ordinary
loss any decrease in such value to the extent it did not exceed prior increases
included in income. Under either election, a Portfolio might be required to
recognize in a year income in excess of its distributions from PFICs and its
proceeds from dispositions of PFIC stock during that year, and such income would
nevertheless be subject to the Distribution Requirement and would be taken into
account for purposes of the 4% excise tax (described below).
Investment income that may be received by certain of the Portfolios from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle any such Portfolio to a reduced rate of, or exemption
from, taxes on such income. If more than 50% of the value of the
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total assets at the close of the taxable year of the International Equity
Portfolio, International Emerging Markets Portfolio, International Small Cap
Equity Portfolio and International Bond Portfolio consist of stock or securities
of foreign corporations, such Portfolio may elect to "pass through" to the
Portfolio's shareholders the amount of foreign taxes paid by such Portfolio. If
a Portfolio so elects, each shareholder would be required to include in gross
income, even though not actually received, his pro rata share of the foreign
taxes paid by the Portfolio, but would be treated as having paid his pro rata
share of such foreign taxes and would therefore be allowed to either deduct such
amount in computing taxable income or use such amount (subject to various Code
limitations) as a foreign tax credit against federal income tax (but not both).
For purposes of the foreign tax credit limitation rules of the Code, each
shareholder would treat as foreign source income his pro rata share of such
foreign taxes plus the portion of dividends received from the Portfolio
representing income derived from foreign sources. No deduction for foreign taxes
could be claimed by an individual shareholder who does not itemize deductions.
In certain circumstances, a shareholder that (i) has held shares of the
Portfolio for less than a specified minimum period during which it is not
protected from risk of loss or (ii) is obligated to make payments related to the
dividends, will not be allowed a foreign tax credit for foreign taxes deemed
imposed on dividends paid on such shares. Additionally, such Portfolio must also
meet this holding period requirement with respect to its foreign stocks and
securities in order for "creditable" taxes to flow-through. Each shareholder
should consult his own tax adviser regarding the potential application of
foreign tax credits.
Ordinary income dividends paid by a Portfolio will qualify for the 70%
dividends-received deduction generally available to corporations to the extent
of the amount of "qualifying dividends" received by a Portfolio from domestic
corporations for the taxable year. A dividend received by a Portfolio will not
be treated as a qualifying dividend (i) if it has been received with respect to
any share of stock that the Portfolio has held for less than 46 days (91 days in
the case of certain preferred stock) during the 90 day period beginning on the
date which is 45 days before the date on which such share becomes ex-dividend
with respect to such dividend (during the 180 day period beginning 90 days
before such date in the case of certain preferred stock), (ii) to the extent
that a Portfolio is under an obligation to make related payments with respect to
positions in substantially similar or related property or (iii) to the extent
the stock on which the dividend is paid is treated as debt-financed. Moreover,
the dividends-received deduction for a corporate shareholder may be disallowed
if the corporate shareholder fails to satisfy the foregoing requirements with
respect to its shares of a Portfolio.
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If for any taxable year any Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions (including amounts derived from interest on Municipal Obligations)
will be taxable as ordinary dividends to the extent of such Portfolio's current
and accumulated earnings and profits. Such distributions will be eligible for
the dividends received deduction in the case of corporate shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
prior to the end of each calendar year to avoid liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund 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
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and with a share of the general liabilities of the Fund. As 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
Effective January 31, 1998, the Fund has changed its name from Compass
Capital Funds/SM/ to BlackRock Funds/SM/.
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 January 8, 1998 owned of record or beneficially 5% or more of
the outstanding shares of a
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<PAGE>
Portfolio which had commenced operations as of that date was as follows:
Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court 2, 200
- ----------------------
Stevens Dr., Lester, PA 19113, 79.498%; BHC Securities Inc., One Commerce
Square, 2005 Market Street, Philadelphia, PA 19103-3212, 8.730%; U.S. Treasury
-------------
Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court 2, 200
- ----------------------
Stevens Dr., Lester, PA 19113, 81.731%; Large Cap Value Equity Portfolio: PNC
--------------------------------
Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester,
PA 19113, 82.888%; Intermediate Government Bond Portfolio: PNC Bank, Saxon &
--------------------------------------
Co., Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113,
92.482%; Municipal Money Market Portfolio: PNC Bank, Airport Business
--------------------------------
Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113, 75.728%; PNC Bank
Pittsburgh, Treas Management-32nd Fl., Two PNC Place, Pittsburgh, PA 15222,
12.721%; Small Cap Value Equity Portfolio: PNC Bank, Saxon & Co., Attn: Income
--------------------------------
Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 69.236%; National
City Bank Kentucky, Humana Retirement/Savings Tr., P.O. Box 94777, Cleveland, OH
44101, 8.418%; Large Cap Growth Equity Portfolio: PNC Bank, Saxon & Co., Attn:
---------------------------------
Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 88.882%;
Managed Income Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200
- ------------------------
Stevens Dr., Suite 260, Lester, PA 19113, 88.059%; Tax-Free Income Portfolio:
--------------------------
PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260,
Lester, PA 19113, 85.165%; Balanced Portfolio: PNC Bank, Saxon & Co., Attn:
------------------
Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 63.110%; BHC
Securities Inc., One Commerce Square, 2005 Market Street, Philadelphia, PA
19103-3212, 17.965%; International Equity Portfolio: PNC Bank, Saxon & Co.,
------------------------------
Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 91.267%;
Ohio Tax-Free Income Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections,
- ------------------------------
200 Stevens Dr., Suite 260, Lester, PA 19113, 69.768%; BHC Securities Inc., One
Commerce Square, 2005 Market Street, Philadelphia, PA 19103-3212, 17.283%;
Pennsylvania Tax-Free Income Portfolio: PNC Bank, Saxon & Co., Attn: Income
- --------------------------------------
Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 44.933%; BHC
Securities Inc., One Commerce Square, 2005 Market Street, Philadelphia, PA
19103-3212, 30.190%; North Carolina Municipal Money Market Portfolio: North
-----------------------------------------------
Carolina Trust Co., 301 North Elm St., P.O. Box 1108, Greensboro, NC 27402,
54.766%; Branch Banking and Trust Company, Wilbranch & Company, Trust
Department, P.O. Box 1847, Wilson, NC 27893, 15.722%; First Citizens Bank,
McWood & Company, P.O. Box 29522, Raleigh, NC 27626, 7.951%; Central Carolina
Bank & Trust Co., P.O. Box 30010, Durham, NC 27702-3010, 12.051%; Ohio Municipal
--------------
Money Market Portfolio: PNC Bank, Airport Business Center/Int'l Court 2, 200
- ----------------------
Stevens Dr., Lester, PA 19113, 45.378%; BHC Securities, One Commerce Square,
2005 Market St, Philadelphia, PA 19103-3212, 36.690%; Wayne County National
Bank, Wayco & Co., P.O. Box 757/1776 Beall Avenue, Wooster, OH 44691, 10.632%;
Low Duration Bond Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections,
- ---------------------------
200 Stevens Dr., Suite 260, Lester, PA 19113, 50.035%; BIT Acquisition
Corporation, 9 Parker, Irvine, CA 92718, 12.960%; U.S. Industries Inc., Master
Trust, c/o Bank of New York, One
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<PAGE>
2
Wall Street, 12th Floor, New York, NY 10286, 11.437%; Vimrx Pharmaceuticals
Inc., 2751 Centerville Rd., Ste. 210, Wilmington, DE 19806, 5.234%; Intermediate
------------
Bond Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens
- --------------
Dr., Suite 260, Lester, PA 19113, 96.631%; Select Equity Portfolio: PNC Bank,
-----------------------
Saxon & Co., Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA
19113, 88.395%; Small Cap Growth Equity Portfolio: PNC Bank, Saxon & Co., Attn:
---------------------------------
Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 55.016%;
Pennsylvania Municipal Money Market Portfolio: PNC Bank, Airport Business
- ---------------------------------------------
Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113, 72.542%; Janney
Montgomery Scott, 1801 Market Street, 9th Floor, Philadelphia, PA 19103, 7.704%;
BHC Securities, Inc., One Commerce Square, 2005 Market St, Philadelphia, PA
19103-3212, 5.310%; Virginia Municipal Money Market Portfolio: First Virginia
-----------------------------------------
Bank Inc., Oldom & Company, 6400 Arlington Blvd., Falls Church, VA 22042,
57.973%; American National Bank & Trust Co, Ambro and Company, 628 Main St, P.O.
Box 191, Danville, VA 24543, 5.444%; Mentor Investment Group, as advisor for
Virginia State Non-Arbitrage Program, 901 East Byrd Street, 6th Fl., Richmond,
VA 23219, 15.720%; F&M Bank-Peoples Warrtrust & Co., P.O. Box 93, Warrenton, VA
22186, 6.799%; International Bond Portfolio: PNC Bank, Saxon & Co., 200 Stevens
----------------------------
Dr., Suite 260, Lester, PA 19113, 86.150%; International Emerging Markets
------------------------------
Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens Dr.,
- ---------
Suite 260, Lester, PA 19113, 93.154%; Government Income Portfolio: BHC
---------------------------
Securities, Inc., One Commerce Square, 2005 Market St, Phila., PA 19103-3212,
16.102%; New Jersey Municipal Money Market Portfolio: PNC Bank, Airport Business
-------------------------------------------
Center/Int'l Court 2, 200 Stevens Dr., Lester, PA 19113, 74.379%; Janney
Montgomery Scott, 1801 Market Street, 9th Fl., Phila., PA 19103, 14.569%; New
---
Jersey Tax-Free Income Portfolio: PNC Bank, Saxon & Co., Attn: Income
- --------------------------------
Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 58.461%; BHC
Securities, Inc., One Commerce Square, 2005 Market Street, Suite 1200,
Philadelphia, PA 19103-3212, 7.731%; Core Bond Portfolio: PNC Bank, Saxon & Co.,
-------------------
Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 83.187%;
Mid-Cap Value Portfolio: PNC Bank, Saxon & Co., 200 Stevens Dr., Suite 260,
- -----------------------
Lester, PA 19113, 89.033%; Mid-Cap Growth Portfolio: PNC Bank, Saxon & Co.,
------------------------
Attn: Income Collections, 200 Stevens Dr., Suite 260, Lester, PA 19113, 92.342%;
Index Equity Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200
- ----------------------
Stevens Dr., Suite 260, Lester, PA 19113, 73.274%; International Small Cap
-----------------------
Equity Portfolio: PNC Bank, Saxon & Co., Attn: Income Collections, 200 Stevens
- ----------------
Drive, Suite 260, Lester, PA 19113, 84.196%; Merrill Lynch Pierce Fenner
Financial Data Services, Attn: Stock Powers, 4800 E. Deer Lake Dr., 3rd Fl.,
Jacksonville, FL 32246, 5.106%.
On January 23, 1998, PNC Bank, which has its principal offices at 1600
Market Street, Philadelphia, Pennsylvania 19103,
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<PAGE>
held of record approximately 77% 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. BlackRock, Inc., PIMC, BlackRock, PCM, PEAC,
CastleInternational, PNC Bank and other institutions that are banks or bank
affiliates are subject to such banking laws and regulations.
BlackRock, Inc., 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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<PAGE>
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
BLACKROCK FUNDS. The audited financial statements and notes thereto in the
Fund's Annual Report to Shareholders for the fiscal year ended September 30,
1997 (the "1997 Annual Report") are incorporated in this Statement of Additional
Information by reference. No other parts of the 1997 Annual Report are
incorporated by reference herein. The financial statements included in the 1997
Annual Report have been audited by the Fund's independent accountants, Coopers &
Lybrand, L.L.P., except for the statements of changes in net assets for the year
ended June 30, 1995 for the Core Bond Portfolio and Short Government Bond
Portfolio (now known as Low Duration Bond Portfolio) and the financial
highlights for the periods ended June 30, 1995, 1994 and 1993 for those same
Portfolios which have been audited by other auditors. The reports of Coopers &
Lybrand L.L.P. are incorporated herein by reference. Such financial statements
have been incorporated herein in reliance upon such reports given upon their
authority as experts in accounting and auditing. Additional copies of the 1997
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 1997 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.
INDEX MASTER PORTFOLIO. The audited financial statements and notes thereto
for The U.S. Large Company Series of the Trust for the fiscal year ended
November 30, 1996 (the "1996 Index Master Report") and the
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<PAGE>
unaudited financial statements and notes thereto for the Trust's U.S. Large
Company Series for the period ended September 30, 1997 (the "1997 Index Master
Report") contained in the Fund's 1997 Annual Report to Shareholders are
incorporated by reference into this Statement of Additional Information. No
other parts of the 1996 Index Master Report or 1997 Index Master Report are
incorporated by reference herein. 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 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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<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of
A-1
<PAGE>
short-term promissory obligations. This will normally be evidenced by many of
the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D- 1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"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:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit feature
are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
A-6
<PAGE>
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
A-7
<PAGE>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future
A-8
<PAGE>
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
A-9
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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.
A-10
<PAGE>
"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
A-11
<PAGE>
but lacking the undeniable strength of the preceding grades. Liquidity and cash
flow protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
APPENDIX B
----------
As stated in the Prospectuses, certain Portfolios of the Fund 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.
B-1
<PAGE>
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
B-2
<PAGE>
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
B-3
<PAGE>
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
B-4
<PAGE>
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.
B-5
<PAGE>
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
B-6
<PAGE>
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
B-7
<PAGE>
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.
B-8
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BLACKROCK STRATEGIC PORTFOLIO I
BLACKROCK STRATEGIC PORTFOLIO II
This Statement of Additional Information provides supplementary information
pertaining to shares representing interests in BlackRock Strategic Portfolio I
and BlackRock Strategic Portfolio II (the "Portfolios") of BlackRock Funds/SM/
(the "Fund"). This Statement of Additional Information is not a prospectus, and
should be read only in conjunction with the Prospectus of the Fund relating to
the Portfolios dated January 28, 1998, as amended from time to time (the
"Prospectus"). The Prospectus may be obtained from the Fund's distributor by
calling toll-free (800) 441-7379. This Statement of Additional Information is
dated January 28, 1998. Capitalized terms used herein and not otherwise defined
have the same meanings as are given to them in the Prospectus.
CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
THE FUND......................................................... 2
INVESTMENT OBJECTIVE AND POLICIES................................ 2
INVESTMENT RESTRICTIONS.......................................... 15
TRUSTEES AND OFFICERS............................................ 16
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICE ARRANGEMENTS............................ 21
PORTFOLIO TRANSACTIONS........................................... 25
PURCHASE AND REDEMPTION INFORMATION.............................. 28
VALUATION OF PORTFOLIO SECURITIES................................ 29
PERFORMANCE INFORMATION.......................................... 30
TAXES............................................................ 34
ADDITIONAL INFORMATION CONCERNING SHARES......................... 38
MISCELLANEOUS.................................................... 39
APPENDIX A....................................................... A-1
APPENDIX B....................................................... B-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
2
THE FUND
The Fund was organized on December 22, 1988 as a Massachusetts business
trust.
The Fund also offers other investment portfolios which are described in
separate Prospectuses and separate Statements of Additional Information. For
information concerning these other portfolios, contact the Distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVE AND POLICIES
For a description of the objective and policies of the Portfolios, see
"Investment Objective and Policies" in the Prospectus. The following
information is provided for those investors desiring information in addition to
that contained in the Prospectus.
CURRENCY TRANSACTIONS. As discussed in the Prospectus, the Portfolios may
engage in currency transactions with counterparties in order to hedge the value
of portfolio holdings denominated in particular currencies against fluctuations
in relative value or to enhance potential gain. Currency transactions include
spot and forward currency contracts, exchange listed currency futures, exchange
listed and OTC options on currencies, and currency swaps. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. Currency swaps usually
involve the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. 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 may enter into
over-the-counter currency transactions with counterparties which have received,
combined with any credit enhancements, a long-term debt rating of "A" by S&P or
Moody's, respectively, or that have an equivalent rating from a nationally
recognized statistical rating organization ("NRSRO") or (except for OTC currency
options) whose obligations are determined to be of equivalent credit quality by
the Adviser.
A Portfolio may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
in relation to other currencies to which the Portfolio has or in which the
Portfolio expects to have exposure. For example, a Portfolio may hold both
French government bonds and German government bonds, and the Adviser may
<PAGE>
3
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.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolios may also engage in
proxy hedging. 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 certain 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. Further, 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 the Portfolio is engaging in proxy hedging. Whenever a
Portfolio enters into a currency hedging transaction, the Portfolio will comply
with the asset segregation requirements of the SEC.
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Portfolio
if it is unable to deliver or receive currency or funds in settlement of
obligations, and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks
that apply to the use of futures generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at an
institution based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
REVERSE REPURCHASE AGREEMENTS. Each Portfolio may invest in reverse
repurchase agreements. Reverse repurchase agreements involve the sale of
securities held by a Portfolio pursuant to a Portfolio's agreement to repurchase
the securities at an agreed upon price, date and interest rate. Such agreements
are considered to be borrowings under the Investment Company Act of 1940 (the
"1940 Act"). While reverse repurchase transactions are
<PAGE>
4
outstanding, a Portfolio will segregate cash, U.S. Government securities or
other liquid assets in an amount at least equal to the repurchase price.
VARIABLE AND FLOATING RATE INSTRUMENTS. With respect to purchasable
variable and floating rate instruments, the 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.
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.
MORTGAGE-RELATED SECURITIES. There are a number of important differences
among the agencies and instrumentalities of the U.S. Government that issue
mortgage-related securities and among the securities that they issue. Mortgage-
related securities guaranteed by the Government National Mortgage Association
("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA, are not backed by or entitled to the full faith and
credit of the 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
<PAGE>
5
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 Portfolios may invest in multiple class pass-through securities,
including collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduit ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S.
Government agencies or instrumentalities, including FNMA and FHLMC, or by trusts
formed by private originators of, or investors in, mortgage loans. In general,
CMOs and REMICs are debt obligations of a legal entity that are collateralized
by, and multiple class pass-through securities represent direct ownership
interests in, a pool of residential 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 Portfolios do not 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
<PAGE>
6
sequential pay CMOs or REMIC Certificates until all other classes having an
earlier final distribution date have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes.
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 Pcs. Pcs represent undivided interests in
specified level payment, residential mortgages or participation 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."
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7
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.
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
----
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity. The relationship between prepayments and interest
rates may give some high-yielding asset-backed securities less potential for
growth in value than conventional bonds with comparable maturities.
In general, the collateral supporting non-mortgage 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 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.
SUPRANATIONAL ORGANIZATION OBLIGATIONS. The Portfolios may purchase debt
securities of supranational organizations such as
<PAGE>
8
the European Coal and Steel Community, the European Economic Community and the
World Bank, which are charted to promote economic development.
MUNICIPAL OBLIGATIONS. When deemed advisable by the Adviser, the
Portfolios may invest in obligations issued by a state or local government
("Municipal Obligations"). The two principal classifications of Municipal
Obligations are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities 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 financed. 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 include "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.
The Portfolios may hold participation certificates in a lease, an
installment purchase contract, or a conditional sales contract ("lease
obligations"). In determining whether a lease obligation is liquid, the Adviser
will consider, among other factors, the following: (i) whether the lease can be
cancelled; (ii) the degree of assurance that assets represented by the lease
could be sold; (iii) the strength of the lessee's general credit (e.g., its
debt, administrative, economic, and financial characteristics); (iv) the
likelihood that the municipality would discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit 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.
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
<PAGE>
9
result in a reduction in the value of the municipal lease experiencing non-
payment and a potential decrease in the net asset value of the 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, a Portfolio may 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 the Portfolio. When the lease contains a non-
appropriation clause, however, the failure to pay would not be a default and the
Portfolio would not have the right to take possession of the assets. 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.
COMMERCIAL PAPER. The Portfolios may purchase commercial paper rated in
one of the highest rating categories of an NRSRO. 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 Portfolios 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 Prospectus
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 Adviser. The 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 at not less than the
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10
repurchase price (including accrued interest). In addition, the 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 amortization of the difference between the
purchase price and the repurchase price specified in the repurchase agreement.
The Adviser will mark-to-market daily the value of the securities. Securities
subject to repurchase agreements will be held by the Portfolios' 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 use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Portfolio will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, a
Portfolio's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that a Portfolio may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, a Portfolio may suffer a loss
to the extent proceeds from the sale of the underlying securities are less than
the repurchase price.
INVESTMENT GRADE DEBT OBLIGATIONS. The Portfolios invest in "investment
grade securities," which are securities rated in the four highest rating
categories of an NRSRO. It should be noted that debt obligations rated in the
lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by S&P) are
considered to have some speculative characteristics and are more sensitive to
economic change than higher rated securities. See Appendix A to this Statement
of Additional Information for a description of applicable securities ratings.
BRADY BONDS. Each of the Portfolios may invest in Brady Bonds. Brady
Bonds are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructuring under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady. Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (but primarily the U.S.
dollar), and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered to be U.S. Government obligations. There can be
no assurance that Brady Bonds acquired by a Portfolio will not be
<PAGE>
11
subject to restructuring arrangements or to requests for new credit, which may
cause the Portfolio to suffer a loss of interest or principal on any of its
holdings.
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 a when-issued or
forward commitment 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 commitments. It may be expected
that the market value of the Portfolios' 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. 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.
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 and 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.
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,
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12
liquid assets in such amount are segregated 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 Portfolio segregates liquid assets in the amount of the difference.
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.
There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities (or currencies) 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
<PAGE>
13
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 Portfolio may invest in
futures contracts and options thereon. These instruments are described in
Appendix B to this Statement of Additional Information.
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.
YIELDS AND RATINGS. The yields on certain obligations are dependent on a
variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"),
Fitch Investor Services, Inc. ("Fitch") and S&P represent their respective
opinions as to the quality of the obligations they undertake to rate. Ratings,
however, are general and are not absolute standards of quality. Consequently,
obligations with the same rating, maturity and interest rate may have different
market prices. Subsequent to its purchase by a Portfolio, a rated security may
cease to be rated. The Adviser will consider such an event in determining
whether the Portfolio should continue to hold the security.
INTEREST RATE TRANSACTIONS. The Portfolios may enter into interest rate
swaps, caps and floors on either an asset-based or
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14
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.
A Portfolio will usually enter into interest rate swaps on a net basis,
i.e., the two payments streams are netted out, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments.
A Portfolio will accrue the net amount of the excess, if any, of its
obligations over its entitlements with respect to each interest rate 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 receive. A Portfolio
may enter into transactions with counterparties which have received, combined
with any credit enhancements, a long-term debt rating of "A" by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or whose
obligations are determined to be of equivalent credit quality by the Adviser.
A Portfolio will enter into interest rate swap, cap and floor transactions
only with institutions deemed the creditworthy by the 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 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.
<PAGE>
15
INVESTMENT RESTRICTIONS
Each Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed only by a vote of the holders of a majority of
the Portfolio's outstanding shares (as defined below under "Miscellaneous").
Each Portfolio may not:
(1) 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 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; (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; and (d) securities issued or
guaranteed by foreign governments are not considered to belong to
a particular industry.
(2) Issue senior securities (including borrowed money, including on
margin if margin securities are owned) in excess of 33 1/3% of
its total assets (including the amount of senior securities
issued but excluding any liabilities and indebtedness not
constituting senior securities) except that the Portfolio may
borrow up to an additional 5% of its total assets for temporary
purposes; or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short
sales, when-issued and forward commitment transactions, dollar
rolls, option and futures transactions, currency transactions and
similar investment strategies. A Portfolio's obligations under
interest rate and currency swaps are not treated as senior
securities.
(3) Makes loans, except that each Portfolio may purchase and hold
debt instruments and enter into repurchase agreements in
accordance with its
<PAGE>
16
investment objective and policies and may lend portfolio
securities.
(4) Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except to the extent that the purchase of
obligations directly from the issuer thereof, or the disposition
of securities, in accordance with the Portfolio's investment
objective, policies and limitations may be deemed to be
underwriting.
(5) 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.
(6) 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.
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 Global Wireless and Chief Financial
1717 Arch Street Officer since August 1997,
29th Floor East Bell Atlantic Global Wireless
Philadelphia, PA 19103 (global wireless communications);
Age: 55 Executive Vice President,
Chief Financial
Officer and Director
from February
1995 - August 1997, Vice
President and
Chief 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;
</TABLE>
<PAGE>
17
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Director, American Waterworks,
Inc. (water utility) since May 1990;
Trustee, The Carl E. & Emily I. Weller
Foundation since October 1991.
Raymond J. Clark/1/ Trustee, Treasurer of Princeton
Office of the Treasurer President and University since 1987;
Princeton University Treasurer Trustee, The Compass
3 New South Building Capital Group of Funds
P.O. Box 35 from 1987 to 1996;
Princeton, New Jersey 08540 Trustee, United-Way
Age: 62 Princeton Area
Communities from 1992-94; Trustee,
Chemical Bank, New Jersey Advisory
Board from 1994 until 1995; Trustee,
Medical Center of Princeton; Trustee,
American Red Cross -Mercer County
Chapter since 1995; and Trustee, United
Way-Greater Mercer County from 1996-
1997.
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 & 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, 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
</TABLE>
____________________
/1/. This trustee may be deemed an "interested person" of the Fund as defined
in the 1940 Act.
<PAGE>
18
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Age: 51 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 & Associates,
Villanova, PA 19085 Inc. (investment
Age: 62 advisers) since
February 1989; Director, Beaver
Management Corporation (land management
company); Managing General Partner,
Chestnut Street Exchange
Fund; 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
BlackRock, Inc. Secretary Capital Group, Inc.
345 Park Avenue since 1995; Managing
New York, NY 10154 Director of BlackRock
Age: 31 Financial Management,
Inc. since 1993; prior to
1993, Vice President of
BlackRock Financial
Management, Inc.
Ellen L. Corson Assistant Vice President and
PFPC Inc. Treasurer Director of Mutual Fund
103 Bellevue Parkway Accounting and Adminis-
Wilmington, DE 19809 tration, PFPC Inc. since
Age: 33 November 1997; Assistant Vice
President, PFPC Inc. from
March 1997 to November 1997; Senior
Accounting Officer, PFPC Inc. from March
1993 to March 1997.
</TABLE>
<PAGE>
19
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Brian P. Kindelan Secretary Senior Counsel, PNC Bank Corp.
PNC Bank Corp. since May 1995; Associate,
1600 Market Street Stradley, Ronon, Stevens &
28th Floor Young, LLP from March 1990
Philadelphia, PA 19103 to May 1995.
Age: 38
</TABLE>
The Fund pays trustees who are not affiliated with BlackRock or BlackRock
Distributors, Inc. ("BDI" or "Distributor") $10,000 annually and $275 per
investment portfolio of the Fund for each full meeting of the Board that they
attend. The Fund pays the Chairman and Vice Chairman an additional $10,000 and
$5,000, respectively, for their services in such capacities. Trustees who are
not affiliated with BlackRock or the Distributor are reimbursed for any expenses
incurred in attending meetings of the Board of Trustees or any committee
thereof. No officer, director or employee of BlackRock, any of the Fund's other
advisers or sub-advisers, PFPC Inc. ("PFPC"), BlackRock Distributors, Inc.
("BDI" and, collectively with PFPC and BlackRock, Inc., 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 class of each investment
portfolio of the Fund.
[End of Page]
<PAGE>
20
The table below sets forth the compensation actually received from the Fund
Complex of which the Fund is a part by the trustees for the fiscal year ended
September 30, 1997:
<TABLE>
<CAPTION>
Total
Compensation
Pension or from
Retirement Registrant
Benefits Estimated and Fund
Aggregate Accrued as Annual Complex/1/
Name of Person, Compensation Part of Fund Benefits upon Paid to
Position from Registrant Expenses Retirement Trustees
- -------- --------------- -------- ---------- --------
<S> <C> <C> <C> <C>
Anthony M. Santomero, $52,300 N/A N/A (3)/2/ $64,300
Trustee
David R. Wilmerding, $61,050 N/A N/A (3)/2/ $73,050
Jr., Trustee
William O. Albertini, $43,550 N/A N/A (1)/2/ $43,550
Trustee
Raymond J. Clark, $43,550 N/A N/A (1)/2/ $43,550
Trustee
Robert M. Hernandez, $43,550 N/A N/A (1)/2/ $43,550
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
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
2. Total number of investment company boards trustees served on within the
Fund Complex.
<PAGE>
21
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law, shareholders
of a business trust may, under certain circumstances, be held personally liable
as partners for the obligations of the trust. However, the Fund's Declaration
of Trust provides that shareholders shall not be subject to any personal
liability in connection with the assets of the Fund for the acts or obligations
of the Fund, and that every note, bond, contract, order or other undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not personally liable thereunder. The Declaration of Trust provides for
indemnification out of the trust property of any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason. The Declaration of Trust
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund, and shall
satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust provides that a trustee is entitled to be indemnified
against all liabilities and expenses reasonably incurred by him in connection
with the defense or disposition of any proceeding in which he may be involved or
with which he may be threatened by reason of his being or having been a trustee,
and that the Fund will indemnify officers, representatives and employees of the
Fund to the same extent that trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICE ARRANGEMENTS
ADVISORY AGREEMENT. The advisory services provided by BlackRock, an
indirect wholly-owned subsidiary of PNC Bank Corp., and the fees received by it
for such services are described in the Prospectus. As stated in the Prospectus,
BlackRock may from time to time voluntarily waive its advisory fees with respect
to the Portfolio and may voluntarily reimburse the Portfolio for expenses.
BlackRock renders advisory services to the Portfolios pursuant to an
Investment Advisory Agreement (the "Advisory Contract"). Under the Advisory
Contract, BlackRock is not liable for any error of judgment or mistake of law or
for any loss suffered by the Fund or the Portfolios in connection with the
<PAGE>
22
performance of the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of BlackRock in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder. The Advisory Contract is terminable as to a Portfolio
by vote of the Board of Trustees or by the holders of a majority of the
outstanding voting securities of the Portfolio involved, at any time without
penalty, on 60 days' written notice to BlackRock. BlackRock may also terminate
its advisory relationship with respect to either Portfolio on 60 days' written
notice to the Fund. The Advisory Contract terminates automatically in the event
of its assignment.
ADMINISTRATION AGREEMENTS. The Fund has entered into a Co-Administration
Agreement with BlackRock, Inc. and a separate Administration Agreement with PFPC
and BDI (the "Administration Agreements"). PFPC, whose principal offices are
located at 400 Bellevue Parkway, Wilmington, DE 19809 and BDI have agreed to
maintain office facilities for the Fund; furnish the Fund with statistical and
research data, clerical, accounting, and bookkeeping services; provide and
supervise the operation of an automated data processing system to process
purchase and redemption orders; provide information and distribute written
communications to shareholders; handle shareholder problems and calls; research
issues raised by financial intermediaries relating to investments in a
Portfolio's shares; review and provide advice with respect to communications for
a Portfolio's shares; monitor the investor programs that are offered in
connection with a Portfolio's shares; provide oversight and related support
services that are intended to ensure the delivery of quality service to the
holders of the Portfolio's shares; and provide certain other services required
by the Fund.
Under its Co-Administration Agreement, BlackRock, Inc. 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.
As compensation for these services, BlackRock, Inc. 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 BDI are entitled to receive a
combined fee, computed daily and payable monthly, at the maximum annual
aggregate rate of .20% of the first $500 million of each Portfolio's average
daily net assets, .18% of the next $500 million of each Portfolio's average
daily net assets, and .16% of each Portfolio's average daily net assets in
excess of $1 billion. From time to time the Administrators may waive some or
all of their administration fees from a Portfolio and may voluntarily reimburse
a Portfolio for expenses.
<PAGE>
23
The Administration Agreements provide that the Administrators will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or the Portfolios in connection with the performance of the
Administration Agreements, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from
reckless disregard of their respective duties and obligations thereunder.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank, National Association
("PNC Bank"), whose principal business address is 1600 Market Street,
Philadelphia, Pennsylvania 19103, 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 each of the Portfolios.
For its services to the Fund under the Custodian Agreement, PNC Bank is
entitled to receive a fee which is calculated based upon each Portfolio's
average gross assets, with a minimum monthly fee of $1,000 per investment
portfolio. PNC Bank is also entitled to out-of-pocket expenses and certain
transaction charges.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems shares in
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 Portfolios under the Transfer Agency
Agreement, PFPC is entitled to receive fees at the annual rate of .03% of the
average net asset value of outstanding shares in each Portfolio, plus per
account fees and disbursements.
<PAGE>
24
DISTRIBUTOR. The Fund has entered into a distribution agreement with the
Distributor under which the Distributor, as agent, offers shares of the
Portfolios on a continuous basis. The Distributor has agreed to use appropriate
efforts to effect sales of the shares, but it is not obligated to sell any
particular amount of shares.
The Fund has adopted an Amended and Restated Distribution and Service Plan
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act on behalf of its
Institutional Shares. The Plan was approved by a majority of (i) the trustees
of the Fund and (ii) the trustees of the Fund who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan or in any agreement related to the Plan (the "Rule 12b-1
Trustees").
The Fund is not required or permitted under the Plan to make distribution
payments with respect to its Institutional Shares. However, the Plan permits
BDI, BlackRock, Inc., 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, BlackRock, Inc. and their affiliates may pay financial
institutions, broker/dealers and/or their salespersons certain compensation for
the sale and distribution of shares of the Fund or for services to the Fund.
These payments ("Additional Payments") may take the form of "due diligence"
payments for a dealer's examination of a Portfolio and payments for providing
extra employee training and information relating to a Portfolio; "listing" fees
for the placement of a Portfolio 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,
BlackRock, Inc. and their affiliates may make Additional Payments for
subaccounting, administrative and/or shareholder processing services. The
Additional Payments made by the Distributor, BlackRock, Inc. 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, BlackRock, Inc. 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,
BlackRock, Inc. 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
<PAGE>
25
educational and sales promotional programs subject to applicable NASD
regulations.
The Plan will continue from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Trustees,
including a majority vote of the Rule 12b-1 Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated with respect to a Portfolio at any time, without penalty, by the vote
of a majority of the Rule 12b-1 Trustees or by a vote of the holders of a
majority of the outstanding shares of a Portfolio. The Plan may not be amended
materially without the approval of the Board of Trustees, including a majority
of the Rule 12b-1 Trustees, cast in person at a meeting called for that purpose.
Any modification to the Plan which would materially increase the costs borne by
a Portfolio for distribution purposes pursuant to the Plan must also be
submitted to the stockholders of a Portfolio for approval. In addition, while
the Plan remains in effect, the selection and nomination of the Fund's trustees
who are not "interested persons" of the Fund shall be committed to the
discretion of the Fund's non-interested trustees.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for the
Portfolios, the selection of brokers and dealers to effect the transactions and
the negotiation of prices and any brokerage commissions. The securities in
which the Portfolios invest are traded principally in the over-the-counter
market. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a mark-up
to the dealer. Securities purchased in underwritten offerings generally
include, in the price, a fixed amount of compensation for the manager(s),
underwriter(s) and dealer(s). The Portfolios may also purchase certain money
market instruments directly from an issuer, in which case no commissions or
discounts are paid. Purchases and sales of debt securities on a stock exchange
are effected through brokers who charge a commission for their services.
The Adviser's primary considerations in selecting the manner of executing
securities transactions for the Portfolios will be prompt execution of orders,
the size and breadth of the market for the security, the reliability, integrity
and financial condition and execution capability of the firm, the size of and
difficulty in executing the order, and the best net price. There are many
instances when, in the judgment of the Adviser, more than one firm can offer
comparable execution services. In selecting among such firms, consideration is
given to those firms which supply research and other services in addition to
execution services. However, it is not the policy of the Adviser, absent
special circumstances, to pay higher commissions to a firm because it has
supplied such services.
<PAGE>
26
The Adviser is able to fulfill its obligations to furnish a continuous
investment program to the Portfolios without receiving such information from
brokers; however, it considers access to such information to be an important
element of financial management. Although such information is considered
useful, its value is not determinable, as it must be reviewed and assimilated by
the Adviser, and does not reduce the Adviser's normal research activities in
rendering investment advice under the Advisory Contract. It is possible that
the Adviser's expenses could be materially increased if it attempted to purchase
this type of information or generate it through its own staff.
One or more of the other accounts which the Adviser manages may own from
time to time the same investments as the Portfolios. Investment decisions for
the Portfolios are made independently from those of such other accounts;
however, from time to time, the same investment decision may be made for more
than one company or account. When two or more companies or accounts seek to
purchase or sell the same securities, the securities actually purchased or sold
will be allocated among the companies and accounts on a good faith equitable
basis by the Adviser in its discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the
price or size of the position obtainable for the Portfolios. In other cases,
however, the ability of the Portfolios to participate in volume transactions may
produce better execution for the Portfolios.
It is expected that under normal market conditions the annual portfolio
turnover rate of the Portfolios will not exceed 400%, excluding securities
having a maturity of one year or less. Because it is difficult to predict
accurately portfolio turnover rate, actual turnover may be higher or lower.
Higher portfolio turnover results in increased Portfolio expenses, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on reinvestment in other securities. The Adviser will monitor
the tax status of the Portfolios under the Internal Revenue Code during periods
in which the annual turnover rate of a Portfolio exceeds 100%.
A Portfolio will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which BlackRock,
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 BlackRock, the
Administrators, the Distributor or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law.
<PAGE>
27
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 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>
Money Market
Morgan Stanley & Co., Inc. Commercial Paper $ 49,402,000
Morgan Stanley & Co., Inc. Variable Rate Obligation 36,997,742
Merrill Lynch & Co. Commercial Paper 128,081,269
Lehman Brothers, Inc. Commercial Paper 49,837,542
Lehman Brothers, Inc. Variable Rate Obligation 50,000,000
U.S. Treasury Money Market
Morgan Stanley & Co., Inc. Repurchase Agreement $ 247,000,000
Greenwich Capital Repurchase Agreement 225,000,000
Goldman, Sachs & Co. Repurchase Agreement 50,000,000
Merrill Lynch & Co. Repurchase Agreement 50,000,000
Swiss Bank Corp. Repurchase Agreement 50,000,000
Low Duration Bond
Morgan Stanley & Co., Inc. Mortgage Pass-Through $ 168,166
Lehman Brothers, Inc. Corporate Bond 3,689,617
Salomon Brothers, Inc. Mortgage Pass-Through 3,065,061
Salomon Brothers, Inc. Corporate Bond 4,037,134
Intermediate Government Bond
Merrill Lynch & Co. Mortgage Pass-Through $ 4,367,211
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 1,407,311
Intermediate Bond
Salomon Brothers, Inc. Mortgage Pass-Through $ 2,117,624
Salomon Brothers, Inc. Corporate Bond 527,865
PaineWebber Jackson & Curtis, Inc. Corporate Bond 1,577,526
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 3,266,973
Merrill Lynch & Co. Mortgage Pass-Through 10,190,099
Merrill Lynch & Co. Commercial Mortgage-Backed Security 1,236,217
</TABLE>
<PAGE>
28
<TABLE>
<CAPTION>
PORTFOLIO SECURITY VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Core Bond
Salomon Brothers, Inc. Mortgage Pass-Through $ 6,900,254
Salomon Brothers, Inc. Corporate Bond 5,701,504
Goldman, Sachs & Co. Commercial Mortgage-Backed Security 2,942,012
Merrill Lynch & Co. Mortgage Pass-Through 428,155
Merrill Lynch & Co. Commercial Mortgage-Backed Security 3,397,277
Merrill Lynch & Co. Asset Backed Security 303,703
Merrill Lynch & Co. Corporate Bond 4,226,051
Government Income
Salomon Brothers, Inc. Mortgage Pass-Through $ 632,894
Managed Income
Salomon Brothers, Inc. Corporate Bond $ 2,639,323
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 1,063,281
PaineWebber Jackson & Curtis, Inc. Corporate Bond 5,004,177
HSBC Securities Corporate Bond 7,852,743
Merrill Lynch & Co. Corporate Bond 8,250,862
Merrill Lynch & Co. Commercial Mortgage-Backed Security 12,884,829
Large Cap Value Equity
Morgan Stanley & Co., Inc. Common Stock $ 29,257,111
Mid-Cap Value Equity
Donaldson, Lufkin & Jenrette Securities Corp. Common Stock $ 1,073,437
Select Equity
Morgan Stanley & Co., Inc. Common Stock $ 7,595,781
Balanced
Morgan Stanley & Co., Inc. Common Stock $ 4,941,312
Salomon Brothers, Inc. Mortgage Pass-Through 1,593,589
Salomon Brothers, Inc. Corporate Bond 316,719
PaineWebber Jackson & Curtis, Inc. Corporate Bond 1,051,684
Merrill Lynch & Co. Corporate Bond 1,006,203
Merrill Lynch & Co. Commercial Mortgage-Backed Security 2,015,045
</TABLE>
PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios are sold at the net asset value per share next
determined after a purchase order is received. The Fund reserves the right, if
conditions exist which make cash payments undesirable, to honor any request for
redemption or repurchase of the Portfolios' shares by making payment in whole or
in part in securities chosen by the Fund and valued in the same way as they
would be valued for purposes of computing the Portfolios' net asset values. 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 each Portfolio is obligated to
redeem its shares solely in cash up to the lesser of $250,000 or 1% of its net
asset value during any 90-day period for any one shareholder of the
Portfolio.
Under the 1940 Act, the Portfolios may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or
<PAGE>
29
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 Prospectus, the Fund may
redeem shares involuntarily to reimburse the Portfolios 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. The Fund reserves the express right to redeem shares of each
Portfolio involuntarily at any time if the Fund's Board of Trustees determines,
in its sole discretion, that failure to do so may have adverse consequences to
the holders of shares in the Portfolio. Upon such redemption the holders of
shares so redeemed shall have no further right with respect thereto other than
to receive payment of the redemption price.
VALUATION OF PORTFOLIO SECURITIES
Valuation of securities held by each 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 3:00 p.m. (Eastern
Time) (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 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 based on quotations or
the equivalent thereof received from dealers; an option or futures contract is
valued at the last sales price prior to 3:00 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 3:00 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
<PAGE>
30
readily available are valued at fair market value as determined in good faith by
or under the direction of the Fund's Board of Trustees. Any securities which
are denominated in a foreign currency are translated into U.S. dollars at the
prevailing market rates.
Certain of the securities acquired by the Portfolios may be traded on
foreign exchanges or over-the-counter markets on days on which the Portfolios'
net asset values are not calculated. In such cases, the net asset value of a
Portfolio's shares may be significantly affected on days when investors can
neither purchase nor redeem shares of the Portfolios.
In determining the approximate market value of portfolio investments,
pricing services used by the Fund 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.
PERFORMANCE INFORMATION
TOTAL RETURN. For purposes of quoting and comparing the performance of
shares of the 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. Under the rules of the SEC, funds advertising performance must include
total return quotes calculated according to the following formula:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical
$1,000 payment made at the beginning of the
period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
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.
<PAGE>
31
A Portfolio may also from time to time include in advertisements, sales
literature and 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 the Portfolio's shares with
other performance measures. For example, in comparing the total return of a
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Salomon Broad Investment Grade Index, as
appropriate, a Portfolio may calculate the aggregate total return for its shares
for the period of time specified in the advertisement or communication by
assuming the investment of $10,000 in the Portfolio's shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value.
In addition to average annual total returns, a 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. Total
returns, yields, and other performance information may be quoted numerically or
in a table, graph or similar illustration.
YIELD. Each Portfolio may advertise the yield on its shares. Under the
rules of the SEC, a Portfolio must calculate yield using the following formula:
a-b
YIELD = 2[(----- +1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
<PAGE>
32
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by each 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 a Portfolio is calculated
by computing the yield to maturity of each obligation held by the Portfolio
based on the market value of the obligation (including actual accrued interest)
at the close of business on the last business day of each month, or, with
respect to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date.
With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
dividend shortly thereafter.
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to providing
performance information that demonstrates the total return or yield of shares of
a Portfolio over a specified period of time, the Fund may provide certain other
information demonstrating hypothetical investment returns. Such information may
include, but is not limited to, illustrating the compounding effects of a
dividend in a dividend reinvestment plan.
<PAGE>
33
MISCELLANEOUS. Performance information for the Portfolios assumes the
reinvestment of dividends and distributions. Performance information may
reflect fee waivers that subsidize and reduce the total operating expenses of a
Portfolio. In these cases, the Portfolios' returns would be lower if there were
not such waivers.
Yield on shares of a Portfolio will fluctuate daily and does not provide a
basis for determining future yield. Because yield will fluctuate, it cannot be
compared with yields on savings accounts or other investment alternatives that
provide an agreed to or guaranteed fixed yield for a stated period of time. In
comparing the yield of one fund to another, consideration should be given to
each fund's investment policies, including the types of investments made,
lengths of maturities of the portfolio securities, and whether there are any
special account charges which may reduce the effective yield. The fees which
may be imposed by the Adviser on its customer accounts are not reflected in the
calculations of total returns or yields for the Portfolios.
As stated above, the Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on an investment in
a Portfolio are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of the Portfolio would increase the value,
not only of the original investment in the Portfolio, but also of the additional
Portfolio shares received through reinvestment. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor, investment management techniques, policies or investment suitability
of a Portfolio, economic conditions, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of a Portfolio), as well as the
views of BlackRock as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Portfolio. The Fund may
also include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of a
Portfolio. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio. Such advertisements or communications may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
<PAGE>
34
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 Prospectus. 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 may wish to consult their tax advisers with specific
reference to their own tax situation.
The Portfolios will each elect to be taxed as a regulated investment
company under Part I of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, each Portfolio
generally is exempt from Federal income tax on its net investment income (i.e.,
----
its investment company taxable income as that term is defined in the Code
without regard to the deduction for dividends paid) and net capital gain (i.e.,
----
the excess of long-term capital gains over short-term capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
net investment income (the "Distribution Requirement") and satisfies certain
other requirements of the Code that are described below. Distributions of net
investment income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investment in such stock,
securities, or currencies (the "Income Requirement") and, for taxable years
beginning on or before August 5, 1997, derive less than 30% of its gross income
from the sale or other disposition of stock, securities and certain other
investments (including securities and forward foreign currency exchange
contracts, but only to the extent that such contracts are not directly related
to the Portfolios' principal business of investing in stock or securities) held
for less than three months (the "Short-Short Gain Test"). The Short-Short Gain
Test has been repealed for taxable years beginning after August 5, 1997. Future
Treasury regulations may provide that foreign currency gains that are not
"directly related" to the Portfolios' principal business of investing in stock
or securities will not satisfy the Income Requirement.
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
<PAGE>
35
companies, and securities of other issuers (as to which the Portfolio has not
invested more than 5% of the value of its total assets in securities of such
issuer and as to which the Portfolio does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of the Portfolio's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which such Portfolio controls
and which are engaged in the same or similar trades or businesses.
Distributions of net investment income will be taxable to shareholders as
ordinary income, regardless of whether such distributions are paid in cash or
are reinvested in shares. Shareholders receiving any taxable distribution from
the Portfolio in the form of additional shares will be treated as receiving a
taxable distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date.
Each Portfolio intends to distribute to shareholders all of its 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 or her shares, whether such gain was
recognized by the Portfolio prior to the date on which a shareholder acquired
shares of the Portfolio and whether the distribution was paid in cash or
reinvested in shares.
It is expected that distributions from each of the Portfolios will
generally not qualify for the "dividends received" deduction for corporate
shareholders. In addition, it is expected that dividends and certain interest
income earned by the Portfolios from foreign securities will be subject to
foreign withholding taxes or other taxes. If more than 50% of the value of a
Portfolio's total assets at the close of the taxable year in question consists
of stock or securities of foreign corporations, the Portfolio may elect, for
U.S. Federal income tax purposes, to treat certain foreign taxes paid by it,
including generally any withholding taxes and other foreign income taxes, as
paid by its shareholders. If this election were made, the amount of such
foreign taxes paid by a Portfolio would be included in its shareholders' income
pro rata (in addition to taxable distributions actually received by them), and
subject to applicable limitations each shareholder generally would 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 proportionate amounts from U.S. income. It is uncertain whether either
Portfolio will meet the test stated above necessary to make this tax election.
In certain circumstances, a shareholder that (i) has held shares of a Portfolio
for less than a specified minimum period during which it is not protected from
risk of loss or (ii) is obligated to make payments related to the dividends,
will not be allowed a foreign tax credit for foreign taxes deemed imposed
<PAGE>
36
on dividends paid on such shares. A Portfolio must also meet this holding
period requirement with respect to its foreign securities in order to flow
through "creditable" taxes.
If a Portfolio purchases shares in a "passive foreign investment company"
(a "PFIC"), such Portfolio may be subject to U.S. federal income tax on a
portion of any "excess distribution" or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by the Portfolio to its
shareholders. Additional charges in the nature of interest may be imposed on a
Portfolio in respect of deferred taxes arising from such distributions or gains.
If a Portfolio were to invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Portfolio would be required to include in income each year a
portion of the ordinary earnings and net capital gain of the qualified electing
fund, even if not distributed to the Portfolio. Alternatively, under recently
enacted legislation, a Portfolio can elect to mark-to-market at the end of each
taxable year its shares in a PFIC; in this case, the Portfolio would recognize
as ordinary income any increase in the value of such shares, and as ordinary
loss any decrease in such value to the extent it did not exceed prior increases
included in income. Under either election, a Portfolio might be required to
recognize in a year income in excess of its distributions from PFICs and its
proceeds from dispositions of PFIC stock during that year, and such income would
nevertheless be subject to the Distribution Requirement and would be taken into
account for purposes of the 4% excise tax (described below).
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. Under recently enacted legislation, long-
term capital gains of individuals are taxed at a maximum rate of 28% with
respect to capital assets held for more than 12 months but less than 18 months
and at a maximum rate of 20% with respect to capital assets held for more than
18 months (10% for gains otherwise taxed at 15%). Capital gains and ordinary
income of corporate taxpayers are both taxed at a maximum nominal rate of 35%.
Investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends have been paid with
respect to such shares.
Each Portfolio may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts (including
options, futures and forward contracts on foreign currencies) and short sales.
Such transactions will be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the
Portfolio (that is, may affect whether gains or losses are ordinary or capital),
accelerate recognition
<PAGE>
37
of income of the Portfolio and defer recognition of certain of the Portfolio's
losses. These rules could therefore affect the character, amount and timing of
distributions to shareholders. In addition, these provisions (1) will require a
Portfolio to "mark-to-market" certain types of positions in its portfolio (that
is, treat them as if they were closed out) and (2) may cause a Portfolio to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the Distribution Requirement and
avoid the 4% excise tax (described below). Each Portfolio intends to monitor
its transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any option,
futures contract, forward contract or hedged investment in order to mitigate the
effect of these rules.
If for any taxable year a Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions will be taxable as ordinary dividends to the extent of a
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). The Portfolios intend to make sufficient distributions or deemed
distributions of their ordinary taxable income and any capital gain net income
prior to the end of the each calendar year to avoid liability for this excise
tax.
A Portfolio will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund that he is not subject
to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by a Portfolio each year.
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
<PAGE>
38
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, a
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Fund's outstanding shares (irrespective of
Portfolio or class) may elect all of the trustees. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees will continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund will be called by the trustees upon the
written request of shareholders owning at least 10% of the outstanding shares
entitled to vote.
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.
<PAGE>
39
The proceeds received by the Portfolios 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 the Portfolios 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.
The Fund's Declaration of Trust authorizes the Board of Trustees, without
shareholder approval (unless otherwise required by applicable law), to: (i)
sell and convey the assets belonging to a class of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
class to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (ii) sell and convert the
assets belonging to one or more classes of shares into money and, in connection
therewith, to cause all outstanding shares of such class to be redeemed at their
net asset value; or (iii) combine the assets belonging to a class of shares with
the assets belonging to one or more other classes of shares if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such class to be redeemed or converted into shares of another class of shares at
their net asset value. The Board of Trustees may authorize the termination of
any class of shares after the assets belonging to such class have been
distributed to its shareholders.
MISCELLANEOUS
Effective January 31, 1998, the fund has changed its name from Compass
Capital Funds/SM/ to BlackRock Funds/SM/.
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.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand, L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
accountants.
SHAREHOLDER OWNERSHIP. The name, address and percentage ownership of each
person that on January 22, 1998, owned of record or beneficially 5% or more of
BlackRock Strategic Portfolio I is as follows:
ARMCO Inc., C/O BlackRock Financial Mgmt, 345 Park Avenue, 29th Floor, New York,
NY 10154, 7.96%; Federated Dept. Stores, C/O BlackRock Financial Mgmt, 345 Park
Avenue, 29th Floor, New York, NY 10154, 18.98%; Salaried Pension Plan, Ball
Corporation, C/O BlackRock Financial Mgmt, 345 Park Avenue, 29th Floor, New
York, NY 10154, 5.68%; Deere & Company, C/O BlackRock Financial Mgmt, 345 Park
Avenue, 29th Floor, New York, NY 10154, 11.61%; Defined Contribution Union Camp,
C/O BlackRock Financial Mgmt, 345 Park Avenue, 29th Floor, New York, NY 10154,
7.13%; Defined Benefit Union Camp, C/O BlackRock Financial Mgmt, 345 Park
Avenue, 29th Floor, New York, NY 10154, 16.18%; McCune Charitable Foundation,
C/O BlackRock Financial Mgmt, 345 Park Avenue, 29th Floor, New York, NY 10154,
5.36%; Alltel Fixed Income Portfolio (ATC), C/O BlackRock Financial Mgmt, 345
Park Avenue, 29th Floor, New York, NY 10154, 8.65%.
On January 23, 1998, PNC Bank held of record approximately 77% 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
<PAGE>
40
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. BlackRock, BlackRock, Inc., PFPC and PNC Bank are
subject to such banking laws and regulations.
BlackRock, BlackRock, Inc., PFPC and PNC Bank believe they may perform the
services for the Fund contemplated by their respective agreements with the Fund
without violation of applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether bank and non-bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent these companies from continuing
to perform such services for the Fund. If such were to occur, it is expected
that the Board of Trustees would recommend that the Fund enter into new
agreements or would consider the possible termination of the Fund. Any new
advisory agreement would be subject to shareholder approval.
SHAREHOLDER APPROVALS. As used in this Statement of Additional Information
and in the Prospectus, a "majority of the outstanding shares" means, with
respect to the approval of a Portfolio's investment advisory agreement or a
change in a fundamental investment limitation, the lesser of (1) 67% of the
shares of that Portfolio represented at a meeting at which the holders of more
than 50% of the outstanding shares of the Portfolio are present in person or by
proxy, or (2) more than 50% of the outstanding shares of that Portfolio.
<PAGE>
APPENDIX A
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the highest rating category 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+."
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 highest rating
category 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.
The highest rating category of Duff & Phelps for commercial paper and
short-term debt is "D-1". Duff & Phelps employs three designations, "D-1+," "D-
1" and "D-1-," within the highest rating category. The following summarizes the
highest 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.
A-1
<PAGE>
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 highest rating category 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+."
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 highest rating used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
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
highest rating category used by IBCA for short-term debt ratings:
"A1+" - Obligations possess a particularly strong credit feature and
are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the "investment grade" 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.
A-2
<PAGE>
"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.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "BBB" 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 "investment grade" 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 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-3
<PAGE>
"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.
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.
Note: Those bonds in the Aa, A and Baa groups which Moody's believes
possess the strongest investment attributes are designated by the symbols, Aa1,
A1 and Baa1.
The following summarizes the "investment grade" 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
A-4
<PAGE>
prudent investment. Considerable variability in risk is present during economic
cycles.
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 developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
"investment grade" 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
A-5
<PAGE>
in business, economic or financial conditions are unlikely to increase
investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
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 "investment grade" 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.
A-6
<PAGE>
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 highest rating 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.
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 highest rating 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.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-7
<PAGE>
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, as an example, a Portfolio may use
interest rate futures contracts as a defense, or hedge, against anticipated
interest rate changes. 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.
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
B-1
<PAGE>
without the making or taking of delivery of securities. Closing out a futures
contract sale is effected by a 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 index futures such as the ALL-
ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
II. Index Futures Contracts
-----------------------
A securities index assigns relative values to the securities included
in the index, which fluctuates with changes in the market values of the
securities included. Some index futures contracts are based on broad market
indexes, while other futures contracts are based on narrower market indexes
segment. As an example, a Portfolio might 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 might 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 might purchase index futures contracts in anticipation
of purchases of securities. A long futures position may be terminated without a
corresponding purchase of securities.
B-2
<PAGE>
In addition, a Portfolio might utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings.
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, as well as for
other purposes as described in the Prospectus.
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 segregate
with a custodian an amount of liquid assets known as initial margin, based on
the value of the contract. The nature of 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.
B-3
<PAGE>
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Portfolio. One risk arises because of the imperfect correlation between
movements in the price of the futures and movements in the price of any
instruments which are the subject of a hedge. The price of the futures 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
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 future, 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 any
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
B-4
<PAGE>
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.
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.
B-5
<PAGE>
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 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.
Investments in futures options involve some of the same considerations
that are involved in connection with investments
B-6
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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 based, or upon
the price of the underlying securities or currencies, 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
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Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-7
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BLACKROCK FUNDS/SM/
STATEMENT OF ADDITIONAL INFORMATION
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
This Statement of Additional Information provides supplementary information
pertaining to Institutional Shares ("Shares") representing interests in the
Multi-Sector Mortgage Securities Portfolio III (the "Portfolio") of BlackRock
Funds (the "Fund"). This Statement of Additional Information is not a
prospectus, and should be read only in conjunction with the Prospectus of the
Fund relating to the Portfolio dated January 28, 1998, as amended from time to
time (the "Prospectus"). The Prospectus may be obtained from the Fund's
distributor by calling toll-free (800) 441-7379. This Statement of Additional
Information is dated January 28, 1998. Capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the
Prospectus.
CONTENTS
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Page
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THE FUND.......................................................... 2
INVESTMENT OBJECTIVE AND POLICIES................................. 2
INVESTMENT RESTRICTIONS........................................... 13
TRUSTEES AND OFFICERS............................................. 14
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS........................... 20
PORTFOLIO TRANSACTIONS............................................ 24
PURCHASE AND REDEMPTION INFORMATION............................... 28
VALUATION OF PORTFOLIO SECURITIES................................. 29
PERFORMANCE INFORMATION........................................... 29
TAXES............................................................. 34
ADDITIONAL INFORMATION CONCERNING SHARES.......................... 37
MISCELLANEOUS..................................................... 39
FINANCIAL STATEMENTS.............................................. 40
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR THE
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR ITS DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE FUND'S DISTRIBUTOR
<PAGE>
IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
THE FUND
The Fund was organized on December 22, 1988 as a Massachusetts business
trust. The Portfolio originally commenced operations on October 6, 1994 as a
separate investment portfolio (the "Predecessor Portfolio") of The BFM
Institutional Trust Inc., which was organized as a Maryland corporation. On
April 26, 1996 the assets and liabilities of the Predecessor Portfolio were
transferred to the Portfolio, which had no prior operating history.
The Fund also offers other investment portfolios which are described in
separate Prospectuses and separate Statements of Additional Information. For
information concerning these other portfolios contact the distributor at the
telephone number stated on the cover page of this Statement of Additional
Information.
INVESTMENT OBJECTIVE AND POLICIES
For a description of the objective and policies of the Portfolio, see
"Investment Policies" in the Prospectus. In accordance with the applicable
provisions of the Investment Company Act of 1940 (the "1940 Act"), the Portfolio
will maintain with its custodian a segregated account of liquid assets to the
extent the Portfolio's obligations require segregation from the use of
investment practices listed below. The following information is provided for
those investors desiring information in addition to that contained in the
Prospectus.
OTHER INVESTMENT PRACTICES
INTEREST RATE TRANSACTIONS. The Portfolio may enter into interest rate
swaps and the purchase or sale of interest rate caps and floors. The Portfolio
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio as a duration
management technique or to protect against any increase in the price of
securities that the Portfolio anticipates purchasing at a later date. The
Portfolio will use these transactions as a hedge or for duration or risk
management. The Portfolio will not sell interest rate caps or floors that it
does not own. Interest rate swaps involve the exchange by the Portfolio with
another party of their respective commitments to pay or receive interest e.g.,
----
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. The purchase of an interest rate cap entitles the
purchaser, to the
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extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
----
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments on the payment dates. The Portfolio will accrue the net amount
of the excess, if any, of the Portfolio's obligations over its entitlements with
respect to each interest rate swap on a daily basis and will segregate with a
custodian an amount of cash or liquid securities having an aggregate net asset
value at all times at least equal to the accrued excess. If there is a default
by the other party to such a transaction, the Portfolio will have contractual
remedies pursuant to the agreements related to the transaction.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may also
enter into contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of debt securities or indices or
prices thereof, other financial indices and U.S. government debt securities or
options on the above. The Portfolio will ordinarily engage in such transactions
only for bona fide hedging, risk management (including duration management) and
other portfolio management purposes.
CALLS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Portfolio may sell
or purchase call options ("calls") on U.S. Treasury securities, mortgage-backed
securities, other debt securities, indices, and Eurodollar instruments that are
traded on U.S. and foreign securities exchanges and in the over-the-counter
markets, and future contracts. A call gives the purchaser of the option the
right to buy, and obligates the seller to sell, the underlying security, futures
contract or index at the exercise price at any time or at a specified time
during the option period. All such calls sold by the Portfolio must be
"covered" as long as the call is outstanding (i.e., the Portfolio must own the
----
securities or futures contract subject to the call or other securities
acceptable for applicable segregation requirements). A call sold by the
Portfolio exposes the Portfolio during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security, index or futures contract and may require the Portfolio to hold a
security or futures contract which it
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<PAGE>
might otherwise have sold. The purchase of a call gives the Portfolio the right
to buy a security, futures contract or index at a fixed price. Calls on futures
on U.S. Treasury securities, Mortgage-Backed Securities, other debt securities
and Eurodollar instruments must also be covered by deliverable securities or the
futures contract or by liquid debt securities segregated to satisfy the
Portfolio's obligations pursuant to such instruments.
PUTS ON SECURITIES, INDICES AND FUTURES CONTRACTS. The Portfolio may
purchase put options ("puts") that relate to U.S. Treasury securities, Mortgage-
Backed Securities, other debt securities and Eurodollar instruments (whether or
not it holds such securities in its portfolio), indices or futures contracts.
The Portfolio may also sell puts on U.S. Treasury securities, Mortgage-Backed
Securities, other debt securities, Eurodollar instruments, indices or futures
contracts on such securities if the Portfolio's contingent obligations on such
puts are secured by segregated assets consisting of cash or liquid debt
securities having a value not less than the exercise price. The Portfolio will
not sell puts if, as a result, more than 50% of the Portfolio's assets would be
required to cover its potential obligations under its hedging and other
investment transactions. In selling puts, there is a risk that the Portfolio
may be required to buy the underlying instrument at a price higher than the
current market price.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Portfolio may also
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis. When such transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. When-issued securities and forward commitments may be sold prior to
the settlement date, but the Portfolio will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. If the Portfolio disposes of the right to
acquire a when-issued security prior to its acquisition or disposes of its right
to deliver or receive against a forward commitment, it can incur a gain or loss.
At the time the Portfolio enters into a transaction on a when-issued or forward
commitment basis, it will segregate with its custodian liquid assets with a
value not less than the value of the when-issued or forward commitment
securities. The value of these assets will be monitored daily to ensure that
their marked to market value will at all times equal or exceed the corresponding
obligations of the Portfolio. There is always a risk that the securities may
not be delivered and that the Portfolio may incur a loss. Settlements in the
ordinary course, which typically occur monthly for mortgage-related securities,
are not treated by the Portfolio as
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<PAGE>
when-issued or forward commitment transactions and accordingly are not subject
to the foregoing restrictions.
REPURCHASE AGREEMENTS. The Portfolio may invest temporarily, without
limitation, in repurchase agreements, which are agreements pursuant to which
securities are acquired by the Portfolio from a third party with the
understanding that they will be repurchased by the seller at a fixed price on an
agreed date. These agreements may be made with respect to any of the portfolio
securities in which the Portfolio is authorized to invest. Repurchase
agreements may be characterized as loans secured by the underlying securities
and will be entered into in accordance with the requirements of the SEC.
The repurchase price under the repurchase agreements generally equals the
price paid by the Portfolio 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 the
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 Adviser. The 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 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 amortization of the difference between the purchase price
and the repurchase price specified in the repurchase agreement. The Portfolio's
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 Portfolio under the 1940 Act.
The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Portfolio will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable
-5-
<PAGE>
bankruptcy or other laws, the Portfolio's ability to dispose of the underlying
securities may be restricted. Finally, it is possible that the Portfolio may not
be able to substantiate its interest in the underlying securities. To minimize
this risk, the securities underlying the repurchase agreement will be held by
the custodian at all times in an amount at least equal to the repurchase price,
including accrued interest. If the seller fails to repurchase the securities,
the Portfolio may suffer a loss to the extent proceeds from the sale of the
underlying securities are less than the repurchase price.
RESTRICTED AND ILLIQUID SECURITIES. The Portfolio may purchase certain
restricted securities ("Rule 144A securities") eligible for sale to qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933. Rule 144A provides an exemption from the registration requirements of the
Securities Act of 1933 for the resale of certain restricted securities to
qualified institutional buyers. One effect of Rule 144A is that certain
restricted securities may now be liquid, though no assurance can be given that a
liquid market for Rule 144A securities will develop or be maintained. The
Portfolio's holdings of Rule 144A securities which are liquid securities will
not be subject to its limitation on investment in illiquid securities. The
Fund's Board of Trustees has adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A are
liquid or illiquid. The Board of Trustees will periodically review the
Portfolio's purchases and sales of Rule 144A securities.
OTHER INVESTMENTS
U.S. GOVERNMENT SECURITIES
U.S. Government securities include:
1. U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury
bonds (generally maturities of greater than ten years), all of which
are direct obligations of the U.S. Government and, as such, are backed
by the "full faith and credit" of the United States.
2. Securities issued by agencies and instrumentalities of the
U.S. Government which are backed by the full faith and credit of the
United States. Among the agencies and instrumentalities issuing such
obligations are the Federal Housing Administration, the Government
National Mortgage Association ("GNMA"), the Department of Housing and
Urban Development, the Export-Import Bank, the Farmers
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<PAGE>
Home Administration ("FHA"), the General Services Administration, the
Maritime Administration and the Small Business Administration. The
maturities of such obligations range from three months to 30 years.
3. Securities issued by agencies and instrumentalities which
are not backed by the full faith and credit of the United States, but
whose issuing agency or instrumentalities may borrow, to meet its
obligations, from the U.S. Treasury. Among the agencies and
instrumentalities issuing such obligations are the Tennessee Valley
Authority, the Federal National Mortgage Association ("FNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC") and the U.S. Postal
Service.
4. Securities issued by agencies and instrumentalities which
are not backed by the full faith and credit of the United States, but
which are backed by the credit of the issuing agency or
instrumentality. Among the agencies and instrumentalities issuing such
obligations are the Federal Farm Credit System and the Federal Home
Loan Bank.
Neither the value nor the yield of the Portfolio's shares or of the U.S.
Government securities which may be invested in by the Portfolio are guaranteed
by the U.S. Government. Such values and yield will fluctuate with changes in
prevailing interest rates and other factors. Generally, as prevailing interest
rates rise, the value of any U.S. Government securities held by the Portfolio
will fall. Such securities with longer maturities generally tend to produce
higher yields and are subject to greater market fluctuation, as a result of
changes in interest rates, than debt securities with shorter maturities.
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the Mortgage-Backed Securities purchased by
the Portfolio evidence an interest in a specific pool of mortgages. Such
securities are issued by GNMA, FNMA and FHLMC and by private issuers, such as
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorized GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured
-7-
<PAGE>
by the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Veterans' Administration
under the Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by
pools of other eligible mortgage loans. The Housing Act provides that the full
faith and credit of the U.S. Government is pledged to the payment of all amounts
that may be required to be paid under the guarantee. In order to meet its
obligations under such guarantee, GNMA is authorized to borrow from the U.S.
Treasury with no limitations as to amount.
The GNMA certificates will represent a pro-rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-to
four-family housing units.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to
purchase home mortgage loans from many capital market investors that may not
ordinarily invest in mortgage loans directly, thereby expanding the total amount
of funds available for housing.
Each FNMA certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro-rata interest in scheduled principal
payments and interest payments (at such FNMA certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA certificate and such holder's proportionate interest in
the full principal amount of any
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<PAGE>
foreclosed or otherwise finally liquidated mortgage loan. The full and timely
payment of principal of and interest on each FNMA certificate will be guaranteed
by FNMA, which guarantee is not backed by the full faith and credit of the U.S.
Government.
Each FNMA certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; and (iii) adjustable rate mortgage loans.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of FHLMC currently consists of the purchase of
first lien, conventional, residential mortgage loans and participation interests
in such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC certificates.
FHLMC guarantees to each registered holder of a FHLMC certificate the
timely payment of interest at the rate provided for by such FHLMC certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on
account of its guarantee of collection of principal at any time after default on
an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of a claim by any mortgage insurer or (iii) the
expiration of any right of redemption, whichever occurs later, but in any event
no later than one year after demand has been made upon the mortgagor for
accelerated payment of principal. The obligations of FHLMC under its guarantee
are obligations solely of FHLMC and are not backed by the full faith and credit
of the U.S. Government.
FHLMC certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC certificate group") purchased by FHLMC. The mortgage loans
underlying the FHLMC certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
the applicable standards set forth in the FHLMC Act. A FHLMC certificate group
may include whole loans, participation interests in whole loans and undivided
interests in
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whole loans and participations comprising another FHLMC certificate group.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates ("ARMs"). ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the mortgage. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but also
may be collateralized by whole loans or private mortgage pass-through securities
(collectively, "Mortgage Assets"). Multi-class pass-through securities are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multi-class pass-
through certificates. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multi-class pass-
through securities. CMOs may be issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of CMOs or multi-class pass-
through securities may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC").
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In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on Mortgage-Backed securities.
The Portfolio also may invest in, among other things, parallel-pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel-pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are parallel-pay
CMOs with the required principal payment on such securities having the highest
priority after interest has been paid to all classes.
The Portfolio may invest in CMO residuals. The residual in a CMO structure
generally represents the interest in any excess cash flow remaining after making
required payments of principal of and interest on the CMOs and related
administrative expenses of the issuer.
TYPES OF CREDIT ENHANCEMENT
Mortgage-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, those
securities may contain elements of credit support, which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs
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in a timely fashion. Protection against losses resulting from default ensures
ultimate payment of the obligations on at least a portion of the assets in the
pool. This protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Portfolio will not pay any additional fees for credit support,
although the existence of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "overcollateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies
or losses in excess of those anticipated could adversely affect the return on an
investment in such issue.
RISK FACTORS RELATING TO MORTGAGE-BACKED SECURITIES
The yield characteristics of Mortgage-Backed Securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Portfolio purchases
such a security at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Portfolio purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected prepayments
will reduce, yield to maturity.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Portfolio are likely to be greater during a
period of declining interest rates and, as a result, likely to
-12-
<PAGE>
be reinvested at lower interest rates than during a period of rising interest
rates. Mortgage-Backed Securities may decrease in value as a result of increases
in interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
INVESTMENT RESTRICTIONS
The Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed only by a vote of the holders of a majority of
the Portfolio's outstanding shares (as defined below under "Miscellaneous").
The Portfolio may not:
(1) invest 25% or more of the value of its total assets in any one
industry (Mortgage-Backed Securities and other securities issued
or guaranteed by the U.S. government or any agency or
instrumentality thereof are not treated as industries); provided,
however, that the Portfolio will, except for temporary defensive
purposes, invest at least 25% of the value of its total assets
in securities which represent interests in mortgages or liens on
real property;
(2) issue senior securities (including borrowing money, including on
margin if margin securities are owned) in excess of 33 1/3% of
its total assets (including the amount of senior securities
issued but excluding any liabilities and indebtedness not
constituting senior securities) except that the Portfolio may
borrow up to an additional 5% of its total assets for temporary
purposes; or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short
sales, when-issued and forward commitment transactions and
similar investment strategies. The Portfolio's obligations under
interest rate swaps are not treated as senior securities;
(3) make loans of money or property to any person, except through
loans of portfolio securities, the purchase of fixed income
securities consistent with the Portfolio's investment objective
and policies or the acquisition of securities subject to
repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent
that in connection with the
-13-
<PAGE>
disposition of portfolio securities or the sale of its own shares
the Portfolio may be deemed to be an underwriter;
(5) invest for the purpose of exercising control over management of
any company other than issuers of collateralized mortgage
obligations;
(6) purchase real estate or interests therein other than Commercial
and Residential Mortgage-Backed Securities and similar
instruments;
(7) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by applicable
law without the Portfolio becoming subject to registration with
the Commodity Futures Trading Commission as a commodity pool; or
(8) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, giving effect
to such sale, the market value of all securities sold short does
not exceed 25% of the value of the Portfolio's total assets and
the Portfolio's aggregate short sales of a particular class of
securities does not exceed 25% of the then outstanding securities
of that class.
TRUSTEES AND OFFICERS
The trustees and executive officers of the Fund, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
William O. Albertini Trustee Executive Vice President
Bell Atlantic Global Wireless and Chief Financial
1717 Arch Street Officer since August,
29th Floor East 1997, Bell Atlantic
Philadelphia, PA 19103 Global Wireless (global
Age: 55 wireless communications);
Executive Vice President,
Chief Financial Officer
and Director from
February 1995 - August
1997, Vice President and
Chief 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>
-14-
<PAGE>
<TABLE>
<S> <C> <C>
Raymond J. Clark/1/ Trustee, Treasurer of Princeton
Office of the Treasurer President and Treasurer University since 1987;
Princeton University 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; and
Trustee, United
Way-Greater Mercer
County from
1996-1997.
Robert M. Hernandez Trustee Director since 1991,
USX Corporation Vice Chairman and Chief
600 Grant Street Financial Officer
6105 USX Tower since 1994, Executive
Pittsburgh, PA 15219 Vice President -
Age: 52 Accounting & Finance and
Chief Financial Officer
from 1991 to 1994,
</TABLE>
________________________
1. This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-15-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Senior Vice President -
Finance and Treasurer
from 1990 to 1991, USX
Corporation (a
diversified company
principally engaged in
energy and steel
businesses); Director,
ACE Limited; Trustee,
Allegheny General
Hospital and Allegheny
Health, Education and
Research Foundation;
Director, Marinette
Marine Corporation;
Director, Pittsburgh
Baseball, Inc.; and
Director and Chairman of
the Board, RMI Titanium
Company.
Anthony M. Santomero Vice Chairman Deputy Dean from
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: 51 Center, since July
1995, and Dean's
Advisory Council
Member since July
1984, The Wharton
School, University
of Pennsylvania;
Associate Editor,
Journal of Banking
and Finance since
June 1978;
Associate Editor,
Journal of
Economics and
Business since
October 1979;
Associate Editor,
Journal of Money,
Credit and Banking
since January
1980; Research
Associate, New
York University
Center for
Japan-U.S.
Business and
Economic Studies
since July 1989;
Editorial Advisory
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
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 Chairman, Gee,
One Aldwyn Center of the Board Wilmerding &
Villanova, PA 19085 Associates, Inc.
Age: 62 (investment advisers)
since February 1989;
Director, Beaver
Management Corporation;
Managing General Partner,
Chestnut Street
Exchange Fund;
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
BlackRock, Inc. Secretary Capital Group, Inc.
345 Park Avenue since 1995; Managing
New York, NY 10154 Director of BlackRock
Age: 31 Financial Management,
Inc. since 1993; prior
to 1993, Vice President
of BlackRock Financial
Management, Inc.
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST FIVE YEARS
- ---------------- ------------------ ----------------------
<S> <C> <C>
Ellen L. Corson Assistant Vice President and
PFPC Inc. Treasurer Director of Mutual Fund
103 Bellevue Parkway Accounting and Adminis-
Wilmington, DE 19809 tration, PFPC Inc. since
Age: 33 November 1997; Assistant Vice
President, PFPC Inc. from
March 1997 to November 1997; Senior
Accounting Officer, PFPC Inc. from March
1993 to March 1997.
Brian P. Kindelan Secretary Senior Counsel, PNC Bank
PNC Bank Corp. Corp. since May 1995;
1600 Market Street, 28th Floor Associate, Stradley, Ronon,
Philadelphia, PA 19103 Stevens & Young from March
Age: 38 1990 to May 1995.
</TABLE>
The Fund pays trustees who are not affiliated with BlackRock, Inc. or
BlackRock Distributors, Inc. ("BDI" 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 an additional $10,000 and $5,000, respectively,
for their services in such capacities. Trustees who are not affiliated with
BlackRock, Inc. or the Distributor are reimbursed for any expenses incurred in
attending meetings of the Board of Trustees or any committee thereof. No
officer, director or employee of BlackRock, Inc., 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"), BlackRock Distributors, Inc. ("BDI" and, collectively with PFPC and
BlackRock, Inc., 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 class of each investment portfolio of the Fund.
-18-
<PAGE>
The table below sets forth the compensation actually received from the Fund
Complex of which the Fund is a part by the trustees for the fiscal year ended
September 30, 1997:
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
AGGREGATE BENEFITS ESTIMATED REGISTRANT AND
COMPENSATION ACCRUED AS ANNUAL FUND COMPLEX/1/
NAME OF PERSON, FROM PART OF FUND BENEFITS UPON PAID TO
POSITION REGISTRANT EXPENSES RETIREMENT TRUSTEES
- -------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Anthony M. $52,300 N/A N/A (3)/2/ $64,300
Santomero, Vice
Chairman of the
Board
David R. Wilmerding, $61,050 N/A N/A (3)/2/ $73,050
Jr., Chairman of the
Board
William O.
Albertini, Trustee $43,550 N/A N/A (1)/2/ $43,550
Raymond J. Clark,
Trustee, President $43,550 N/A N/A (1)/2/ $43,550
and Treasurer
Robert M. Hernandez,
Trustee $43,550 N/A N/A (1)/2/ $43,550
</TABLE>
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law, shareholders
of a business trust may, under certain circumstances, be held personally liable
as partners for the obligations of the trust. However, the Fund's Declaration
of Trust provides that shareholders shall not be subject to any personal
liability in connection with the assets of the Fund for the acts or obligations
of the Fund, and that every note, bond, contract, order or other undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not personally liable thereunder. The Declaration of Trust provides for
indemnification out of the trust property of any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or
_________________
1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
2. Total number of investment company boards trustees served on within the
Fund Complex.
-19-
<PAGE>
some other reason. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the Declaration
of Trust provides that a trustee is entitled to be indemnified against all
liabilities and expenses reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the Fund will indemnify officers, representatives and employees of the Fund
to the same extent that trustees are entitled to indemnification.
-20-
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
ADVISORY AGREEMENT. The advisory services provided by BlackRock, an
indirect wholly-owned subsidiary of PNC Bank Corp., and the fees received by it
for such services are described in the Prospectus. As stated in the Prospectus,
BlackRock may from time to time voluntarily waive its advisory fees with respect
to the Portfolio and may voluntarily reimburse the Portfolio for expenses.
BlackRock renders advisory services to the Portfolio pursuant to an
Investment Advisory Agreement (the "Advisory Contract"). Under the Advisory
Contract, BlackRock is not liable for any error of judgment or mistake of law or
for any loss suffered by the Fund or the Portfolio in connection with the
performance of the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of BlackRock in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder. The Advisory Contract is terminable as to the Portfolio
by vote of the Board of Trustees or by the holders of a majority of the
outstanding voting securities of the Portfolio, at any time without penalty, on
60 days' written notice to BlackRock. BlackRock may also terminate its advisory
relationship with respect to the Portfolio, on 60 days' written notice to the
Fund. The Advisory Contract terminates automatically in the event of its
assignment.
For the period from October 1, 1996 through September 30, 1997, the
Portfolio paid $323,455 in advisory fees to BlackRock and BlackRock waived
$45,000 in expenses. For the period from April 26, 1996 through September 30,
1996, the Portfolio paid $150,034 in advisory fees to BlackRock, and BlackRock
waived $31,063 in expenses.
The Predecessor Portfolio was also advised by BlackRock. For the period
from April 1, 1996 through April 25, 1996, the Portfolio paid $24,092 in
advisory fees to BlackRock, and BlackRock waived $344 in expenses. For the
fiscal period from July 1, 1995 to March 31, 1996 and the fiscal period from
October 6, 1994 (commencement of investment operations) through June 30, 1995,
the Predecessor Portfolio paid $213,047 and $189,677, respectively, in
investment advisory fees to BlackRock pursuant to the prior advisory agreement.
In addition, during the same periods, BlackRock waived $3,652 and $56,269,
respectively, in expenses.
ADMINISTRATION AGREEMENTS. The Fund has entered into a Co-Administration
Agreement with BlackRock, Inc. and a separate Administration Agreement with
PFPC, whose principal
-21-
<PAGE>
business address is 400 Bellevue Parkway, Wilmington, DE 19809, and BDI (the
"Administration Agreements"). PFPC and BDI have agreed to maintain office
facilities for the Fund; furnish the Fund with statistical and research data,
clerical, accounting, and bookkeeping services; provide and supervise the
operation of an automated data processing system to process purchase and
redemption orders; provide information and distribute written communications to
shareholders; handle shareholder problems and calls; research issues raised by
financial intermediaries relating to investments in a Portfolio's shares; review
and provide advice with respect to communications for a Portfolio's shares;
monitor the investor programs that are offered in connection with a Portfolio's
shares; provide oversight and related support services that are intended to
ensure the delivery of quality service to the holders of the Portfolio's shares;
and provide certain other services required by the Fund.
Under the Co-Administration Agreement, BlackRock, Inc. 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.
As compensation for these services, BlackRock, Inc. 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 BDI are entitled to receive a
combined fee, computed daily and payable monthly, at the maximum annual
aggregate rate of .20% of the first $500 million of each Portfolio's average
daily net assets, .18% of the next $500 million of each Portfolio's average
daily net assets, and .16% of each Portfolio's average daily net assets in
excess of $1 billion. From time to time the Administrators may waive some or all
of their administration fees from a Portfolio.
The Administration Agreements provide that the Administrators will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or the Portfolio in connection with the performance of the
Administration Agreements, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from
reckless disregard of their respective duties and obligations thereunder.
For the period from October 1, 1996 through September 30, 1997, the
Portfolio paid $297,578 in administrative fees to Compass Capital Group, Inc.
("CCG", which served as Co-Administrator to the Fund from December 1, 1995 until
January 28, 1998), PFPC and BDI and CCG, PFPC and BDI waived fees totalling
$276,079. For the period from April 26, 1996 through September
-22-
<PAGE>
30, 1996, the Portfolio paid $86,204 in administrative fees to CCG, PFPC and
BDI, and CCG, PFPC and BDI waived fees totalling $54,252.
During the periods from April 1, 1996 through April 25, 1996 and January
13, 1996 through March 31, 1996, the Predecessor Portfolio paid $8,673 and
$8,620, respectively, in administrative fees to CCG, PFPC and BDI.
During the period from July 1, 1995 through January 12, 1996, the
Predecessor Portfolio received administrative services from PFPC. During that
period, the Predecessor Portfolio paid PFPC $55,878 in administrative fees
pursuant to a prior administrative agreement. Prior to July 1, 1995, the
Predecessor Portfolio received administrative services from State Street Bank
and Trust Company ("State Street"). During the fiscal period from October 6,
1994 (commencement of investment operations) through June 30, 1995, the
Predecessor Portfolio paid $32,948 in administrative fees to State Street
pursuant to a prior administration agreement.
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. PNC Bank, National Association
("PNC Bank"), whose principal business address is 1600 Market Street,
Philadelphia, Pennsylvania 19103, is custodian of the Fund's assets pursuant to
a custodian agreement (the "Custodian Agreement"). Under the Custodian
Agreement, PNC Bank or a sub-custodian (i) maintains a separate account or
accounts in the name of the Portfolio, (ii) holds and transfers portfolio
securities on account of the Portfolio, (iii) accepts receipts and makes
disbursements of money on behalf of the Portfolio, (iv) collects and receives
all income and other payments and distributions on account of the Portfolio's
securities and (v) makes periodic reports to the Board of Trustees concerning
the Portfolio's operations. PNC Bank is authorized to select one or more banks
or trust companies to serve as sub-custodian on behalf of the Fund, provided
that, with respect to sub-custodians other than sub-custodians for foreign
securities, PNC Bank remains responsible for the performance of all its duties
under the Custodian Agreement and holds the Fund harmless from the acts and
omissions of any sub-custodian. Citibank, N.A. serve as the international sub-
custodians for various portfolios of the Fund.
For its services to the Fund under the Custodian Agreement, PNC Bank
receives a fee which is calculated based upon the Portfolio's average gross
assets, with a minimum monthly fee of $1,000 per investment portfolio. PNC Bank
is also entitled to out-of-pocket expenses and certain transaction charges.
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer
-23-
<PAGE>
Agency Agreement (the "Transfer Agency Agreement"), under which PFPC (i) issues
and redeems shares in the Portfolio, (ii) addresses and mails all communications
by the Portfolio to record owners of its shares, including reports to
shareholders, dividend and distribution notices and proxy materials for its
meetings of shareholders, (iii) maintains shareholder accounts and, if
requested, sub-accounts and (iv) makes periodic reports to the Board of Trustees
concerning the operations of the Portfolio. PFPC may, on 30 days' notice to the
Fund, assign its duties as transfer and dividend disbursing agent to any other
affiliate of PNC Bank Corp. For its services with respect to the Fund's
Institutional Shares under the Transfer Agency Agreement, PFPC is entitled to
receive fees at the annual rate of .03% of the average net asset value of
outstanding Institutional Shares in the Portfolio, plus per account fees and
disbursements.
DISTRIBUTOR AND DISTRIBUTION PLAN. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of the Portfolio on a continuous basis. The Distributor
has agreed to use appropriate efforts to effect sales of the shares, but it is
not obligated to sell any particular amount of shares.
The Fund has adopted an Amended and Restated Distribution and Service Plan
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act on behalf of its
Institutional Shares. The Plan was approved by a majority of (i) the trustees
of the Fund and (ii) the trustees of the Fund who are not interested persons of
the Fund and who have no direct or indirect financial interest in the operation
of the Plan or in any agreement related to the Plan (the "Rule 12b-1 Trustees").
The Fund is not required or permitted under the Plan to make distribution
payments with respect to its Institutional Shares. However, the Plan permits
BDI, BlackRock, Inc., 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, BlackRock, Inc. and their affiliates may pay financial
institutions, broker/dealers and/or their salespersons certain compensation for
the sale and distribution of shares of the Fund or for services to the Fund.
These payments ("Additional Payments") may take the form of "due diligence"
payments for a dealer's examination of the Portfolio and payments for providing
extra employee training and information relating to the Portfolio; "listing"
fees for the placement of the Portfolio 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
-24-
<PAGE>
maintenance of share balances. In addition, the Distributor, BlackRock, Inc. and
their affiliates may make Additional Payments for subaccounting, administrative
and/or shareholder processing services. The Additional Payments made by the
Distributor, BlackRock, Inc. 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, BlackRock, Inc. 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, BlackRock, Inc. 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.
The Plan will continue from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Trustees,
including a majority vote of the Rule 12b-1 Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated with respect to the Portfolio at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Trustees or by a vote of the holders of a
majority of the outstanding shares of the Portfolio. The Plan may not be
amended materially without the approval of the Board of Trustees, including a
majority of the Rule 12b-1 Trustees, cast in person at a meeting called for that
purpose. Any modification to the Plan which would materially increase the costs
borne by the Portfolio for distribution purposes pursuant to the Plan must also
be submitted to the stockholders of the Portfolio for approval. In addition,
while the Plan remains in effect, the selection and nomination of the Fund's
trustees who are not "interested persons" of the Fund shall be committed to the
discretion of the Fund's non-interested trustees.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for the
Portfolio, the selection of brokers and dealers to effect the transactions and
the negotiation of prices and any brokerage commissions. The securities in which
the Portfolio invests are traded principally in the over-the-counter market. In
the over-the-counter market, securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the
-25-
<PAGE>
price of the security usually includes a mark-up to the dealer. Securities
purchased in underwritten offerings generally include, in the price, a fixed
amount of compensation for the manager(s), underwriter(s) and dealer(s). The
Portfolio may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid. Purchases and sales
of debt securities on a stock exchange are effected through brokers who charge a
commission for their services.
The Adviser's primary considerations in selecting the manner of executing
securities transactions for the Portfolio will be prompt execution of orders,
the size and breadth of the market for the security, the reliability, integrity
and financial condition and execution capability of the firm, the size of and
difficulty in executing the order, and the best net price. There are many
instances when, in the judgment of the Adviser, more than one firm can offer
comparable execution services. In selecting among such firms, consideration is
given to those firms which supply research and other services in addition to
execution services. However, it is not the policy of the Adviser, absent
special circumstances, to pay higher commissions to a firm because it has
supplied such services.
The Adviser is able to fulfill its obligations to furnish a continuous
investment program to the Portfolio without receiving such information from
brokers; however, it considers access to such information to be an important
element of financial management. Although such information is considered
useful, its value is not determinable, as it must be reviewed and assimilated by
the Adviser, and does not reduce the Adviser's normal research activities in
rendering investment advice under the Advisory Contract. It is possible that
the Adviser's expenses could be materially increased if it attempted to purchase
this type of information or generate it through its own staff.
One or more of the other accounts which the Adviser manages may own from
time to time the same investments as the Portfolio. Investment decisions for
the Portfolio are made independently from those of such other accounts; however,
from time to time, the same investment decision may be made for more than one
company or account. When two or more companies or accounts seek to purchase or
sell the same securities, the securities actually purchased or sold will be
allocated among the companies and accounts on a good faith equitable basis by
the Adviser in its discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the price
or size of the position obtainable for the Portfolio. In other cases, however,
the ability of the Portfolio to participate in volume transactions may produce
better execution for the Portfolio.
-26-
<PAGE>
Although the Advisory Agreement contains no restrictions on portfolio
turnover, it is not the policy of the Portfolio to engage in transactions with
the objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Portfolio will not exceed 400%,
excluding securities having a maturity of one year or less. Because it is
difficult to predict accurately portfolio turnover rate, actual turnover may be
higher or lower. Higher portfolio turnover results in increased Portfolio
expenses, including brokerage commissions, dealer mark-ups and other transaction
costs on the sale of securities and on reinvestment in other securities. The
Adviser will monitor the tax status of the Portfolio under the Internal Revenue
Code during periods in which the annual turnover rate of the Portfolio exceeds
100%. The portfolio turnover rate of the Portfolio is calculated by dividing the
lesser of the 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 Portfolio will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which BlackRock,
Inc., 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 BlackRock, Inc., 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.
For the periods from October 1, 1996 through September 30, 1997, and April
26, 1996 through September 30, 1996, the Portfolio paid no brokerage
commissions. In addition, for the same periods, the portfolio turnover rate for
the Portfolio was 52% and 19%, respectively. For the period from April 1, 1996
through April 25, 1996, the period from July 1, 1995 through March 31, 1996 and
the period from October 6, 1994 (commencement of operations) through June 30,
1995, the Predecessor Portfolio paid no brokerage commissions. In addition, for
the same periods, the portfolio turnover rate for the Predecessor Portfolio was
4%, 119% and 215%, respectively.
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<PAGE>
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>
Money Market
Morgan Stanley & Co., Inc. Commercial Paper $ 49,402,000
Morgan Stanley & Co., Inc. Variable Rate Obligation 36,997,742
Merrill Lynch & Co. Commercial Paper 128,081,269
Lehman Brothers, Inc. Commercial Paper 49,837,542
Lehman Brothers, Inc. Variable Rate Obligation 50,000,000
U.S. Treasury Money Market
Morgan Stanley & Co., Inc. Repurchase Agreement $ 247,000,000
Greenwich Capital Repurchase Agreement 225,000,000
Goldman, Sachs & Co. Repurchase Agreement 50,000,000
Merrill Lynch & Co. Repurchase Agreement 50,000,000
Swiss Bank Corp. Repurchase Agreement 50,000,000
Low Duration Bond
Morgan Stanley & Co., Inc. Mortgage Pass-Through $ 168,166
Lehman Brothers, Inc. Corporate Bond 3,689,617
Salomon Brothers, Inc. Mortgage Pass-Through 3,065,061
Salomon Brothers, Inc. Corporate Bond 4,037,134
Intermediate Government Bond
Merrill Lynch & Co. Mortgage Pass-Through $ 4,367,211
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 1,407,311
Intermediate Bond
Salomon Brothers, Inc. Mortgage Pass-Through $ 2,117,624
Salomon Brothers, Inc. Corporate Bond 527,865
PaineWebber Jackson & Curtis, Inc. Corporate Bond 1,577,526
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 3,266,973
Merrill Lynch & Co. Mortgage Pass-Through 10,190,099
Merrill Lynch & Co. Commercial Mortgage-Backed Security 1,236,217
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO SECURITY VALUE
--------- -------- -----
<S> <C> <C>
Core Bond
Salomon Brothers, Inc. Mortgage Pass-Through $ 6,900,254
Salomon Brothers, Inc. Corporate Bond 5,701,504
Goldman, Sachs & Co. Commercial Mortgage-Backed Security 2,942,012
Merrill Lynch & Co. Mortgage Pass-Through 428,155
Merrill Lynch & Co. Commercial Mortgage-Backed Security 3,397,277
Merrill Lynch & Co. Asset Backed Security 303,703
Merrill Lynch & Co. Corporate Bond 4,226,051
Government Income
Salomon Brothers, Inc. Mortgage Pass-Through $ 632,894
Managed Income
Salomon Brothers, Inc. Corporate Bond $ 2,639,323
Morgan Stanley & Co., Inc. Commercial Mortgage-Backed Security 1,063,281
PaineWebber Jackson & Curtis, Inc. Corporate Bond 5,004,177
HSBC Securities Corporate Bond 7,852,743
Merrill Lynch & Co. Corporate Bond 8,250,862
Merrill Lynch & Co. Commercial Mortgage-Backed Security 12,884,829
Large Cap Value Equity
Morgan Stanley & Co., Inc. Common Stock $ 29,257,111
Mid-Cap Value Equity
Donaldson, Lufkin & Jenrette Securities Corp. Common Stock $ 1,073,437
Select Equity
Morgan Stanley & Co., Inc. Common Stock $ 7,595,781
Balanced
Morgan Stanley & Co., Inc. Common Stock $ 4,941,312
Salomon Brothers, Inc. Mortgage Pass-Through 1,593,589
Salomon Brothers, Inc. Corporate Bond 316,719
PaineWebber Jackson & Curtis, Inc. Corporate Bond 1,051,684
Merrill Lynch & Co. Corporate Bond 1,006,203
Merrill Lynch & Co. Commercial Mortgage-Backed Security 2,015,045
</TABLE>
PURCHASE AND REDEMPTION INFORMATION
Institutional Shares of the Portfolio are sold at the net asset value per
share next determined after a purchase order is received.
The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption or repurchase of the
Portfolio's shares by making payment in whole or in part in securities chosen by
the Fund and valued in the same way as they would be valued for purposes of
computing the Portfolio's net asset value. If payment is made in securities, a
shareholder may incur transaction costs in converting these securities into
cash. The Fund has elected, however, to be governed by Rule 18f-1 under the 1940
Act so that the Portfolio is obligated to redeem its shares solely in cash up to
the lesser
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of $250,000 or 1% of its net asset value during any 90-day period for any one
shareholder of the Portfolio.
Under the 1940 Act, the Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Portfolio
may also suspend or postpone the recordation of the transfer of its shares upon
the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectus, the Fund may
redeem shares involuntarily to reimburse the Portfolio for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any charge relating to a transaction effected
for the benefit of a shareholder as provided in the Prospectus from time to
time.
VALUATION OF PORTFOLIO SECURITIES
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use, without limitation, a
matrix or formula method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. This may result in the securities
being valued at a price different from the price that would have been determined
had the matrix or formula method not been used. All cash, receivables and
current payables are carried on the Fund's books at their face value. Other
assets, if any, are valued at fair value as determined in good faith under the
supervision of the Board of Trustees.
PERFORMANCE INFORMATION
TOTAL RETURN. For purposes of quoting and comparing the performance of
shares of the Portfolio to the performance of other mutual funds and to stock or
other relevant indexes in advertisements, sales literature, communications to
shareholders and other materials, performance may be stated in terms of total
return. Under the rules of the SEC, funds advertising performance must include
total return quotes calculated according to the following formula:
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<PAGE>
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
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.
The total returns for the Portfolio include performance information for the
Predecessor Portfolio for periods prior to April 26, 1996, the date on which the
assets and liabilities of the Predecessor Portfolio were transferred to the
Portfolio. Based on the foregoing, the total returns for the Portfolio were as
follows:
<TABLE>
<CAPTION>
AGGREGATE TOTAL AVERAGE ANNUAL
RETURN TOTAL RETURN
--------------- --------------
<S> <C>
FOR THE
TWELVE MONTHS FROM COMMENCEMENT
ENDED OF OPERATIONS TO
9/30/97 9/30/97/(1)/
12.67% 39.54%
</TABLE>
__________________
/(1)/ Predecessor Portfolio commenced investment operations on October
6, 1994.
The Portfolio 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 the Portfolio's shares with other
performance measures. For example, in comparing the total return of the
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance
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<PAGE>
of the Salomon Broad Investment Grade Index, as appropriate, the Portfolio may
calculate the aggregate total return for its shares for the period of time
specified in the advertisement or communication by assuming the investment of
$10,000 in the Portfolio's shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder by the beginning value.
In addition to average annual total returns, the 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. Total
returns, yields, and other performance information may be quoted numerically or
in a table, graph or similar illustration.
YIELD. The Portfolio may advertise its yield on its Institutional Shares.
Under the rules of the SEC, the Portfolio must calculate yield using the
following formula:
a-b
YIELD = 2[(----- +1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the Portfolio is recognized by accruing 1/360th of the stated dividend rate
of the security each
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<PAGE>
day that the security is in the Portfolio. Except as noted below, interest
earned on any debt obligations held by the Portfolio is calculated by computing
the yield to maturity of each obligation held by the Portfolio based on the
market value of the obligation (including actual accrued interest) at the close
of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held by the Portfolio. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date.
With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) the
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
dividend shortly thereafter.
The annualized yield for the 30-day period ended September 30, 1997 for the
Portfolio was 7.31%.
OTHER INFORMATION REGARDING INVESTMENT RETURNS. In addition to providing
performance information that demonstrates the total return or yield of
Institutional Shares of the Portfolio over a specified period of time, the Fund
may provide certain other
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<PAGE>
information demonstrating hypothetical investment returns. Such information may
include, but is not limited to, illustrating the compounding effects of a
dividend in a dividend reinvestment plan.
MISCELLANEOUS. Performance information for the Portfolio assumes the
reinvestment of dividends and distributions. Performance information may
reflect fee waivers that subsidize and reduce the total operating expenses of
the Portfolio. In these cases, the Portfolio's return would be lower if there
were not such waivers.
Yield on shares of the Portfolio will fluctuate daily and does not provide
a basis for determining future yield. Because yield will fluctuate, it cannot
be compared with yields on savings account or other investment alternatives that
provide an agreed to or guaranteed fixed yield for a stated period of time. In
comparing the yield of one fund to another, consideration should be given to
each fund's investment policies, including the types of investments made,
lengths of maturities of the portfolio securities, and whether there are any
special account charges which may reduce the effective yield. The fees which
may be imposed by authorized dealers and other institutions on their customers
are not reflected in the calculations of total returns or yields for the
Portfolio.
As stated above, the Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on an investment in
the Portfolio are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of the Portfolio would increase the value,
not only of the original investment in the Portfolio, but also of the additional
Portfolio shares received through reinvestment. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor, investment management techniques, policies or investment suitability
of the Portfolio, economic conditions, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of the Portfolio), as well as the
views of BlackRock as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to the Portfolio. The Fund may
also include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury
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<PAGE>
bills and shares of the Portfolio. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in the Portfolio. Such advertisements or communications
may include symbols, headlines or other material which highlight or summarize
the information discussed in more detail therein.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussion here and in
the Prospectuses is not intended as a substitute for careful tax planning.
Investors are urged to consult their tax advisers with specific reference to
their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Portfolio generally is exempt
from federal income tax on its net investment income (i.e., its investment
company taxable income as that term is defined in the Code without regard to the
deduction for dividends paid) and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
shareholders, provided that it distributes an amount equal to at least 90% of
its net investment income (the "Distribution Requirement") and satisfies certain
other requirements of the Code that are described below. Distributions of net
investment income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, the Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investment in such stock,
securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of the Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
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<PAGE>
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of the Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Distributions of net investment income will be taxable to shareholders as
ordinary income, regardless of whether such distributions are paid in cash or
are reinvested in shares. Shareholders receiving any taxable distribution from
the Portfolio in the form of additional shares will be treated as receiving a
taxable distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date.
The Portfolio intends to distribute to shareholders any of its net capital
gain for each taxable year. Net capital gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless of
the length of time the shareholder has held his shares, whether net capital gain
was recognized by the Portfolio prior to the date on which a shareholder
acquired shares of the Portfolio and whether the distribution was paid in cash
or reinvested in shares.
It is expected that distributions from the Portfolio will generally not
qualify for the "dividends received" deduction for corporate shareholders.
Ordinary income of individuals will be taxable at a maximum marginal rate
of 39.6%, but because of limitations on itemized deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate of
tax for some taxpayers may be higher. Under recently enacted legislation, long-
term capital gains of individuals are taxed at a maximum rate of 28% with
respect to capital assets held for more than 12 months but less than 18 months,
and at a maximum rate of 20% with respect to capital assets held for more than
18 months (10% for gains otherwise taxed at 15%). Capital gains and ordinary
income of corporate taxpayers are both taxed at a maximum nominal rate of 35%.
Investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends have been paid with
respect to such shares.
The Portfolio may engage in hedging or derivatives transactions involving
forward contracts, options and futures
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<PAGE>
contracts and short sales. Such transactions will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by the Portfolio (that is, may affect whether gains or
losses are ordinary or capital), accelerate recognition of income of the
Portfolio and defer recognition of certain of the Portfolio's losses. These
rules could therefore affect the character, amount and timing of distributions
to shareholders. In addition, these provisions (1) will require the Portfolio to
"mark-to-market" certain types of positions in its portfolio (that is, treat
them as if they were closed out) and (2) may cause the Portfolio to recognize
income without receiving cash with which to pay dividends or make distributions
in amounts necessary to satisfy the Distribution Requirement and avoid the 4%
excise tax (described below). The Portfolio intends to monitor its transactions,
will make the appropriate tax elections and will make the appropriate entries in
its books and records when it acquires any option, futures contract, forward
contract or hedged investment in order to mitigate the effect of these
rules.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions will be taxable as ordinary dividends to the extent of the
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
prior to the end of the each calendar year to avoid liability for this excise
tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund that he is not subject
to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Portfolio each year.
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<PAGE>
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although the Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of the Fund have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Fund's outstanding shares (irrespective of
Portfolio or class) may elect all of the trustees. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees will continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund will be called by the trustees upon the
written request of shareholders owning at least 10% of the outstanding shares
entitled to vote.
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
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<PAGE>
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 the 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 the Portfolio. The underlying assets
of the Portfolio will be segregated on the books of account, and will be charged
with the liabilities in respect to the Portfolio and with a share of the general
liabilities of the Fund.
The Funds' Declaration of Trust authorizes the Board of Trustees, without
shareholder approval (unless otherwise required by applicable law), to: (i)
sell and convey the assets belonging to a class of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
class to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (ii) sell and convert the
assets belonging to one or more classes of shares into money and, in connection
therewith, to cause all outstanding shares of such class to be redeemed at their
net asset value; or (iii) combine the assets belonging to a class of shares with
the assets belonging to one or more other classes of shares if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such class to be redeemed or converted into shares of another class of shares at
their net asset value. The Board of Trustees may authorize the termination of
any class of shares after the assets belonging to such class have been
distributed to its shareholders.
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<PAGE>
MISCELLANEOUS
Effective January 31, 1998, the Fund has changed its name from Compass
Capital Funds/SM/ to BlackRock Funds/SM/.
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.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, serves as the Fund's independent
accountants.
FIVE PERCENT OWNERS. The name, address and percentage ownership of each
person that on December 31, 1997 owned of record or beneficially 5% or more of
the outstanding shares of the Portfolio was as follows: Ameritech Pension Trust,
c/o Harris Trust & Savings Bank, 111 West Monroe 5W, Chicago, IL 60603,
99.97%.
On January 23, 1998, PNC Bank held of record approximately 77% 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. BlackRock, BlackRock, Inc., PFPC and PNC Bank are
subject to such banking laws and regulations.
BlackRock, BlackRock, Inc., PFPC and PNC Bank believe they may perform the
services for the Fund contemplated by their respective agreements with the Fund
without violation of applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether bank and non-bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by
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<PAGE>
these companies, and future changes in either Federal or state statutes and
regulations relating to permissible activities of banks and their subsidiaries
or affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
these companies from continuing to perform such services for the Fund. If such
were to occur, it is expected that the Board of Trustees would recommend that
the Fund enter into new agreements or would consider the possible termination of
the Fund. Any new advisory or sub-advisory agreement would be subject to
shareholder approval.
SHAREHOLDER APPROVALS. As used in this Statement of Additional Information
and in the Prospectus, a "majority of the outstanding shares" means, with
respect to the approval of the Portfolio's investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the lesser of
(1) 67% of the shares of the Portfolio represented at a meeting at which the
holders of more than 50% of the outstanding shares of the Portfolio are present
in person or by proxy, or (2) more than 50% of the outstanding shares of the
Portfolio.
FINANCIAL STATEMENTS
The audited financial statements for the Portfolio contained in its Annual
Report to Shareholders for the period ended September 30, 1997 (the "1997 Annual
Report") are incorporated by reference in this Statement of Additional
Information. No other parts of the 1997 Annual Report are incorporated by
reference herein. The financial statements included in the 1997 Annual Report
have been audited by the Fund's independent accountant, Coopers & Lybrand
L.L.P., except for the financial statements and financial highlights covering
the periods ended March 31, 1996 and June 30, 1995 which have been audited by
other auditors. The reports of Coopers & Lybrand L.L.P. are incorporated herein
by reference. Such financial statements have been incorporated herein in
reliance upon such reports given upon their authority as experts in accounting
and auditing. Additional copies of the Annual Report may be obtained at no
charge by telephoning the Distributor at the telephone number appearing on the
front page of this Statement of Additional Information.
The financial statements included in the 1997 Annual Report for the period
from October 6, 1994 through June 30, 1995 and for the nine month period ended
March 31, 1996 have been audited by the former independent accountants of the
Predecessor Portfolio, Deloitte & Touche, L.L.P., whose report thereon is also
incorporated herein by reference. Such financial statements have been
incorporated herein by reference in reliance on the
-41-
<PAGE>
reports of Coopers & Lybrand L.L.P. and Deloitte & Touche, L.L.P. given upon
their authority as experts in accounting and auditing.
-42-
<PAGE>
COMPASS CAPITAL FUNDS(SM)/BLACKROCK FUNDS(SM)
EQUITY PORTFOLIOS, BOND PORTFOLIOS,
MONEY MARKET PORTFOLIOS,
MICRO-CAP EQUITY PORTFOLIO,
BLACKROCK STRATEGIC PORTFOLIO I,
BLACKROCK STRATEGIC PORTFOLIO II AND
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
SUPPLEMENT TO PROSPECTUSES AND
STATEMENTS OF ADDITIONAL INFORMATION
DATED JANUARY 28, 1998
Effective January 31, 1998, Compass Capital Funds(SM) will change its
name to BlackRock Funds(SM). Until January 31, 1998, all references in the
accompanying prospectus or statement of additional information to "BlackRock
Funds" should be read as referring to "Compass Capital Funds".
In addition, effective January 31, 1998, PNC Asset Management Group,
Inc., the investment adviser to each of the Equity, Bond and Money Market
Portfolios of the Fund and the co-administrator of each Portfolio of the Fund,
will change its name to BlackRock, Inc. Until January 31, 1998, all references
in the accompanying prospectus or statement of additional information to
"BlackRock, Inc." should be read as referring to "PNC Asset Management Group,
Inc."
Finally, effective January 31, 1998, Compass Distributors, Inc., the
distributor of the shares of each Portfolio of the Fund, will change its name to
BlackRock Distributors, Inc. Until January 31, 1998, all references in the
accompanying prospectus or statement of additional information to "BlackRock
Distributors, Inc." should be read as referring to "Compass Distributors, Inc."
This supplement is dated January 28, 1998.
<PAGE>
COMPASS CAPITAL FUNDS/SM/
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:
(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, Mid-Cap Value Equity,
Mid-Cap Growth Equity, Small Cap Value Equity,
Small Cap Growth Equity, International Equity,
International Small Cap 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,
1997, 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 fiscal years or periods ended September
30, 1997, 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 fiscal
years or periods ended September 30, 1997,
September 30, 1996 and March 31, 1996, and for
the fiscal years ended June 30, 1995, June 30,
1994 and June 30, 1993.
<PAGE>
(iv) Audited Financial Highlights for the Multi-
Sector Mortgage Securities Portfolio III for the
fiscal years or periods ended September 30,
1997, September 30, 1996, March 31, 1996 and
June 30, 1995.
(2) Incorporated by reference into Part B of the
Registration Statement are the following audited
financial statements:
(i) With respect to the Money Market, U.S. Treasury
Money Market, Municipal Money Market, Ohio
Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money
Market, New Jersey Municipal Money Market and
Virginia Municipal Money Market Portfolios:
Report of Independent Accountants for the
year ended September 30, 1997;
Statements of Net Assets - September 30,
1997;
Statements of Operations for the year ended
September 30, 1997;
Statements of Changes in Net Assets for the
years ended September 30, 1997 and 1996;
Financial Highlights;
Notes to Financial Statements.
(ii) With respect to the Large Cap Value Equity,
Large Cap Growth Equity, Mid-Cap Value Equity,
Mid-Cap Growth Equity, Small Cap Growth Equity,
Select Equity, Index Equity, Small Cap Value
Equity, International Equity, International
Small Cap Equity, International Emerging Markets
and Balanced Portfolios:
Report of Independent Accountants for the
year or period ended September 30, 1997;
Statements of Net Assets - September 30,
1997;
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<PAGE>
Statements of Operations for the year or
period ended September 30, 1997;
Statements of Changes in Net Assets for the
years or periods ended September 30, 1997 and
1996;
Financial Highlights;
Notes to Financial Statements.
(iii) With respect to the Managed Income, Tax-Free
Income, Intermediate Government Bond, 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 year ended September
30, 1997;
Schedules of Investments and Statements of
Assets and Liabilities with respect to the
International Bond and Tax-Free Income
Portfolios - September 30, 1997;
Statements of Net Assets (all Portfolios
except International Bond and Tax-Free Income
Portfolios)- September 30, 1997;
Statements of Operations for the year ended
September 30, 1997;
Statement of Cash Flows with respect to the
Government Income Portfolio for the year
ended September 30, 1997;
Statements of Changes in Net Assets for the
years or periods ended September 30, 1997 and
1996 and for the periods ended March 31, 1996
for the Low Duration Bond (formerly the Short
Government Bond) Portfolio and the Core Bond
Portfolio and January 31, 1996 for the
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<PAGE>
International Bond and New Jersey Tax-Free
Income Portfolios;
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:
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 Multi-Sector Mortgage
Securities Portfolio III:
Report of Independent Accountants (Coopers &
Lybrand L.L.P.) for the year ended September 30,
1997;
Schedule of Investments - September 30,
1997;
Statement of Assets and Liabilities -
September 30, 1997;
Statement of Operations for the year ended
September 30, 1997;
Statement of Changes in Net Assets for the
year ended September 30, 1997 and the periods
ended September 30, 1996 and March 31,
1996;
Financial highlights for all periods
presented;
Notes to Financial Statements.
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<PAGE>
(vi) 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:
(i) With respect to The U.S. Large Company Series of
The DFA Investment Trust Company:
Statements of Net Assets - September 30,
1997;
Statements of Operations for the ten months
ended September 30, 1997;
Statements of Changes in Net Assets for the
ten months ended September 30, 1997;
Financial Highlights;
Notes to Financial Statements.
(b) Exhibits:
(1) (a) Declaration of Trust of the Registrant dated
December 22, 1988.
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<PAGE>
(b) Amendment No. 1 to Declaration of Trust dated
May 4, 1989.
(c) Amendment No. 2 to the Declaration of Trust
dated December 23, 1993.
(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").
(e) Amendment No. 4 to the Declaration of Trust dated
December 23, 1997.
(2) Registrant's Code of Regulations.
(3) None.
(4) Sections V, VIII and IX of Registrant's
Declaration of Trust dated December 22, 1988 are
incorporated herein by reference to Exhibit 1(a)
filed herewith; Article II of Registrant's Code
of Regulations is incorporated herein by
reference to Exhibit 2 filed herewith.
(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
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<PAGE>
Mid-Cap Growth Equity Portfolios is incorporated
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) 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.
(g) 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 (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 PNC Equity Advisors
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<PAGE>
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.
(i) 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.
(j) 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.
(k) 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.
(l) Sub-Advisory Agreement between PNC Asset
Management Group, Inc. and Provident Capital
Management, Inc. with respect to the Mid-Cap
Value Equity Portfolio is incorporated 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.
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<PAGE>
(m) 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.
(n) 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.
(o) 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.
(p) Form of Addendum No. 3 to Investment Advisory
Agreement between Registrant and PNC Asset
Management Group, Inc. with respect to the Micro-
Cap Equity Portfolio, GNMA Portfolio, Delaware
Tax-Free Income Portfolio and Kentucky Tax-Free
Income Portfolio.
(q) 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.
(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.
C-9
<PAGE>
(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.
(b) Amendment No. 1 to Custodian Agreement between
Registrant and PNC Bank, National
Association.
(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.
(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 Custody Agreement between Barclays Bank
PLC and PNC Bank, National Association dated
October 28, 1992.
(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,
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<PAGE>
National Association dated November 21, 1989 is
incorporated herein by reference to Exhibit 8(f)
of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A
filed on January 18, 1995.
(i) 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.
(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) Form of Amended and Restated Administration
Agreement among Registrant, Compass Distributors,
Inc. and PFPC Inc. is incorporated herein by
reference
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<PAGE>
to Exhibit 9(d) of Post-Effective Amendment No.
27 to Registrant's Registration Statement on Form
N-1A filed on January 28, 1997.
(b) Forms of Appendix A and Appendix B to Amended and
Restated Administration Agreement between
Registrant, Compass Distributors, Inc. and PFPC
Inc.
(c) Form of Co-Administration Agreement between
Registrant and BlackRock, Inc.
(d) Form of Appendix A to Co-Administration Agreement
between Registrant and BlackRock, Inc. is
incorporated herein by reference to Exhibit 9(c)
hereof.
(e) Transfer Agency Agreement dated October 4, 1989
between Registrant and PFPC Inc.
(f) Amendment No. 1 to Transfer Agency Agreement
dated October 4, 1989 between Registrant and PFPC
Inc. relating to the Tax-Free Income
Portfolio.
(g) Amendment No. 2 to Transfer Agency Agreement
dated October 4, 1989 between Registrant and PFPC
Inc. relating to the Pennsylvania Municipal Money
Market, Ohio Municipal Money Market, Intermediate
Government, Ohio Tax-Free Income, Pennsylvania
Tax-Free Income, Large Cap Value Equity, Index
Equity and Small Cap Value Equity
Portfolios.
(h) Amendment No. 3 to Transfer Agency Agreement
dated October 4, 1989 between Registrant and PFPC
Inc. relating to the Short-Term Bond,
Intermediate-Term Bond, Core Equity, Small Cap
Growth Equity and North Carolina Municipal Money
Market Portfolios.
(i) Amendment No. 4 to Transfer Agency Agreement
dated October 4, 1989 between Registrant and PFPC
Inc. relating to Series B Investor Shares of the
Money Market, Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, 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
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<PAGE>
Income, Government Income, International Emerging
Markets, International Equity and Balanced
Portfolios.
(j) Form of Appendix C to Transfer Agency Agreement
between Registrant and PFPC Inc.
(k) 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) Opinion and Consent of Counsel.
(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.
(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,
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<PAGE>
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.
(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.
(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.
(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;
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<PAGE>
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 to
Registrant's Registration Statement on Form N-1A
filed on October 18, 1996.
(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-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.
(n) Form of Purchase Agreement between Registrant and
Compass Distributors, Inc. relating to Shares of
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
C-15
<PAGE>
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.
(17) Financial Data Schedules are filed herewith.
(18) Plan Pursuant to 18f-3 for Operation of a Multi-
Class Distribution System is incorporated herein
by reference to Exhibit (18) of Post-Effective
Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.
(24) (a) Registrant's Annual Reports for the Money Market,
Equity and Bond Portfolios, each dated September
30, 1997, are incorporated herein by reference to
Registrant's filings including such Annual
Reports filed on December 5, 1997 with respect to
the Money Market Portfolios (Accession No.
0000935069-97-000209), and December 9, 1997 with
respect to the Equity and Bond Portfolios
(Accession Nos. 0000935069-97-000210 and
0000935069-97-000211).
(b) Registrant's Annual Report for the Multi-Sector
Mortgage Securities Portfolio III, dated
September 30, 1997, is incorporated herein by
reference to Registrant's filing including such
Annual Report filed on November 26, 1997
(Accession No. 0000930413-97-000628).
(c) 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-16
<PAGE>
(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.
(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.
C-17
<PAGE>
Item 26. Number of Holders of Securities
C-18
<PAGE>
With regard to the classes of shares of the Registrant, the following
information is as of December 31, 1997:
<TABLE>
<CAPTION>
Portfolio Institutional Service Investor A Investor B Investor C
- --------- ------------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Money Market 18 708 832 30 1
US Treasury Money Market 3 200 84 1 1
Municipal Money Market 2 63 8 1 2
Ohio Municipal Money Market 8 3 4 1 1
Pennsylvania Municipal Money Market 24 44 46 1 1
North Carolina Municipal 13 5 8 1 1
Money Market
New Jersey Municipal Money Market 9 113 21 1 1
Virginia Municipal Money Market 10 2 3 0 0
Managed Income 29 11 259 65 0
Tax-Free Income 10 121 139 54 2
Ohio Tax-Free Income 3 2 27 21 0
Pennsylvania Tax-Free Income 1 116 337 415 1
New Jersey Tax-Free Income 0 1,506 18 24 1
Low Duration Bond 28 953 62 5 2
Low Duration Bond/BlackRock Class 8 N/A N/A N/A N/A
Intermediate Bond 8 442 44 0 0
Core Bond 37 1,516 39 532 9
Core Bond/BlackRock Class 7 N/A N/A N/A N/A
Intermediate Government 13 3 152 4 1
Government Income 0 0 72 926 9
International Bond 6 92 62 92 36
International Emerging Markets 16 15 170 416 4
Large Cap Growth Equity 35 603 583 1,015 5
Index Equity 22 161 725 2,434 629
Small Cap Value Equity 56 13 814 1,639 71
International Equity 30 551 608 1,176 7
International Small Cap Equity 6 6 21 125 4
Balanced 14 123 1,674 2,601 5
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
Portfolio Institutional Service Investor A Investor B Investor C
- --------- ------------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Large Cap Value Equity 21 4,091 768 2,593 6
Small Cap Growth Equity 162 437 1,350 4,354 384
Select Equity 32 9 264 2,713 14
Mid-Cap Value Equity 10 14 60 844 6
Mid-Cap Growth Equity 14 6 39 616 14
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
BlackRock Distributors, Inc. in their capacity as co-administrators is provided
for in Section 7 of the Amended and Restated Administration Agreement
incorporated by reference herein as Exhibit 9(a). Indemnification of
Registrant's Custodian and Transfer Agent is provided for, respectively, in
Section 22 of the Custodian Agreement incorporated by reference herein as
Exhibit 8(a) and Section 17 of the Transfer Agency Agreement incorporated by
reference herein as Exhibit 9(e). Indemnification of BlackRock, Inc. in its
capacity as co-administrator as provided for in Section 7 of the Co-
Administration Agreement incorporated by reference herein as Exhibit 9(c).
Registrant intends to obtain from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions. In
addition, Section 9.3 of the Registrant's Declaration of Trust incorporated by
reference herein as Exhibit 1(a) provides as follows:
Indemnification of Trustees, Officers, Representatives and Employees.
--------------------------------------------------------------------
The Trust shall indemnify each of its Trustees against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be involved or
with which he may be threatened, while as a Trustee or thereafter, by reason
of his being or having been such a Trustee except with respect to any matter
------
as to which he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties,
provided that as to any matter disposed of by a compromise payment by such
--------
person, pursuant to a consent decree or otherwise, no indemnification either
for said payment or for 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
C-20
<PAGE>
matter of bad faith had been adjudicated, it would in the opinion of such
counsel have been adjudicated in favor of such person. The rights accruing
to any person under these provisions shall not exclude any other right to
which he may be lawfully entitled, provided that no person may satisfy any
--------
right of indemnity or reimbursement hereunder except out of the property of
the Trust. The Trustees may make advance payments in connection with the
indemnification under this Section 9.3, provided that the indemnified person
--------
shall have given a written undertaking to reimburse the Trust in the event
it is subsequently determined that he is not entitled to such
indemnification.
The Trustee shall indemnify officers, representatives and employees of
the Trust to the same extent that Trustees are entitled to indemnification
pursuant to this Section 9.3.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Section 9.6 of the Registrant's Declaration of Trust, filed herein as
Exhibit 1(a), also provides for the indemnification of shareholders of the
Registrant. Section 9.6 states as follows:
Indemnification of Shareholders. In case any Shareholder or former
-------------------------------
Shareholder shall be held to be personally liable solely by reason of his
being or having 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.
C-21
<PAGE>
Item 28. Business and Other Connections of Investment Advisers
(a) BlackRock, Inc. (formerly PNC Asset Management Group, Inc.) is an
indirect wholly-owned subsidiary for PNC Bank Corp. BlackRock, Inc. 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
BlackRock, Inc., 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, Inc. 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 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).
C-22
<PAGE>
(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 BlackRock Distributors, Inc. (formerly Compass
Distributors, Inc.) is incorporated by reference to Schedule A of FORM BD filed
by BlackRock 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).
(3) BlackRock Distributors, Inc., Four Falls Corporate Center,
6th Floor, West Conshohocken, PA 19428-2961 (records
relating to its functions as distributor and co-
administrator).
(4) BlackRock, Inc., 1600 Market Street, 29th Floor,
Philadelphia, PA 19103 (records relating to its functions
as investment adviser and co-administrator).
(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).
C-23
<PAGE>
(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) CastleInternational Asset Management Limited, 7 Castle
Street, Edinburgh, Scotland, EH2 3AH (records relating to
its functions as investment sub-adviser).
(13) Citibank, N.A., 111 Wall Street, 23rd Floor, Zone 6, New
York, NY 10043 (records relating to its functions as sub-
custodian).
(14) 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.
C-24
<PAGE>
(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. 33 to Registrant's 1933 Act Registration
Statement relating to shares of the Micro-Cap Equity Portfolio and
BlackRock Shares of the Intermediate Bond Portfolio, or the initial
public offering thereof, whichever is later.
C-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 33 to
its Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment No. 33 to its
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of New York and the State of New York on the 27th
day of January, 1998.
COMPASS CAPITAL FUNDS/SM/
Registrant
Raymond J. Clark
By___________________________________
Raymond J. Clark,
President and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 33 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Raymond J. Clark Trustee, President and January 27, 1998
____________________________________ Treasurer
(Raymond J. Clark)
/s/ David R. Wilmerding, Jr. Chairman of the Board January 27, 1998
____________________________________
(David R. Wilmerding, Jr.)
/s/ Anthony M. Santomero Vice-Chairman of the Board January 27, 1998
____________________________________
(Anthony M. Santomero)
/s/ William O. Albertini Trustee January 27, 1998
____________________________________
(William O. Albertini)
/s/ Robert M. Hernandez Trustee January 27, 1998
____________________________________
(Robert M. Hernandez)
</TABLE>
C-26
<PAGE>
SIGNATURES
As it relates to the Index Equity Portfolio only, The DFA Investment
Trust Company consents to the filing of this Amendment to the Registration
Statement of Compass Capital Funds which is signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Monica and the
State of California on this 27th day of January, 1998.
THE DFA INVESTMENT TRUST COMPANY
* David G. Booth
--------------------------------
David G. Booth
President and Chairman-Chief
Executive Officer
The undersigned Trustees and Principal Officers of The DFA Investment
Trust Company consent to the filing of this Amendment to the Registration
Statement of Compass Capital Funds as it relates to the Index Equity Portfolio
only, on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* David G. Booth President, Chairman - January 27, 1998
- ---------------------------- Chief Executive Officer
David G. Booth and Trustee
* Rex A. Sinquefield Chairman - Chief January 27, 1998
- ---------------------------- Investment Officer
Rex A. Sinquefield and Trustee
* George M. Constantinides January 27, 1998
- ---------------------------- Trustee
George M. Constantinides
* John P. Gould Trustee January 27, 1998
- ----------------------------
John P. Gould
* Roger G. Ibbotson Trustee January 27, 1998
- ----------------------------
Roger G. Ibbotson
* Merton H. Miller Trustee January 27, 1998
- ----------------------------
Merton H. Miller
* Myron S. Scholes Trustee January 27, 1998
- ----------------------------
Myron S. Scholes
* Michael T. Scardina Vice President, Chief January 27, 1998
- ----------------------------
Michael T. Scardina Financial Officer,
Controller and Treasurer
</TABLE>
*By: /s/ Irene R. Diamant
--------------------
Irene R. Diamant
Attorney-in-fact
C-27
<PAGE>
THE DFA INVESTMENT TRUST COMPANY
POWER OF ATTORNEY
-----------------
The undersigned officers and trustees of THE DFA INVESTMENT TRUST
COMPANY (the "Fund") hereby appoint DAVID G. BOOTH, REX A. SINQUEFIELD, MICHAEL
T. SCARDINA, IRENE R. DIAMANT, CATHERINE L. NEWELL and STEPHEN W. KLINE, ESQUIRE
(with full power to any of them to act) as attorney-in-fact and agent, in all
capacities, to execute, and to file any of the documents referred to below
relating to a Registration Statement under the Securities Act of 1933 and/or the
Investment Company Act of 1940, including any and all amendments thereto,
covering the registration of any registered investment company for which any
Series of the Fund serves as a master fund in a master fund-feeder fund
structure, including all exhibits and any and all documents required to be filed
with respect thereto with any regulatory authority. Each of the undersigned
grants to each of said attorneys full authority to do every act necessary to be
done in order to effectuate the same as fully, to all intents and purposes, as
he could do if personally present, thereby ratifying all that said attorneys-in-
fact and agents may lawfully do or cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of
Attorney as of the 18th day of July, 1997.
/s/ David G. Booth /s/ Rex A. Sinquefield
- -------------------------------------- -------------------------------------
David G. Booth, Rex A. Sinquefield, Chairman-Chief
Chairman-Chief Executive Investment Officer and Trustee
Officer, President and Trustee
/s/ George M. Constantinides /s/ John P. Gould
- -------------------------------------- -------------------------------------
George M. Constantinides John P. Gould, Trustee
Trustee
/s/ Roger G. Ibbotson /s/ Merton H. Miller
- -------------------------------------- -------------------------------------
Roger G. Ibbotson, Trustee Merton H. Miller, Trustee
/s/ Myron S. Scholes /s/ Michael T. Scardina
- -------------------------------------- -------------------------------------
Myron S. Scholes, Trustee Michael T. Scardina, Chief Financial
Officer, Treasurer and Vice President
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
1(a) Declaration of Trust.
1(b) Amendment No. 1 to the Declaration of Trust.
1(c) Amendment No. 2 to the Declaration of Trust.
1(e) Amendment No. 4 to the Declaration of Trust.
2 Code of Regulations.
5(p) Form of Addendum No. 3 to Investment Advisory
Agreement between Registrant and PNC Asset
Management Group, Inc. with respect to the
Micro-Cap Equity, GNMA, Kentucky Tax-Free
Income and Delaware Tax-Free Income Portfolios.
5(q) 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 dated January 31, 1994 between Registrant
and Compass Distributors, Inc.
6(b) Form of Appendix A to the Distribution
Agreement between Registrant and Compass
Distributors, Inc.
6(c) Amendment No. 2 to the Distribution Agreement.
8(a) Custodian Agreement dated October 4, 1989 between Registrant and
PNC Bank, National Association.
8(b) Amendment No. 1 to the Custodian Agreement.
8(c) Amendment No. 2 to the Custodian Agreement.
8(d) Form of Appendix B to the Custodian Agreement
between Registrant and PNC Bank,
National Association.
</TABLE>
<PAGE>
2
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
8(f) Global Custody Agreement dated October 28, 1992 between Barclays
Bank PLC and PNC Bank, National Association.
9(b) Forms of Appendix A and Appendix B to the
Amended and Restated Administration Agreement
among Registrant, Compass Distributors, Inc. and
PFPC Inc.
9(c) Form of Co-Administration Agreement between Registrant and
BlackRock, Inc.
9(e) Transfer Agency Agreement dated October 4, 1989 between
Registrant and PFPC Inc.
9(f) Amendment No. 1 to the Transfer Agency Agreement.
9(g) Amendment No. 2 to the Transfer Agency Agreement.
9(h) Amendment No. 3 to the Transfer Agency Agreement.
9(i) Amendment No. 4 to the Transfer Agency Agreement.
9(j) Form of Appendix C to the Transfer Agency Agreement between
Registrant and PFPC Inc.
10 Opinion and Consent of Counsel.
11 Consent of Coopers & Lybrand L.L.P.
13(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.
13(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.
</TABLE>
<PAGE>
3
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
13(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.
13(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
II-5.
13(n) Form of Purchase Agreement between Registrant and Compass
Distributors, Inc. relating to shares of Class S-6.
15(b) Form of Appendix A to Amended and Restated
Distribution and Service Plan.
27 Financial Data Schedules.
</TABLE>
<PAGE>
EXHIBIT 1(a)
DECLARATION
OF
TRUST
OF
NCP FUNDS
<PAGE>
DECLARATION OF TRUST
OF
NCP FUNDS
DECLARATION OF TRUST, made as of December 22, 1988 by Patricia L.
Bickimer and Peter Meenan (the "Trustees"):
WHEREAS, the Trustees desire to establish a trust fund for the
investment and reinvestment of funds contributed thereto;
NOW, THEREFORE, the Trustees declare that all money and property
contributed to the trust fund hereunder shall be held and managed under this
Declaration of Trust as herein set forth below.
I.
NAME
This trust shall be known as NCP FUNDS (hereinafter called the
"Trust"), and the Trustees shall conduct the business of the Trust under that
name or any other name as they shall from time to time determine.
II.
DEFINITIONS
2.1 Definition of Certain Terms. As used in this Declaration of
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Trust, the terms set forth below shall have the following meanings:
A. The "Act" refers to the Investment Company Act of 1940, as now or
hereafter amended, to the rules and regulations adopted from time to time
thereunder and to any order or orders thereunder which may from time to time be
applicable to the Trust.
B. The terms "affiliated person," "assignment" and "interested
person" shall have the respective meanings set forth in the Act. The term "vote
of a majority of outstanding Shares" shall mean the "vote of a majority of the
outstanding voting securities" as defined in the Section 2(a)(42) of the Act.
C. The "Regulations" shall refer to the Code of Regulations of the
Trust as adopted and amended from time to time.
D. The "Declaration of Trust" shall mean this Declaration of Trust
as amended or restated from time to time.
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2
E. "Person" shall mean a natural person, a corporation, a
partnership, an association, a joint-stock company, a trust, a fund or any
organized group of persons whether incorporated or not.
F. "Shares" means the equal proportionate transferable units of
interest of each class into which the beneficial interest in the Trust may be
classified or reclassified from time to time by the Trustees acting under this
Declaration of Trust, or in the absence of such action, means the equal
proportionate transferable units of interest into which the entire beneficial
interest in the Trust shall be divided from time to time, and includes fractions
of Shares as well as whole Shares.
G. "Shareholder" means a record owner of Shares in the Trust.
H. The "Trustees" refers to the individual trustees of the Trust
named herein or elected in accordance with Article 6 hereof in their capacity as
trustees hereunder and not as individuals and to their successor or successors
while serving in office as a trustee of the Trust, and includes a single
trustee.
I. "Trust Property" means any and all assets and property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust or the Trustees.
III.
PURPOSE OF TRUST; AGENT FOR SERVICE
The Trust is a Massachusetts business trust of the type described in
Chapter 182 Section 1 of the General Laws of the Commonwealth of Massachusetts
formed for the purpose of acting as a management investment company under the
Act; provided, however, that the Trust may exercise all powers which are
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ordinarily exercised by or permissible for Massachusetts business trusts.
The Agent of the Trust for Service of Process within the Commonwealth
of Massachusetts shall be: The Boston Company Advisors, Inc., One Exchange
Place, Boston, Massachusetts 02109.
IV.
OWNERSHIP OF ASSETS OF THE TRUST
The assets of the Trust shall be held separate and apart from any
assets now or hereafter held in any capacity, other than as Trustees hereunder,
by the Trustees, including without limitation any successor Trustees. Legal
title to all the assets of the Trust shall be vested in the Trustees as joint
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3
tenants except that the Trustees shall have power to cause legal title to any
assets of the Trust to be held by or in the name of one or more of the Trustees,
or in the name of the Trust, or in the name of any other person as nominee, on
such terms as the Trustees may reasonably determine. The right, title and
interest of the Trustees in the assets of the Trust shall vest automatically in
each person who may hereafter become a Trustee. Upon the resignation, removal or
death of a Trustee, such Trustee shall automatically cease to have any right,
title or interest in any of the assets of the Trust, and the right, title and
interest of such Trustee in the assets of the Trust shall vest automatically in
the remaining Trustees. Such vesting and cessation of title shall be effective
regardless of whether conveyancing documents (pursuant to Section 6.6 hereof or
otherwise) have been executed and delivered. Except to the extent otherwise
required by Article V hereof, no Shareholder shall be deemed to have severable
ownership in any individual asset of the Trust or any right of partition or
possession thereof, or shall be called upon to assume any loss of the Trust nor
can he be called upon to assume any loss of the Trust or suffer an assessment of
any kind by virtue of his ownership of Shares, but each Shareholder shall have a
proportionate undivided beneficial interest in the assets belonging to a
particular class or classes of Shares to the extent provided in Article V. The
ownership of the Trust Property of every description and the right to conduct
any business hereinbefore described shall be vested exclusively in the Trustees,
and the Shareholders shall have no interest therein other than the beneficial
interest conferred by their Shares, and they shall have no right to call for any
partition or division of any property, profits, rights or interests of the Trust
nor can they be called upon to assume any losses of the Trust or suffer an
assessment of any kind by virtue of their ownership of Shares. The Shares shall
be personal property giving only the rights specifically set forth in this
Declaration of Trust. Shares shall not entitle any holder thereof to preference,
preemptive, appraisal, conversion or exchange rights, except as the Trustees may
determine pursuant to Article V hereof.
V.
SHAREHOLDERS; BENEFICIAL INTEREST IN THE TRUST;
PURCHASE AND REDEMPTION OF SHARES
5.1 Shares in the Trust.
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A. The beneficial interest in the Trust shall at all times be
divided into an unlimited number of full and fractional transferable Shares with
a par value of $.001 per share. All Shares shall be of one class, provided that
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subject to this Declaration of Trust and the requirements of applicable law, the
Trustees shall have the power to classify or reclassify any unissued Shares into
any number of additional classes of Shares
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4
by setting or changing in any one or more respects, from time to time before the
issuance thereof, their designations, preferences, conversion or other rights,
voting powers, restrictions, limitations, qualifications or terms or conditions
of redemption, and provided further that the investment objectives, policies and
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restrictions governing the management and operations of the Trust, including the
management of assets belonging to any class of Shares, may from time to time be
changed or supplemented by the Trustees, subject to the requirements of the Act.
The power of the Trustees to classify or reclassify Shares shall include,
without limitation, the power to classify or reclassify any class of Shares into
one or more series of such class. All references to Shares in this Declaration
of Trust which are not accompanied by a reference to any particular class of
Shares shall be deemed to apply to all outstanding Shares of any and all
classes. All references in this Declaration of Trust to any class of Shares
shall include and refer to the Shares of any series thereof.
Upon the issuance of the first Share of a second class of Shares
classified or reclassified by the Trustees pursuant to this Section 5.1, all
Shares theretofore issued and outstanding shall automatically represent Shares
of a separate class having the preferences, conversion and other rights, voting
powers, restrictions, limitations, qualifications and terms and conditions of
redemption provided for in this Declaration of Trust with respect to any class
of Shares. The Trustees may from time to time divide or combine the outstanding
Shares of the Trust, or of any class or classes with the same alphabetical
designation, into a greater or lesser number without thereby changing the
proportionate beneficial interest of the Shares in the Trust as so divided or
combined or in the assets belonging to such class or classes, as the case may
be.
At any time that there are no Shares outstanding of a particular class
previously established and designated, the Trustees may abolish that class and
the establishment and designation thereof.
B. Subject always to the power of the Trustees to classify and
reclassify any unissued Shares pursuant to subsection A of this Section 5.1,
Shares of the Trust shall (unless the Trustees otherwise determine with respect
to a class of Shares at the time of establishing and designating the same) have
the following designations, preferences, conversion and other rights, voting
powers, restrictions, limitations, qualifications and terms and conditions of
redemption:
(1) Designations. The Board of Trustees shall give each class of
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Shares an alphabetical designation ("A," "B," "C," etc.), and may give any class
of Shares such supplementary designations as the Board may deem appropriate.
More than one class of Shares may have the same alphabetical designation.
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(2) Assets Belonging to Classes With Same Alphabetical Designation.
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All consideration received by the Trust for the issue and sale of Shares of any
class shall be commingled, invested and reinvested together with the
consideration received by the Trust for the issue and sale of Shares of such
other class or classes, if any, that have the same alphabetical designation,
along with all income, earnings, profits and proceeds derived from the
investment thereof, including any proceeds derived from the sale, exchange or
liquidation of such investments, any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, and any general
assets of the Trust not belonging to a particular class which the Trustees may,
in their sole discretion, allocate to such classes having the same alphabetical
designation, and shall irrevocably belong to the classes with respect to which
such assets, payments or funds were received or allocated for all purposes,
subject only to the rights of creditors, and shall be so handled upon the books
of account of the Trust. For purposes of this Declaration of Trust, such assets
and the income, earnings, profits and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation thereof, and any assets derived
from any reinvestment of such proceeds in whatever form, are referred to as
"assets belonging to" such classes. Each Share of the classes having the same
alphabetical designation shall share equally with each other Share of such
classes in the assets belonging to such classes. Shareholders of any class of
Shares shall have no right, title or interest in or to the assets belonging to
any class of Shares with a different alphabetical designation.
(3) Liabilities Belonging to Classes With Same Alphabetical
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Designation. The assets belonging to classes or Shares with the same
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alphabetical designation shall be charged with the direct liabilities in respect
of such classes and shall also be charged with such classes' proportionate share
of the general liabilities of the Trust as determined by comparing the assets
belonging to such classes with the aggregate assets of the Trust, provided, that
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the Board of Trustees may, in their discretion, direct that any one or more
general liabilities of the Trust be allocated to such classes on a different
basis. The liabilities so charged to such classes are herein referred to as
"liabilities belonging to, such classes, and each Share of such classes shall be
charged equally with each other Share of a class having the same alphabetical
designation with the liabilities belonging to such classes, except that:
(a) A class of Shares shall bear any expenses and liabilities directly
attributable to such class of Shares which the Trustees determine should be
borne solely by such class, which expenses and liabilities may include, without
limitation, expenses and liabilities incurred in connection with
the distribution of Shares of such class and expenses and liabilities incurred
pursuant to agreements under which institutions agree to provide services with
respect to beneficial
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6
owners of Shares of that class but not with respect to beneficial owners of
Shares of other classes with the same alphabetical designation; and
(b) A class of Shares shall not be required to bear any expenses and
liabilities directly attributable to one or more other classes of Shares which
the Trustees determine should be borne solely by such other class or classes.
(4) Dividends and Distributions. Shares of classes having the same
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alphabetical designation shall be entitled to such dividends and distributions,
in Shares or in cash or both, as may be declared from time to time by the
Trustees, acting in their sole discretion, with respect to such classes,
provided that such dividends and distributions shall be paid only out of the
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lawfully available "assets belonging to" such classes as such term is defined in
subsection B(2) of this Section 5.1.
(5) Liquidating Distributions. In the event of the termination of the
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Trust and the winding up of its affairs, the Shareholders of classes having the
same alphabetical designation shall be entitled to receive out of the assets of
the Trust available for distribution to Shareholders, but other than general
assets not belonging to any particular class of Shares, the assets belonging to
such classes and the assets so distributable to the Shareholders of such classes
shall, subject to the allocation of certain liabilities to a particular class as
set forth in subsection B(3) of this Section 5.1, be distributed among such
shareholders in proportion to the number of Shares of such classes held by them
and recorded in their name on the books of the Trust. In the event that there
are any general assets not belonging to any particular class of Shares and
available for distribution, the Shareholders of classes having the same
alphabetical designation shall be entitled to receive a portion of such general
assets determined by comparing the assets belonging to such classes with the
aggregate assets of the Trust; and the assets so distributable to the
Shareholders of such classes shall, subject to the allocation of certain
liabilities to a particular class as set forth in subsection B(3) of this
Section 5.1, be distributed among such Shareholders in proportion to the number
of Shares of such classes held by them and recorded in their name on the books
of the Trust.
(6) Voting. The holder of each Share shall be entitled to one vote
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for each full Share, and a proportionate fractional vote for each fractional
Share, irrespective of the class, then recorded in his name on the books of the
Trust, to the extent provided in Article VIII hereof.
(7) Pre-emptive Rights. Shareholders shall have no pre-emptive or
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other rights to subscribe to any additional Shares or other securities issued by
the Trust.
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(8) Conversion Rights. The Trustees shall have the authority to
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provide from time to time that the holders of Shares of any class shall have the
right to convert or exchange said Shares for or into Shares of one or more other
classes in accordance with such requirements and procedures as may be
established from time to time by the Trustees.
(9) Redemption of Shares. To the extent of the assets of the Trust
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legally available for such redemptions, a Shareholder of the Trust shall have
the right to require the Trust to redeem his full and fractional Shares of any
class out of assets belonging to the classes with the same alphabetical
designation as such class at a redemption price equal to the net asset value per
Share next determined after receipt of a request to redeem in proper form as
determined by the Trustees, subject to the right of the Trustees to suspend the
right of redemption of Shares or postpone the date of payment of such redemption
price in accordance with the provisions of applicable law. The Trustees shall
establish such rules and procedures as they deem appropriate for the redemption
of Shares, provided that all redemptions shall be in accordance with the Act.
Without limiting the generality of the foregoing, the Trust shall, to the extent
permitted by applicable law, have the right at any time to redeem the Shares
owned by any holder thereof: (a) in connection with the termination of any
class of Shares as provided hereunder; (b) if the value of such Shares in the
account or accounts maintained by the Trust or its transfer agent for any class
or classes of Shares is less than the value determined from time to time by the
Trustees as the minimum required for an account or accounts of such class or
classes, provided that the Trust shall provide a Shareholder with written notice
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at least fifteen (15) days prior to effecting a redemption of Shares as a result
of not satisfying such requirement; (c) to reimburse the Trust for any loss it
has sustained by reason of the failure of such Shareholder to make full payment
for Shares purchased by the Shareholder; (d) to collect any charge relating to a
transaction effected for the benefit of such Shareholder which is applicable to
Shares as provided in the prospectus relating to such Shares; or (e) if the net
income with respect to any particular class of Shares should be negative or it
should otherwise be appropriate to carry out the Trust's responsibilities under
the Act, in each case subject to such further terms and conditions as the
Trustees may from time to time establish. The redemption price of Shares in the
Trust shall, except as otherwise provided in this subsection, be the net asset
value thereof as determined by the Trustees from time to time in accordance with
the provisions of applicable law, less such redemption fee or other charge, if
any, as may be fixed by the Trustees. When the net income of any class with
respect to which the Trustees have, in their discretion, established a policy of
maintaining a constant net asset value per Share is negative or whenever deemed
appropriate by the Trustees in order to carry out the Trust's responsibilities
under the Act, the Trust may, without payment of compensation but in
consideration of the interests of the Trust
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8
and the holders of Shares of such class in maintaining a constant net
asset value per Share of such class, redeem pro rata from each holder of record
on such day, such number of full and fractional Shares of such class as may be
necessary to reduce the aggregate number of outstanding Shares in order to
permit the net asset value thereof to remain constant. Payment of the
redemption price, if any, shall be made in cash by the Trust at such time and in
such manner as may be determined from time to time by the Trustees unless, in
the opinion of the Trustees, which shall be conclusive, conditions exist which
make payment wholly in cash unwise or undesirable; in such event the Trust may
make payment in the assets belonging or allocable to the classes of Shares
having the same alphabetical designation as the class of the Shares redemption
of which is being sought, the value of which shall be determined as provided
herein.
(10) Termination of Classes. Without the vote of the Shares of any
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class then outstanding (unless otherwise required by applicable law), the
Trustees may:
(a) Sell and convey the assets belonging to any class or classes of
Shares having the same alphabetical designation to another trust or corporation
that is a management investment company (as defined in the Act) and is organized
under the laws of any state of the United States for consideration which may
include the assumption of all outstanding obligations, taxes and other
liabilities, accrued or contingent, belonging to such class(es) and which may
include securities issued by such trust or corporation. Following such sale and
conveyance, and after making provision for the payment of any liabilities
belonging to such class(es) that are not assumed by the purchaser of the assets
belonging to such class(es), the Trust may, at the Trustees' option, redeem all
outstanding Shares of such class(es) at net asset value as determined by the
Trustees in accordance with the provisions of applicable law, less such
redemption fee or other charge, if any, as may be fixed by the Trustees.
Notwithstanding any other provision of this Declaration of Trust to the
contrary, the redemption price may be paid in cash or by distribution of the
securities or other consideration received by the Trust for the assets belonging
to such class(es) upon such conditions as the Trustees deem, in their sole
discretion, to be appropriate consistent with applicable law and this
Declaration of Trust;
(b) Sell and convert the assets belonging to any class or classes of
Shares having the same alphabetical designation into money and, after making
provision for the payment of all obligations, taxes and other liabilities,
accrued or contingent, belonging to such class(es), the Trust may, at the
Trustees' option, (i) redeem all outstanding Shares of such
class(es) at net asset value as determined by the Trustees in accordance with
the provisions of applicable law, less such redemption fee or other charge, if
any, as may be fixed by the Trustees upon such conditions as the Trustees deem,
in their sole
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9
discretion, to be appropriate consistent with applicable law and
this Declaration of Trust; or (ii) combine the assets belonging to such
class(es) following such sale and conversion with the assets belonging to any
one or more other class(es) of Shares having a different alphabetical
designation pursuant to and in accordance with subsection (c) of this Section
5.1(B)(10);
(c) Combine the assets belonging to any class or classes of Shares
having the same alphabetical designation with the assets belonging to any one or
more other classes of Shares having a different alphabetical designation if the
Trustees reasonably determine that such combination will not have a material
adverse effect on the Shareholders of any class participating in such
combination. In connection with any such combination of assets the Shares of
any class then outstanding may, if so determined by the Trustees, be converted
into Shares of any other class or classes of Shares participating in such
combination, or may be redeemed, at the option of the Trustees, at net asset
value as determined by the Trustees in accordance with the provisions of
applicable law, less such redemption fee or other charge, or conversion cost, if
any, as may be fixed by the Trustees upon such conditions as the Trustees deem,
in their sole discretion, to be appropriate consistent with applicable law and
this Declaration of Trust. Notwithstanding any other provision of this
Declaration of Trust to the contrary, any redemption price, or part thereof,
paid pursuant to this subsection may be paid in Shares of any other class or
classes participating in such combination; or
(d) Otherwise terminate and wind up the affairs of any class or
classes of Shares having the same alphabetical designation in accordance with
this Declaration of Trust and applicable law. In connection with such
termination of a class or classes of Shares having the same alphabetical
designation and the winding up of the affairs of such class(es), all of the
powers of the Trustees under this Declaration of Trust shall continue until the
affairs of such class(es) shall have been wound up, including the power to
fulfill or discharge the contracts of the Trust relating to such class(es), to
collect assets belonging to such class(es), to sell, convey, assign, exchange,
transfer or otherwise dispose of all or any part of the remaining assets
belonging to such class(es) to one or more persons at public or private sale for
consideration that may consist in whole or in part of cash, securities or other
property of any kind, to discharge or pay the liabilities belonging to such
class(es), and to do all other acts appropriate to liquidate the business of
such class(es), provided that the holders of Shares of any class shall not be
entitled in any liquidation to receive any distribution upon the assets
belonging to any other class that has a different alphabetical designation.
If no Shares of a class then remain outstanding, or after the excess
of the assets belonging to any class(es) of Shares over the liabilities
belonging to such class(es) has been
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10
distributed among the Shareholders of such class(es) as provided in this
Declaration of Trust, the Trustees may authorize the termination of such
class(es) of Shares.
5.2 Purchase of Shares. The Trustees may accept investments in the
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Trust from such persons for such consideration, including cash or property, and
on such other terms as they may from time to time authorize and the Trustees may
in such manner acquire other assets (including the acquisition of assets subject
to, and in connection with, the assumption of liabilities) and businesses. The
Trustees may in their discretion reject any order for the purchase of Shares.
5.3 Net Asset Value Per Share. The net asset value per Share of any
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class of Shares shall be computed at such time or times as the Trustees may
specify pursuant to the Act. Assets shall be valued and net asset value per
Share shall be determined by such person or persons as the Trustees may appoint
under the supervision of the Trustees in such manner as the Trustees may
determine not inconsistent with the Act.
5.4 Ownership of Shares. The ownership of Shares shall be recorded
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on the record books of the Trust. The Trustees may make such rules and
regulations as they consider appropriate for the issuance of Share certificates,
the transfer of Shares and similar matters. Certificates certifying the
ownership of Shares may be issued as the Trustees may determine from time to
time, provided that the Trustees shall have the power to call outstanding Share
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certificates and to replace them with book entries. The record books of the
Trust shall be conclusive as to the identity of holders of Shares and as to the
number of Shares held by each Shareholder.
VI.
THE TRUSTEES
6.1 Management of the Trust. The affairs of the Trust shall be
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managed by the Trustees and they shall have all powers necessary or desirable to
carry out such responsibility, including without limitation the appointment of
and delegation of responsibility to such officers, employees, agents, and
contractors as they may select.
6.2 Number and Term of Office. The number of Trustees shall be
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determined from time to time by the Trustees themselves, but shall not be more
than twenty. Subject to the provisions of this section relating to resignation
or removal, the Trustees shall have the power to set and alter the terms of
office of the Trustees, and they may at any time lengthen or shorten their own
terms or make their terms of unlimited duration, provided that the term of
office of any incumbent Trustee shall continue until terminated as provided in
the concluding sentence of this Section
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6.2 or, if not so terminated until the election of such Trustee's successor in
office has become effective in accordance with this section. A Trustee shall
qualify by accepting in writing his election or appointment and agreeing to be
bound by the provisions of this Declaration of Trust. Except as otherwise
provided herein in the case of vacancies, Trustees (other than the Initial
Trustees provided in Section 6.3 hereof) shall be elected by the Shareholders at
such time or times as the Trustees shall determine that such election is
required under Section 16(a) of the Act or is otherwise advisable.
Notwithstanding the foregoing, (a) any Trustee may resign as a Trustee by
written instrument signed by him and delivered to the other Trustees at the
principal business office of the Trust (without need for prior or subsequent
accounting), which shall take effect upon such delivery or upon such later date
as is specified therein; (b) any Trustee may be removed at any time with or
without cause by written Instrument, signed by a least two-thirds of the number
of Trustees in office prior to such removal, specifying the date when such
removal shall become effective; (c) any Trustee who has become incapacitated by
illness or injury may be retired by written instrument signed by a majority of
the other Trustees; and (d) the term of a Trustee shall terminate at his death,
resignation, removal or adjudicated incompetency.
6.3 Initial Trustees. The initial Trustees shall be Peter Meenan and
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Patricia L. Bickimer, who, by their execution hereof, have each agreed to be
bound by the provisions of this Declaration of Trust. The initial Trustees
shall have the power to appoint additional Trustees prior to any public meeting.
6.4 Quorum. At all meetings of the Trustees, a majority of the
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Trustees shall constitute a quorum for the transaction of business and the
action of a majority of the Trustees present at any meeting at which a quorum is
present shall be the action of the Trustees unless the concurrence of a greater
proportion is required for such action by law, the Regulations or this
Declaration of Trust. If a quorum shall not be present at any meeting of
Trustees, the Trustees present thereat may by a majority vote adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present. Meetings may be held by means of a
conference telephone circuit or similar communications equipment by means of
which all persons participating may hear each other. The Trustees may also act
without a meeting, unless provided otherwise in this Declaration of Trust or
prohibited by law, by written consents of a majority of the Trustees. As used
herein, a "majority of the Trustees" shall mean a majority of the Trustees in
office at the time in question or if there shall be only one (1) Trustee in
office then such term shall mean such Trustee.
The Trustees may appoint committees of Trustees and delegate powers to
them as provided in the Regulations. Any committee of the Trustees, including
an executive committee, if
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any, may act with or without a meeting. A quorum for all meetings of any such
committee shall be a majority of the members thereof. Unless provided otherwise
in this Declaration of Trust, any action of any such committee may be taken at a
meeting by vote of a majority of the members present (a quorum being present) or
without a meeting by unanimous written consent of the members.
6.5 Vacancies. In case a vacancy shall exist by reason of an
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increase in number, or for any other reason, the remaining Trustee or Trustees
may fill such vacancy by appointing such other person as he or they in their
discretion shall select. An appointment of a Trustee may be made in
anticipation of a vacancy to occur at a later date by reason of retirement or
resignation of a Trustee or an increase in the number of Trustees; provided,
that such appointment will not become effective prior to such retirement or
resignation or such increase in the number of Trustees. Whenever a vacancy in
the number of Trustees shall occur, until such vacancy is filled as provided in
this Section 6.5, the Trustee or Trustees then in office, regardless of number,
shall have all the powers granted to the Trustees, and shall discharge all the
duties imposed on the Trustees, by this Declaration of Trust. A written
instrument certifying the existence of such vacancy signed by a majority of the
Trustees shall be conclusive evidence of the existence of such vacancy. Such
appointment shall be evidenced by a written instrument signed by a majority of
the then Trustees but the appointment shall not take effect until the individual
so named shall have qualified by accepting in writing the appointment and
agreeing to be bound by the terms of this Declaration of Trust. A vacancy may
also be filled by the Shareholders in an election held at an annual or special
meeting. As soon as any Trustee so appointed or elected shall have qualified,
the Trust estate shall vest in the new Trustee or Trustees, together with the
continuing Trustees, without any further act or conveyance.
6.6 Effect of Death, Resignation, etc. of Trustee. The death,
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resignation, removal, or incapacity of the Trustees, or any one of them, shall
not operate to annul the Trust or to revoke any existing agency created pursuant
to the terms of this Declaration of Trust. Upon the resignation or removal of a
Trustee, or his otherwise ceasing to be a Trustee, he shall execute and deliver
such documents as the remaining Trustees shall require for the purpose of
conveying to the Trust or the remaining Trustees any Trust property held in the
name of the resigning or removed Trustee. Upon the incapacity or death of any
Trustee, his legal representative shall execute and deliver on his behalf such
documents as the remaining Trustees shall require as provided in the preceding
sentence. The failure to request or deliver such documents shall not affect the
operation of the provisions of Article IV hereof.
6.7 Powers. The Trustees in all instances shall act as principals
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and are and shall be free from the control of the
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Shareholders. The Trustees shall have full power and authority to do any and all
acts and to make and execute any and all contracts and instruments that they may
consider necessary or desirable in connection with the management of the Trust.
The Trustees shall not be bound or limited by present or future laws or customs
in regard to Trust investments, but shall have full authority and power to make
any and all investments which they, in their uncontrolled discretion, shall deem
proper to accomplish the purpose of this Trust. Without limiting the foregoing,
and subject to any applicable limitation in this Declaration of Trust or the
Regulations, the Trustees shall have power and authority:
A. To conduct, operate and carry on, either directly or through one
or more wholly-owned subsidiaries, the business of an investment company or any
other lawful business activity which the Trustees, in their sole and absolute
discretion, consider to be (1) incidental to the business of the Trust or any
class of Shares as an investment company, (2) conducive to or expedient for the
benefit or protection of the Trust or the Shareholders of any class of Shares,
or (3) calculated in any other manner to promote the interests of the Trust or
the Shareholders of any class of Shares.
B. To adopt Regulations not inconsistent with this Declaration of
Trust providing for the conduct of the affairs of the Trust and to amend and
repeal them to the extent that they do not reserve that right solely to the
Shareholders.
C. To issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in Shares of the
Trust; and to apply to any such repurchase, redemption, retirement, cancellation
or acquisition of Shares, any funds or other assets of the Trust, whether
constituting capital or surplus or otherwise, to the full extent now or
hereafter permitted by applicable law; and to divide or combine Shares without
thereby changing the proportionate beneficial interest in the Trust.
D. To issue, acquire, hold, resell, convey, write options on, and
otherwise deal in securities, debt instruments and other instruments and rights
of a financial character and to apply to any acquisition of securities any
property of the Trust whether from capital or surplus or otherwise.
E. To invest and reinvest cash, and to hold cash uninvested.
F. To borrow money, issue guarantees of indebtedness or contractual
obligations of others, to sell, exchange, lend, pledge, mortgage, hypothecate,
write options on and lease any or all of the Trust Property.
<PAGE>
14
G. To act as a distributor of Shares and as underwriter of, or broker
or dealer in, securities or other property.
H. To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such Person or Persons as the Trustees shall
deem proper, granting to such Person or Persons such power and discretion with
relation to securities or property as the Trustees shall deem proper.
I. To exercise powers and rights of subscription or otherwise which
in any manner arise out of ownership of securities.
J. To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in the name
of the Trustees or of the Trust or in the name of a custodian, sub-custodian or
other depositary or a nominee or nominees or otherwise.
K. To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer, any security of which is
or was held in the Trust; and consent to any contract, lease, mortgage, purchase
or sale of property by such corporation or issuer; and to pay calls or
subscriptions with respect to any security held in the Trust.
L. To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper.
M. To enter into joint ventures, general or limited partnerships and
any other combinations or associations.
N. To enter into contracts of any kind and description.
O. To collect all property due to the Trust, to pay all claims,
including taxes, against the assets belonging to the Trust, to prosecute,
defend, compromise, arbitrate, or otherwise adjust claims in favor of or against
the Trust or any matter in controversy including, but not limited to, claims for
taxes, to foreclose any security interest securing any obligations by virtue of
which any property is owed to the Trust, and to enter into releases, agreements
and other instruments.
<PAGE>
15
P. To retain and employ any Person or Persons to serve on behalf of
the Trust as investment adviser, administrator, transfer agent, custodian,
underwriter, distributor or in such other capacities as they consider desirable
and to delegate such power and authority as they consider desirable to any such
Person or Persons.
Q. To indemnify any person with whom the Trust has dealings.
R. To purchase and pay for entirely out of Trust Property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including without limitation, insurance policies insuring the Trust
Property and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers or managers, principal
underwriters, or independent contractors of the Trust individually against all
claims and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action alleged to
have been taken or omitted by any such person as Shareholder, Trustee, officer,
employee, agent, investment adviser or manager, principal underwriter, or
independent contractor, including any action taken or omitted that may be
determined to constitute negligence, whether or not the Trust would have the
power to indemnify such Person against such liability.
S. To engage in and to prosecute, defend, compromise, abandon, or
adjust, by arbitration or otherwise, any actions, suits, proceedings, disputes,
claims, and demands relating to the Trust or the Trust Property, and, out of the
Trust Property, to pay or to satisfy any debts, claims or expenses incurred in
connection therewith, including those of litigation, and such power shall
include without limitation the power of the Trustees or any appropriate
committee thereof, in the exercise of their or its good faith business judgment,
to consent to dismiss any action, suit, proceeding, dispute, claim, or demand,
derivative or otherwise, brought by any person, including a Shareholder in such
Shareholder's own name or in the name of the Trust, whether or not the Trust or
any of the Trustees may be named individually therein or the subject matter
arises by reason of business for or on behalf of the Trust.
T. To establish pension, profit sharing, Share purchase, and other
retirement, incentive and benefit plans for any Trustees, officers, employees
and agents of the Trust.
U. To determine and change the fiscal year of the Trust and the
method by which its accounts shall be kept.
V. To establish in their absolute discretion in accordance with the
provisions of applicable law the basis or method for determining the value of
the assets belonging to any
<PAGE>
16
class or classes of Shares, the value of the liabilities belonging to any class
or classes of Shares, the allocation of any assets or liabilities to any class
or classes of Shares, the net asset value of any class of Shares, the times at
which Shares of any class shall be deemed to be outstanding or no longer
outstanding and the net asset value of each Share of any class for purposes of
sales, redemptions, repurchases of Shares or otherwise.
W. To determine in accordance with generally accepted accounting
principles and practices what constitutes net profits or net earnings, and to
determine what accounting periods shall be used by the Trust for any purpose,
whether annual or any other period, including daily; to set apart out of the
assets belonging to any class or classes of Shares such reserves of funds for
such purposes as it shall determine and to abolish the same; to declare and pay
any dividends and distributions to any class of Shares in cash, securities or
other property from any assets legally available therefor, at such intervals
(which may be as frequently as daily) or on such other periodic basis, as it
shall determine; to declare such dividends or distributions by means of a
formula or other method of determination, at meetings held less frequently than
the frequency of the effectiveness of such declaration; to establish payment
dates for dividends or any other distributions on any basis, including dates
occurring less frequently than the effectiveness of declarations thereof; and to
provide for the payment of declared dividends on a date earlier or later than
the specified payment date in the case of Shareholders redeeming their entire
ownership of Shares of any class.
X. To engage in any other lawful act or activity in which a
Massachusetts business trust or a corporation organized under the Massachusetts
Business Corporation Law may engage.
No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see to the
application of any payments made or property transferred to the Trustees or upon
their order.
6.8 Trustees and Representatives as Shareholders. Any Trustee,
--------------------------------------------
officer, representative or other agent of the Trust may acquire, own and dispose
of Shares of the Trust to the same extent as if he were not a Trustee, officer,
representative or agent; and the Trust may issue and sell or cause to be issued
and sold Shares of the Trust to, and may buy such Shares from, any person with
which such Trustee, officer, representative or agent is affiliated subject only
to the general limitations herein contained as to the sale and purchase of such
Shares; all subject to any restrictions which may be contained in the
Regulations.
6.9 Expenses; Trustee Reimbursement. The Trustees shall have the
-------------------------------
power to incur and to pay (or shall be reimbursed)
<PAGE>
17
from the Trust Property all expenses and disbursements of the Trust, including,
without limitation, interest expense, compensation payable to Trustees, officers
and representatives of the Trust, taxes, fees and commissions of every kind
incurred in connection with the affairs of the Trust, expenses of issue,
repurchase and redemption of Shares, expenses of registering and qualifying the
Trust and its Shares under Federal and State securities laws and regulations,
charges of custodians, transfer agents, investment advisers, distributors,
service providers, administrators and registrars, expenses of preparing and
printing and distributing prospectuses, auditing and legal expenses, expenses of
reports to Shareholders, expenses of meetings of Shareholders and proxy
solicitations therefor, insurance expense, association membership dues and such
non-recurring items as may arise, including costs and expenses of litigation to
which the Trust is a party, and for all losses and liabilities by them incurred
in administering the Trust, provided that expenses, disbursements, losses and
--------
liabilities incurred in connection with classes of Shares having the same
alphabetical designation or in connection with the management of the assets
belonging to such classes shall be payable solely out of the assets belonging to
such classes, and provided further that the Trustees shall have a lien on the
----------------
Trust Property prior to any rights or interests of the Shareholders thereto for
the payment of any expenses, disbursements, losses and liabilities of the Trust.
6.10 Power to Carry Out Trust's Purposes; Presumptions. The Trustees
-------------------------------------------------
shall have power to carry out any and all acts consistent with the Trust's
purposes through branches and offices both within and without the Commonwealth
of Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, possessions, agencies or instrumentalities of the United States of
America and of foreign governments, and to do all such other things and execute
all such instruments as they deem necessary, proper or desirable in order to
promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees. The enumeration of any specific power herein
shall not be construed as limiting the aforesaid power. The Trustees shall not
be required to obtain any court order to deal with the Trust Property.
6.11 Determinations by Trustees. Any determination made in good
--------------------------
faith and, so far as accounting matters are involved in accordance with
generally accepted accounting principles, by or pursuant to the direction of the
Trustees as to the amount and value of assets, obligations or liabilities of the
Trust or any class of Shares, as to the amount of net income of the Trust or any
class of Shares from dividends and interest for any period or amounts at any
time legally available for the payment of
<PAGE>
18
dividends, as to the amount of any reserves or charges set up and the propriety
thereof, as to the time of or purpose for creating reserves or as to the use,
alteration or cancellation of any reserves or charges (whether or not any
obligation or liability for which such reserves or charges shall have been
created shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged), as to the value of any security owned by the
Trust or any class of Shares, as to the allocation of any assets or liabilities
to a class or classes of Shares, as to the times at which Shares of any class
shall be deemed to be outstanding or no longer outstanding, or as to any other
matters relating to the issuance, sale, redemption or other acquisition or
disposition of securities or Shares, and any reasonable determination made in
good faith by the Trustees as to whether any transaction constitutes a purchase
of securities on "margin," a sale of securities "short," or any underwriting of
the sale of, or a participation in any underwriting or selling group in
connection with the public distribution of, any securities, shall be final and
conclusive, and shall be binding upon the Trust and all Shareholders, past,
present and future, and Shares are issued and sold on the condition and
understanding, evidenced by the purchase of Shares or acceptance of Share
certificates, that any and all such determinations shall be binding as
aforesaid.
6.12 Service in Other Capacities. Any Trustee, officer,
---------------------------
representative, employee or agent of the Trust, including any investment
adviser, transfer agent, administrator, distributor, custodian or underwriter
for the Trust, may serve in any other capacity on his or its own behalf or on
behalf of others, and may engage in other business activities in addition to his
or its services on behalf of the Trust, provided that such other activities do
--------
not materially interfere with the performance of his or its duties for or on
behalf of the Trust.
VII.
AGREEMENTS WITH INVESTMENT ADVISER,
PRINCIPAL UNDERWRITER, ADMINISTRATOR,
TRANSFER AGENT, CUSTODIAN AND OTHERS
7.1 Investment Adviser. The Trustees may, on such terms and
------------------
conditions as they may in their discretion determine, enter into a written
investment advisory agreement or agreements with any Person or Persons providing
for portfolio management, investment advisory, statistical and research
facilities and other services pertaining to the assets belonging to one or more
classes of Shares. Notwithstanding any other provision hereof, the Trustees may
authorize such an investment adviser (subject to such general or specific
instructions as the Trustees may adopt) to effect purchases, sales or exchanges
of portfolio securities of such class(es) on behalf of the Trustees and to
determine the net asset value and net income of such class(es) or may authorize
<PAGE>
19
any representative, officer or Trustee to effect such purchases, sales or
exchanges pursuant to the recommendations of such investment adviser (all
without further action by the Trustees). Any such purchases, sales and
exchanges so effected shall be deemed to have been authorized by all of the
Trustees.
7.2 Administrator. The Trustees may, on such terms and conditions as
-------------
they may in their discretion determine, enter into one or more agreements with
any Person or Persons providing for administrative services to one or more
classes of Shares, including assistance in supervising the affairs of such
class(es) and performance of administrative, clerical and other services
considered desirable by the Trustees.
7.3 Distributor. The Trustees may, on such terms and conditions as
-----------
they may in their discretion determine, enter into one or more distribution
agreements with any Person or Persons providing for sale of Shares of one or
more classes at a price at least equal to the net asset value per Share of such
class(es) and providing for sale of the Shares of such class(es) pursuant to
arrangements by which the Trust may either agree to sell the Shares of such
class(es) to the other party to the agreement or appoint such other party its
sales agent for such Shares. Such agreement(s) may also provide for the
repurchase of Shares of such class(es) by such other party as principal or as
agent of the Trust, and may authorize the other party to enter into agreements
with others for the purpose of the distribution or repurchase of Shares of such
class(es).
7.4 Transfer Agent. The Trustees may, on such terms and conditions
--------------
as they may In their discretion determine, enter into one or more agreements
with any Person or Persons providing for transfer agency and other services to
Shareholders of any class.
7.5 Custodian. The Trustees may, on such terms and conditions as
---------
they may in their discretion determine, enter into one or more agreements with
any Person or Persons providing for the custody and safekeeping of the property
of the Trust or any class of Shares.
7.6 Service and Distribution Plans. The Trustees may, on such terms
------------------------------
and conditions as they may in their discretion determine, adopt one or more
plans pursuant to which Persons may be compensated directly or indirectly by the
Trust for Shareholder servicing, administration or distribution with respect to
one or more classes of Shares, including without limitation plans subject to
Rule 12b-1 under the Act, and the Trustees may enter into agreements pursuant to
such Plans.
7.7 Parties to Agreements. The same Person may be employed in
---------------------
multiple capacities under Sections 7.1 through 7.6 of this Article VII and may
receive compensation in as many capacities as such Person serves. The Trustees
may enter into
<PAGE>
20
any agreement of the character described in this Article VII, or any other
agreement necessary or appropriate to the conduct of the business of the Trust
or any class of Shares, with any Person, including any Person in which any
Trustee, officer, representative, employee or Shareholder of the Trust may be
interested, and no such agreement shall be invalidated or rendered voidable by
reason of the existence of any such relationship, nor shall any Person holding
such relationship be liable by reason of such relationship for any loss or
expense to the Trust under or by reason of said agreement or accountable for any
profit realized directly or indirectly therefrom.
VIII.
SHAREHOLDERS' VOTING POWERS AND MEETINGS
8.1 Voting Powers. The Shareholders shall have power to vote (a) for
-------------
the election of Trustees as provided in Section 6.2 hereof, (b) to the same
extent as the shareholders of a Massachusetts business corporation when
considering whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the Shareholders, (c) with respect to any of the matters and to the extent
provided in Article X hereof, (d) with respect to such additional matters
relating to the Trust as may be required by law, by this Declaration of Trust,
by the Regulations of the Trust, by any requirement applicable to or agreement
of the Trust, and as the Trustees may consider desirable. Every Shareholder of
record shall have the right to one vote for every whole Share (other than Shares
held in the treasury of the Trust) standing in his name on the books of the
Trust, and to have a proportional fractional vote for any fractional Share, as
to any matter on which the Shareholder is entitled to vote. There shall be no
cumulative voting. Shares may be voted in person or by proxy. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action required or permitted to be taken by Shareholders by law, this
Declaration of Trust or the Regulations.
8.2 Meetings. Meetings of Shareholders may be called by the Trustees
--------
as provided in the Regulations and shall be called by the Trustees upon the
written request of Shareholders owning at least ten percent (10%) of the
outstanding Shares entitled to vote.
8.3 Quorum and Required Vote. The presence, in person or by proxy,
------------------------
of Shareholders entitled to cast at least a majority of the votes which all
Shareholders are entitled to cast on the particular matter shall constitute a
quorum for the purpose of considering such matter. Action may be taken on all
matters for which a quorum exists, irrespective of the absence of a quorum on
other matters. If a meeting cannot be organized with respect to a particular
matter because a quorum for that matter has not
<PAGE>
21
attended, those present and entitled to vote on such matter may adjourn the
meeting to such reasonable time and place as they may determine.
On any matter submitted to a vote of Shareholders, Shares with
different alphabetical class designations that are then issued and outstanding
and entitled to vote shall be voted in the aggregate and not by class except:
(1) as otherwise required by applicable law or permitted by the Board of
Trustees of the Trust, or (2) when the matter, as conclusively determined by the
Trustees, affects only the interests of the Shareholders of a class or classes
with a particular alphabetical designation (in which case only Shareholders of
the affected class or classes shall be entitled to vote thereon).
Each Share of classes having the same alphabetical designation shall
vote together in the aggregate and not by class on all matters submitted to a
vote of the Shareholders of such classes, except that:
(1) on any matter that pertains to the expenses and liabilities
described in subsection B(3)(a) of Section 5.1 hereof (or to any agreement, plan
or other document adopted by the Trust relating to said expenses or liabilities)
and is submitted to a vote of Shareholders of the Trust, only the particular
class of Shares specified therein shall be entitled to vote, except that: (i) if
said matter affects Shares in the Trust other than such class of Shares, such
other affected Shares in the Trust shall also be entitled to vote, and in such
case the particular class of Shares so specified shall be voted in the aggregate
together with such other affected Shares and not by class except where otherwise
required by law or permitted by the Board of Trustees of the Trust; and (ii) if
said matter does not affect the particular class of Shares specified therein,
said class of Shares shall not be entitled to vote (except where required by law
or permitted by the Board of Trustees) even though the matter is submitted to a
vote of the holders of Shares in the Trust other than Shares of such class; and
(2) on any matter that pertains to the expenses and liabilities
described in subsection B(3)(b) of Section 5.1 hereof (or any agreement, plan or
other document adopted by the Trust relating to said expenses or liabilities)
and is submitted to a vote of Shareholders of the Trust, the particular class of
Shares specified therein shall not be entitled to vote, except where otherwise
required by law or permitted by the Board of Trustees of the Trust, and except
that if said matter affects such class of Shares, such class of Shares shall be
entitled to vote, and in such case shall be voted in the aggregate together with
all other Shares in the Trust voting on the matter and not by class except where
otherwise required by law or permitted by the Board of Trustees.
<PAGE>
22
Subject to any applicable requirements of law or of this Declaration
of Trust or the Regulations: (a) the acts, at any duly organized meeting, of the
Shareholders present, in person or by proxy, entitled to cast at least a
majority of the votes which all Shareholders present are entitled to cast on the
particular matter shall be the acts of the Shareholders with respect to that
matter; and (b) in the election of Trustees, a plurality of the Shares voting
shall elect a Trustee.
8.4 Shareholder Action by Written Consent. Any action which may be
-------------------------------------
taken by Shareholders may be taken without a meeting if not less than a majority
of the Shareholders entitled to vote on the matter consent to the action in
writing and the written consents are filed with the records of the meetings of
Shareholders. Such consent shall be treated for all purposes as a vote taken at
a meeting of Shareholders.
8.5 Code of Regulations. The Regulations may include further
-------------------
provisions not inconsistent with this Declaration of Trust for meetings of
Shareholders, votes, record dates, notices of meetings and related matters.
IX.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION
9.1 Liabilities of Classes. Liabilities belonging to classes of
----------------------
Shares with the same alphabetical designation, including, without limitation,
expenses, fees, charges, taxes, and liabilities incurred or arising in
connection with such classes, or in connection with the management thereof,
shall be paid only from the assets belonging to such classes.
9.2 Limitation of Trustee Liability. Every act or thing done or
-------------------------------
omitted, and every power exercised or obligation incurred by the Trustees or any
of them in the administration of this Trust or in connection with any affairs,
property or concerns of the Trust, whether ostensibly in their own names or in
their Trust capacity, shall be done, omitted, exercised or incurred by them as
Trustees and not as individuals. Every person contracting or dealing with the
Trustees or having any debt, claim or judgment against them or any of them shall
look only to the funds and property of the Trust for payment or satisfaction.
No Trustee or Trustees of the Trust shall ever 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 of the affairs of the Trust. Every note, bond,
contract, order or other undertaking issued by the Trust or the Trustees
relating to the Trust, and stationery used by the Trust, shall include the
notice set forth in Section 9.5 of this Article IX (but the omission thereof
shall not be construed as a waiver
<PAGE>
23
of the foregoing provision, and shall not render the Trustees personally
liable).
It is the intention of this Section 9.2 that no Trustee shall be
subject to any personal liability whatsoever to any person for any action or
failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except that nothing
in this Declaration of Trust shall protect any Trustee from any liability to the
Trust or its Shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of his
duties, or by reason of reckless disregard of his obligations and duties as
Trustee; and that all persons shall look solely to the Trust Property belonging
to a class of Shares for satisfaction of claims of any nature arising in
connection with the affairs of such class of the Trust.
9.3 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 Trustees 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.
<PAGE>
24
9.4 Reliance on Experts, etc. Each Trustee, officer and
-------------------------
representative of the Trust shall, in the performance of his duties, be fully
and completely justified and protected with regard to any act or any failure to
act resulting from reliance in good faith upon the books of account or other
records of the Trust, upon an opinion of counsel satisfactory to the Trust, or
upon reports made to the Trust by any of its officers, representatives or
employees or by the investment adviser, the principal underwriter, selected
dealers, accountants, appraisers or other experts or consultants selected with
reasonable care by the Trustees, officers or representatives of the Trust,
regardless of whether such counsel or expert may also be a Trustee.
9.5 Limitation of Shareholder Liability. Shareholders shall not be
-----------------------------------
subject to any personal liability in connection with the assets of the Trust for
the acts or obligations of the Trust. The Trustees shall have no power to bind
any Shareholder personally or to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time personally agree to pay by way of subscription to any Shares or
otherwise. Every obligation, contract, instrument, certificate, Share, other
security of any class of Shares or undertaking, and every other act whatsoever
executed in connection with the Trust or any class of Shares, shall be
conclusively presumed to have been executed or done by the executors thereof
only in their capacities as Trustees under the Declaration of Trust or in their
capacity as officers, employees or agents of the Trust and not individually.
Every note, bond, contract, order or other undertaking issued by or on behalf of
the Trust or the Trustees relating to the Trust or any class of Shares, and the
stationery used by the Trust, shall include a recitation limiting the obligation
represented thereby to the Trust and its assets (but the omission of such a
recitation shall not operate to bind any Shareholder), as follows:
"The names 'NCP Funds' and 'Trustees of NCP Funds' refer respectively
to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a
Declaration of Trust dated December 1988 which is hereby referred to
and a copy of which is on file at the office of the State Secretary of
The Commonwealth of Massachusetts and at the principal office of the
Trust. The obligations of 'NCP Funds' entered into in the name or on
behalf thereof by any of the Trustees, officers, representatives or
agents are made not individually, but in such capacities, and are not
binding upon any of the Trustees, Shareholders, officers,
representatives or agents of the Trust personally, but bind only the
Trust Property, and all persons dealing with any class of shares of
<PAGE>
25
the Trust must look solely to the Trust Property belonging to such
class for the enforcement of any claims against the Trust."
The rights accruing to a Shareholder under this Section 9.5 shall not
exclude any other right to which such Shareholder may be lawfully entitled, nor
shall anything herein contained restrict the right of the Trust to indemnify or
reimburse a Shareholder in any appropriate situation even though not
specifically provided for herein, provided that a Shareholder of any class of
--------
shares shall be indemnified only from assets belonging to the classes of Shares
with the same alphabetical designation.
9.6 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.
X.
MISCELLANEOUS
10.1 Trust Not a Partnership. It is hereby expressly declared that a
-----------------------
Massachusetts business trust and not a partnership, joint venture, corporation,
joint stock company or any form of legal relationship other than a trust is
created hereby. Nothing herein shall be construed to make the Shareholders,
either by themselves or with the Trustees, partners or members of a joint stock
association. No Trustee hereunder shall have any power to bind personally
either a representative of the Trust or any officer or Shareholder. All persons
extending credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the Trust for payment under such
credit, contract or claim; and neither the Shareholders, the officers nor the
Trustees, whether past, present or future, shall be personally liable therefor.
10.2 No Bond or Surety. The Trustees shall not be required to give
-----------------
any bond as such, nor any surety if a bond is required.
<PAGE>
26
10.3 Duration of Trust. This Trust shall continue without limitation
-----------------
of time, provided that the Trust or any class of Shares may be terminated at any
--------
time in accordance with the provisions of this Declaration of Trust and
applicable law.
10.4 Merger, Consolidation and Sale of Assets. The Trust may merge
----------------------------------------
into or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its good will, upon such terms and conditions and for
such consideration when and as authorized by vote or written consent of the
Trustees and approved by the affirmative vote of the holders of not less than
two-thirds of the shares outstanding and entitled to vote, voting in the
aggregate and not by class except to the extent that applicable law may require
voting by class, or by an instrument or instruments in writing without a meeting
consented to by the holders of not less than two-thirds of such Shares, voting
in the aggregate and not by class except to the extent that applicable law may
require voting by class, provided that if such merger, consolidation, sale,
--------
lease or exchange is recommended by the Trustees, such may be approved by a vote
of the majority of the outstanding shares, voting in the aggregate and not by
class except to the extent that applicable law may require voting by class or by
an instrument or instruments in writing without a meeting consented to by the
holders of not less than a majority of such Shares, voting in the aggregate and
not by class except to the extent that applicable law may require voting by
class.
10.5 Incorporation. With the approval of the holders of a majority
-------------
of the outstanding Shares, voting in the aggregate and not by class except to
the extent that applicable law may require voting by class, the Trustees may
cause to be organized, or assist in organizing, a corporation or corporations
under the law of any jurisdiction, to carry on any affairs in which the Trust
shall directly or indirectly have any interest, and to transfer the Trust
Property to any such Person in exchange for any Shares or securities thereof or
otherwise, and to lend money, to subscribe for the Shares or securities of, and
enter into any contracts with any such Person in which the Trust holds or is
about to acquire securities or any other interest. The Trustees may also cause
a merger or consolidation between the Trust or any successor thereto and any
such Person if and to the extent permitted by law. Nothing contained herein
shall be construed as requiring approval of Shareholders for the Trustees to
organize or assist in organizing one or more corporations, trusts, partnerships
associations or organizations and selling, conveying or transferring a portion
of the Trust Property to such Person(s).
10.6 Filing of Copies, References, Headings. The original instrument
--------------------------------------
of this Declaration of Trust and of each amendment hereto shall be filed with
the State Secretary of the Commonwealth of Massachusetts as provided by law and
copies
<PAGE>
27
thereof shall be kept at the office of the Trust where they may be inspected by
any Shareholder. Each amendment so filed shall be accompanied by a certificate
signed and acknowledged by a Trustee or by the Secretary or any assistant
Secretary of the Trust stating that such action was duly taken in the manner
provided herein, and unless such amendment or such certificate sets forth some
later time for the effectiveness of such amendment, such amendment shall be
effective upon its filing. A restated Declaration of Trust, integrating into a
single instrument all of the provisions of the Declaration of Trust that are
then in effect and operative, may be executed from time to time by a majority of
the Trustees and shall, upon filing with the State Secretary of the Commonwealth
of Massachusetts, be conclusive evidence of all amendments contained therein and
may thereafter be referred to in lieu of the initial Declaration of Trust and
the various amendments thereto. Anyone dealing with the Trust may rely on a
certificate by a representative of the Trust as to whether or not any such
amendment hereto may have been made and as to any matters in connection with the
Trust hereunder, with the same effect as if it were the original, and may rely
on a copy certified by a representative of the Trust to be a copy of this
instrument or of any amendment thereto. Headings are placed herein for
convenience of reference only and, in the case of any conflict, the text of this
instrument, rather than the headings, shall control. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original. All signatures to this instrument need not appear on the same page.
10.7 Applicable Law. The Trust set forth in this instrument is a
--------------
trust made in the Commonwealth of Massachusetts and is to be governed by and
construed and administered according the laws of said Commonwealth.
10.8 Provisions in Conflict With Law or Regulations.
----------------------------------------------
A. No provision of this Declaration of Trust shall be effective
to:
(1) Require a waiver of compliance with any provision of the
Securities Act of 1933, as amended, or the Act, or of any valid rule, regulation
or order of the Securities and Exchange Commission thereunder; or
(2) Protect or purport to protect any Trustee or officer of
the Trust against any liability to the Trust or its Shareholders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
B. The provisions of this Declaration of Trust are severable,
and if the Trustees shall determine with the advice of counsel that any of such
provisions is in conflict with
<PAGE>
28
the Act, the regulated investment company provisions of the Internal Revenue
Code, Chapter 182 of the General Laws of the Commonwealth of Massachusetts or
with any other applicable law or regulation, then in such event the conflicting
provision shall be deemed never to have constituted a part of this Declaration
of Trust, provided that such determination shall not affect any of the remaining
--------
provisions of this Declaration of Trust or render invalid or improper any action
taken or omitted prior to such determination.
C. If any provision of this Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of this Declaration of Trust in any jurisdiction.
10.9 Amendment of Declaration of Trust.
---------------------------------
A. This Declaration of Trust may be amended upon a resolution
to that effect being adopted by the Trustees and approved by the affirmative
vote of the holders of not less than a majority of the outstanding Shares,
voting in the aggregate and not by class except to the extent that applicable
law may require voting by class.
B. Notwithstanding any other provision hereof, until such time
as a Registration Statement under the Securities Act of 1933, as amended,
covering the first public offering of securities of the Trust shall have become
effective, this Declaration of Trust may be terminated or amended in any respect
by the affirmative vote of a majority of the Trustees.
C. The Trustees may amend this Declaration of Trust without a
vote of Shareholders to change the name of the Trust or to cure any error or
ambiguity or if they deem it necessary to conform this Declaration of Trust to
the requirements of applicable state or federal laws or regulations, including
without limitation the requirements of the regulated investment company
provisions of the Internal Revenue Code, but the Trustees shall not be liable
for failing so to do.
D. Notwithstanding any other provision hereof, this Declaration
of Trust may not be amended in any manner whatsoever that would impair the
exemption from personal
<PAGE>
29
liability of the Trustees and Shareholders of the Trust or that would permit an
assessment upon any Shareholder.
IN WITNESS WHEREOF, the undersigned have executed this Declaration of
Trust in the capacities indicated, this 22 day of December, 1988.
/s/ Patricia L. Bickimer
-----------------------------------------
Patricia L. Bickimer, Initial Trustee
/s/ Peter Meenan
----------------------------------------
Peter Meenan, Initial Trustee
<PAGE>
30
M A S S A C H U S E T T S
Suffolk, ss.:
On this 22 day of December , 1988, personally appeared before me
Patricia L. Bickimer and Peter Meenan, each known to me and known to me to be
the individuals described in and who executed the foregoing Declaration of
Trust, and each acknowledged the said Declaration of Trust to be her and his
free act and deed.
_________________________________
Notary Public
[NOTARIAL SEAL] My Commission Expires: 6-8-90
<PAGE>
EXHIBIT 1(b)
AMENDMENT NO. 1 TO DECLARATION OF TRUST
DATED DECEMBER 22, 1988
The undersigned, Assistant Secretary of The PNC(R) Fund the "Fund"),
does hereby certify that at a meeting of the Board of Trustees held on April 21,
1989, the following resolutions were unanimously approved by the trustees of the
Fund and that said resolutions continue in full force and effect as of the date
hereof:
WHEREAS, Article X, Section 10.9B of the Fund's Declaration of Trust
dated as of December 22, 1988 (the "Declaration of Trust") provides that,
until such time as a Registration Statement under the Securities Act of
1933, as amended, covering the first public offering of securities of the
Fund shall have become effective, the Declaration of Trust may be amended
in any respect by the affirmative vote of a majority of the trustees;
RESOLVED, that pursuant to the authorization described above, the
Declaration of Trust shall be amended in the following respect:
Article I of the Declaration of Trust is amended to change the name of
the Fund from "NCP Funds" to "The PNC Fund", and all other appropriate
references in the Declaration of Trust are amended to reflect the fact
that the name of the Fund is "The PNC Fund";
FURTHER RESOLVED, that any officer of the Fund be, and each of them
hereby is, authorized to execute, seal and deliver any and all documents,
instruments, certificates, papers and writings; to file the same with any
public official including, without limitation, the Secretary of the
Commonwealth of Massachusetts and the Boston City Clerk; and to do any and
all other acts, in the name of the Fund and on its behalf, as may be
required or desirable in connection with or in furtherance of the foregoing
resolution; and
FURTHER RESOLVED, that the foregoing amendment to the Declaration of
Trust shall be effective upon the filing of
<PAGE>
2
an instrument containing the same with the Secretary of the Commonwealth of
Massachusetts and the Boston City Clerk.
WITNESS my hand and seal this 4th day of May, 1909.
/s/
-----------------------------------
Patricia L. Bickimer
Assistant Secretary
COMMONWEALTH OF MASSACHUSETTS )
) ss.
CITY OF BOSTON )
Then personally appeared Patricia L. Bickimer, Assistant Secretary of
The PNC Fund, and acknowledged this instrument to be her free act and deed this
4th day of May, 1989.
----------------------------------
Notary Public
My commission expires: 11/17/89
<PAGE>
EXHIBIT 1(c)
THE PNC(R) FUND
(A MASSACHUSETTS BUSINESS TRUST)
AMENDMENT NO. 2 TO DECLARATION OF TRUST
DATED DECEMBER 22, 1988;
CERTIFICATE OF CLASSIFICATION OF SHARES
The undersigned, Secretary of The PNC(R) Fund (the "Fund"), does
hereby certify that at a meeting of the Board of Trustees held on June 24, 1993,
the following resolutions were unanimously approved by the trustees of the Fund
and that said resolutions continue in full force and effect as of the date
hereof:
APPROVAL OF AMENDMENT TO THE FUND'S DECLARATION OF TRUST TO APPOINT A NEW
-------------------------------------------------------------------------
AGENT FOR SERVICE OF PROCESS IN MASSACHUSETTS.
---------------------------------------------
RESOLVED, that pursuant to Article X, Section 10.9 of the Fund's
Declaration of Trust, the second paragraph of Article III of the
Declaration of Trust shall be amended to read as follows:
The Agent of the Trust for Service of Process within the Commonwealth
of Massachusetts shall be: CT Corporation System, 2 Oliver Street,
Boston, Massachusetts 02109.
FURTHER RESOLVED, that any officer of the Fund be, and each of
them hereby is, authorized to execute, seal and deliver any and all
documents, instruments, certificates, papers and writings; to file the same
with any public official including, without limitation, the Secretary of
the Commonwealth of Massachusetts and the Boston City Clerk; and to do any
and all other acts, in the name of the Fund and on its behalf, as may be
required or desirable in connection with or in furtherance of the foregoing
resolution; and
FURTHER RESOLVED, that the foregoing amendment to the Declaration of
Trust shall be effective upon the approval of a majority of the outstanding
shares of the Fund and the filing of an instrument containing the amendment
with the Secretary of the Commonwealth of Massachusetts and the Boston City
Clerk.
The undersigned also certifies that the following resolution was duly
adopted by the shareholders of the Fund at a Special Meeting of Shareholders
held on September 10, 1993:
RESOLVED, that pursuant to Article X, Section 10.9 of the Fund's
Declaration of Trust, the second paragraph of Article III of the
Declaration of Trust shall be amended to read as follows:
<PAGE>
2
The Agent of the Trust for Service of Process within the Commonwealth
of Massachusetts shall be: CT Corporation System, 2 Oliver Street,
Boston, Massachusetts 02109.
The undersigned also certifies that at a meeting of the Board of
Trustees held on January 21, 1993, the following resolutions were duly adopted
by the trustees of the Fund and that said resolutions continue in full force and
effect as of the date hereof:
APPROVAL OF NEW CLASSES OF SHARES.
---------------------------------
RESOLVED, that pursuant to Article V of the Fund's Declaration of
Trust, an unlimited number of authorized, unissued and unclassified shares
of beneficial interest of the Fund be, and hereby are, classified into
separate classes of shares with the designations: Class Q-1, Class Q-2 and
Class Q-3, representing interests in the Service, Investor and
Institutional Shares, respectively, of the North Carolina Municipal Money
Market Portfolio; Class R-1, Class R-2 and Class R-3, representing
interests in the Service, Investor and Institutional Shares, respectively,
in the Short-Term Bond Portfolio; Class S-1, Class S-2 and Class S-3,
representing interests in the Service, Investor and Institutional Shares,
respectively, in the Intermediate-Term Bond Portfolio; Class T-1, Class T-2
and Class T-3, representing interests in the Service, Investor and
Institutional Shares, respectively, of the Small Cap Growth Equity
Portfolio; and Class U-1, Class U-2 and Class U-3, representing interests
in the Service, Investor and Institutional Shares, respectively, of the
Core Equity Portfolio;
FURTHER RESOLVED, that each share of each such Class shall have all of
the preferences, conversion and other rights, voting powers, restrictions,
limitations, qualifications and terms and conditions of redemption that are
set forth in the Fund's Declaration of Trust with respect to its shares of
beneficial interest; and
FURTHER RESOLVED, that the officers of the Fund be, and each hereby
is, authorized and empowered to execute, seal and deliver any and all
documents, instruments, papers and writings, including, but not limited to,
any instrument to be filed with the State Secretary of the Commonwealth of
Massachusetts or the Boston City Clerk, and to do any and all other acts,
in the name of the Fund and on its behalf, as he, she or they may deem
necessary or desirable in connection with or in furtherance of the
foregoing resolutions, such determination to be conclusively evidenced by
such actions.
<PAGE>
3
The undersigned also certifies that at a meeting of the Board of
Trustees held on December 17, 1993, the following resolutions were duly adopted
by the trustees of the Fund and that said resolutions continue in full force and
effect as of the date hereof:
APPROVAL OF NEW CLASS OF SHARES.
-------------------------------
RESOLVED, that pursuant to Article V of the Fund's Declaration of
Trust, an unlimited number of authorized, unissued and unclassified shares
of beneficial interest of the Fund be, and hereby are, classified into
separate classes of shares with the designations: Class V-1, Class V-2 and
Class V-3, representing interests in the Service, Investor and
Institutional Shares, respectively, of the Virginia Municipal Money Market
Portfolio; Class W-1, Class W-2 and Class W-3, representing interests in
the Service, Investor and Institutional Shares, respectively, in the
International Fixed Income Portfolio; Class X-1, Class X-2 and Class X-3,
representing interests in the Service, Investor and Institutional Shares,
respectively, in the Government Income Portfolio; and Class Y-1, Class Y-2
and Class Y-3, representing interests in the Service, Investor and
Institutional Shares, respectively, of the International Emerging Markets
Portfolio.
FURTHER RESOLVED, that each share of each such Class shall have all of
the preferences, conversion and other rights, voting powers, restrictions,
limitations, qualifications and terms and conditions of redemption that are
set forth in the Fund's Declaration of Trust with respect to its shares of
beneficial interest; and
FURTHER RESOLVED, that the officers of the Fund be, and each hereby
is, authorized and empowered to execute and deliver any and all documents,
instruments, papers and writings, including, but not limited to, any
instrument to be filed with the State Secretary of the Commonwealth of
Massachusetts or the Boston City Clerk, and to do any and all other acts,
in the name of the Fund and on its behalf, as he, she or they may deem
necessary or desirable in connection with or in furtherance of the
foregoing resolutions.
WITNESS my hand and seal this 23rd day of December,
1993.
/s/ Morgan R. Jones
------------------------
Morgan R. Jones, Esq.
Secretary
<PAGE>
4
COMMONWEALTH OF PENNSYLVANIA )
) ss.
CITY OF PHILADELPHIA )
Then personally appeared Morgan R. Jones, Secretary of The PNC(R)
Fund, and acknowledged this instrument to be his free act and deed this 23rd day
of December, 1993.
_____________________________
Notary Public
My commission expires:
<PAGE>
EXHIBIT 1(e)
AMENDMENT NO. 4 TO DECLARATION OF TRUST
dated December 22, 1988
The undersigned, Secretary of Compass Capital Funds (the "Fund"), does
hereby certify that by written consent of the Board of Trustees dated December
17, 1997, the following resolutions were approved by the trustees of the Fund
and that said resolutions continue in full force and effect as of the date
hereof:
Amendment to Declaration of Trust.
---------------------------------
WHEREAS, Article X, Section 10.9(C) of the Fund's
Declaration of Trust dated as of December 22, 1988, as amended
(the "Declaration of Trust") provides that the Trustees may amend
the Declaration of Trust without a vote of shareholders to change
the name of the Fund;
RESOLVED, that pursuant to the authorization described
above, the Declaration of Trust shall be amended in the following
respect:
Article I of the Declaration of Trust is amended to change
the name of the Fund from "Compass Capital Funds" to
"BlackRock Funds", and all other appropriate references in
the Declaration of Trust are amended to reflect the fact
that the name of the Fund is "BlackRock Funds"; and
FURTHER RESOLVED, that any Trustee or officer of the Fund
be, and each of them hereby is, authorized to execute, seal and
deliver any and all documents, instruments, certificates, papers
and writings; to file the same with any public official
including, without limitation, the Secretary of the Commonwealth
of Massachusetts and the Boston City Clerk; and to do any and all
other acts, in the name of the Fund and on its behalf, as may be
required or desirable in connection with or in furtherance of the
foregoing resolutions; and
FURTHER RESOLVED, that the foregoing amendment to the
Declaration of Trust shall be effective upon the filing of an
instrument containing the same with the Secretary of the
Commonwealth of Massachusetts and the Boston City Clerk or at
such other date as specified in such instrument.
This Amendment No. 4 to the Declaration of Trust of the Fund shall be
effective as of January 31, 1998.
<PAGE>
2
WITNESS my hand and seal this ____ day of December, 1997.
__________________________
Brian P. Kindelan, Esq.
COMMONWEALTH OF PENNSYLVANIA )
) ss.
CITY OF PHILADELPHIA )
Then personally appeared Brian P. Kindelan, Secretary of Compass
Capital Funds, and acknowledged this instrument to be his free act and deed this
____ day of December, 1997.
__________________________
Notary Public
My commission expires:
<PAGE>
EXHIBIT 2
CODE OF REGULATIONS
of
NCP FUNDS
ARTICLE I
---------
TRUSTEES
--------
1.1 Number and Term of Office. The number of Trustees shall be such
-------------------------
number, not more than twenty (20), as may be fixed from time to time by the
Trustee(s). Each Trustee shall hold office until the next meeting of the
Shareholders following his election or appointment as a Trustee at which
trustees are elected and until his successor shall have been elected and
qualified.
1.2 Place of Meetings; Telephone Meetings. Meetings of the Trustees,
-------------------------------------
regular or special, shall be held at the principal office of the Trust or at
such other place as the Trustees may from time to time determine. The Trustees
or any committee thereof may participate in a meeting of the Trustees or of such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting may hear each other
at the same time and participation by such means shall constitute presence in
person at the meeting except for the purpose of voting on any investment
advisory agreement or distribution plan of the Trust.
1.3 Regular Meetings. Regular meetings of the Trustees may be held
----------------
without notice at such time and at the principal office of the Trust or at such
other place as the Trustees may from time co time determine.
<PAGE>
2
1.4 Special Meetings. Special meetings of the Trustees may be called
----------------
by the President on one day's notice to each Trustee; special meetings of the
Trustees shall be called by the President or Secretary in like manner and on
like notice on the written request of three Trustees.
1.5 Committees. The Trustees may by resolution passed by a majority
----------
of the Trustees appoint from among its members an executive committee and other
committees composed of two or more Trustees, and may delegate to such
committees, in the intervals between meetings of the Trustees, any or all of the
powers of the Trustees in the management of the business and affairs of the
Trust, except the power to issue Shares in the Trust or to recommend to
Shareholders any action requiring Shareholder approval.
1.6 Chairman of the Board. The Trustees may at any time appoint one
---------------------
of their number as Chairman of the Board, who shall serve at the pleasure of the
Trustees and shall perform and execute such duties as the Trustees may from time
to time provide but who shall not by reason of performing or executing these
duties be deemed an officer or employee of the Trust.
1.7 Compensation. Any Trustee, whether or not a salaried officer,
------------
employee, or agent of the Trust, may be compensated for his services as a
Trustee or as a member of a committee, or as Chairman of the Trustees or
Chairman of a committee, by fixed periodic payments or by fees for attendance at
meetings or by both, and in addition may be reimbursed for
<PAGE>
3
transportation and other expenses, all in such manner and amounts as the
Trustees may from time to time determine.
ARTICLE II
----------
SHAREHOLDERS
------------
2.1 Meetings. Meetings of the Shareholders of the Trust may be
--------
called by the Trustees and shall be called by the Trustees whenever required by
law or upon the written request of the holders of at least ten percent (10%) of
the outstanding Shares entitled to vote.
2.2 Notice. Written notice, stating the place, day and hour of each
------
meeting of the Shareholders and the general nature of the business to be
transacted shall be given by, or at the direction of, the person calling the
meeting to each Shareholder of record entitled to vote at the meeting at least
ten days prior to the day named for the meeting, unless in a particular case a
longer period of notice is required by law.
2.3 Shareholders' List. The officer or agent having charge of the
------------------
transfer books for Shares of the Trust shall make, at least five days before
each meeting of the Shareholders, a complete list of the Shareholders entitled
to vote at the meeting, arranged in alphabetical order and including the address
of and the number of Shares held by each such Shareholder. The list shall be
kept on file at the office of the Trust and shall be subject to inspection by
any Shareholder at any time during usual business hours and shall also be
produced and kept open at the time and place of each meeting of Shareholders and
shall be
<PAGE>
4
subject to inspection by any Shareholder during each meeting of Shareholders.
2.4 Record Date. The Trustees may fix a time (during which they may
-----------
close the Share transfer books of the Trust) not more than ninety (90) days
prior to the date of any meeting of the Shareholders, or the date fixed for the
payment of any dividend, or the date of the allotment of rights or the date when
any change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, or to vote
at, any such meeting, or entitled to receive payment of any such dividend, or to
receive any such allotment of rights, or to exercise such rights, as the case
may be. In such case, only such Shareholders as shall be Shareholders of record
at the close of business on the date so fixed shall be entitled to notice of, or
to vote at, such meeting or to receive payment of such dividend, or to receive
such allotment of rights, or to exercise such rights, as the case may be,
notwithstanding any transfer of any Shares on the books of the Trust after any
record date fixed, as aforesaid.
ARTICLE III
-----------
NOTICES
-------
3.1 Form. Notices to the Trustees shall be oral or by telephone or
----
telegram or in writing delivered personally or mailed to the Trustees at their
addresses appearing on the books of the Trust. Notices to the Shareholders
shall be in writing and delivered personally or mailed to the Shareholders at
their addresses appearing on the books of the Trust. Oral notice shall
<PAGE>
5
be deemed to be given when given directly to the person required to be notified
and notice by mail shall be deemed to be given when deposited in the United
States mail or with a telegraph office for transmission. Notice to the Trustees
need not state the purpose of a regular or special meeting of the Trustees or
committee.
3.2 Waiver. Whenever any notice of the time, place or purpose of any
------
meeting of the Shareholders, the Trustees or a committee is required to be given
under the provisions of Massachusetts law or under the provisions of the
Declaration of Trust or these Regulations, a waiver thereof in writing, signed
by the person or persons entitled to such notice and filed with the records of
the meeting, whether before or after the holding thereof, or actual attendance
at the meeting of the Shareholders in person or by proxy, or at the meeting of
the Trustees or the committee in person, shall be deemed equivalent to the
giving of such notice to such persons.
ARTICLE IV
----------
OFFICERS
--------
4.1 Number. The officers of the Trust shall be chosen by the
------
Trustees and shall include a President, a Secretary and a Treasurer. The Board
of Trustees may from time to time elect or appoint one or more Vice Presidents,
Assistant Secretaries and Assistant Treasurers.
4.2 Other Officers. The Trustees from time to time may appoint such
--------------
other officers and agents as they shall deem advisable, who shall hold their
offices for such terms and shall
<PAGE>
6
exercise such powers and perform such duties as the Trustees may from time to
time prescribe. The Trustees may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe the
respective rights, terms of office, authorities and duties.
4.3 Election and Tenure. The officers of the Trust shall be chosen
-------------------
by the Trustees. Two or more offices may be held by the same person but no
officer shall execute, acknowledge or verify any instrument in more than one
capacity if such instrument is required by law, the Declaration of Trust or
these Regulations to be executed, acknowledged or verified by two or more
officers. Any officer or agent may be removed by the Trustees. An officer of
the Trust may resign by filing a written resignation with the President or with
the Trustees or with the Secretary. Any vacancy occurring in any office of the
Trust by death, resignation, removal or otherwise may be filled by the Trustees.
4.4 Compensation. The salaries or other compensation of all officers
------------
and agents of the Trust shall be fixed by the Trustees, except that the Trustees
may delegate to any committee the power to fix the salary or other compensation
of any officer or agent of the Trust.
4.5 President. The President shall be the chief executive officer of
---------
the Trust; unless a Chairman has been designated, he shall preside at all
meetings of the Trustees and of the Shareholders; he shall be, ex officio, a
----------
member of all standing committees; and he shall see that all orders and
<PAGE>
7
resolutions of the Trustees are carried into effect. He, or such person as he
may designate, shall sign, execute and acknowledge, in the name of the Trust,
deeds, mortgages, bonds, contracts and other instruments authorized by the
Trustees, except in the case where the signing and execution thereof shall be
delegated by the Trustees to some other officer or agent of the Trust. The
President shall also be the chief administrative officer of the Trust and shall
perform such other duties and shall have such other powers as the Trustees may
from time to time prescribe.
4.6 Vice Presidents. The Vice Presidents, in the order of their
---------------
seniority, shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President, and shall perform such other
duties as the Trustees may from time to time prescribe.
4.7 Secretary. The Secretary shall attend all meetings of the
---------
Trustees and of the Shareholders and shall record all the proceedings thereof
and shall perform like duties for any committee when required. He shall give,
or cause to be given, notice of meetings of the Trustees and of the
Shareholders, and shall perform such other duties as may be prescribed by the
Trustees or the President, under whose supervision he shall be. He shall keep
in safe custody the seal of the Trust and, when authorized by the Trustees,
affix and attest the same to any instrument requiring it, provided that, in lieu
of affixing the seal of the Trust to any document, it shall be sufficient to
meet the requirements of any law, rule or regulation relating to a seal to affix
the word "(SEAL)" adjacent to the signature of the
<PAGE>
8
authorized officer of the Trust. The Trustees may give general authority to any
other officer to affix the seal of the Trust and to attest the affixing by his
signature.
4.8 Assistant Secretaries. The Assistant Secretaries, in order of
---------------------
their seniority, shall, in the absence or disability of the Secretary, perform
the duties and exercise the powers of the Secretary and shall perform such other
duties as the Trustees may from time to time prescribe.
4.9 Treasurer. The Treasurer shall be the chief financial officer of
---------
the Trust. He shall be responsible for the maintenance of its accounting
records and shall render to the Trustees when the Trustees so require an account
of all the Trust's financial transactions and a report of the financial
condition of the Trust.
4.10 Assistant Treasurers. The Assistant Treasurers, in the order of
--------------------
their seniority, shall, in the absence or disability of the Treasurer, perform
the duties and exercise the powers of the Treasurer and shall perform such other
duties as the Trustees may from time to time prescribe.
ARTICLE V
---------
INVESTMENT RESTRICTIONS
-----------------------
The Trustees may from time to time adopt such restrictions upon the
investment of the assets of the Trust, or amendments thereto, as they may
consider necessary or desirable, provided that any such restriction or amendment
--------
shall be approved by a majority of the outstanding Shares of the Trust entitled
to
<PAGE>
9
vote thereon if required by the Investment Company Act of 1940, as amended.
ARTICLE VI
----------
GENERAL PROVISIONS
------------------
6.1 Inspection of Books. The Trustees may from time to time
-------------------
determine whether and to what extent, and at what times and places, and under
what conditions and regulations the accounts and books of the Trust or any of
them shall be open to inspection by the Shareholders; and no Shareholder shall
have any right to inspect any account or book or document of the Trust except as
conferred by law or authorized by the Trustees or by resolution of the
Shareholders.
6.2 Reports. The Trust shall transmit to the Shareholders and/or
-------
file with federal and state regulatory agencies such reports of its operations
as the Trustees shall consider necessary or desirable or as may be required by
law.
6.3 Bonding of Officers and Employees. All officers and employees of
---------------------------------
the Trust shall be bonded to such extent, and in such manner, as may be required
by law.
6.4 Transfer of Shares. Transfer of Shares shall be made on the
------------------
books of the Trust at the direction of the person named on the Trust's books or
named in the certificates for such Shares (if issued), or by his attorney
lawfully constituted in writing, and upon surrender of the certificate or
certificates for such Shares (if issued) properly endorsed, together with a
proper request for redemption, to the Trust's transfer agent, with such evidence
of the authenticity of such transfer,
<PAGE>
10
authorization and other matters as the Trust or its agents may reasonably
require, and subject to such other reasonable conditions and requirements as may
be required by the Trust or its agents; or if the Trustees shall by resolution
so provide, transfer of Shares may be made in any other manner provided by law.
ARTICLE VII
-----------
AMENDMENTS
----------
This Code of Regulations may be altered or repealed by the Trustees at
any regular or special meeting of the Trustees.
<PAGE>
EXHIBIT 5(p)
COMPASS CAPITAL FUNDS/SM/
Addendum No. 3 to the Investment Advisory Agreement
This Addendum dated as of the ____ day of __________, 1998 is entered
into by and between COMPASS CAPITAL FUNDS, a Massachusetts business trust (the
"Fund"), and PNC ASSET MANAGEMENT GROUP, INC., a Delaware corporation (the
"Adviser").
WHEREAS, the Fund and the Adviser have entered into an Investment
Advisory Agreement dated as of January 4, 1996 (the "Advisory Agreement")
pursuant to which the Fund appointed the Adviser to act as investment adviser to
certain investment portfolios of the Fund; and
WHEREAS, Section 1(b) of the Advisory Agreement provides that in the
event the Fund establishes one or more additional investment portfolios with
respect to which it desires to retain the Adviser to act as investment adviser
under the Advisory Agreement, the Fund shall so notify the Adviser in writing
and if the Adviser is willing to render such services it shall so notify the
Fund in writing; and
WHEREAS, pursuant to Section 1(b) of the Advisory Agreement, the Fund
has notified the Adviser that it is establishing the Micro-Cap Equity Portfolio,
the GNMA Portfolio, the Delaware Tax-Free Income Portfolio and the Kentucky Tax-
Free Income Portfolio (each, a "Portfolio"), and that it desires to retain the
Adviser to act as the investment adviser therefor, and the Adviser has notified
the Fund that it is willing to serve as investment adviser to each Portfolio;
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Fund hereby appoints the Adviser to act as
-----------
investment adviser to each Portfolio for the period and on the
terms set forth in the Advisory Agreement. The Adviser hereby
accepts such appointment and agrees to render the services set
forth in the Advisory Agreement with respect to each Portfolio
for the compensation herein provided.
2. Compensation. For the services provided and the expenses assumed
------------
pursuant to the Advisory Agreement, the Fund will pay the
Adviser, and the Adviser will accept as full compensation
therefor from the Fund, a fee at the following annual rates:
a. With respect to the Micro-Cap Equity Portfolio, 1.10%
of the first $1 billion of the Portfolio's average
daily net
1
<PAGE>
assets, 1.05% of the next $1 billion of the Portfolio's
average daily net assets, 1.025% of the next $1 billion
of the Portfolio's average daily net assets and 1.00%
of the average daily net assets of the Portfolio in
excess of $3 billion.
b. With respect to the GNMA Portfolio, .550% of the first
$1 billion of the Portfolio's average daily net assets,
.500% of the next $1 billion of the Portfolio's average
daily net assets, .475% of the next $1 billion of the
Portfolio's average daily net assets and .450% of the
average daily net assets of the Portfolio in excess of
$3 billion.
c. With respect to the Delaware Tax-Free Income Portfolio,
.550% of the first $1 billion of the Portfolio's
average daily net assets, .500% of the next $1 billion
of the Portfolio's average daily net assets, .475% of
the next $1 billion of the Portfolio's average daily
net assets and .450% of the average daily net assets of
the Portfolio in excess of $3 billion.
d. With respect to the Kentucky Tax-Free Income Portfolio,
.550% of the first $1 billion of the Portfolio's
average daily net assets, .500% of the next $1 billion
of the Portfolio's average daily net assets, .475% of
the next $1 billion of the Portfolio's average daily
net assets and .450% of the average daily net assets of
the Portfolio in excess of $3 billion.
Such fee as is attributable to each Portfolio shall be a separate
charge to such Portfolio and shall be the several (and neither
joint nor joint and several) obligation of such Portfolio.
3. Capitalized Terms. From and after the date hereof, the term
-----------------
"Portfolios" as used in the Advisory Agreement shall be deemed to
include the Micro-Cap Equity Portfolio, the GNMA Portfolio, the
Delaware Tax-Free Income Portfolio and the Kentucky Tax-Free
Income Portfolio.
4. Miscellaneous. Except to the extent supplemented hereby, the
-------------
Advisory Agreement shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed in all respects as
supplemented hereby. Without limiting the generality of the
foregoing, it is understood that the
2
<PAGE>
Adviser may employ one or more sub-advisers for each Portfolio
pursuant to Section 2 of the Advisory Agreement.
5. Release. "BlackRock Funds" and "Trustees of BlackRock Funds"
-------
refer respectively to the trust created and the Trustees, as
trustees but not individually or personally, acting from time to
time under a Declaration of Trust dated December 22, 1988 which
is hereby referred to and a copy of which is on file at the
office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The
obligations of "BlackRock Funds" entered into in the name or on
behalf thereof by any of the Trustees, officers, representatives
or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, shareholders, officers,
representatives or agents of the Fund personally, but bind only
the Trust Property (as defined in the Declaration of Trust), and
all persons dealing with any class of shares of the Fund must
look solely to the Trust Property belonging to such class for the
enforcement of any claims against the Fund.
[End of Text]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Addendum No. 3
to the Advisory Agreement to be executed by their officers designated below as
of the day and year first above written.
Attest: COMPASS CAPITAL FUNDS/SM/
[SEAL] By:________________________
Name:
Title:
PNC ASSET MANAGEMENT GROUP, INC.
[SEAL] By:________________________
Name:
Title:
4
<PAGE>
EXHIBIT 5(q)
SUB-ADVISORY AGREEMENT
Micro-Cap Equity Portfolio
AGREEMENT dated as of _______________, 1998, between PNC Asset
Management Group, Inc., a Delaware corporation ("Adviser"), and PNC Equity
Advisors Company, a Delaware corporation ("Sub-Adviser").
WHEREAS, Adviser has agreed to furnish investment advisory services to
the Micro-Cap Equity Portfolio (the "Portfolio") of BlackRock Funds (the
"Fund"), an open-end, management investment company registered under the
Investment Company Act of 1940 ("1940 Act"); and
WHEREAS, Adviser wishes to retain the Sub-Adviser to provide it with
sub-advisory services as described below in connection with Adviser's advisory
activities on behalf of the Portfolio;
WHEREAS, the advisory agreement between Adviser and the Fund dated
January 4, 1996 (such Agreement or the most recent successor agreement between
such parties relating to advisory services to the Portfolio is referred to
herein as the "Advisory Agreement") contemplates that Adviser may sub-contract
investment advisory services with respect to the Portfolio to a sub-adviser
pursuant to a sub-advisory agreement agreeable to the Fund and approved in
accordance with the provisions of the 1940 Act;
WHEREAS, this Agreement has been approved in accordance with the
provisions of the 1940 Act, and Sub-Adviser is willing to furnish such services
upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Adviser hereby appoints Sub-Adviser to act as sub-
-----------
adviser with respect to the Portfolio as provided in Section 2 of the Advisory
Agreement. Sub-Adviser accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
2. Services of Sub-Adviser. Subject to the oversight and
-----------------------
supervision of Adviser and the Fund's Board of Trustees, Sub-Adviser will
supervise the day-to-day operations of the Portfolio and perform the following
services: (i) provide investment research and credit analysis concerning the
Portfolio's investments, (ii) conduct a continual program of investment of the
Portfolio's assets, (iii) determine what portion of the Portfolio's assets will
be invested in cash, cash equivalents and money market instruments, (iv) place
<PAGE>
orders for all purchases and sales of the investments made for the Portfolio,
and (v) maintain the books and records as are required to support Fund
operations (in conjunction with record-keeping and accounting functions
performed by Adviser). In addition, Sub-Adviser will keep the Fund and Adviser
informed of developments materially affecting the Fund and shall, on its own
initiative, furnish to the Fund from time to time whatever information Sub-
Adviser believes appropriate for this purpose. Sub-Adviser will communicate to
Adviser on each day that a purchase or sale of an instrument is effected for the
Portfolio (i) the name of the issuer, (ii) the amount of the purchase or sale,
(iii) the name of the broker or dealer, if any, through which the purchase or
sale will be effected, (iv) the CUSIP number of the instrument, if any, and (v)
such other information as Adviser may reasonably require for purposes of
fulfilling its obligations to the Fund under the Advisory Agreement. Sub-Adviser
will provide the services rendered by it under this Agreement in accordance with
the Portfolio's investment objectives, policies and restrictions as stated in
the Portfolio's Prospectuses and Statements of Additional Information (as
currently in effect and as they may be amended or supplemented from time to
time), and the resolutions of the Fund's Board of Trustees.
3. Other Sub-Adviser Covenants. Sub-Adviser further agrees that it:
---------------------------
(a) will comply with all applicable Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and will in addition conduct its
activities under this Agreement in accordance with other applicable law;
(b) will place orders either directly with the issuer or with
any broker or dealer. Subject to the other provisions of this paragraph, in
placing orders with brokers and dealers, Sub-Adviser will attempt to obtain the
best price and the most favorable execution of its orders. In placing orders,
Sub-Adviser will consider the experience and skill of the firm's securities
traders as well as the firm's financial responsibility and administrative
efficiency. Consistent with this obligation, Sub-Adviser may, subject to the
approval of the Fund's Board of Trustees, select brokers on the basis of the
research, statistical and pricing services they provide to the Portfolio and
other clients of Adviser or Sub-Adviser. Information and research received from
such brokers will be in addition to, and not in lieu of, the services required
to be performed by Sub-Adviser hereunder. A commission paid to such brokers may
be higher than that which another qualified broker would have charged for
effecting the same transaction, provided that Sub-Adviser determines in good
faith that such commission is reasonable in terms either of the transaction or
the overall responsibility of Adviser and Sub-Adviser to the Portfolio and their
other clients and that the total commissions paid by the Portfolio will be
reasonable in relation to the benefits to the Portfolio over the long-term. In
addition, Sub-Adviser is authorized to take into account the sale of shares of
the Fund in allocating purchase and sale orders for portfolio securities to
brokers or dealers (including brokers and dealers that are affiliated with
Adviser, Sub-Adviser or the Fund's distributor), provided that Sub-Adviser
believes that the quality of the transaction and the commission are comparable
to what they would be with other qualified firms. In no instance, however, will
the Portfolio's securities be purchased from or sold to
-2-
<PAGE>
the Adviser, Sub-Adviser, the Fund's distributor or any affiliated person
thereof, except to the extent permitted by the SEC or by applicable law;
(c) will maintain or cause Adviser to maintain books and records
with respect to the Portfolio's securities transactions and will render to
Adviser and the Fund's Board of Trustees such periodic and special reports as
they may request;
(d) will maintain a policy and practice of conducting its
investment advisory services hereunder independently of the commercial banking
operations of its affiliates. When Sub-Adviser makes investment recommendations
for the Portfolio, its investment advisory personnel will not inquire or take
into consideration whether the issuer of securities proposed for purchase or
sale for the Portfolio's account are customers of the commercial department of
its affiliates; and
(e) will treat confidentially and as proprietary information of
the Fund all records and other information relative to the Fund, the Portfolio's
and the Fund's prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Fund, which approval shall not be unreasonably
withheld and may not be withheld where Sub-Adviser may be exposed to civil or
criminal contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested by the
Fund.
4. Services Not Exclusive. Sub-Adviser's services hereunder are not
----------------------
deemed to be exclusive, and Sub-Adviser shall be free to render similar services
to others so long as its services under this Agreement are not impaired thereby.
5. Books and Records. In compliance with the requirements of Rule
-----------------
31a-3 under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for the Portfolio are the property of the Fund and further agrees to
surrender promptly to the Fund any such records upon the Fund's request. Sub-
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, Sub-Adviser will
--------
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities, and other investments
(including brokerage commissions and other transaction charges, if any)
purchased or sold for the Portfolio.
7. Compensation. For the services which the Sub-Adviser will render
------------
to Adviser under this Agreement, Adviser will pay to Sub-Adviser a fee, computed
daily and payable monthly, at the annual rate of .950% of the first $1 billion
of the Portfolio's average daily net assets, .900% of the next $1 billion of its
average daily net assets, .875% of the next
-3-
<PAGE>
$1 billion of its average daily net assets and .850% of the average daily net
assets of the Portfolio in excess of $3 billion.
If the Adviser waives any or all of its advisory fee payable under the
Advisory Agreement, or reimburses the Fund pursuant to Section 8(b) of that
Agreement, with respect to the Portfolio, the Sub-Adviser will bear its share of
the amount of such waiver or reimbursement by waiving fees otherwise payable to
it hereunder on a proportionate basis to be determined by comparing the
aggregate fees that would otherwise be paid to it hereunder with respect to the
Portfolio to the aggregate fees that would otherwise be paid by the Fund to the
Adviser under the Advisory Agreement with respect to the Portfolio. Adviser
shall inform Sub-Adviser prior to waiving any advisory fees.
8. Limitation on Liability. Sub-Adviser will not be liable for any
-----------------------
error of judgment or mistake of law or for any loss suffered by Adviser or by
the Portfolio in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties under this Agreement.
9. Duration and Termination. This Agreement will become effective
------------------------
as of the date hereof and, unless sooner terminated with respect to the
Portfolio as provided herein, shall continue in effect with respect to the
Portfolio until March 31, 1999. Thereafter, if not terminated, this Agreement
shall continue in effect with respect to the Portfolio for successive annual
periods ending on March 31, provided such continuance is specifically approved
at least annually (a) by the vote of a majority of those members of the Fund's
Board of Trustees who are not interested persons of any party to this Agreement,
cast in person at a meeting called for the purpose of voting on such approval,
and (b) by the Fund's Board of Trustees or by a vote of a majority of the
outstanding voting securities of the Portfolio. Notwithstanding the foregoing,
this Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the Fund (by vote of the Fund's Board of
Trustees or by vote of a majority of the outstanding voting securities of the
Portfolio), or by Adviser or Sub-Adviser on 60 days' written notice, and will
terminate automatically upon any termination of the Advisory Agreement between
the Fund and Adviser. This Agreement will also immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the same meanings of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
11. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or
-4-
<PAGE>
otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding on, and shall inure to the benefit of the parties
hereto and their respective successors and shall be governed by Delaware law.
12. Counterparts. This Agreement may be executed in counterparts by
------------
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
[End of Text]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PNC ASSET MANAGEMENT GROUP, INC.
By:______________________________
PNC EQUITY ADVISORS COMPANY
By:______________________________
-6-
<PAGE>
EXHIBIT 6(a)
THE PNC(R) FUND
DISTRIBUTION AGREEMENT
----------------------
Agreement dated as of January 31, 1994 between THE PNC(R) FUND, a
Massachusetts business trust (the "Company"), and Provident Distributors, Inc.,
a Delaware corporation (the "Distributor").
WHEREAS, the Company is an open-end, diversified management investment
company and is so registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Company desires to retain the Distributor as its
distributor to provide for the sale and distribution of each class and series of
units of beneficial interest ("shares") in each of the Company's investment
portfolios (individually, a "Fund," collectively, the "Funds") as listed on
Appendix A (as such Appendix may, from time to time, be supplemented (or
amended)), and the Distributor is willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth and intending to be legally bound, the parties hereto agree as
follows:
1. Appointment of Distributor. The Company hereby appoints the
--------------------------
Distributor as distributor of each class and series of shares in each of the
Company's Funds on the terms and for the period set forth in this Agreement. The
Distributor hereby accepts such appointment and agrees to render the services
and duties set forth in Section 3 below. In the event that the Company
establishes additional classes or investment portfolios other than the Funds
listed on Appendix A with respect to which it desires to retain the Distributor
to act as distributor hereunder, the Company shall notify the Distributor,
whereupon such Appendix A shall be supplemented (or amended) and such portfolio
shall become a Fund hereunder and shall be subject to the provisions of this
Agreement to the same extent as the Funds (except to the extent that said
provisions may be modified in writing by the Company and Distributor at the
time).
2. Delivery of Documents. The Company has furnished the Distributor
---------------------
with copies, properly certified or authenticated, of each of the following
documents and will deliver to it all future amendments and supplements, if any:
a. The Company's Declaration of Trust, filed with the Secretary
of State of the Commonwealth of Massachusetts on December 22, 1988, as amended
(the "Charter");
b. The Company's Code of Regulations, as amended and
supplemented ("Code");
c. Resolutions of the Company's Board of Trustees authorizing
the execution and delivery of this Agreement;
<PAGE>
2
d. The Company's most recent amendment to its Registration
Statement under the Securities Act of 1933, as amended (the "1933 Act"), and the
1940 Act on Form N-1A as filed with the Securities and Exchange Commission (the
"Commission") on January 7, 1994, relating to its Funds (the Registration
Statement, as presently in effect and as amended or supplemented from time to
time, is herein called the "Registration Statement");
e. The Company's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto (such
Prospectuses and Statements of Additional Information and supplements thereto,
as presently in effect and as from time to time amended and supplemented, are
herein called the "Prospectuses"); and
f. The Company's Amended and Restated Service Plan and related
Distribution and Servicing Agreement and form of broker-dealer agreement.
3. Service and Duties. The Distributor enters into the following
------------------
covenants with respect to its services and duties:
a. The Distributor agrees to sell, as agent, from time to time
during the term of this Agreement, shares upon the terms and at the current
offering price as described in the Prospectuses. The Distributor will act only
in its own behalf as principal in making agreements with selected dealers. No
broker dealer or other person which enters into a selling or servicing agreement
with the Distributor shall be authorized to act as agent for the Company or its
Funds in connection with the offering or sale of shares to the public or
otherwise. The Distributor shall use its best efforts to sell shares of each
class of each of the Funds but shall not be obligated to sell any certain number
of shares.
b. The Distributor shall prepare or review, provide advice with
respect to, and file with the federal and state agencies or other organizations
as required by federal, state, and other applicable laws and regulations, all
sales literature (advertisements, brochures and shareholder communications) for
each of the Funds and any class of shares thereof.
c. In performing all of its services and duties as Distributor,
the Distributor will act in conformity with the Charter, Code, Prospectuses and
resolutions and other instructions of the Company's Board of Trustees and will
comply with the requirements of the 1933 Act, the Securities Exchange Act of
1934, the 1940 Act and all other applicable federal or state laws.
d. The Distributor will bear the cost of (i) printing and
distributing any Prospectus (including any
<PAGE>
3
supplement thereto) to persons who are not shareholders, and (ii) preparing,
printing and distributing any literature, advertisement or material which is
primarily intended to result in the sale of shares; provided, however, that the
-------- -------
Distributor shall not be obligated to bear the expenses incurred by the Company
in connection with the preparation and printing of any amendment to any
Registration Statement or Prospectus necessary for the continued effective
registration of the shares under the 1933 Act and state securities laws and the
distribution of any such document to existing shareholders of the Company's
Funds.
e. The Company shall have the right to suspend the sale of shares
at any time in response to conditions in the securities markets or otherwise,
and to suspend the redemption of shares of any Fund at any time permitted by the
1940 Act or the rules and regulations of the Commission ("Rules").
f. The Company reserves the right to reject any order for shares
but will not do so arbitrarily or without reasonable cause.
4. Forfeiture of Sales Charges. If any shares sold by the
---------------------------
Distributor under the terms of this Agreement are redeemed or repurchased by the
Fund or by the Distributor as agent or are tendered for redemption within seven
business days after the date of confirmation of the original purchase of said
shares, the Distributor shall forfeit the amount above the net asset value
received by it in respect of such shares, provided that the portion, if any, of
such amount re-allowed by the Distributor to broker-dealers or other persons
shall be repayable to the Company only to the extent recovered by the
Distributor from the broker dealer or other person concerned. The Distributor
shall include in the form of agreement with such broker-dealers and other
persons a corresponding provision for the forfeiture by them of their concession
with respect to shares sold by them or their principals and redeemed or
repurchased by the Company or by the Distributor as agent (or tendered for
redemption) within seven business days after the date of confirmation of such
initial purchases.
5. Limitations of Liability. The Distributor shall not be liable for
------------------------
any error of judgment or mistake of law or for any loss suffered by the Company
in connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
6. Proprietary and Confidential Information. The Distributor agrees
----------------------------------------
on behalf of itself and its employees to treat confidentially and as proprietary
information of the Company all records and other information relative to the
Company and its Funds and prior, present or potential shareholders, and not to
use such records and information for any purpose other than
<PAGE>
4
performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Company, which approval shall not
be unreasonably withheld and may not be withheld where the Distributor may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Company.
7. Indemnification.
----------------
a. The Company represents and warrants to the Distributor that
the Registration Statement contains, and that the Prospectuses at all times will
contain, all statements required by the 1933 Act and the Rules of the
Commission, will in all material respects conform to the applicable requirements
of the 1933 Act and the Rules and will not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that no representation or warranty
in this Section 7 shall apply to statements or omissions made in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of the Distributor or either of the Company's co-administrators expressly
for use in the Registration Statement or Prospectuses.
b. The Company on behalf of each Fund agrees that each Fund will
indemnify, defend and hold harmless the Distributor, its several officers, and
directors, and any person who controls the Distributor within the meaning of
Section 15 of the 1933 Act, from and against any losses, claims, damages or
liabilities, joint or several, to which the Distributor, its several officers,
and directors, and any person who controls the Distributor within the meaning of
Section 15 of the 1933 Act, may become subject under the 1933 Act or
otherwise,insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Prospectuses or in any application or other document
executed by or on behalf of the Company with respect to such Fund or are based
upon information furnished by or on behalf of the Company with respect to such
Fund filed in any state in order to qualify the shares under the securities or
blue sky laws thereof ("Blue Sky application") or arise out of, or are based
upon, the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Distributor, its several officers, and directors, and any
person who controls the Distributor within the meaning of Section 15 of the 1933
Act, for any legal or other expenses reasonably incurred by the Distributor, its
several officers, and directors, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, in investigating, defending or
preparing to defend any such action, proceeding or
<PAGE>
5
claim; provided, however, that the Company shall not be liable in any case to
-------- -------
the extent that such loss, claim, damage or liability arises out of, or is based
upon, any untrue statement, alleged untrue statement, or omission or alleged
omission made in the Registration Statement, the Prospectus or any Blue Sky
application with respect to such Fund in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Distributor
or either of the Company's co administrators specifically for inclusion therein
or arising out of the failure of the Distributor to deliver a current
Prospectus.
c. The Company on behalf of each Fund shall not indemnify any
person pursuant to this Section 7 unless the court or other body before which
the proceeding was brought has rendered a final decision on the merits that such
person was not liable by reason of his or her willful misfeasance, bad faith or
gross negligence in the performance of his or her duties, or his or her reckless
disregard of any obligations and duties, under this Agreement ("disabling
conduct") or, in the absence of such a decision, a reasonable determination
(based upon a review of the facts) that such person was not liable by reason of
disabling conduct has been made by the vote of a majority of a quorum of the
trustees of the Company who are neither "interested parties" (as defined in the
1940 Act) nor parties to the proceeding, or by independent legal counsel in a
written opinion.
d. The Distributor will indemnify and hold harmless the Company
and each of its Funds and its several officers and trustees, and any person who
controls the Company within the meaning of Section 15 of the 1933 Act, from and
against any losses, claims, damages or liabilities, joint or several, to which
any of them may become subject under the 1933 Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of, or are based upon, any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, the
Prospectus or any Blue Sky application, or arise out of, or are based upon, the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, which
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company or any of its several officers
and trustees by or on behalf of the Distributor or either of the Company's co-
administrators specifically for inclusion therein, and will reimburse the
Company and its several officers, trustees and such controlling persons for any
legal or other expenses reasonably incurred by any of them in investigating,
defending or preparing to defend any such action, proceeding or claim.
e. The obligations of each Fund under this Section 7 shall be the
several (and not the joint or joint and several) obligation of each Fund.
<PAGE>
6
8. Duration and Termination. This Agreement shall become effective
------------------------
upon its execution as of the date first written above and, unless sooner
terminated as provided herein, shall continue until October 3, 1994. Thereafter,
if not terminated, this Agreement shall continue automatically for successive
terms of one year, provided that such continuance is specifically approved at
least annually (a) by a vote of a majority of those members of the Company's
Board of Trustees who are not parties to this Agreement or "interested persons"
of any such party, cast in person at a meeting called for the purpose of voting
on such approval, and (b) by the Company's Board of Trustees or by vote of a
"majority of the outstanding voting securities" of the Company; provided,
--------
however, that this Agreement may be terminated by the Company at any time,
- -------
without the payment of any penalty, by vote of a majority of the entire Board of
Trustees or by a vote of a "majority of the outstanding voting securities" of
the Company on 60 days' written notice to the Distributor, or by the Distributor
at any time, without the payment of any penalty, on 90-days' written notice to
the Company. This Agreement will automatically and immediately terminate in the
event of its "assignment." (As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested person" and "assignment" shall
have the same meanings as such terms have in the 1940 Act.)
9. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which an enforcement of the change,
waiver, discharge or termination is sought.
10. Notices. Notices of any kind to be given to the Company hereunder
-------
by the Distributor shall be in writing and shall be duly given if mailed or
delivered to the Company at Bellevue Park Corporate Center, Suite 152, 103
Bellevue Parkway, Wilmington, Delaware 19809, Attention: Mr. Edward J. Roach,
Vice President and Treasurer, with a copy to Morgan R. Jones, Esq., Secretary,
1100 PNB Building, 1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496,
or at such other address or to such individual as shall be so specified by the
Company to the Distributor. Notices of any kind to be given to the Distributor
hereunder by the Company shall be in writing and shall be duly given if mailed
or delivered to Provident Distributors, Inc., 259 Radnor-Chester Road, Suite
120, Radnor, Pennsylvania 19087, Attention: Monroe J. Haegele or at such other
address or to such other individual as shall be so specified by the Distributor
to the Company.
11. Miscellaneous.
-------------
a. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. If any provision of this
Agreement shall be held or
<PAGE>
7
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
b. The names "The PNC(R) Fund" and "Trustees of The PNC(R) Fund"
refer specifically to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988, which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Company. The obligations of
"The PNC(R) Fund" entered into in the name or on behalf thereof by any of the
Trustees, officers, representatives or agents are not made individually, but in
such capacities, and are not binding upon any of the Trustees, officers,
representatives or agents are not made individually, but in such capacities, and
are not binding upon any of the Trustees, shareholders, representatives or
agents of the Company personally, but bind only the Trust property (as defined
in the Declaration of Trust), and all persons dealing with any Fund or class of
shares of the Company must look solely to the Trust property belonging to such
Fund or class for the enforcement of any claims against the Company.
12. Counterparts. This Agreement may be executed in counterparts,
------------
all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE PNC(R) FUND
By: _________________________
President
PROVIDENT DISTRIBUTORS, INC.
By: _________________________
Title:
<PAGE>
EXHIBIT 6(b)
APPENDIX A
to the
DISTRIBUTION AGREEMENT
BETWEEN
Compass Capital Funds/SM/
(previously The PNC(R) Fund)
and
Compass Distributors, Inc.
_________________________________________________________________
Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
U.S. Treasury Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series Investor C Shares)
New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C
Investor Shares)
North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Virginia Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
Intermediate Government Bond Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Bond Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares, Series C Investor Shares and BlackRock Shares)
Low Duration Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and
BlackRock Shares)
Intermediate Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and
BlackRock Shares)
Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)
Large Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Large Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
-2-
<PAGE>
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Select Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
BlackRock Strategic Portfolio I (Institutional Shares)
BlackRock Strategic Portfolio II (Institutional Shares)
International Small Cap Equity Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Micro-Cap Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
GNMA Portfolio (Institutional Shares, Service Shares, Series A Investor Shares,
Series B Investor Shares and Series C Investor Shares)
Delaware Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Kentucky Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Release. "Compass Capital Funds" and "Trustees of Compass Capital Funds" refer
- -------
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Company. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any
-3-
<PAGE>
of the Trustees, officers, representatives or agents are made not individually,
but in such capacities, and are not binding upon any of the Trustees,
shareholders, officers, representatives or agents of the Company personally, but
bind only the Trust Property (as defined in the Declaration of Trust), and all
persons dealing with any class of shares of the Company must look solely to the
Trust Property belonging to such class for the enforcement of any claims against
the Company.
[End of Text]
-4-
<PAGE>
Agreed to and accepted as of ____________, 1998.
COMPASS CAPITAL FUNDS(SM)
By:_____________________
Name:
Title:
COMPASS DISTRIBUTORS, INC.
By:_____________________
Name:
Title:
-5-
<PAGE>
EXHIBIT 6(c)
PNC(R) Fund
Amendment No. 2 to the Distribution Agreement
This Amendment dated as of the 18th day of October, 1994, is entered
into between The PNC FUND, a Massachusetts business trust (the "Company") and
Provident Distributors, Inc. ("PDI"), a Delaware corporation (the
"Distributor").
WHEREAS, the Company and the Distributor have entered into a
Distribution Agreement dated as of January 31, 1994, and amended on September
23, 1994 (the "Distribution Agreement"), pursuant to which the Company appointed
the Distributor to act as distributor to the Company;
WHEREAS, the parties hereto desire to amend the Distribution Agreement
to restate the substance of Amendment No. 1 to the Distribution Agreement and to
clarify the payment of certain fees to the Distributor; and
WHEREAS, except to the extent amended hereby, the Distribution
Agreement shall remain unchanged and in full force and effect, and is hereby
ratified and confirmed in all respects as amended hereby.
NOW, THEREFORE, the parties hereby, intending to be legally bound,
hereby agree as follows:
1. Amendment No. 1 to the Distribution Agreement is hereby
superseded by this Agreement.
2. Paragraph (f) of Section 2 (relating to the delivery of
documents) is amended to read in its entirety as follows:
"(f) The Company's Distribution and Service Plan and related
Distribution and Servicing Agreement relating to Series A Investor
Class Shares and the Company's Series B Distribution Agreement
relating to the Company's Series B Investor Class Shares."
3. The following paragraph is inserted into the Distribution
Agreement as paragraph 3A:
"3A. Payments Relating to Distribution Plans. Payments by the
---------------------------------------
Company relating to any distribution plan within the meaning of Rule
12b-1 under the 1940 Act (a "Plan") adopted by the Company's Board of
Trustees shall be payable to the Distributor or his assignees, all in
accordance with the terms and conditions of such Plan."
<PAGE>
2
4. The following paragraph is inserted into the Distribution
Agreement as paragraph 3B:
"3B. Payments of Sales Charges. Any front-end sales charges or
-------------------------
deferred sales charges payable in connection with purchases of Series
A Investor Class Shares and Series B Investor Class Shares,
respectively, shall be payable to the Distributor or his assignees,
all in accordance with the Company's registration statement."
5. Section 8 of the Distribution Agreement is amended to read in its
entirety as follows:
"8. Duration and Termination. This Agreement shall become
------------------------
effective upon its execution as of the date first written above and,
unless sooner terminated as provided herein, shall continue until
March 31, 1995. Thereafter, if not terminated, this Agreement shall
continue automatically for successive terms of one year, provided that
such continuance is specifically approved at least annually (a) by a
vote of a majority of those members of the Company's Board of Trustees
who are not parties to this Agreement or "interested persons" of any
such party, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by the Company's Board of Trustees or
by vote of a "majority of the outstanding voting securities" of the
Company; provided, however, that this Agreement may be terminated by
-------- -------
the Company at any time, without the payment of any penalty, by vote
of a majority of the entire Board of Trustees or by a vote of a
"majority of the outstanding voting securities" of the Company on 60
days' written notice to the Distributor, or by the Distributor at any
time, without the payment of any penalty, on 90-days' written notice
to the Company. This Agreement will automatically and immediately
terminate in the event of its "assignment." (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meanings as
such terms have in the 1940 Act.)"
<PAGE>
3
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date and year first written above.
The PNC(R) Fund
By: ___________________________
Name:
Title:
Provident Distributors, Inc.
By: ___________________________
Name:
Title:
<PAGE>
EXHIBIT 8(a)
CUSTODIAN AGREEMENT
-------------------
THIS AGREEMENT is made as of October 4, 1989 by and between THE PNC(R)
FUND, a Massachusetts business trust (the "Fund", and PROVIDENT NATIONAL BANK, a
national banking association ("Bank").
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end, diversified,
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Fund desires to retain Bank to serve as the Fund's
custodian and Bank is willing to serve as the Fund's custodian;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Bank to act as custodian of
-----------
the securities, cash and other property belonging to each investment portfolio
(a "portfolio") of the Fund for the period and on the terms set forth in this
Agreement. Bank accepts such appointment and agrees to furnish the services
herein set forth in return for the compensation as provided in Paragraph 21 of
this Agreement. Bank agrees to comply with all relevant provisions of the 1940
Act and applicable rules and regulations thereunder. The Fund's shares, $.001
par value per share (the "Shares"), have been classified into seven different
classes, i.e., Classes A-l, B-1, C-l, D, E, F and G. The Fund may from time to
time issue additional classes of Shares or classify and reclassify shares of
each such class. Bank shall identify to each such class property belonging to
such class and in such reports, confirmations and notices to the Fund called for
under this Agreement shall identify the class to which such report, confirmation
or notice pertains.
2. Delivery of Documents. The Fund has furnished Bank with copies,
---------------------
properly certified or authenticated, of each of the following:
(a) Resolutions of the Fund's Board of Trustees authorizing the
appointment of Bank as custodian of the portfolio securities, cash and
other property belonging to the Fund and approving this Agreement;
(b) Appendix A identifying and containing the signatures of the
Fund's officers and/or other persons authorized to issue Oral Instructions
and to sign Written Instructions, as hereinafter defined, on behalf of the
Fund;
<PAGE>
2
(c) The Fund's Declaration of Trust as filed with the State
Secretary of the Commonwealth of Massachusetts and the Boston City Clerk on
December 22, 1988;
(d) The Fund's Code of Regulations;
(e) The Investment Advisory Agreement between Provident
Institutional Management Corporation (Adviser) and the Fund (the "Advisory
Agreement");
(f) The Sub-Advisory Agreements between Adviser and Provident
National Bank (relating to the Money Market and Government Money Market
Portfolios and the Total Return Portfolio), Adviser and The Central Trust
Company, N.A. (relating to the Tax-Free Money Market, Capital Appreciation
and Managed Income Portfolios) and Adviser and Provident Capital
Management, Inc. (relating to the International Portfolio);
(g) The Administration Agreement between The Boston Company
Advisors, Inc. and the Fund (the "Administration Agreement");
(h) The Administration and Accounting Services Agreement between
Provident Financial Processing Corporation ("PFPC") and the Fund
(collectively with the Administration Agreement, the "Administration
Agreements";
(i) The Distribution Agreement between TBC Funds Distributor,
Inc. and the Fund;
(j) The Transfer Agency Agreement between PFPC (in its capacity
as transfer agent, the "Transfer Agent") and the Fund (the "Transfer Agency
Agreement");
(k) The Fund's Notification of Registration on Form N-8A under
the 1940 Act as filed with the Securities and Exchange Commission ("SEC")
on December 23, 1998;
(l) The Fund's Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of 1933 (the "1933 Act")
and the 1940 Act, as filed with the SEC on December 23, 1988, and all
amendments thereto;
(m) The Fund's non-12b-1 Shareholder Services Plan and the
Fund's form of shareholder servicing agreement;
(n) The Fund's 12b-1 Plan and the Fund's form of dealer
agreement and shareholder servicing agreement;
(o) The Fund's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto
(collectively, the "Prospectuses"); and
<PAGE>
3
(p) Before any portfolio engages in any transactions
regulated by the Commodity Futures Trading Commission ("CFTC"),
a copy of either (i) a filed notice of eligibility to claim the
exclusion from the definition of "commodity pool operator"
contained in Section 2(a)(1)(A) of the Commodity Exchange
Account ("CEA") that is provided in Rule 4.5 under the CEA,
together with all supplements as are required by the CFTC, or
(ii) a letter which has been granted the Fund by the CFTC which
states that the Fund will not be treated as a "pool" as defined
in Section 4.10(d) of the CFTC's General Regulations, or (iii) a
letter which has been granted the Fund by the CFTC which states
that the CFTC will not take any enforcement action if the Fund
does not register as a commodity pool operator."
The Fund will furnish Bank from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
3. Definitions.
-----------
(a) "Authorized Person." As used in this Agreement, the term
-----------------
"Authorized Person" means any of the officers of the Fund and any other person,
whether or not any such person is an officer or employee of the Fund, duly
authorized by the Board of Trustees of the Fund to give Oral and Written
Instructions on behalf of the Fund and listed on the Certificate annexed hereto
as Appendix A or any amendment thereto as may be received by Bank from time to
time.
(b) "Book-Entry System." As used in this Agreement, the term "Book-
-----------------
Entry System" means the Federal Reserve/Treasury book-entry system for United
States and federal agency securities, its successor or successors and its
nominee or nominees and any book-entry system maintained by a clearing agency
registered with the SEC under Section 17A of the Securities Exchange Act of 1934
(the "1934 Act").
(c) "Oral Instructions." As used in this Agreement, the term "Oral
-----------------
Instructions" means oral instructions actually received by Bank from an
Authorized Person or from a person reasonably believed by Bank to be an
Authorized Person. The Fund agrees to deliver to Bank, at the time and in the
manner specified in Paragraph 8(b) of this Agreement, Written Instructions
confirming Oral Instructions.
(d) "Property." The term "Property," as used in this Agreement,
--------
means:
(i) any and all securities and other property which the Fund
may from time to time deposit, or cause to be deposited, with Bank or
which Bank may from time to time hold for the Fund;
<PAGE>
4
(ii) all income in respect of any of such securities or other
property;
(iii) all proceeds of the sale of any of such securities or
other property; and
(iv) all proceeds of the sale of securities issued by the Fund,
which are received by Bank from time to time from or on behalf of the Fund.
(e) "Written Instructions." As used in this Agreement, the term
--------------------
"Written Instructions" means written instructions delivered by hand, mail,
tested telegram, cable, telex or facsimile sending device, and received by Bank
and signed by an Authorized Person.
4. Delivery and Registration of the Property. The Fund will deliver
-----------------------------------------
or cause to be delivered to Bank all securities and all moneys owned by it,
including cash received for the issuance of its Shares, at any time during the
period of this Agreement. Bank will not be responsible for such securities and
such moneys until actually received by it. All securities delivered to Bank
(other than in bearer form) shall be registered in the name of the Fund or in
the name of a nominee of the Fund or in the name of any nominee of Bank (with or
without indication of fiduciary status), or in the name of any sub-custodian or
any nominee of any such sub-custodian appointed pursuant to Paragraph 6 hereof
or shall be properly endorsed and in form for transfer satisfactory to Bank.
5. Receipt and Disbursement of Money.
---------------------------------
(a) Bank shall open and maintain a separate custodial account or
accounts in the name of each portfolio of the Fund, subject only to draft or
order by Bank acting pursuant to the terms of this Agreement, and shall hold in
such account or accounts, subject to the provisions hereof, all cash received by
it from or for the account of such portfolios. Bank shall make payments of cash
to, or for the account of, each portfolio of the Fund from such cash only (i)
for the purchase of securities for the Fund's portfolios as provided in
Paragraph 13 hereof; (ii) upon receipt of written Instructions, for the payment
of interest, dividends, taxes, administration, accounting, distribution,
advisory or management fees or expenses which are to be borne by the Fund under
the terms of this Agreement, the Advisory Agreement, the Administration
Agreements, the Transfer Agency Agreement and the Distribution and Service plan;
(iii) upon receipt of Written Instructions, for payments in connection with the
conversion, exchange or surrender of securities owned or subscribed to by the
Fund and held by or to be delivered to Bank; (iv) to a sub-custodian pursuant to
Paragraph 6 hereof; (v) for the redemption of Shares; (vi) for payment of the
amount of dividends received in respect of securities sold short; or (vii) upon
receipt of Written Instructions, for other proper Fund
<PAGE>
5
purposes. No payment pursuant to (i) above shall be made unless Bank has
received a copy of the broker's or dealer's confirmation or the payee's invoice,
as appropriate.
(b) Bank is hereby authorized to endorse and collect all checks,
drafts, negotiable instruments or other orders for the payment of money received
as custodian for the account of the Fund.
6. Receipt of Securities.
---------------------
(a) Except as provided by Paragraph 7 hereof, Bank shall hold and
physically segregate in separate accounts, identifiable at all times from those
of any other persons, firms, or corporations, all securities and non-cash
property received by it for the account of each portfolio of the Fund. All such
securities and non-cash property are to be held or disposed of by Bank for each
portfolio of the Fund pursuant to the terms of this Agreement. In the absence
of Written Instructions accompanied by a certified resolution of the Fund's
Board of Trustees authorizing the transaction, Bank shall have no power or
authority to withdraw, deliver, assign, hypothecate, pledge or otherwise dispose
of any such securities and investments except in accordance with the express
terms provided for in this Agreement. In no case may any trustee, officer,
employee or agent of the Fund withdraw any securities. In connection with its
duties under this Paragraph 6, Bank may, at its own expense, enter into sub-
custodian agreements with other banks or trust companies for the receipt of
certain securities and cash to be held by Bank for the account of the Fund
pursuant to this Agreement; provided that each such bank or trust company has an
aggregate capital, surplus and undivided profits, as shown by its last published
report, of not less than one million dollars ($1,000,000) for a Bank subsidiary
or affiliate, or of not less than twenty million dollars ($20,000,000) if such
bank or trust company is not a Bank subsidiary or affiliate and that in either
case such bank or trust company agrees with Bank to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations thereunder.
Bank shall remain responsible for the performance of all of its duties under
this Agreement and shall hold the Fund harmless from the acts and omissions,
under the standards of care provided for herein, of any bank or trust company
that it might choose pursuant to this Paragraph 6 except to the extent that the
Fund has entered into a separate sub-custody agreement with respect to the
custody of any foreign securities owned by the Fund.
(b) Where securities pre transferred to an account of the Fund
established pursuant to Paragraph 7 hereof, Bank shall also by book-entry or
otherwise identify as belonging to the applicable portfolio of Fund the quantity
of securities in a fungible bulk of securities registered in the name of Bank
(or its nominee) or shown in Bank's account on the books of the Book-Entry
System. At least monthly and from time to time, Bank
<PAGE>
6
shall furnish the Fund with a detailed statement of the Property held for each
portfolio of the Fund under this Agreement.
7. Use of Book-Entry System. The Fund shall deliver to Bank
------------------------
certified resolutions of the Board of Trustees of the Fund approving,
authorizing and instructing Bank on a continuous and on-going basis until
instructed to the contrary by Oral or Written Instructions actually received by
Bank (a) to deposit in the Book-Entry System all securities belonging to each
portfolio of the Fund eligible for deposit therein and (b) to utilize the Book-
Entry System to the extent possible in connection with settlements of purchases
and sales of securities by each portfolio of the Fund, and deliveries and
returns of securities loaned, subject to repurchase agreements or used as
collateral in connection with borrowings. Without limiting the generality of
such use, it is agreed that the following provisions shall apply thereto:
(a) Securities and any cash of a portfolio of the Fund deposited in
the Book-Entry System will at all times be segregated from any assets and cash
controlled by Bank in other than a fiduciary or custodian capacity but may be
commingled with other assets held in such capacities. Bank and its sub-
custodian, if any, will pay out money only upon receipt of securities and will
deliver securities only upon the receipt of money.
(b) All books and records maintained by Bank which relate to the
Fund's participation in the Book-Entry, System will at all times during Bank's
regular business hours be open to the inspection of the Fund's duly authorized
employees or agents, and the Fund will be furnished with all information in
respect of the services rendered to it as it may require.
(c) Bank will provide the Fund with copies of any report obtained by
Bank on the system of internal accounting control of the Book-Entry System
promptly after receipt of such a report by Bank. Bank will also provide the
Fund with such reports on its own system of internal control as the Fund may
reasonably request from time to time.
8. Instructions Consistent with Declaration of Trust and Code of
-------------------------------------------------------------
Regulations.
- -----------
(a) Unless otherwise provided in this Agreement, Bank shall act only
upon Oral and Written Instructions. Although Bank may know of the provisions of
the Declaration of Trust and Code of Regulations (collectively, the
"Organization Documents") of the Fund, Bank may assume that any Oral or Written
Instructions received hereunder are not in any way inconsistent with any
provisions of the Organization Documents or any vote, resolution or proceeding
of the Fund's shareholders (the "Shareholders"), or of the Board of Trustees, or
of any committee thereof.
<PAGE>
7
(b) Bank shall be entitled to rely upon any Oral Instructions and any
Written Instructions actually received by Bank pursuant to this Agreement. The
Fund agrees to forward to Bank Written Instructions confirming Oral Instructions
in such manner that the Written Instructions are received by Bank by the close
of business of the same day that such Oral Instructions are given to Bank. The
Fund agrees that the fact that such confirming Written Instructions are not
received by Bank shall in no way affect the validity of the transactions or
enforceability of the transactions authorized by the Fund by giving Oral
Instructions. The Fund agrees that Bank shall incur no liability to the Fund in
acting upon Oral Instructions given to Bank hereunder concerning such
transactions provided such instructions reasonably appear to have been received
from an Authorized Person.
9. Transactions Not Requiring Instructions. In the absence of
---------------------------------------
contrary Written Instructions, Bank is authorized to take the following actions:
(a) Collection of Income and Other Payments. Bank shall:
---------------------------------------
(i) collect and receive for the account of each portfolio of the
Fund, all income and other payments and distributions, including (without
limitation) stock dividends, rights, bond coupons, option premiums and
similar items, included or to be included in the Property, and promptly
advise the Fund of such receipt and shall credit such income, as collected,
to the applicable portfolio's custodian account;
(ii) endorse and deposit for collection, in the name of the
applicable portfolio of the Fund, checks, drafts, negotiable instruments,
or other orders for the payment of money on the same day as received;
(iii) receive and hold for the account of each portfolio of the
Fund all securities received as a distribution on the portfolio's
securities as a result of a stock dividend, share split-up or
reorganization, recapitalization, readjustment or other rearrangement or
distribution of rights or similar securities issued with respect to any
securities belonging to the portfolio held by Bank hereunder;
(iv) present for payment and collect the amount payable upon all
securities which may mature or be called, redeemed, or retired, or
otherwise become payable on the date such securities become payable; and
(v) take any action which may be necessary and proper in
connection with the collection and receipt of such income and other
payments and the endorsement for collection
<PAGE>
8
of checks, drafts, and other negotiable instruments as described in
Paragraph 24 of this Agreement.
(b) Miscellaneous Transactions. Bank is authorized to deliver or
--------------------------
cause to be delivered Property against payment or other consideration or written
receipt therefor in the following cases:
(i) for examination by a broker selling for the account of a
portfolio of the Fund in accordance with street delivery custom;
(ii) for the exchange of interim receipts or temporary
securities for definitive securities; and
(iii) for transfer of securities into the name of a portfolio of
the Fund or Bank or nominee of either, or for exchange of securities for a
different number of bonds, certificates, or other evidence, representing
the same aggregate face amount or number of units bearing the same interest
rate, maturity date and call provisions, if any; provided that, in any such
case, the new securities are to be delivered to Bank.
10. Transactions Requiring Instructions. Upon receipt of Oral or
-----------------------------------
Written Instructions and not otherwise, Bank, directly or through the use of the
Book-Entry System, shall:
(a) execute and deliver to such persons as may be designated in
such Oral or Written Instructions, proxies, consents, authorizations, and
any other instruments whereby the authority of the Fund as owner of any
securities on behalf of a portfolio may be exercised;
(b) deliver any securities held for a portfolio of the Fund
against receipt of other securities or cash issued or paid in connection
with the liquidation, reorganization, refinancing, tender offer, merger,
consolidation or recapitalization of any corporation, or the exercise of
any conversion privilege;
(c) deliver any securities held for a portfolio of the Fund to
any protective committee, reorganization committee or other person in
connection with the reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any corporation, and receive and hold
under the terms of this Agreement such certificates of deposit, interim
receipts or other instruments or documents as may be issued to it to
evidence such delivery;
(d) make such transfers or exchanges of the assets of a
portfolio of the Fund and take such other steps as shall be stated in said
Oral or Written Instructions to
<PAGE>
9
be for the purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Fund;
(e) release securities belonging to a portfolio of the Fund to
any bank or trust company for the purpose of pledge or hypothecation to
secure any loan incurred by a portfolio of the Fund; provided, however,
that securities shall be released only upon payment to Bank of the monies
borrowed, except that in cases where additional collateral is required to
secure a borrowing already made, subject to proper prior authorization,
further securities may be released for that purpose; and repay such loan
upon redelivery to it of the securities pledged or hypothecated therefor
and upon surrender of the note or notes evidencing the loan;
(f) release and deliver securities owned by a portfolio of the
Fund in connection with any repurchase agreement entered into on behalf of
a portfolio of the Fund, but only on receipt of payment therefor; and pay
out moneys of a portfolio of the Fund in connection with such repurchase
agreements, but only upon the delivery of the securities; and
(g) otherwise transfer, exchange or deliver securities in
accordance with Oral or Written Instructions.
11. Segregated Accounts.
-------------------
(a) Bank shall upon receipt of Written or Oral Instructions establish
and maintain a segregated account or accounts on its records for and on behalf
of each portfolio of the Fund, into which account or accounts may be transferred
cash and/or securities, including securities in the Book-Entry System (i) for
the purposes of compliance by the Fund with the procedures required by a
securities or option exchange, providing such procedures comply with the 1940
Act and Release No. 10666 or any subsequent release or releases of the SEC
relating to the maintenance of segregated accounts by registered investment
companies, and (ii) for other proper corporate purposes, but only, in the case
of clause (ii), upon receipt of Written Instructions.
(b) Bank may enter into separate custodial agreements with various
futures commission merchants ("FCMs") that the Fund uses (each an "FCM
Agreement"), pursuant to which the Fund's margin deposits in any transactions
involving futures contracts and options on futures contracts will be held by
Bank in accounts (each an "FCM Account") subject to the disposition by the FCM
involved in such contracts in accordance with the customer contract between FCM
and the Fund ("FCM Contract"), SEC rules governing such segregated accounts,
CFTC rules and the rules of the applicable commodities exchange. Such FCM
Agreements shall
<PAGE>
10
only be entered into upon receipt of Written Instructions from the Fund which
state that (i) a customer agreement between the FCM and the Fund has been
entered into; and (ii) the Fund is in compliance with all the rules and
regulations of the CFTC. Transfers of initial margin shall be made into an FCM
Account only upon Written Instructions; transfers of premium and variation
margin may be made into an FCM Account pursuant to Oral Instructions. Transfers
of funds from an FCM Account to the FCM for which Bank holds such an account may
only occur upon certification by the FCM to Bank that pursuant to the FCM
Agreement and the FCM Contract, all conditions precedent to its right to give
Bank such instruction have been satisfied.
12. Dividends and Distributions. The Fund shall furnish Bank with
---------------------------
appropriate evidence of action by the Fund's Board of Trustees declaring and
authorizing the payment of any dividends and distributions. With respect to
each portfolio of the Fund, upon receipt by Bank of Written Instructions with
respect to dividends and distributions declared by the Fund's Board of Trustees
and payable to Shareholders who have elected in the proper manner to receive
their distributions or dividends in cash, and in conformance with procedures
mutually agreed upon by Bank, the Fund, and the Transfer Agent, Bank shall pay
to the Transfer Agent, as agent for the Shareholders, an amount equal to the
amount indicated in said Written Instructions as payable by each portfolio of
the Fund to such Shareholders for distribution in cash by the Transfer Agent to
such Shareholders. In lieu of paying the Transfer Agent cash dividends and
distributions, Bank may arrange for the direct payment of cash dividends and
distributions to Shareholders by Bank in accordance with such procedures and
controls as are mutually agreed upon from time to time by and among the Fund,
Bank and the Transfer Agent.
In accordance with the applicable Prospectus, the Internal Revenue
Code and regulations promulgated thereunder, and with such procedures and
controls as are mutually agreed upon from time to time by and among the Fund,
Bank and the Transfer Agent, Bank shall arrange for the establishment of IRA
custodian accounts for such Shareholders holding Shares through IRA accounts.
13. Purchases of Securities. Promptly after each decision to
-----------------------
purchase securities by the Adviser, the Fund, through the Adviser, shall deliver
to Bank Oral Instructions specifying with respect to each such purchase: (a)
the name of the issuer (including CUSIP number, if assigned) and the title of
the securities, (b) the number of shares or the principal amount purchased and
accrued interest, if any, (c) the date of purchase and date and location of
settlement, (d) the purchase price per unit, (e) the total amount payable upon
such purchase, (f) the name of the person from whom or the broker through whom
the purchase was made, and (g) the portfolio of the Fund to which such purchase
applies. Bank shall upon receipt of (a) securities purchased by or for a
portfolio of the Fund or (b) a copy of the
<PAGE>
11
broker's or dealer's confirmation or the payee's invoice, as appropriate, pay
out of the moneys held for the account of such portfolio of the Fund the total
amount payable to the person from whom or the broker through whom the purchase
was made, provided that the same conforms to the total amount payable as set
forth in such Oral Instructions.
14. Sales of Securities. Promptly after each decision to sell
-------------------
securities by the Adviser or exercise of an option written by the Fund, the
Fund, through the Adviser, shall deliver to Bank Oral Instructions, specifying
with respect to each such sale: (a) the name of the issuer (including CUSIP
number, if assigned) and the title of the security, (b) the number of shares or
principal amount sold, and accrued interest, if any, (c) the date of sale and
date and location of settlement, (d) the sale price per unit, (e) the total
amount payable to the Fund upon such sale, (f) the name of the broker through
whom or the person to whom the sale was made, and (g) the portfolio of the Fund
to which such sale applies. Bank shall deliver the securities upon receipt of
the total amount payable to the Fund upon such sale in accordance with the
customs prevailing among dealers in securities.
15. Records. The books and records pertaining to the Fund which are
-------
in the possession of Bank shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws and regulations and shall, to the extent practicable,
be maintained separately for each portfolio of the Fund. The Fund, or the
Fund's authorized representatives, shall have access to such books and records
at all times during Bank's normal business hours. Upon the reasonable request
of the Fund, copies of any such books and records shall be provided by Bank to
the Fund or the Funds authorized representative at the Fund's expense.
16. Reports.
-------
(a) Bank shall furnish the Fund the following reports:
(1) such periodic and special reports as the Fund may reasonably
request;
(2) a monthly statement summarizing all transactions and entries
for the account of each portfolio of the Fund, listing the portfolio
securities belonging to each portfolio of the Fund with the adjusted
average cost of each issue and the market value at the end of such month,
and stating the cash account of each portfolio of the Fund including
disbursements;
(3) the reports to be furnished to the Fund pursuant to Rule
17f-4; and
<PAGE>
12
(4) such other information as may be agreed upon from time to
time between the Fund and Bank.
(b) Bank shall transmit promptly to the Fund any proxy statement,
proxy materials, notice of a call or conversion or similar communications
received by it as Custodian of the Property.
17. Cooperation with Accountants. Bank shall cooperate with the
----------------------------
Fund's independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to assure that the
necessary information is made available to such accountants for the expression
of their opinion, as such may be required from time to time by the Fund.
18. Confidentiality. Bank agrees on behalf of itself and its
---------------
employees to treat confidentially all records and other information relative to
the Fund, any portfolio of the Fund and the Fund's prior, current, or potential
Shareholders, except, after prior notification to and approval in writing by the
Fund, which approval shall not be unreasonably withheld and may not be withheld
where Bank may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Fund.
19. Right to Receive Advice.
-----------------------
(a) Advice of Fund. If Bank shall be in doubt as to any action to be
--------------
taken or omitted by it, it may request, and shall receive, from the Fund
directions or advice, including Oral or Written Instructions where appropriate.
(b) Advice of Counsel. If Bank shall be in doubt as to any question
-----------------
of law involved in any action to be taken or omitted by Bank, it may request
advice at its own cost from counsel of its own choosing (who may be counsel for
the Adviser, the Fund or Bank, at the option of Bank).
(c) Conflicting Advice. In case of conflict between directions,
------------------
advice or Oral or Written Instructions received by Bank pursuant to subparagraph
(a) of this Paragraph and advice received by Bank pursuant to subparagraph (b)
of this Paragraph, Bank shall be entitled to rely on and follow the advice
received pursuant to the latter provision alone.
(d) Protection of Bank. Bank shall be protected in any action or
------------------
inaction which it takes in reliance on any directions, advice or Oral or Written
Instructions received pursuant to subparagraphs (a) or (b) of this Paragraph
which Bank, after receipt of any such directions, advice or Oral or Written
Instructions, in good faith believes to be consistent with such directions,
advice or Oral or Written Instructions, as
<PAGE>
13
the case may be. However, nothing in this Paragraph shall be construed as
imposing upon Bank any obligation (i) to seek such directions, advice or Oral or
Written Instructions, or (ii) to act in accordance with such directions, advice
or Oral or Written Instructions when received, unless, under the terms of
another provision of this Agreement, the same is a condition to Bank's properly
taking or omitting to take such action. Nothing in this subparagraph shall
excuse Bank when an action or omission on the part of Bank constitutes willful
misfeasance, bad faith, negligence or reckless disregard by Bank of any duties
or obligations under this Agreement.
20. Compliance with Governmental Rules and Regulations. Bank assumes
--------------------------------------------------
no responsibility for ensuring that the Fund complies with all applicable
requirements of the 1933 Act, the 1934 Act, the 1940 Act, the CEA, and any laws,
rules and regulations of governmental authorities having jurisdiction.
21. Compensation. (a) As compensation for the services rendered by
------------
Bank during the term of this Agreement, the Fund will pay to Bank, with respect
to each portfolio of the Fund, monthly fees that shall be agreed upon from time
to time in writing by Bank and the Fund. The fee attributable to each portfolio
of the Fund shall be the several (and not joint or joint and several) obligation
of each such portfolio.
(b) Notwithstanding anything to the contrary in Paragraph 6 of this
Agreement, in connection with any foreign custody arrangements entered into by
the Fund, or by the Bank on behalf of the Fund, the Fund shall pay each foreign
sub-custodian appointed pursuant to any such arrangement fees and expenses
according to the schedule approved from time to time by the Board of Trustees of
the Fund. The fees and expenses so payable shall be in addition to any fees and
expense reimbursements payable by the Fund to the Bank pursuant to this
Paragraph.
22. Indemnification. The Fund, on behalf of each portfolio of the
---------------
Fund, agrees that each portfolio of the Fund shall indemnify and hold harmless
the Bank and its nominees from all taxes, charges, expenses, assessments, claims
and liabilities (including, without limitation, liabilities arising under the
1933 Act, the 1934 Act, the 1940 Act, the CEA and any state and foreign
securities and blue sky laws, all as or to be amended from time to time) and
expenses, including attorneys' fees and disbursements (as long as such attorney
has been retained with the consent of the Fund, which consent shall not be
unreasonably withheld), arising directly or indirectly from any action or thing
which the Bank or its nominees takes or does or omits to take or do for a
portfolio of the Fund at the request or on the direction of or in reliance on
the advice of the Fund, provided, that neither the Bank nor any of its nominees
--------
shall be indemnified against any liability to the Fund, any portfolio of the
Fund or to the Shareholders (or any expenses incident to such
<PAGE>
14
liability) arising out of the Bank's or any of its nominees' willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement. In the event of any advance of cash for any
purpose made by the Bank resulting from Oral or Written Instructions of the Fund
or in the event that the Bank or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Agreement, except such as may arise from it or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any Property at any time held for the account of the Fund shall be security
therefor. The obligations of each portfolio of the Fund under this Paragraph 22
shall be the several (and not joint or joint and several) obligation of each
portfolio of the Fund.
23. Responsibility of Bank. Bank shall be under no duty to take any
----------------------
action on behalf of the Fund except as specifically set forth herein or as may
be specifically agreed to by Bank in writing. In the performance of its duties
hereunder, Bank shall be obligated to exercise care and diligence and to act in
good faith and to use its best efforts within reasonable limits to ensure the
accuracy and completeness of all services performed under this Agreement. Bank
shall be responsible for its own negligent failure to perform its duties under
this Agreement, but to the extent that duties, obligations and responsibilities
are not expressly set forth in this Agreement, Bank shall not be liable for any
act or omission which does not constitute willful misfeasance, bad faith or
gross negligence on the part of Bank or reckless disregard of such duties,
obligations and responsibilities. Without limiting the generality of the
foregoing or of any other provision of this Agreement, Bank in connection with
its duties under this Agreement shall not be under any duty or obligation to
inquire into and shall not be liable for or in respect of (a) the validity or
invalidity or authority or lack thereof of any Oral or Written Instruction,
notice or other instrument which conforms to the applicable requirements of this
Agreement, if any, and which Bank reasonably believes to be genuine; (b) the
validity or invalidity of the issuance of any securities included or to be
included in the Property, the legality or illegality of the purchase of such
securities, or the propriety or impropriety of the amount paid therefor; (c) the
legality or illegality of the sale (or exchange) of any Property or the
propriety or impropriety of the amount for which such Property is sold (or
exchanged); or (d) delays or errors or loss of data occurring by reason of
circumstances beyond Bank's control, including acts of civil or military
authority, national emergencies, labor difficulties, fire, mechanical breakdown,
flood or catastrophe, acts of God, insurrection, war, riots or failure of the
mails, transportation, communication or power supply, nor shall Bank be under
any duty or obligation to ascertain whether any Property at any time delivered
to or held by Bank may properly be held by or for the Fund. Notwithstanding the
foregoing, the Bank shall use its best efforts to mitigate the effects of the
events enumerated
<PAGE>
15
in (d) of this Paragraph, although such efforts shall not impute any liability
thereto. Bank expressly disclaims all responsibility for consequential damages,
including but not limited to any that may result from performance or non-
performance of any duty or obligation whether express or implied in this
Agreement and also expressly disclaims any express or implied warranty of
products or services provided in connection with this Agreement.
24. Collections. All collections of monies or other property in
-----------
respect, or which are to become part, of the Property (but not the safekeeping
thereof upon receipt by Bank) shall be at the sole risk of the Fund. In any
case in which Bank does not receive any payment due the Fund within a reasonable
time after Bank has made proper demands for the same, it shall so notify the
Fund in writing, including copies of all demand letters, any written responses
thereto, and memoranda of all oral responses thereto and to telephonic demands,
and await instructions from the Fund. Bank shall not be obliged to take legal
action for collection unless and until reasonably indemnified to its
satisfaction. Bank shall also notify the Fund as soon as reasonably practicable
whenever income due on securities is not collected in due course.
25. Duration and Termination. This Agreement shall continue as to
------------------------
each portfolio of the Fund until terminated by the Fund on behalf of a portfolio
or by Bank, in either case on sixty (60) days' written notice. Upon any
termination of this Agreement, pending appointment of a successor to Bank or
vote of the shareholders of the applicable portfolio of the Fund to dissolve or
to function without a custodian of its cash, securities or other property, Bank
shall not deliver cash, securities or other property of the applicable portfolio
of the Fund to the Fund, but may deliver them to a bank or trust company of its
own selection, having an aggregate capital, surplus and undivided profits, as
shown by its last published report, of not less than twenty million dollars
($20,000,000) as a custodian for such portfolio to be held under terms similar
to those of this Agreement, provided, however, that Bank shall not be required
to make any such delivery or payment until full payment shall have been made by
such portfolio of the Fund of all liabilities constituting a charge on or
against the properties of such portfolio of the Fund then held by Bank or on or
against Bank and until full payment shall have been made to Bank of all of its
fees, compensation, costs and expenses.
26. Notices. All notices and other communications, including Written
-------
Instructions (collectively referred to as "Notice" or "Notices" in this
Paragraph 26), hereunder shall be in writing or by confirming telegram, cable,
telex or facsimile sending device. Notices shall be addressed (a) if to Bank at
Airport Business Center, International Court II, 200 Stephens Drive, Lester,
Pennsylvania 19113, marked for the attention of the Mutual Fund Custodian
Services Department (or its successor);
<PAGE>
16
(b) if to the Fund, at the address of the Fund; or (c) if to neither of the
foregoing, at such other address as shall have been notified to the sender of
any such Notice or other communication. If the location of the sender of a
Notice and the address of the addressee thereof are, at the time of sending,
more than 100 miles apart, the Notice may be sent by first-class mail, in which
case it shall be deemed to have been given five business days after it is sent,
or if sent by confirming telegram, cable, telex or facsimile sending device, it
shall be deemed to have been given immediately, and, if the location of the
sender of a Notice and the address of the addressee thereof are, at the time of
sending, not more than 100 miles apart, the Notice may be sent by first-class
mail, in which case it shall be deemed to have been given three business days
after it is sent, or if sent by messenger, it shall be deemed to have been given
on the day it is delivered, or if sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately.
All postage, cable, telegram, telex and facsimile sending device charges arising
from the sending of a Notice hereunder shall be paid by the sender.
27. Further Actions. Each party agrees to perform such further acts
---------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
28. Amendments. This Agreement or any part hereof may be changed or
----------
waived only by an instrument in writing signed by the party against which
enforcement of such change or waiver is sought.
29. Delegation. On thirty (30) days' prior written notice to the
----------
Fund, Bank may assign its rights and delegate its duties hereunder to any
wholly-owned direct or indirect subsidiary of Bank, provided that (i) the
delegate agrees with Bank to comply with all relevant provisions of the 1940
Act; and (ii) Bank and such delegate shall promptly provide such information as
the Fund may request, and respond to such questions as the Fund may ask,
relative to the delegation, including (without limitation) the capabilities of
the delegate.
30. Release. The names "The PNC Fund" and "Trustees of The PNC Fund"
-------
refer respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1998 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Trust. The obligations of "The
PNC Fund" entered into in the name or on behalf thereof by any of the Trustees,
officers, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Trust personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Trust must
<PAGE>
17
look solely to the Trust Property belonging to such class for the enforcement of
any claims against the Trust
31. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
32. Miscellaneous. This Agreement embodies the entire agreement and
-------------
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof, provided that the
parties hereto may embody in one or more separate documents their agreement, if
any, with respect to delegated and/or Written or Oral Instructions. The
captions in this Agreement are included for convenience of reference only and in
no way define or delimit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement shall be deemed to be a contract made in
Pennsylvania and governed by Pennsylvania law. If any provision of this
Agreement shall be held or made invalid by a court decision, stature, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding on, and shall insure to the benefit of, the parties
hereto and their respective successors, permitted assigns and permitted
delegates.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below on the day and year first above
written.
Attest: THE PNC FUND
By:
- ------------------------- --------------------------
its: its:
Attest: PROVIDENT NATIONAL BANK
(Corporate Seal)
By:
- ------------------------- --------------------------
its: its:
<PAGE>
18
APPENDIX A
----------
Authorized Persons
- -------------------------------------- ---------------------------------------
(name) (signature)
- -------------------------------------- --------------------------------------
(name) (signature)
- -------------------------------------- --------------------------------------
(name) (signature)
- -------------------------------------- --------------------------------------
(name) (signature)
- -------------------------------------- --------------------------------------
(name) (signature)
- -------------------------------------- --------------------------------------
(name) (signature)
- -------------------------------------- --------------------------------------
(name) (signature)
<PAGE>
EXHIBIT 8(b)
AMENDMENT NO. 1 TO CUSTODIAN AGREEMENT
--------------------------------------
This Amendment, dated the 3rd day of February 1992, is entered into
between THE PNC(R) FUND (the "Funds"), a Massachusetts business trust, and
PROVIDENT NATIONAL BANK ("Bank"), a national banking association.
WHEREAS, the Fund and Bank have entered into a Custodian Agreement
dated as of October 4, 1989, (the "Custodian Agreement"), pursuant to which the
Fund appointed Bank to act as custodian for its investment portfolios;
WHEREAS, the Fund desires to retain Bank to serve as the Fund's
custodian with respect to shares of the Intermediate Government Portfolio, Value
Equity Portfolio, Index Equity Portfolio, Special Equity Portfolio, Pennsylvania
Tax-Free Income Portfolio, Ohio Tax-Free Income Portfolio, Pennsylvania Tax-Free
Money Market Portfolio, Ohio Tax-Free Money Market Portfolio ("Portfolios"), and
any such future portfolio of the Fund as listed in Appendix B of the Custodian
Agreement with respect to which it wants to appoint Bank to act as custodian
under the Custodian Agreement;
WHEREAS, Bank has notified the Fund that it wants to serve as
custodian for the Portfolios and any such other future portfolio as listed in
Appendix B; and
WHEREAS, the Fund's Board of Directors has approved this Amendment.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
Paragraph 1 is amended and restated in full as follows:
1. Appointment. The Fund hereby appoints Bank to act as custodian
-----------
of the securities, cash and other property belonging to each
investment portfolio ("portfolios") of the Fund for the period
and on the terms set forth in this Agreement. Bank accepts such
appointment and agrees to furnish the services herein set forth
in return for the compensation as provided in Paragraph 21 of
this Agreement. Bank agrees to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations
thereunder. The Fund's shares, $.001 par value per share (the
"Shares"), have been classified into different classes
representing interests in the Fund's Value Equity Portfolio,
Growth Equity Portfolio, Index Equity Portfolio, Special Equity
Portfolio, International Equity Portfolio, Balanced Portfolio,
Managed Income Portfolio, Tax-Free Income Portfolio, Intermediate
Government Portfolio, Ohio Tax-Free Income Portfolio,
Pennsylvania Tax-Free Income
<PAGE>
2
Portfolio, Money Market Portfolio, Tax-Free Money Market
Portfolio, Government Money Market Portfolio, Ohio Tax-Free Money
Market Portfolio, Pennsylvania Tax-Free Money Market Portfolio
and such other classes as may be created in the future and listed
in Appendix B hereto. The Fund may from time to time issue
additional classes of Shares or classify and reclassify Shares of
each other class. Bank shall identify to each such class
property belonging to such class and in such reports,
confirmations and notices to the Fund called for under this
Agreement shall identify the class to which ouch report,
confirmation or notice pertains.
2. Miscellaneous. Except to the extent amended and supplemented
-------------
hereby, the Custodian Agreement shall remain unchanged and in
full force and effect and is hereby ratified and confirmed in all
respects as amended and supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first above written.
THE PNC(R) FUND
[SEAL] By:______________________
Title:
PROVIDENT NATIONAL BANK
[SEAL] By:______________________
Title:
<PAGE>
3
The PNC(R) Fund
Appendix B to Custodian
Agreement dated as of October 4, 1989
The Fund hereby appoints Bank to act as custodian of the securities,
cash and other property belonging to each additional Portfolio listed below
("Additional Portfolios") for the period and on the terms set forth in this
Agreement. Bank accepts such appointment and agrees to furnish the services
herein set forth in return for the compensation as provided in Paragraph 21 of
this Agreement. Bank agrees to comply with all relevant provisions of the 1940
Act and applicable rules and regulations thereunder.
The Additional Portfolios are as follows:
. Government Income Portfolio
. International Emerging Markets Portfolio
. International Fixed Income Portfolio
. Virginia Municipal Money Market Portfolio
Agreed to and accepted as of
December 17, 1993
The PNC(R) Fund
By:__________________________
PNC Bank, National Association
By:__________________________
<PAGE>
EXHIBIT 8(c)
AMENDMENT NO. 2 TO CUSTODIAN AGREEMENT
--------------------------------------
This Amendment, dated the 1st day of March, 1993, is entered into
between THE PNC(R) FUND, a Massachusetts business trust (the "Fund"), and PNC
BANK NATIONAL ASSOCIATION, a national banking association "Bank").
WHEREAS, the Fund and Bank have entered into a Custodian Agreement
dated as of October 4, 1989, as amended (the "Custodian Agreement"), pursuant to
which the Fund appointed Bank to act as custodian for its investment portfolios;
WHEREAS, the Fund desires to retain Bank to serve as the Fund's
custodian with respect to shares of the North Carolina Municipal Money Market,
Short-Term Bond, Intermediate-Term Bond, Small Cap Growth Equity and Core Equity
Portfolios (the "Portfolios"), and any such future portfolio of the Fund as
listed in Appendix B of the Custodian Agreement with respect to which it wants
to appoint Bank to act as custodian under the Custodian Agreement;
WHEREAS, Bank has notified the Fund that it wants to serve as
custodian for the Portfolios and any such other future portfolio as listed in
Appendix B; and
WHEREAS, the Fund's Board of Trustees has approved this Amendment.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
Paragraph 1 is amended and restated in full as follows:
1. Appointment. The Fund hereby appoints Bank to act as custodian
-----------
of the securities, cash and other property belonging to each
investment portfolio ("Portfolio") of the Fund for the period and
on the terms set forth in this Agreement. Bank accepts such
appointment and agrees to furnish the services herein set forth
in return for the compensation as provided in Paragraph 21 of
this Agreement. Bank agrees to comply with all relevant
provisions of the 1940 Act and applicable rules and regulations
thereunder. The Fund's shares, $.001 par value per share (the
"Shares"), have been classified into different classes
representing interests in the Fund's Money Market, Municipal
Money Market, Government Money Market, Ohio Municipal Money
Market, Pennsylvania Municipal Money Market, North Carolina
Municipal Money Market, Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-
Free Income, Short-Term Bond, Intermediate-Term Bond, Value
Equity, Growth Equity, Index Equity, Small Cap Value Equity,
<PAGE>
2
International Equity, Small Cap Growth Equity, Core Equity and
Balanced Portfolios and such other classes as may be created in
the future and listed in Appendix B hereto. The Fund may from
time to time issue additional classes of Shares or classify and
reclassify Shares of each such class. Bank shall identify to
each such class property belonging to such class and in such
reports, confirmations and notices to the Fund called for under
this Agreement shall identify the class to which such report,
confirmation or notice pertains.
2. Miscellaneous. Except to the extent amended and supplemented hereby,
-------------
the Custodian Agreement shall remain unchanged and in full force and
effect and is hereby ratified and confirmed in all respects as amended
and supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first above written.
THE PNC(R) FUND
[SEAL] By:_________________________
Title:
PNC BANK, NATIONAL ASSOCIATION
[SEAL] By:_________________________
Title:
<PAGE>
EXHIBIT 8(d)
Compass Capital Funds(SM)
(previously named The PNC(R) Fund)
Appendix B to Custodian
Agreement dated as of October 4, 1989
The Fund hereby appoints Bank to act as custodian of the securities,
cash and other property belonging to the additional Portfolios listed below
("Additional Portfolios") for the period and on the terms set forth in this
Agreement. Bank accepts such appointment and agrees to furnish the services
herein set forth in return for the compensation as provided in Paragraph 21 of
this Agreement. Bank agrees to comply with all relevant provisions of the 1940
Act and applicable rules and regulations thereunder.
The additional Portfolios are as follows:
. Government Income Portfolio
. International Emerging Markets Portfolio
. International Bond Portfolio
. Virginia Municipal Money Market Portfolio
. New Jersey Municipal Money Market Portfolio
. New Jersey Tax-Free Income Portfolio
. Core Bond Portfolio
. Multi-Sector Mortgage Securities Portfolio III
. Mid-Cap Value Equity Portfolio
. Mid-Cap Growth Equity Portfolio
. BlackRock Strategic Portfolio I
. BlackRock Strategic Portfolio II
. International Small Cap Equity Portfolio
. Micro-Cap Equity Portfolio
. GNMA Portfolio
. Delaware Tax-Free Income Portfolio
. Kentucky Tax-Free Income Portfolio
Release. "Compass Capital Funds" and "Trustees of Compass Capital Funds" refer
- -------
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Fund must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Fund.
<PAGE>
2
Agreed to and accepted as of ___________, 1998:
Compass Capital Funds(SM)
By:_________________________
Name:
Title:
PNC Bank, National Association
By:__________________________
Name:
Title:
<PAGE>
EXHIBIT 8(f)
GLOBAL CUSTODY AGREEMENT dated as of October 28, 1992 between Barclays
Bank PLC, a company organized and existing under the laws of England and Wales,
(hereinafter called "Barclays") and Provident National Bank (hereinafter called
the "Custodian"), and the investment companies which are signatories hereto.
WHEREAS, the Custodian acts as a custodian of the property of certain
of its customers (the "Customers"), including without limitation certain
investment companies registered under the Investment Company Act of 1940, as
amended (the "Act");
WHEREAS, the agreements between each Customer and the Custodian (the
"Custodian Agreements") provide that the
Custodian may from time to time employ as its agent one or more subcustodians,
all in compliance with Section 17(f) of the Act and Rule 17 f-5 thereunder; and
WHEREAS, the Custodian and each Customer a party hereto wish to employ
Barclays as such intermediary Custodian and expert third party for the Customers
and appoint Barclays as the agent of the Custodian and its Customers and
Barclays is willing to act as such Subcustodian, expert third party and agent;
NOW, THEREFORE, in consideration of the mutual promises herein made,
the Custodian and Barclays agree as follows:
1. Custody and Cash Accounts. (a) Upon satisfaction of the
-------------------------
condition specified in paragraph (b) below, Barclays agrees to establish and
maintain (i) separate custody accounts for the benefit of the Custodian, acting
as custodian for each Customer (each a "Custody Account"), for any and all
stocks, shares, bonds, debentures, notes, mortgages or other obligations for the
payment of money and any certificates, receipts, warrants or other instruments
representing rights to receive, purchase or subscribe for the same or evidencing
or representing any other rights or interests therein and other similar property
hereinafter called ("Securities") and all other assets (except cash) from time
to time received by Barclays or its Subcustodians (as defined in Section 3
hereof) on behalf of a Customer of the Custodian, and (ii) separate deposit
accounts for the benefit of the Custodian, acting as custodians for each
Customer (each a "Cash Account"; the Custody Account(s) and the Cash Account(s),
collectively referred to herein as the "Accounts") for any and all cash in any
currency received by Barclays or its Subcustodians on behalf of a Customer of
the Custodian, which cash shall not be subject to withdrawal by draft or check
except upon Instructions (as defined in Section 8 hereof) from the Custodian or
as provided in Sections 7 and 16 hereof.
(b) The obligation of Barclays to establish and maintain any account
is subject to the condition precedent that it shall have received an agreement
setting forth the fees payable to Barclays in respect of its services hereunder.
<PAGE>
2
2. Maintenance of Securities and Assets Abroad. (a) Securities and
-------------------------------------------
other assets in each Custody Account shall be held in such country or other
jurisdiction as shall be the one in which the principal trading market for such
Securities is located or the country or jurisdiction in which such Securities
may be presented for payment or are acquired for a Custody Account. Cash
credited to any Cash Account shall be denominated in the legal currency for the
payment of public or private debts for the country or jurisdiction where such
Cash Account is located.
(b) Barclays is authorized to enter into separate transfer or foreign
exchange arrangements with Custodian,
from time to time, in order to facilitate the transfer of
cash to or from any Cash Account.
3. Foreign Subcustodians and Depositories. Barclays may act under
--------------------------------------
this Agreement through the subcustodians listed in Schedule A hereto, with each
of whom Barclays has entered into subcustodial agreements ("Subcustodians").
The Custodian authorizes Barclays to hold cash and Securities in accounts which
Barclays has established with its branches and the Subcustodians. Barclays and
the Subcustodians are authorized to hold Securities with securities depository
facilities with whom they participate. Barclays reserves the right to add new,
or to replace or remove, Subcustodians. The Custodian will be given reasonable
prior notice by Barclays of any amendment to Schedule A.
4. Use of Subcustodian. With respect to Securities, other
-------------------
assets and cash of any Customer which are maintained by Barclays in the custody
of any Subcustodian of Barclays pursuant to Section 3 hereof (such Securities,
other assets and cash hereinafter referred to as "Assets"):
(a) Barclays will identify on its books as belonging to the Custodian,
as custodian for such Customer, any Assets held by such Subcustodian.
(b) Each Subcustodian will hold Assets together with assets belonging
to other customers of Barclays in accounts identified on such Subcustodian's
books as special custody accounts for the exclusive benefit of customers of
Barclays; in the event that a Subcustodian permits any of the Securities placed
in its care to be held in a foreign securities depository, such Subcustodian
will be required by its agreement with Barclays to identify on its books such
Assets as being held for the account of Barclays as agent for the Custodian.
Each Subcustodian will hold Securities in a separate custody account for each
Customer and cash in a general account established with Barclays.
(c) Any Assets in the Custody Account or a Cash Account held by such
Subcustodian will be subject only to the instructions of Barclays, and any
Securities held in a securities
<PAGE>
3
depository for the account of a Subcustodian will be subject only to the
instructions of such Subcustodian.
(d) Each Foreign Sub-Custody Agreement shall provide, through
Barclays, that the Assets will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of such Subcustodian or its
creditors except a claim for payment for their safe custody or administration
and that beneficial ownership of the Assets will be freely transferable without
payment of money or value other than for safe custody or administration.
(e) Barclays shall allow independent public accountants of each
Customer such reasonable access to the records of Barclays relating to the
Assets of such Customer held in the Custody Accounts or Cash Accounts as is
required by such accountants in connection with their examination of the books
and records pertaining to the affairs of such Customer. Barclays shall, subject
to restrictions under applicable law, also obtain from any Subcustodian with
which Barclays maintains the custody of any Assets in the Custody Accounts or
Cash Accounts an undertaking to permit independent public accountants of such
Customer such reasonable access to the records of such Subcustodian as may be
required in connection with their examination of the books and records
pertaining to the affairs of such Customers.
(f) Barclays will supply to the Custodian from time to time as
mutually agreed upon a statement with respect to any Assets in the Custody
Accounts and Cash Accounts held by a Subcustodian, including an identification
of the entity having possession of such Assets, and Barclays will send to the
Custodian an advice or notification of any transfers of Assets to or from any
Custody Account or Cash Account, indicating as to the Assets acquired for the
Custodian the identity of the entity having physical possession of such Assets.
Unless the Custodian sends Barclays an exception or objection to any statement
within sixty days of receipt (such objection or exception to be subsequently
confirmed in writing), the Custodian shall be deemed to have approved such
statement. In such event, or where the Custodian has otherwise approved any such
statement, Barclays shall, to the extent permitted by law, be released, relieved
and discharged with respect to all matters set forth in such statement or
reasonably implied therefrom as though it had been settled by decree of a court
of competent jurisdiction in an action where the Custodian and all persons
having or claiming an interest in the Custodian or the Accounts were parties.
5. Cash Account Transactions. (a) Subject to Sections 7 and 8,
-------------------------
Barclays shall make, or cause its Subcustodians to make, payments of cash
credited to a Cash Account only:
(i) in connection with the purchase of Assets for a Customer,
which purchase (A) shall, unless Instructions are
<PAGE>
4
received to the contrary, be made in accordance with the customary or
established securities trading and processing practices and procedures in
the jurisdiction or market in which such purchase is to take place,
including, without limitation, payments of cash in connection with such
purchase to the seller, the dealer or their agents against a receipt
indicating, or the expectation of, future delivery of such Security, and
(B) shall be made at prices set forth in Instructions from Authorized
Persons (as defined in Section 10 hereof);
(ii) when required in connection with the conversion, exchange
or surrender of Assets held in a Custody Account;
(iii) for any other proper corporate purpose of a Customer; or
(iv) upon the termination of this Agreement as hereinafter set
forth.
All payments of cash for a purpose permitted by subsection (i), (ii) or (iii) of
this Section 5 will be made, except as provided in Sections 7 and 8 hereof, only
upon receipt by Barclays of Instructions from Authorized Persons which shall
specify the purpose for which the payment is to be made and all other
information required by Barclays. Any payment pursuant to subsection (iv) above
will be made in accordance with Section 16 hereof.
(b) In the event that any payment made under this Section 5 exceeds
the funds available in the applicable Cash Account, Barclays may, in its
discretion, advance the Custodian an amount equal to such excess and such
advance shall be deemed a loan from Barclays to the Custodian, payable on demand
and bearing interest at the rate of interest customarily charged by Barclays on
similar loans.
6. Custody Account Transactions. Subject to Sections 7 and 8,
----------------------------
Assets of any Customer in a Custody Account will be transferred, exchanged or
delivered by Barclays or its Subcustodians only:
(a) upon sale of such Assets for the account of such Customer, which
sale (i) shall, unless Instructions are received to the contrary, be made
in accordance with the customary or established securities trading and
processing practices and procedures in the jurisdiction or market in which
such sale is to take place, including, without limitation, delivery of a
Security in connection with such sale to the buyer, the dealer or their
agents against a receipt indicating, or the expectation of, future payment
for such Security and (ii) shall be at prices set forth in Instructions
from Authorized Persons;
<PAGE>
5
(b) to a depository agent in connection with tender or other similar
offers for Securities of such Customer;
(c) to the issuer of Securities or its agent, when such Securities are
called, redeemed or retired or otherwise become payable; provided that, in
any such case, the cash or other consideration is to be delivered to
Barclays or its Subcustodian;
(d) to the issuer of Securities, or its agent, for transfer into the
name of any nominee of Barclays or any of its Subcustodians; or for
exchange for a different number of bonds, certificates or other evidences
of securities representing the same aggregate face amount or number of
shares or units; provided that, in any such case, the new Securities are to
be delivered to Barclays or its Subcustodian;
(e) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
Securities or pursuant to provisions for conversion of such Securities, or
pursuant to any deposit agreement; provided that in any such case, the new
Securities or cash, if any, are to be delivered to Barclays or its
Subcustodian;
(f) in the case of warrants, rights or similar securities, the
surrender thereof in connection with exercise of such warrants, rights or
similar securities, or the surrender of interim receipts or temporary
Securities for definitive Securities, provided that, in any such case, the
new Securities and cash, if any, are to be delivered to Barclays or its
Subcustodian;
(g) for any other proper corporate purposes of such Customer; and
(h) upon the termination of this Agreement as hereinafter set forth.
All transfers, exchanges or deliveries of Assets
in a Custody Account for a purpose permitted by either subsection (a), (b), (c),
(d), (e), (f) or (g) of this Section 6 will be made, except as provided in
Section 7 hereof, only upon receipt by Barclays of Instructions from Authorized
Persons which shall specify the purpose of the transfer, exchange or delivery to
be made and all other information required by Barclays. Any transfer or
delivery pursuant to subsection (h) of this Section 6 will be made in accordance
with Section 16 hereof.
7. Accounting Procedures. (a) Barclays may, in its sole discretion,
---------------------
credit or debit any of the Cash Accounts on the contractual settlement date in
amounts equal to the sale proceeds or purchase price relating to any sale,
exchange or
<PAGE>
6
purchase of Securities. Otherwise, such transactions will be credited or debited
to the Cash Account on the date cash is actually received by Barclays and
reconciled to the Cash Account.
(b) Barclays will provisionally credit, or will cause provisional
credits to be made to, each relevant Cash Account with Subject Income (as
defined in the second following sentence) on or before specific crediting dates
as established by Barclays from time to time for such Subject Income ("Crediting
Dates"). Schedule B attached hereto sets forth the Crediting Dates as of the
date hereof. For purposes hereof, "Subject Income" with respect to a Customer
shall mean interest on, or dividends with respect to, Securities actually known
by Barclays to be part of such Customer's portfolio credited to the relevant
Customer Custody Account and with respect to which the issuer thereof has
declared or scheduled an interest or dividend payment date. In no event shall
Subject Income include any income not referred to above, including market claims
and non-cash distributions or entitlements, such as stock dividends.
(c) Subject to the immediately following sentence, Barclays may
reverse credits or debits made to any Account in its sole discretion if the
related transaction fails to settle within a reasonable period, determined by
Barclays in its discretion, after the contractual settlement date for the
related transaction. If Barclays credits any Cash Account on a payable date, or
at any time prior to actual collection and reconciliation to such Cash Account,
with interest, dividends, redemptions or any other amount, including, without
limitation, any provisional credit under Section 7(b) hereof, the Custodian will
promptly return any such amount upon oral or written notification: (i) that
such amount has not been received in the ordinary course of business or (ii)
that such amount was incorrectly credited. If the Custodian does not promptly
return any amount upon such notification, Barclays shall be entitled, upon oral
or written notification to the Custodian, to reverse such credit by debiting the
relevant Cash Account for the amount previOusly credited. Barclays or its
Subcustodian shall have no duty or obligation to institute legal proceedings,
file a claim or a proof of claim in any insolvency proceeding or take any other
action with respect to the collection of such amount, but may act for the
Custodian upon instructions after consultation with the Custodian.
(d) If any Securities delivered pursuant to this Section 7 are
returned by the recipient thereof, Barclays may reverse the credits and debits
of the particular transaction at any time.
8. Actions of Barclays. Until Barclays receives Instructions
-------------------
from Authorized Persons to the contrary, Barclays will, or will instruct its
Subcustodian to:
<PAGE>
7
(a) promptly collect all income and other payments known by Barclays
or its Subcustodian to be payable with respect to Securities held hereunder
and Credit such income, as collected, to the applicable Cash Account.
Barclays or its Subcustodian shall do all things necessary and proper in
connection with such prompt collections and, without limiting the
foregoing, Barclays or its Subcustodian will:
(i) present for payment all coupons and other income items
known by Barclays or its Subcustodian as requiring presentation;
(ii) present for payment all Securities, known to Barclays
or its Subcustodian which have matured or have been called, redeemed,
retired or otherwise become payable; and
(iii) endorse and deposit for collection, in the name of
the Custodian, checks, drafts or other negotiable instruments;
(b) in respect of Securities in a Custody Account, execute in the name
of the Custodian such ownership and other certificates as may be required
to obtain payments in respect thereof;
(c) exchange interim receipts or temporary Securities in a Custody
Account for definitive Securities;
(d) where any Securities held in any securities depository are called
for a partial redemption by the issuer of such Securities, allot in
Barclays' or such Subcustodian's sole discretion the called portion to the
respective holders in any manner deemed to be fair and equitable in
Barclays' or such Subcustodian's judgment; and
(e) subject to the prior receipt of all documentation required by
applicable law, pay or cause to be paid any and all taxes and levies in the
nature of taxes imposed on the Assets in the Custody or Cash Accounts by
any governmental authority and shall use reasonable efforts where
appropriate to promptly enable the Custodian or a Customer to reclaim any
foreign withholding tax relating to any such Assets.
9. Settlement Procedures; Instructions.
-----------------------------------
(a) Promptly after the acceptance of an offer to purchase Securities
by a Customer for which such Customer intends Barclays, directly or through any
foreign custodian or depository, to act as custodian, the Custodian shall
deliver to Barclays Instructions specifying, inter alia and as necessary, with
respect to each such purchase: (a) the name of the issuer and the title of the
Securities, including CUSIP number or other similar securities identification
number, if any,
<PAGE>
8
(b) the number of shares or the principal amount purchased and accrued interest,
if any, (c) to the extent known, the date payment is due and the date delivery
is to be made, (d) the purchase price per unit, (e) the total amount payable
upon such purchase, (f) the name of the person from whom or the broker through
whom the purchase was made, and (g) the foreign subcustodian or depository where
such Securities are to be delivered and held, and whether the total amount
payable will be paid from the Cash Account maintained in the country or
jurisdiction where such subcustodian or depository is located. Subject to
Section 5, Barclays directly or through the applicable foreign subcustodian or
depository shall receive Securities purchased by a Customer from the person
through or from whom the same were purchased, and shall pay, out of the monies
credited to the applicable Cash Account, the total amount payable upon such
purchase, provided that the same conforms to the total amount payable shown on
the Instructions with respect to such purchase. On the scheduled date for
payment for any Security to be purchased for deposit in a Custody Account, the
Custodian shall have caused there to be deposited in the Cash Account located in
the country or jurisdiction where such purchase is to take place, amounts
sufficient, and in such denominations, to enable Barclays or the foreign
subcustodian to pay for such Security.
(b) Promptly after the acceptance of an offer to sell any Securities
by a Customer, the Custodian shall deliver to Barclays Instructions specifying,
inter alia and as necessary, with respect to such sale: (a) the name of the
issuer and the title of the Security, including CUSIP number or other similar
securities identification number, if any, (b) the number of shares or principal
amount sold, and accrued interest, if any, (c) to the extent known, the date
payment is to be received and the date delivery of the Security is to be made,
(d) the sale price per unit, (e) the total amount payable upon such sale, (f)
the name of the broker through whom or the person to whom the sale was made and
to whom the Security is to be delivered, and (g) the foreign subcustodian or
depositary from which such Securities are to be delivered. Subject to Section
6, Barclays shall directly or through the applicable foreign subcustodian or
depository deliver the Securities sold to the broker or other person named in
such Instructions upon receipt by Barclays or a foreign subcustodian of the
total amount payable to such Customer upon such sale provided that the same
conforms to the total amount payable to the Customer as set forth in the
Instructions with respect to such sale. Unless Barclays shall be in receipt of
Instructions to the contrary, amounts received from the sale of any Security
shall be deposited in the Cash Account located in the country or jurisdiction
where such sale shall have occurred, in the denomination in which payment was
made, and, subject to the provisions of Section 5, shall be held in such Cash
Account until Instructions are received from the Custodian.
(c) As used in this Agreement, the term "Instructions" means
instructions of the Custodian to Barclays containing all
<PAGE>
9
information required by Barclays received via telephone, telex, TWX, facsimile
transmission, bank wire or other teleprocess or electronic instruction systems
acceptable to Barclays which Barclays believes in good faith to have been given
by Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Barclays may specify.
(d) Any Instructions delivered to Barclays by telephone or facsimile
transmission shall promptly thereafter be confirmed in writing by an Authorized
Person (which confirmation shall bear the original or facsimile signature of
such Authorized person). However, Barclays may rely upon instructions by
telephone or facsimile transmission in the event of failure of an Authorized
Person to send such confirmation in writing. Barclays may rely upon telephone
instructions in the event of the failure of such confirmation to conform to the
telephone instructions received if such telephone instructions are acted upon
prior to receipt of such confirmation. Unless otherwise expressly provided, all
Instructions shall continue in full force and effect until cancelled or
superseded. If Barclays requires test arrangements, authentication methods or
other security devices to be used with respect to Instructions, any Instructions
given by the Custodian thereafter shall be given and processed in accordance
with such terms and conditions for the use of such arrangements, methods or
devices as Barclays may put into effect and modify from time to time. The
Custodian shall safeguard any testkeys, identifications, codes or other security
devices which Barclays shall make available to it. Barclays and the Custodian
may electronically record any Instructions given by telephone, and any other
telephone discussions, with respect to a Custody Account or a Cash Account.
(e) If the Custodian elects, Barclays shall provide the Custodian with
such instructions and passwords as may be necessary in order for the Custodian
to have dial up access or other means of access to Barclays telecommunications
system for securities in custody accounts. The Custodian understands
information provided to it through such system shall be limited to information
relating to the Custody Accounts and the Cash Accounts. If the Custodian elects
to utilize such system, the Custodian agrees to assume full responsibility for
the consequence of any misuse or unauthorized use by the Custodian of any
terminal device or the instructions or passwords mentioned above.
10. Authorized Persons. As used in this Agreement, the term
------------------
"Authorized Persons" means such officials or such agents of the Custodian as
have been designated in writing to Barclays to act on behalf of the Custodian in
the performance of any acts which Authorized Persons may do under this
Agreement. Such persons shall continue to be Authorized Persons until such time
as Barclays receives Instructions from Authorized Persons
<PAGE>
10
that any such official or agent is no longer an Authorized Person.
11. Nominees. Securities in a Custody Account which are ordinarily
--------
held in registered form may be registered in the nominee name of Barclays, any
Subcustodian or securities depository. The Custodian agrees to hold any such
nominee harmless from any liability as a holder of record of such Securities.
Barclays may cause any such Securities to cease to be registered in the name of
any such nominee and to be registered in the name of another nominee provided
such nominee is either a Subcustodian or a securities depository.
12. Standard of Care.
----------------
(a) Barclays shall be responsible for the performance only of such
duties as are specifically set forth herein or contained in Instructions given
to Barclays by Authorized Persons which are not contrary to the provisions of
this Agreement. Barclays will use reasonable care with respect to the
safekeeping of the Assets in the Custody Accounts and Cash Accounts and in the
performance of is functions and duties under this Agreement. Barclays shall be
liable to the Custodian for any loss which shall occur as the direct and
foreseeable result of the failure of a Subcustodian to exercise reasonable care
with respect to the safekeeping of Assets or in the performance of its functions
or duties in connection herewith to the same extent that such Subcustodian would
be liable to the Custodian under applicable law if such Subcustodian and the
Custodian had directly entered into a custodial agreement governed by the law of
the country of such Subcustodian. In the event of any loss to the Custodian by
reason of the failure of Barclays or its Subcustodian to utilize reasonable
care, Barclays shall be liable to the Custodian to the extent of the Custodian's
direct and foreseeable damages, to be determined (in the case of a loss of
property) based on the market value in U.S. dollars of the property which is the
subject of the loss at the date on which actual notice of such loss is received
by Barclays, and without reference to any special conditions or circumstances.
Barclays shall be held to the exercise of reasonable care in carrying out this
Agreement but shall be indemnified by, and shall be without liability to, the
Custodian for any action taken or omitted by Barclays in good faith without
negligence in accordance with the terms of this Agreement. Barclays shall be
entitled to rely, and may act, on advice of counsel (who may be counsel for the
Custodian) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. Barclays will be subject to
the reasonableness standard articulated above.
(b) Except as otherwise specifically agreed to herein, Barclays shall
have no liability for any loss occasioned by any mistakes contained in, or
errors in the transmission of, any Instruction, or by delay in the actual
receipt of any Instruction
<PAGE>
11
or any notice to Barclays or by or to its Subcustodian of any payment,
redemption or other transaction regarding Securities in the Custody Accounts in
respect of which Barclays has agreed to take action as provided in Section 8
hereof. Barclays shall not be liable for any action taken in good faith upon
Instructions or in reliance upon the designation of "Authorized Persons"
referred to in Section 10 hereof and may rely on the genuineness of any such
documents which it may in good faith believe to be validly executed. Barclays
shall not be liable for any loss or damage resulting from or caused by
nationalization, expropriation, currency or other regulatory restrictions, labor
unrest, acts of war, civil war or terrorism, insurrection, revolution, military
or usurped powers, nuclear fusion, fission or radiation, earthquake, storm or
other disturbance of nature or acts of God.
(c) Without limiting the generality of the foregoing, neither Barclays
nor any Subcustodian shall be under any duty or obligation to inquire into, or
be liable for :
(i) the validity of the issue of any Securities purchased by or
for any Customer, the legality of the purchase thereof, or the propriety of
the amount paid therefor; or
(ii) the legality of the sale of any Securities by or for any
Customer, or the propriety of the amount for which the same are sold; or
(iii) any default in the payment of principal or income of any
security other than as provided in Section 7 of this Agreement; or
(iv) the financial condition of any broker, agent or other party
to which Securities are delivered or payments are made pursuant to this
Agreement; or
(v) the existence or content of any trade confirmations received
from brokers;
the Custodian or its Authorized Persons issuing Instructions shall bear any
responsibility to review such confirmations against Instructions issued to and
statements issued by Barclays.
(d) Neither Barclays nor any Subcustodian shall be liable for, or
considered to be the custodian of, any money represented by any check, draft, or
other instrument for the payment of money received by it on behalf of any
Customer, until Barclays or such Subcustodian actually receives such money.
(e) Neither Barclays nor any Subcustodian shall be under any duty or
obligation to take action to effect collection of any amount, if the Securities
upon which such amount is payable are in default, or if payment is refused
after
<PAGE>
12
due demand or presentation, unless and until (i) it shall be directed to take
such action by Instructions, and (ii) it shall be assured to its satisfaction of
reimbursement of its costs and expenses by the Custodian in connection with any
such action.
(f) Neither Barclays nor any Subcustodian shall be under any duty or
obligation to ascertain whether any Securities at any time delivered to or held
by it in any Custody Account are such as may properly be held by a Customer.
(g) It is understood and agreed that Barclays is
not under any duty to maintain any insurance for the benefit of any Customer or
the Custodian or to supervise the investment of, or to advise or make any
recommendation to any Customer or the Custodian with respect to the sale or
other disposition of any Securities at any time held hereunder or to advise or
recommend the purchase of any Securities at any time.
(h) The Custodian will indemnify Barclays for any direct and
foreseeable damages to Barclays with respect to the performance of Barclays'
obligations under this Agreement (including, but not limited to, Barclays' legal
fees and expenses and any other legal fees and expenses for which Barclays is
liable, and any loss or liability in connection with a claim settled by
Barclays, which agreement is accepted by the Custodian) unless such direct and
foreseeable damages arises from any failure by Barclays or any Subcustodian to
exercise reasonable care with respect to any assets in any Custody or Cash
Account or from any negligence, fraud, bad faith, willful misconduct or reckless
disregard of duties on the part of Barclays or any Subcustodian which maintains
any Securities.
13. Proxies; Corporate Action. Unless Instructions to the contrary
-------------------------
are received, Barclays or its Subcustodian shall forward to the Custodian only
such communications from issuers relating to the Securities in a Custody Account
as call for voting or the exercise of rights or other specific action (including
material relative to legal proceedings intended to be transmitted to security
holders) to the extent sufficient copies are received by Barclays or its
Subcustodian in time for forwarding to the Custodian. Barclays or its
Subcustodian will cause its nominee to execute and deliver to the Custodian
proxies relating to Securities in a Custody Account registered in the name of
such nominee, but without indicating the manner in which such proxies are to be
voted. Proxies relating to bearer Securities will be delivered in accordance
with written Instructions.
14. Fees and Expenses. The Custodian agrees to pay to Barclays from
-----------------
time to time such compensation for its services pursuant to this Agreement and
such out-of-pocket or incidental expenses as may be mutually agreed upon in
writing from time to time. The Custodian hereby agrees to hold Barclays
harmless from any liability or loss resulting from any taxes or other
<PAGE>
13
governmental charges, and any expenses related thereto, which may be imposed or
assessed with respect to any Custody Account. The Custodian agrees to pay for
and hold Barclays harmless from any liability or loss resulting from the
imposition or assessment of any taxes or other governmental charges, and any
related expenses with respect to income from or Assets in the Accounts and
Barclays is authorized to charge any account of the Custodian for such items.
15. Effectiveness. This Agreement shall be effective on the date
-------------
first noted above.
16. Termination. This Agreement or the accounts of any Customer may
-----------
be terminated by the Custodian or Barclays by 90 days' written notice to the
other, sent by registered mail, provided that such notice from the Custodian
shall specify the names of the persons to whom Barclays shall deliver the
Securities in the applicable Custody Accounts and to whom the cash in the
applicable Cash Accounts shall be paid. If notice of termination is given by
Barclays, the Custodian shall, within 60 days following the giving of such
notice, specify in writing the names of the persons to whom Barclays shall
deliver the Securities in the applicable Custody Accounts and to whom the cash
in the applicable Cash Accounts shall be paid. In either case Barclays will
deliver such Securities and cash to the person so specified. If within 60 days
following the giving of a notice of termination by Barclays, the Custodian has
not specified in writing the names of the persons to whom Barclays shall deliver
the Securities in the applicable Custody Accounts and to whom the cash in the
applicable Cash Accounts shall be paid, Barclays, at its election, may deliver
such Securities and pay such cash to a bank or trust company doing business in
the State of New York to be held and disposed of pursuant to the provisions of
this Agreement, or to Authorized Persons, or may continue to hold such
Securities and cash until such information is delivered in writing to Barclays.
The obligations of the parties hereto regarding the use of reasonable care,
indemnities and payment of fees and expenses shall survive the termination of
this Agreement.
17. Notices. Any notice or other communication including
-------
Instructions from the Custodian to Barclays is to be delivered or mailed,
postage prepaid to the office of Barclays at 75 Wall Street, New York, New York
10265, Attention: Global Custody Group, Telephone: (212) 412-4000, telecopier
(212) 797-3024 or such other address as may thereafter be given to the Custodian
in accordance with the notice provisions hereunder. Any notice from Barclays to
any Customer or the Custodian is to be delivered or mailed postage prepaid to
the office of the Custodian as set forth below or such other address as may
hereafter be given to Barclays in accordance with the notice provisions
hereunder.
<PAGE>
14
18. Governing Law, Successors and Assigns and Third Party
-----------------------------------------------------
Beneficiaries. This Agreement shall be governed by the law of the State of New
- -------------
York and shall not be assignable by either party, but shall bind the successors
(including, without limitation, by merger) and assigns of the custodian and
Barclays.
19. Headings. The headings of the paragraphs hereof are included for
--------
convenience of reference only and do not form a part of this Agreement.
20. Riders. Rider A to this Agreement is incorporated herein to the
------
extent Assets governed hereby are subject to the Employee Retirement Income
Security Act of 1974, as amended. Rider B to this Agreement is incorporated
herein to the extent Assets governed hereby are subject to the Investment
Company Act of 1940, as amended.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed in its name and behalf by its duly authorized officer as of the date
first above written.
Attest: PROVIDENT NATIONAL BANK
_____________________ By:_______________________
Title:
Address: 200 Stevens Drive
Lester, PA 19113
Attest: BARCLAYS BANK PLC
_____________________ By:_______________________________
Authorized Officer
<PAGE>
15
Rider A
-------
Required Revisions for Pension Funds
------------------------------------
SECTION 1. CUSTODY AND CASH ACCOUNTS.
Add the following language to the end of Section 1:
(c) The Custodian represents that the Assets being placed in Barclays'
custody are subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). It is understood that in connection therewith Barclays is a
service provider and not a fiduciary of the plan and trust to which the assets
are related. Barclays shall not be considered a party to the underlying plan and
trust, and the Custodian hereby assumes all responsibility to assure that
Instructions issued under this Agreement are in compliance with such plan and
trust and all applicable requirements under ERISA.
(d) This Agreement will be interpreted so as to be in compliance with
the Department of Labor Regulations Section 2550.404b-1 concerning the
maintenance of indicia of ownership of plan assets outside of the jurisdiction
of the district courts of the United States.
SECTION 2. MAINTENANCE OF SECURITIES AND ASSETS ABROAD.
Add the following paragraph at the end of Subsection 2(b):
Instructions to execute foreign exchange transactions with Barclays,
its subsidiaries, affiliates or Subcustodians will include (1) the time period
in which the transaction must be completed; (2) the location of the Subcustodian
with whom the contract is to be executed and (3) such additional information and
guidelines as may be deemed necessary; and, if the instruction is a standing
instruction, a provision allowing such instruction to be overridden by specific
contrary instructions.
SECTION 3. FOREIGN SUBCUSTODIANS AND DEPOSITORIES.
Add the following language to the end of Section 3:
As used in this Agreement, the term Subcustodian and the term
securities depositories include a branch of Barclays, a branch of a qualified
U.S. bank, an eligible foreign custodian, or an eligible foreign securities
depository, where such terms shall mean:
(a) "qualified U.S. bank" shall mean a U.S. bank as described in
paragraph (a)2(ii)(A)(1) of the Department of Labor Regulations Section
2550.404b-1;
<PAGE>
16
(b) "eligible foreign custodian" shall mean a banking institution
incorporated or organized under the laws of a country other than the United
States which is supervised or regulated by that country's government or an
agency thereof or other regulatory authority in the foreign jurisdiction
having authority over banks; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of
a country other than the United States, which is supervised or regulated by
that country's government or an agency thereof or other regulatory
authority in the foreign jurisdiction having authority over such
depositories or clearing agencies and which is described in paragraph
(c)(2) of the Department of Labor Regulations Section 2550.404b-1.
SECTION 5. CASH ACCOUNT TRANSACTIONS.
Subsection (b) is amended to read as follows:
(b) in the event that any payment made under this Section 5 exceeds
the funds available in the Cash Account, such discretionary advance shall
be deemed a service provided by Barclays under this Agreement for which it
is entitled to recover its reasonable costs and expenses as may be
determined by Barclays in good faith.
SECTION 10. AUTHORIZED PERSONS.
Add the following paragraph at the end of Section 10:
The Custodian represents that: (i) Instructions will only be issued
by or for a fiduciary pursuant to Department of Labor Regulations Section 404b-1
(a)(2)(i), and (ii) if instructions are to be issued by an investment manager,
such entity will meet the requirements of Section 3(38) of ERISA and will have
been designated by the Custodian or the Customer to manage assets held in the
Accounts ("Investment Manager"). An Investment Manager may designate certain of
its employees to act as Authorized Persons under this Agreement.
<PAGE>
17
Rider B
-------
Required Revision for Mutual Funds
----------------------------------
SECTION 1. CUSTODY AND CASH ACCOUNTS.
Add the following language to the end of Section 1:
(c) The Custodian represents that the Assets being placed in Barclays'
custody are subject to the Investment Company Act of 1940 (the "Act"), as the
same may be amended from time to time.
(d) Barclays shall be responsible for assuring that it and each
Subcustodian is an eligible foreign custodian, qualified U.S. Bank or overseas
branch of a qualified U.S. Bank in accordance with the definitions thereof set
forth herein.
(e) Except to the extent that Barclays has specifically agreed to
comply with a condition of a rule, regulation or interpretation promulgated by
or under the authority of the Securities Exchange Commission (the "SEC") or an
exemptive order applicable to accounts of this nature issued to Barclays, one or
more of the other parties hereto shall be responsible to assure that the
maintenance of assets under this Agreement complies with such rules,
regulations, interpretations or exemptive order promulgated by or under the
authority of the SEC.
(f) As used in this Agreement, as applied to any assets or property of
an investment company having multiple portfolios or series, the term "Customer"
shall mean each of such Customer's individual investment portfolios or series.
SECTION 3. FOREIGN SUBCUSTODIANS AND DEPOSITORIES.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used in this
Agreement shall mean a branch of a qualified U.S. bank, an eligible foreign
custodian or an eligible foreign securities depository, which are further
defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the Act;
(b) "eligible foreign custodian" shall mean (i) a banking institution
or trust company incorporated or organized under the laws of a country
other than the United States that is regulated as such by that country's
government or an agency thereof and that has shareholders' equity in excess
of $200 million in U.S. currency (or
<PAGE>
18
foreign currency equivalent thereof), (ii) a majority owned direct or
indirect subsidiary of a qualified U.S. bank or bank holding company that
is incorporated or organized under the laws of a country other than the
United States and that has shareholders' equity in excess of $100 million
in U.S. currency (or a foreign currency equivalent thereof), (iii) a
banking institution or trust company incorporated or organized under the
laws of a country other than the United States or a majority owned direct
or indirect subsidiary of a qualified U.S. bank or bank holding company
that is incorporated or organized under the laws of a country other than
the United States which has such qualifications in addition to those set
forth in clause (i) or (ii) above, as shall be specified in Instructions
and approved by Barclays, or (iv) any other entity that shall have been so
qualified by exemptive order, rule or other appropriate action of the SEC;
and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of
a country other than the United States, which operates (i) the central
system for handling securities or equivalent book-entries in that country
or (ii) a transnational system for the central handling of securities or
equivalent book-entries.
The Custodian represents that the Board of each Customer has approved
each of the Subcustodians listed in Schedule A to this Agreement and the terms
of each subcustody agreement between Barclays and each Subcustodian, and further
represents that each Board has determined that the use of each Subcustodian and
the terms of each subcustody agreement are consistent with the best interests of
the Customer's fund(s) and its (their) shareholders, in each case, to the extent
required by the Act. Barclays will supply the Custodian with any amendment to
Schedule A for approval and will supply the Custodian and, at the Custodian's
request, each Customer's Board of Directors, with information reasonably
necessary to determine such new Subcustodian's eligibility under Rule 17f-5,
including a copy of the proposed agreement with such Subcustodian. Each
Customer has supplied or will supply the Custodian with certified copies of its
Board resolution(s) with respect to the foregoing prior to placing Assets of
such Customer with any Subcustodian so approved. If Barclays intends to remove
any Subcustodian previously approved, it shall so notify the Custodian and shall
move the Securities and other assets to another Subcustodian previously approved
or to a new Subcustodian, subject to the requirements set forth in this
paragraph. Barclays shall take steps as may be required to remove any
Subcustodian which has ceased to meet the requirements of Rule 17f-5.
Barclays hereby warrants to the Customers and the Custodian that in
its opinion, after due inquiry, the established procedures to be followed by
each of its branches, each branch of
<PAGE>
19
a qualified U.S. bank, each eligible foreign custodian and each eligible foreign
securities depository holding Securities pursuant to this Agreement afford
protection for such Securities not materially different than that provided with
respect to similar securities held by Barclays (and its securities depositories)
in the United States.
The Custodian acknowledges that Barclays, in accordance with orders of
the Commission (Investment Company Act Release No. IC-16536 August 24, 1988 and
No. IC-17268 December 19, 1989), shall be permitted to delegate to its
Subsidiaries located in Australia, Canada, France, Japan, Spain and Switzerland,
such of Barclays' duties and Obligations as is necessary to permit any such
subsidiary to hold Securities and cash in custody in the country or countries in
which it operates; provided, however, Barclays shall continue to be liable for
any loss due to such delegation except such loss as may result from political
risk or any other risk of loss (excluding bankruptcy or insolvency of the
subsidiary) for which neither Barclays nor the subsidiary would otherwise be
liable.
SECTION 9. SETTLEMENT PROCEDURES; INSTRUCTIONS.
Add the following language to the end of Section 9:
(f) Account transactions made pursuant to Section 5 and 6 of this
Agreement may be made only for the purposes listed below. Instructions must
specify the purpose for which any transaction is to be made and the Custodian
shall be solely responsible to assure that instructions are in accord with any
limitations or restrictions applicable to the Customer by law or as may be set
forth in its prospectus.
(i) In connection with the purchase or sale of Securities at
prices as confirmed by Instructions.
(ii) When Securities are called, redeemed or retired, or
otherwise become payable.
(iii) In exchange for or upon conversion into other securities
alone or other securities and cash pursuant to any plan of merger,
consolidation, reorganization, recapitalization or readjustment.
(iv) Upon conversion of Securities pursuant to their terms into
other securities.
(v) Upon exercise of subscription, purchase or other similar
rights represented by Securities.
(vi) For the payment of interest, taxes, management or
supervisory fees, distributions or operating expenses.
<PAGE>
20
(vii) In connection with any borrowings by the Customer
requiring a pledge of Securities, but only against receipt of amounts
borrowed.
(viii) In connection with any loans, but only against receipt of
adequate collateral as specified in Instructions which shall reflect any
restrictions applicable to the Customer.
(ix) For the purpose of redeeming shares of the capital stock of
the Customer and the delivery to, or the crediting to the account of
Barclays, its Subcustodian or the Customer's transfer agent, such shares to
be purchased or redeemed.
(x) For the purpose of redeeming in kind shares of the Customer
against delivery of the shares to be redeemed to Barclays, its Subcustodian
or the Customer's transfer agent.
(xi) For delivery in accordance with the provisions of any
agreement among the Customer, Barclays and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a member of
the National Association of Securities Dealers, Inc., relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Customer.
(xii) For release of Securities to designated brokers under
covered call options, provided, however, that such Securities shall be
released only upon payment to Barclays of monies for the premium due and a
receipt for the Securities which are to be held in escrow. Upon exercise
of the option, or at expiration, Barclays will receive the Securities
previously deposited from brokers. Barclays will act strictly in
accordance with Instructions in the delivery of Securities to be held in
escrow and will have no responsibility or liability for any such Securities
which are not returned promptly when due other than to make proper request
for such return.
(xiii) For spot or forward foreign exchange transactions to
facilitate security trading, receipt of income from Securities or related
transactions.
(xiv) For other proper purposes as may be specified in
Instructions, which shall include a statement that the purpose is a proper
purpose under the instruments governing the Customer.
<PAGE>
21
(xv) Upon the termination of this Agreement as set forth in
Section 16.
SECTION 12. STANDARD OF CARE.
Section 12(a) is hereby amended by deleting paragraph (a) thereof in
its entirety and substituting therefor the following:
(a) Barclays shall be responsible for the performance only of such
duties as are specifically set forth herein or contained in Instructions
given to Barclays by Authorized Persons which are not contrary to the
provisions of this Agreement. Barclays will use reasonable care with
respect to the safekeeping of the Assets in the Custody Accounts and Cash
Accounts and in the performance of its functions and duties under this
Agreement. Barclays shall be liable to, and indemnify and hold harmless,
the Custodian and the Customer, for any loss which shall occur as the
direct and foreseeable result of the failure of a Subcustodian to exercise
reasonable care with respect to the safekeeping of Assets or in the
performance of its functions or duties in connection herewith to the same
extent that such Subcustodian would be liable to the Custodian and the
Customer, as under applicable law if such Subcustodian and the Custodian
and the Customer had directly entered into a custodial agreement governed
by the law of the country of such Subcustodian. In the event of any loss
to the Custodian or the Customer by reason of the failure of Barclays or
its Subcustodian to utilize reasonable care, Barclays shall be liable to,
and indemnify and hold harmless, the Custodian and the Customer to the
extent of such party's direct and foreseeable damages, to be determined (in
the case of a loss of property) based on the market value in U.S. dollars
of the property which is the subject of the loss at the date on which
actual notice of such loss is received by Barclays, and without reference
to any special conditions or circumstances. Barclays shall be held to the
exercise of reasonable care in carrying out this Agreement but shall be
indemnified by, and shall be without liability to, the Custodian and the
Customer for any action taken or omitted by Barclays in good faith without
negligence in accordance with this Agreement. Barclays shall be entitled
to rely, and may act, on advice of counsel (who may be counsel for the
Custodian) on all matters and shall be without liability for any action
reasonably taken or omitted pursuant to such advice. Barclays will be
subject to the reasonableness standard articulated above.
SECTION 21. REPORTS.
In addition to the reports specified in Section 4(f) of this
Agreement, which Barclays shall provide at least monthly to the Custodian, and
at the Custodian's request, to the Board of
<PAGE>
22
Directors of each Customer, Barclays shall provide to the Custodian and to the
Board of Directors of each Customer on an annual basis a report confirming that
it and each of the Subcustodians is an eligible foreign custodian, a qualified
U.S. Bank or branch of a qualified U.S. Bank, as defined herein. Barclays shall
also provide such information regarding the Securities and other assets, any
Subcustodian, any foreign country or itself as may be reasonably requested from
time to time by the Custodian.
Section 22. Corporate Action.
- ------------------------------
Whenever Barclays or a Subcustodian receives information concerning
the Securities which requires discretionary action by the beneficial owner of
the Securities (other than a proxy), such as subscription rights, bonus issues,
stock repurchase plans and rights offerings, or legal notice or other material
intended to be transmitted to securities holders ("Corporate Actions"), Barclays
will promptly give the Custodian notice of such Corporate Actions to the extent
that Barclays has actual knowledge of a Corporate Action.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Barclays will endeavor to obtain
Instructions, but if Instructions are not received in time for Barclays to take
timely action, or actual notice of such Corporate Action was received too late
to seek Instructions, Barclays is authorized to sell such rights entitlement or
fractional interest and to credit the applicable Cash Account with the proceeds
and to take any other action it deems, in good faith, to be appropriate in which
case, provided it has met the standard of care in this Agreement, it shall be
held harmless by the Customers for any such action.
<PAGE>
23
SIGNATURES.
Add the following after the signature lines:
The provisions of Section 3 hereof
are hereby acknowledged by:
BARCLAYS BANK OF CANADA
By:
-------------------------------
Authorized Attorney-in-Fact
BARCLAYS BANK S.A. (FRANCE)
By:
-------------------------------
Authorized Attorney-in-Fact
BARCLAYS TRUST AND BANKING
COMPANY (JAPAN) LIMITED
By:
-------------------------------
Authorized Attorney-in-Fact
BARCLAYS BANK S.A.E. (SPAIN)
By:
-------------------------------
Authorized Attorney-in-Fact
BARCLAYS BANK S.A. (SWITZERLAND)
By:
-------------------------------
Authorized Attorney-in-Fact
BARCLAYS BANK AUSTRALIA LIMITED
By:
-------------------------------
Authorized Attorney-in-Fact
<PAGE>
24
The following investment companies hereby agree and become parties to the
provision of the Global Custody Agreement of which this Rider B is a part.
Barclays and the Custodian undertake to discharge their respective obligations
set forth in the Global Custody Agreement and herein to the undersigned
investment companies which shall each be a "Customer" under this Agreement.
By: ____________________________________
Title: _________________________________
Dated as of:
<PAGE>
EXHIBIT 9(b)
APPENDIX A
to the
AMENDED AND RESTATED ADMINISTRATION AGREEMENT
between
Compass Capital Funds(SM)
(previously The PNC(R) Fund)
and
PFPC Inc.
and
Compass Distributors, Inc.
______________________________________________________________________________
Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
U.S. Treasury Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Ohio Municipal Money Market Portfolio (Institutional Shares, Services Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Virginia Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
Intermediate Government Bond Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Bond Portfolio (BlackRock Shares, Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Low Duration Bond Portfolio (BlackRock Shares, Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Intermediate Bond Portfolio (BlackRock Shares, Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
International Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)
Large Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Large Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Small Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Select Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
BlackRock Strategic Portfolio I (Institutional Shares)
BlackRock Strategic Portfolio II (Institutional Shares)
International Small Cap Equity Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Micro-Cap Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
GNMA Portfolio (Institutional Shares, Service Shares, Series A Investor Shares,
Series B Investor Shares and Series C Investor Shares)
Delaware Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Kentucky Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
Release. "Compass Capital Funds" and "Trustees of Compass Capital Funds" refer
- -------
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Company. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, shareholders,
officers, representatives or agents of the Company personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Company must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Company.
[End of Text]
<PAGE>
Agreed to and accepted as of ________________, 1998.
COMPASS CAPITAL FUNDS(SM)
By:___________________________
Name:
Title:
PFPC INC.
By:___________________________
Name:
Title:
COMPASS DISTRIBUTORS, INC.
By:___________________________
Name:
Title:
<PAGE>
APPENDIX B
----------
Administration Fees Payable
With Respect to Compass Capital Funds(SM)
<TABLE>
<CAPTION>
I. Portfolios Fund-Based Administration Fees
---------- ------------------------------
<S> <C>
All Portfolios. Administrators are entitled to receive a
combined fee, computed daily and payable
monthly, at an annual rate of .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 each Portfolio's average
daily net assets in excess of $1 billion.
II. Portfolios Class-Specific Administration Fee
---------- ---------------------------------
Managed Income, Core Bond, Intermediate Administrators are entitled to receive a
Government Bond, Tax-Free Income, New combined fee, computed daily and payable
Jersey Tax-Free Income, Ohio Tax-Free monthly, at the following maximum annual
Income, Pennsylvania Tax-Free Income, rates based on the average daily net assets
Low Duration Bond, Intermediate Bond, allocated to each respective class of shares:
International Bond, Government Income, .115% of the first $500 millon of average
Multi-Sector Mortgage Securities Portfolio daily net assets allocated to a class of shares,
III, BlackRock Strategic Portfolio I, .105% of the next $500 million of such
BlackRock Strategic Portfolio II, GNMA, average daily net assets, and .095% of all
Delaware Tax-Free Income and Kentucky average daily net assets allocated to a class
Tax-Free Income Portfolios. of shares in excess of $1 billion.
Money Market, Municipal Money Market, Administrators are entitled to receive a
U.S. Treasury Money Market, Ohio combined fee, computed daily and payable
Municipal Money Market, New Jersey monthly, at the following maximum annual
Municipal Money Market, Pennsylvania rates based on the average daily net assets
Municipal Money Market, North Carolina allocated to each respective class of shares:
Municipal Money Market and Virginia .065% of the first $500 million of average
Municipal Money Market Portfolios. daily net assets allocated to a class of shares,
.055% of the next $500 million of such
average daily net assets, and .045% of all
average daily net assets allocated to a class
of shares in excess of $1 billion.
</TABLE>
<PAGE>
2
<TABLE>
<S> <C>
Large Cap Value Equity, Large Cap Growth Administrators are entitled to receive a
Equity, Small Cap Value Equity, combined fee, computed daily and payable
International Equity, Index Equity, monthly, at the following maximum annual
Balanced, Small Cap Growth Equity, Select rates based on the average daily assets
Equity, Mid-Cap Value Equity, Mid-Cap allocated to each class of shares: .115% of
Growth Equity, International Emerging the first $500 million of average daily net
Markets, International Small Cap Equity and assets allocated to a class of shares, .105%
Micro-Cap Equity Portfolios. of the next $500 million of such average
daily net assets and .095% of all average
daily net assets allocated to a class of shares
in excess of $1 billion.
</TABLE>
<PAGE>
3
Release. "Compass Capital Funds" and "Trustees of Compass Capital Funds"
- -------
refer respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Company. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, shareholders,
officers, representatives or agents of the Company personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Company must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Company.
Agreed to and accepted as of
________________, 1998.
COMPASS CAPITAL FUNDS(SM)
By:_________________________
Name:
Title:
PFPC INC.
By:_________________________
Name:
Title:
COMPASS DISTRIBUTORS, INC.
By: _________________________
Name:
Title:
<PAGE>
EXHIBIT 9(c)
BLACKROCK FUNDS/SM/
CO-ADMINISTRATION AGREEMENT
---------------------------
AGREEMENT dated as of January __, 1998 between BLACKROCK FUNDS, a
Massachusetts business trust (the "Company"), and BLACKROCK, INC., a Delaware
corporation (the "Co-Administrator").
WHEREAS, the Company is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Company desires to retain the Co-Administrator to provide
certain administration services and the Co-Administrator is willing to furnish
such administration services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and intending to be legally bound, it is agreed between the
parties hereto as follows:
1. Appointment of Co-Administrator. The Company hereby appoints the
-------------------------------
Co-Administrator to provide certain administration services, as more fully
described herein, for each class and series of shares in each of the Company's
investment portfolios set forth in Appendix A hereto (the "Portfolios") on the
terms and for the period set forth in this Agreement. The Co-Administrator
accepts such appointment and agrees to perform the services and duties set forth
in Section 3 below in return for the compensation provided in Section 5 below.
In the event that the Company establishes additional classes or investment
portfolios other than the Portfolios listed on Appendix A with respect to which
it desires to retain the Co-Administrator to act as an administrator hereunder,
the Company shall notify the Co-Administrators, whereupon such Appendix A shall
be supplemented (or amended) and such portfolio shall become a Portfolio
hereunder and shall be subject to the provisions of this Agreement to the same
extent as the Portfolios (except to the extent that said provisions, including
the compensation payable on behalf of such new Portfolio, may be modified in
writing by the Company and the Co-Administrator at the time).
2. Delivery of Documents. The Company has furnished the Co-
---------------------
Administrator with copies, properly certified or authenticated, of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
a. The Company's Declaration of Trust, filed with the Secretary
of State of the Commonwealth of Massachusetts on December 22, 1988, as amended
(the "Charter");
<PAGE>
b. The Company's Code of Regulations, as amended ("Code");
c. Resolutions of the Company's Board of Trustees authorizing
the execution and delivery of this Agreement;
d. The Company's most recent amendment to its Registration
Statement under the Securities Act of 1933, as amended, and under the 1940 Act
on Form N-1A as filed with the Securities and Exchange Commission (the
"Commission") relating to its Portfolios (the Registration Statement, as
presently in effect and as amended or supplemented from time to time, is herein
called the "Registration Statement"); and
e. The Company's most recent Prospectuses and Statements of
Additional Information and all amendments and supplements thereto (such
Prospectuses and Statements of Additional Information and supplements thereto,
as presently in effect and as from time to time amended and supplemented, are
herein called the "Prospectuses").
3. Services and Duties.
-------------------
a. Subject to the supervision and control of the Company's
Board of Trustees, the Co-Administrator shall be responsible for the performance
of the following services:
(1) The oversight and coordination of the performance of
each of the service providers to the Company, including without
limitation, its investment advisers, sub-advisers, other
administrators, transfer agent, custodian, distributor,
shareholder servicing agents, legal counsel and independent
auditors;
(2) The negotiation of service contracts and arrangements
between the Company and each of its service providers;
(3) Acting as liaison between the Company's Board of
Trustees and its service providers;
(4) Assisting in the preparation of materials for meetings
of the Company's Board of Trustees and shareholders; and
(5) Providing general ongoing business management and
support services in connection with the Company's operations.
b. In performing all of its services and duties hereunder, the
Co-Administrator will act in conformity with the Charter, Code, Prospectuses and
resolutions and other instructions of the Company's Board of Trustees and will
comply with the requirements of the 1940 Act and other applicable federal or
state law.
-2-
<PAGE>
4. Expenses Assumed as Co-Administrator. The Co-Administrator will
------------------------------------
bear all expenses incurred by it in performing its services and duties
hereunder, except as otherwise expressly provided herein. Other expenses to be
incurred in the operation of the Portfolios, including taxes, interest,
brokerage fees and commissions, if any; salaries and fees of officers and
trustees who are not officers, directors, shareholders or employees of the
Company's administrators, or of the Company's investment adviser, other
administrators or of the distributor for the Portfolios; Commission fees and
state Blue Sky qualification fees; advisory and administration fees; charges of
custodians; transfer and dividend disbursing agents' fees; certain insurance
premiums; outside auditing and legal expenses; costs of maintaining corporate
existence; typesetting and printing of Prospectuses for regulatory purposes and
for distribution to current shareholders of the Portfolios; costs of
shareholders' reports and corporate meetings; and any extraordinary expenses,
will be borne by the Company, provided, however, that the Company will not bear,
-------- -------
directly or indirectly, the cost of any activity which is primarily intended to
result in the sale of shares of the Portfolios otherwise than pursuant to its
Amended and Restated Distribution and Service Plan.
5. Compensation.
------------
a. For the services provided and the expenses assumed as Co-
Administrator pursuant to Section 4 above, the Company will pay to the Co-
Administrator a monthly fee at an annual rate equal to 0.03% of the average
daily net assets of each Portfolio, as modified by agreement of the Co-
Administrator and the Company from time to time. The fee attributable to each
Portfolio shall be the several (and not joint or joint and several) obligation
of each Portfolio.
b. For the purpose of determining fees payable to the Co-
Administrator for the services provided hereunder, the value of each Portfolio's
net assets shall be computed as required by its Prospectuses, generally accepted
accounting principles and resolutions of the Company's Board of Trustees. The
fee attributable to each Portfolio shall be the several (and not joint or joint
and several) obligation of each such Portfolio.
c. The Co-Administrator will from time to time employ or
associate with itself such person or persons as it may believe to be fitted to
assist it in the performance of this Agreement. Such person or persons may be
officers and employees who are employed by both the Company and the Co-
Administrator. The compensation of such person or persons shall be paid by the
Co-Administrator, and no obligation shall be incurred on behalf of the Company
in such respect.
6. Proprietary and Confidential Information. The Co-Administrator
----------------------------------------
agrees on behalf of itself and its employees to treat confidentially and as
proprietary information of the Company all records and other information
relative to the Company and its Portfolios and prior, present or potential
shareholders, and not to use such records and information for any purpose other
than performance of their responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Company, which approval
shall not be
-3-
<PAGE>
unreasonably withheld and may not be withheld where the Co-Administrator may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Company.
7. Limitations of Liability. The Co-Administrator shall not be
------------------------
liable for any error of judgment or mistake of law or for any loss suffered by
the Company in connection with the matters to which this Agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. Any person, even though also an
officer, director, employee or agent of the Co-Administrator, who may be or
become an officer, employee or agent of the Company, shall be deemed, when
rendering services to the Company or acting on any business of the Company
(other than services or business in connection with the Co-Administrator's
duties hereunder), to be rendering such services to or acting solely for the
Company and not as an officer, director, employee or agent or one under the
control or direction of the Co-Administrator even though paid by the Co-
Administrator.
8. Duration and Termination. This Agreement shall become effective
------------------------
upon its execution as of the date first written above and, unless sooner
terminated as provided herein, shall continue until March 31, 1999. Thereafter,
if not terminated, this Agreement shall continue automatically for successive
terms of one year, provided that such continuance is specifically approved at
least annually (a) by a vote of a majority of those members of the Company's
Board of Trustees who are not parties to this Agreement or "interested persons"
of any such party, cast in person at a meeting called for the purpose of voting
on such approval, and (b) by the Company's Board of Trustees or by vote of a
"majority of the outstanding voting securities" of the Company; provided,
--------
however, that this Agreement may be terminated by the Company at any time,
- -------
without the payment of any penalty, by vote of a majority of the entire Board of
Trustees or a vote of a "majority of the outstanding voting securities" of the
Company, on 60-days' written notice to the Co-Administrator, or by the Co-
Administrator at any time, without the payment of any penalty, on 90-days'
written notice to the Company. (As used in this Agreement, the terms "majority
of the outstanding voting securities" and "interested person" shall have the
same meaning as such terms have in the 1940 Act.)
9. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, discharge
or termination is sought.
10. Notices. Notices of any kind to be given to the Company
-------
hereunder by the Co-Administrator shall be in writing and shall be duly given if
mailed or delivered to the Company at 1600 Market Street, 28th Floor,
Philadelphia, Pennsylvania 19103, Attention: Brian P. Kindelan, Esq., Secretary,
or at such other address or to such individual as shall be so specified by the
Company to the Co-Administrator. Notices of any kind to be given to the Co-
Administrator hereunder by the Company shall be in writing and shall be duly
given if
-4-
<PAGE>
mailed or delivered to BlackRock, Inc., [___________________], Attention:
[___________], or at such other address or to such other individual as shall be
so specified by the Co-Administrator to the Company.
11. Miscellaneous.
-------------
a. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors.
b. The names "BlackRock Funds" and "Trustees of The BlackRock
Funds" refer specifically to the trust created and the Trustees, as trustees but
not individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988, which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Company. The obligations of
"BlackRock Funds" entered into in the name or on behalf thereof by any of the
Trustees, officers, representatives or agents are not made individually, but in
such capacities, and are not binding upon any of the Trustees, shareholders,
representatives or agents of the Company personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any Portfolio or class of shares of the Company must look solely to the Trust
Property belonging to such Portfolio or class for the enforcement of any claims
against the Company.
12. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York.
13. Counterparts. This Agreement may be executed in counterparts,
------------
all of which together shall constitute one and the same instrument.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
BLACKROCK FUNDS
By:_______________________________
BLACKROCK, INC.
By:_______________________________
-6-
<PAGE>
APPENDIX A
to the
Co-Administration Agreement
between BlackRock Funds/SM/
and BlackRock, Inc.
Class of
Name of Portfolio Shares
- ----------------- --------
Small Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Small Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Large Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Large Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Select Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
-7-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Index Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Emerging
Markets Portfolio Institutional
Service
Investor A
Investor B
Investor C
Balanced Portfolio Institutional
Service
Investor A
Investor B
Investor C
Low Duration Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
Intermediate Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
-8-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
Intermediate Government
Bond Portfolio Institutional
Service
Investor A
Investor B
Investor C
Government Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Core Bond Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
Managed Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Tax-Free Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
-9-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
Pennsylvania Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
New Jersey Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
Ohio Tax-Free Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Municipal Money Market
Portfolio Institutional
Service
Investor A
Investor B
Investor C
U.S. Treasury Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
-10-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
Ohio Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Pennsylvania Municipal
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
North Carolina Municipal
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
New Jersey Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Virginia Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Multi-Sector Mortgage
Securities Portfolio III Institutional
-11-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Mid-Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Mid-Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock Strategic
Portfolio I Institutional
BlackRock Strategic
Portfolio II Institutional
International Small Cap
Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
Micro-Cap
Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
GNMA Portfolio Institutional
Service
Investor A
Investor B
Investor C
-12-
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- --------
Delaware Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
Kentucky Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
-13-
<PAGE>
EXHIBIT 9(e)
TRANSFER AGENCY AGREEMENT
-------------------------
THIS AGREEMENT is made as of October 4, 1989 between THE PNC/(R)/
FUND, a Massachusetts business trust (the "Fund"), and PROVIDENT FINANCIAL
PROCESSING CORPORATION, a Delaware corporation (the "'Transfer Agent") which is
an indirect, wholly-owned subsidiary of PNC Financial Corp.
R E C I T A L
WHEREAS, the Fund is registered as an open-end, diversified management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund desires to retain the Transfer Agent to serve as the
Fund's transfer agent, registrar, and dividend disbursing agent with respect to
its shares, par value $.001 per share (the "Shares") of its Money Market, Tax-
Free Money Market, Government Money Market, Capital Appreciation, Total Return,
Managed Income and International Portfolios, and the Transfer Agent is willing
to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints the Transfer Agent to serve
-----------
as transfer agent, registrar and dividend disbursing agent for the Fund for the
period and on the terms set forth in this Agreement. The Transfer Agent shall
identify to each class ("Class") of the Shares, or any additional class
hereafter created that is designated by the Fund as a Class, property belonging
to such Class and in such reports, confirmations and notices to the Fund called
for under this Agreement and shall identify the Class to which such report,
confirmation or notice pertains. The Transfer Agent accepts such appointment and
agrees to furnish the services herein set forth in return for the compensation
as provided in Paragraph 16 of this Agreement.
2. Delivery of Documents. The Fund has furnished the Transfer Agent
---------------------
with copies, properly certified or authenticated, of each of the following:
(a) Resolutions of the Fund's Board of Trustees authorizing the
appointment of the Transfer Agent as transfer agent and registrar and
dividend disbursing agent for the Shares and approving this Agreement;
(b) Appendix A identifying and containing the signatures of the
Fund's officers and other persons authorized to issue Oral Instructions and
to sign Written Instructions, as hereinafter defined, on behalf of the Fund
and to execute certificates representing Shares;
<PAGE>
2
(c) The Fund's Declaration of Trust as filed with the State Secretary
of the Commonwealth of Massachusetts and the Boston City Clerk on December
22, 1988;
(d) The Fund's Code of Regulations;
(e) The Investment Advisory Agreement between Provident Institutional
Management Corporation (Adviser) and the Fund;
(f) The Sub-Advisory Agreements between Adviser and Provident
National Bank (relating to the Money Market and Government Money Market
Portfolios and the Total Return Portfolio), Adviser and The Central Trust
Company, N.A. (relating to the Tax-Free Money Market, Capital Appreciation
and Managed Income Portfolios) and Adviser and Provident Capital
Management, Inc. (relating to the International Portfolio);
(g) The Administration Agreement between The Boston Company Advisors,
Inc. and the Fund;
(h) The Administration and Accounting Services Agreement between
Provident Financial Processing Corporation and the Fund;
(i) The Distribution Agreement between TBC Funds Distributor, Inc.
and the Fund;
(j) The Custodian Agreement between Provident National Bank (the
"Custodian.) and the Fund;
(k) The Fund's Notification of Registration on Form N-8A under the
1940 Act as fled with the Securities and Exchange Commission ("SEC") on
December 22, 1988;
(l) The Fund's Registration Statement on Form N-1A (the "Registration
Statement") under the Securities Act of 1933 (the "1933 Act") and the 1940
Act, as filed with the SEC on December 23, 1988, and all amendments
thereto;
(m) The Fund's non-12b-1 Shareholder Services Plan and the Fund's
form of shareholder servicing agreement;
(n) The Fund's 12b-1 Plan and the Fund's form of dealer agreement and
shareholder servicing agreement;
(o) The Fund's most recent Prospectuses and Statements of Additional
Information and all amendments and supplements thereto; and
(p) Before any investment portfolio of the Fund engages in any
transaction regulated by the Commodity Futures Trading Commission ("CFTC"),
a copy of either (i) a
<PAGE>
3
filed notice of eligibility to claim the exclusion from the definition of
"commodity pool operator "contained in Section 2(a)(1)(A) of the Commodity
Exchange Act ("CEA") that is provided in Rule 4.5 under the CEA, together
with all supplements as are required by the CFTC, or (ii) a letter which
has been granted the Fund by the CFTC which states that the Fund will not
be treated as a "pool" as defined in Section 4.10(d) of the CFTC's General
Regulations, or (iii) a letter which has been granted the Fund by the CFTC
which states that the CFTC will not take any enforcement action if the Fund
does not register as a "commodity pool operator."
The Fund will furnish the Transfer Agent from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing, if any.
3. Definitions.
-----------
(a) "Authorized Person." As used in this Agreement, the term
-----------------
"Authorized Person" means any officer of the Fund and any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized by
the Board of Trustees of the Fund to give Oral and Written Instructions on
behalf of the Fund and listed on the Certificate annexed hereto as Appendix A or
any amendment thereto as may be received by the Transfer Agent from time to
time.
(b) "Oral Instructions." As used in this Agreement, the term "Oral
-----------------
Instructions" means oral instructions actually received by the Transfer Agent
from an Authorized Person or from a person reasonably believed by the Transfer
Agent to be an Authorized Person. The Fund agrees to deliver to the Transfer
Agent, at the time and in the manner specified in Paragraph 4(b) of this
Agreement, Written Instructions confirming Oral Instructions.
(c) "Written Instructions." As used in this Agreement, the term
--------------------
"Written Instructions" means written instructions delivered by hand, mail,
tested telegram, cable, telex or facsimile sending device, and received by the
Transfer Agent and signed by an Authorized Person.
4. Instructions Consistent with Declaration of Trust and Code of
-------------------------------------------------------------
Regulations.
- -----------
(a) Unless otherwise provided in this Agreement, the Transfer Agent
shall act only upon Oral or written Instructions. Although the Transfer Agent
may know of the provisions of the Declaration of Trust or Code of Regulations
(collectively, the "Organization Documents") of the Fund, the Transfer Agent may
assume that any Oral or Written Instructions received hereunder are not in any
way inconsistent with any provisions of the Organization Documents or any vote,
resolution or proceeding of
<PAGE>
4
the Fund's shareholders (the "Shareholders"), or of the Board of Trustees, or of
any committee thereof.
(b) The Transfer Agent shall be entitled to rely upon any Oral
Instructions and any Written Instructions actually received by the Transfer
Agent pursuant to this Agreement. The Fund agrees to forward to the Transfer
Agent written Instructions confirming Oral Instructions in such manner that the
Written Instructions are received by the Transfer Agent by the close of business
of the same day that such Oral Instructions are given to the Transfer Agent.
The Fund agrees that the fact that such confirming Written Instructions are not
received by the Transfer Agent shall in no way affect the validity of the
transactions or enforceability of the transactions authorized by the Fund by
giving Oral Instructions. The Fund agrees that the Transfer Agent shall incur
no liability to the Fund in acting upon Oral Instructions given to the Transfer
Agent hereunder concerning such transactions, provided such instructions
reasonably appear to have been received from an Authorized Person.
5. Transactions Not Requiring Instructions. In the absence of
---------------------------------------
contrary Written Instructions, the Transfer Agent is authorized to take the
following actions:
(a) Issuance of Shares. Upon receipt of a purchase order from or on
------------------
behalf of an investor for the purchase of Shares and sufficient information,
including a completed application to purchase ("Application") (if any), to
enable the Transfer Agent to establish a Shareholder account and to determine
which Class of Shares the investor wishes to purchase, and after confirmation of
receipt of payment in the form described in the Prospectus and statement of
additional information for the Class of Shares involved, the Transfer Agent
shall issue and credit the account of the investor or other record holder with
Shares in the manner described in the Prospectus relating to such Shares and
shall prepare and mail the appropriate confirmation in accordance with legal
requirements.
(b) Transfer of Shares; Uncertificated Securities. Where a
---------------------------------------------
Shareholder does not hold a certificate representing the number of Shares in his
account and does provide the Transfer Agent with instructions for the transfer
of such Shares and such other appropriate documentation to permit a transfer as
specified in the Prospectus relating to such Shares, then the Transfer Agent
shall register such Shares and shall deliver them pursuant to instructions
received from the transferor, pursuant to the rules of the exchange upon which
the Shares are listed (if any), the rules and regulations of the SEC, and the
law of the Commonwealth of Massachusetts relating to the transfer of shares of
common stock.
(c) Share Certificates. If at any time the Fund issues share
------------------
certificates with respect to any Class of Shares,
<PAGE>
5
the following provisions will apply with respect to such Class of Shares:
(i) The Fund will supply the Transfer Agent with a sufficient
supply of share certificates representing such Class of Shares, in the form
approved from time to time by the Board of Trustees of the Fund, and, from
time to time, shall replenish such supply upon request of the Transfer
Agent. Such share certificates shall be properly signed, manually or by
facsimile signature, by the duly authorized officers of the Fund, whose
names and positions shall be set forth on Appendix B hereto, and
notwithstanding the death, resignation or removal of any officer of the
Fund, such executed certificates bearing the manual or facsimile signature
of such officer shall remain valid and may be issued to Shareholders until
the Transfer Agent is otherwise directed by Written Instructions.
(ii) In the case of the loss or destruction of any certificate
representing any Class of Shares, no new certificate shall be issued in
lieu thereof, unless there shall first have been furnished an appropriate
bond of indemnity issued by the surety company approved by the Transfer
Agent.
(iii) Upon receipt of signed share certificates, which shall be
in proper form for transfer, and upon cancellation or destruction thereof,
the Transfer Agent shall countersign, register and issue new certificates
for the same number of such Class of Shares and shall deliver them pursuant
to instructions received from the transferor, the rules and regulations of
the SEC, and the law of the Commonwealth of Massachusetts relating to the
transfer of Shares.
(iv) Upon receipt of the share certificates, which shall be in
proper form for transfer, together with the Shareholders instructions to
hold such share certificates for safekeeping, the Transfer Agent shall
reduce such Shares to uncertificated status, while retaining the
appropriate registration in the name of the Shareholder upon the transfer
books.
(v) Upon receipt of written instructions from a Shareholder of
uncertificated securities for a certificate in the number of Shares in his
account, the Transfer Agent will issue such share certificates and deliver
them to the Shareholder.
(d) Redemption of Shares. Upon receipt of a redemption order
--------------------
from a Shareholder in the manner and form specified in the Prospectus relating
to such Shares, the Transfer Agent shall redeem the number of Shares so
indicated from the redeeming Shareholder's account and receive from the
Custodian and disburse
<PAGE>
6
to the redeeming Shareholder or account as designated in the Application the
redemption proceeds therefor or arrange for direct payments of redemption
proceeds to such Shareholder by the Custodian, in the case of a redemption
check, to the party presenting such check for payment in accordance with such
procedures and controls as are mutually agreed upon from time to time by and
among the Fund, the Transfer Agent and the Custodian.
6. Authorized Shares. The Fund's authorized capital shares consist
-----------------
of an unlimited number of Shares in each of seven classes, i.e., Classes A-1, B-
----
1, C-1, D, E, F and G. The Fund's Board of Trustees is authorized to classify
and reclassify any unissued Shares into one or more classes. The Fund shall
notify the Transfer Agent of any such classification or reclassification. The
Fund agrees to notify the Transfer Agent promptly of any termination of the
Fund's Declaration under Rule 24f-2 of the 1940 Act.
7. Dividends and Distributions. The Fund shall furnish the Transfer
---------------------------
Agent with appropriate evidence of action by the Fund's Board of Trustees
authorizing the declaration and payment of dividends and distributions as
described in the Prospectuses. After deducting any amount required to be
withheld by any applicable tax laws, rules and regulations or other applicable
laws, the Transfer Agent shall in accordance with the instructions in proper
form from a Shareholder and the provisions of the Organization Documents and
applicable Prospectus, pay such dividends to the Shareholders in the manner
described in the applicable Prospectus. In lieu of receiving from the Custodian
and paying to Shareholders cash dividends or distributions, the Transfer Agent
may arrange for the direct payment of cash dividends and distributions to
Shareholders by the Custodian, in accordance with such procedures and controls
as are mutually agreed upon from time to time by and among the Fund, the
Transfer Agent and the Custodian.
The Transfer Agent shall prepare, file with the Internal Revenue
Service and other appropriate taxing authorities, and address and mail to
Shareholders such returns and information relating to dividends and
distributions paid by the Fund as are required to be so prepared, filed and
mailed by applicable laws, rules and regulations, or such substitute form of
notice as may from time to time be permitted or required by the Internal Revenue
Service. On behalf of the Fund, the Transfer Agent shall mail certain requests
for Shareholders' certifications under penalties of perjury and pay on a timely
basis to the appropriate Federal authorities any taxes to be withheld on
dividends and distributions paid by the Fund, all as required by applicable
Federal tax laws and regulations.
In accordance with the applicable Prospectus and such procedures and
controls as are mutually agreed upon from time to time by and among the Fund,
the Transfer Agent and the Custodian, the Transfer Agent shall (a) arrange for
issuance of Shares
<PAGE>
7
obtained through (1) transfers of funds from Shareholders' accounts at financial
institutions, (2) the Fund's pre-authorized check plan, and (3) the Fund's right
of accumulation plan; (4) the Fund's automatic investing program; (b) arrange
for the exchange of Shares of a Class or series of the Fund having an exchange
privilege for Shares of other Classes or series of the Fund to which such
exchange privilege extends; and (c) arrange for systematic withdrawals from the
account of a Shareholder participating in the Fund's systematic withdrawal
program.
8. Communications with Shareholders.
--------------------------------
(a) Communications to Shareholders. The Transfer Agent will address
------------------------------
and mail all communications by the Fund to Shareholders, including, without
limitation, reports to Shareholders, confirmations of purchases and sales of
Shares, monthly statements, year-end Federal tax information, dividend and
distribution notices and proxy material for its meetings of Shareholders. The
Transfer Agent will receive and tabulate the proxy cards for the meetings of the
Shareholders.
(b) Correspondence. The Transfer Agent will answer such
--------------
correspondence from Shareholders, securities brokers and others relating to its
duties hereunder and such other correspondence as may from time to time be
mutually agreed upon between the Transfer Agent and the Fund.
9. Records. The Transfer Agent shall maintain records of the
-------
accounts for each Shareholder showing the following information:
(a) name, address and United States Tax Identification or Social
Security number;
(b) number and Class of Shares held and number and Class of Shares
for which certificates, if any, have been issued, including certificate
numbers and denominations;
(c) historical information regarding the account of each Shareholder,
including dividends and distributions paid and the date and price for all
transactions on a Shareholder's account;
(d) any stop or restraining order placed against a Shareholder's
account;
(e) any correspondence relating to the current maintenance of a
Shareholder's account;
(f) information with respect to withholdings; and,
(g) any information required in order for the Transfer Agent to
perform any calculations contemplated or required by this Agreement.
<PAGE>
8
The Transfer Agent shall maintain sub-accounts for each Shareholder
requesting such services in connection with Shares held by such Shareholder for
separate accounts containing the same information for each sub-account as that
described above for accounts.
The Transfer Agent shall keep a record of all redemption checks and
dividend checks returned by postal authorities, and shall maintain such records
as are required for the Fund to comply with the escheat laws of any State or
other authority.
The books and records pertaining to the Fund which are in the
possession of the Transfer Agent shall be the property of the Fund. Such books
and records shall be prepared and maintained as required by the 1940 Act and
other applicable securities laws and rules and regulations and shall, to the
extent practicable, be maintained separately for each portfolio of the Fund. The
Fund, or the Fund's authorized representatives, shall have access to such books
and records at all times during the Transfer Agent's normal business hours. Upon
the reasonable request of the Fund, copies of any such books and records shall
be provided by the Transfer Agent to the Fund or the Fund's authorized
representative at the Fund's expense.
10. Ongoing Functions. The Transfer Agent will perform the following
-----------------
on an ongoing basis:
(a) furnish daily reports of transactions in Shares;
(b) furnish monthly reports of transactions in Fund Shares by type
(custodial, trust, Keogh, IRA, other) including numbers of accounts;
(c) furnish state-by-state blue sky registration reports to the Fund;
(d) calculate sales load or compensation payment, if applicable, and
provide such information to the Fund;
(e) calculate dealer commissions for the Fund, as applicable;
(f) provide toll-free lines for direct Shareholder use, plus customer
liaison staff with on-line inquiry capacity;
(g) mail duplicate confirmations to dealers of their clients'
activity, whether executed through the dealer or directly with the Transfer
Agent;
(h) provide detail for underwriter or broker confirmations and other
participating dealer Shareholder
<PAGE>
9
accounting, in accordance with such procedures as may be agreed upon
between the Fund and the Transfer Agent;
(i) provide Shareholder lists and statistical information concerning
accounts to the Fund; and
(j) provide timely notification of Fund activity and such other
information as may be agreed upon from time to time between the Transfer
Agent and the Custodian, to the Fund or the Custodian.
11. Cooperation with Accountants. The Transfer Agent shall cooperate
----------------------------
with the Fund's independent public accountants and shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion as such may be required by the Fund from time to
time.
12. Confidentiality. The Transfer Agent agrees on behalf of itself
---------------
and its employees to treat confidentially all records and other information
relative to the Fund, each portfolio of the Fund, and the Fund's prior, current
or potential Shareholders, except after prior notification to and approval in
writing by the Fund, which approval shall not be unreasonably withheld and may
not be withheld where the Transfer Agent may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, or when so requested by the Fund.
13. Equipment Failures. In the event of equipment failures beyond
------------------
the Transfer Agent's control, the Transfer Agent shall, at no additional expense
to the Fund, take reasonable steps to minimize service interruptions but shall
have no liability with respect thereto. The foregoing obligation shall not
extend to computer terminals located outside of premises maintained by the
Transfer Agent. The Transfer Agent shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable provision for
emergency use of electronic data processing equipment to the extent appropriate
equipment is available.
14. Right to Receive Advice.
-----------------------
(a) Advice of Fund. If the Transfer Agent shall be in doubt as to
--------------
any action to be taken or omitted by it, it may request, and shall receive, from
the Fund directions or advice, including Oral or Written Instructions where
appropriate.
(b) Advice of Counsel. If the Transfer Agent shall be in doubt as to
-----------------
any question of law involved in any action to be taken or omitted by the
Transfer Agent, it may request advice at its own cost from counsel of its own
choosing t Who may be
<PAGE>
10
counsel for the Fund or the Transfer Agent at the option of the Transfer Agent).
(c) Conflicting Advice. In case of conflict between directions,
------------------
advice or Oral or Written Instructions received by the Transfer Agent pursuant
to subparagraph (a) of this Paragraph 14 and advice received by the Transfer
Agent pursuant to subparagraph (b) of this Paragraph 14, the Transfer Agent
shall be entitled to rely on and follow the advice received pursuant to the
latter provision alone.
(d) Protection of the Transfer Agent. The Transfer Agent shall be
--------------------------------
protected in any action or inaction which it takes in reliance on any
directions, advice or Oral or Written Instructions received pursuant to
subparagraphs (a) or (b) of this Paragraph 14 which the Transfer Agent, after
receipt of any such directions, advice or Oral or Written Instructions, in good
faith believes to be consistent with such directions, advice or Oral or Written
Instructions, as the case may be. However, nothing in this Paragraph shall be
construed as imposing upon the Transfer Agent any obligation (i) to seek such
directions, advice or Oral or Written Instructions, or (ii) to act in accordance
with such directions, advice or Oral or Written Instructions when received,
unless, under the terms of another provision of the Agreement, the same is a
condition to the Transfer Agent's properly taking or omitting to take such
action. Nothing in this subparagraph shall excuse the Transfer Agent when an
action or omission on the part of the Transfer Agent constitutes willful
misfeasance, bad faith, negligence or reckless disregard by the Transfer Agent
of its duties and obligations under this Agreement.
15. Compliance with Governmental Rules and Regulations. The Transfer
---------------------------------------------------
Agent assumes no responsibility for ensuring that the Fund complies with all
applicable requirements of the 1933 Act, the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the 1940 Act, the CEA, and any laws, rules and
regulations of governmental authorities having jurisdiction.
16. Compensation. As compensation for the services rendered by the
------------
Transfer Agent during the term of this Agreement, the Fund will pay to the
Transfer Agent, with respect to each Class of the Fund, monthly fees that shall
be agreed to from time to time by the Fund and the Transfer Agent, for each
account open at any time during the month for which payment is being made, plus
certain of the Transfer Agent's expenses relating to such services, as shall be
agreed to from time to time by the Fund and the Transfer Agent. The fee
attributable to each Class shall be the several (and not joint or joint and
several) obligation of each Class.
17. Indemnification. The Fund, on behalf of each portfolio of the
---------------
Fund, agrees that each portfolio of the Fund shall indemnify and hold harmless
the Transfer Agent and its
<PAGE>
11
nominees and sub-contractors from all taxes, charges, expenses, assessments,
claims and liabilities (including, without limitation, liabilities arising under
the 1933 Act, the 1934 Act, the 1940 Act, the CEA and any state and foreign
securities and blue sky laws, all as or to be amended from time to time) and
expenses, including attorneys' fees and disbursements (as long as such attorney
has been retained with the consent of the Fund, which consent shall not be
unreasonably withheld), arising directly or indirectly from any action or thing
which the Transfer Agent or its nominees or sub-contractors takes or does or
omits to take or do for a portfolio of the Fund at the request or on the
direction of or in reliance on the advice of the Fund, provided, that neither
--------
the Transfer Agent nor any of its nominees or sub-contractors shall be
indemnified against any liability to the Fund, any portfolio of the Fund or to
the Shareholders (or any expenses incident to such liability) arising out of the
Transfer Agent's or any of its nominees' or sub-contractors' willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement. The obligations of each portfolio of the Fund
under this Paragraph 17 shall be the several (and not joint or joint and
several) obligation of each portfolio of the Fund.
18. Responsibility of the Transfer Agent. The Transfer Agent shall
------------------------------------
be under no duty to take any action on behalf of the Fund except as specifically
set forth herein or as may be specifically agreed to by the Transfer Agent in
writing. In the performance of its duties hereunder, the Transfer Agent shall be
obligated to exercise care and diligence and to act in good faith and to use its
best efforts within reasonable limits to ensure the accuracy and completeness of
all services performed under this Agreement. The Transfer Agent shall be
responsible for its own negligent failure to perform its duties under this
Agreement, but to the extent that duties, obligations and responsibilities are
not expressly set forth in this Agreement, the Transfer Agent shall not be
liable for any act or omission which does not constitute willful misfeasance,
bad faith or gross negligence on the part of the Transfer Agent or reckless
disregard of such duties, obligations and responsibilities. Without limiting the
generality of the foregoing or of any other provision of this Agreement, the
Transfer Agent in connection with its duties under this Agreement shall not be
under any duty or obligation to inquire into and shall not be liable for or in
respect of (a) the validity or invalidity or authority or lack thereof of any
Oral or Written Instruction, notice or other instrument which conforms to the
applicable requirements of this Agreement, if any, and which the Transfer Agent
reasonably believes to be genuine, or (b) delays or errors or loss of data
occurring by reason of circumstances beyond the Transfer Agent's control,
including acts of civil or military authority, national emergencies, labor
difficulties, fire, mechanical breakdown (except as provided in Paragraph 13),
flood or catastrophe, acts of God, insurrection, war, riots or failure of the
mails, transportation, communication or power supply. Notwithstanding
<PAGE>
12
the foregoing, the Transfer Agent shall use its best efforts to mitigate the
effects of such events, although such efforts shall not impute any liability
thereto. The Transfer Agent expressly disclaims all responsibility for
consequential damages, including but not limited to any that may result from
performance or non performance of any duty or obligation whether express or
implied in this Agreement, and also expressly disclaims any express or implied
warranty of products or services provided in connection with this Agreement.
19. Duration and Termination. This Agreement shall continue as to
------------------------
each portfolio of the Fund until terminated by the Fund or by the Transfer Agent
on sixty (60) days' written notice.
20. Registration as a Transfer Agent. The Transfer Agent represents
--------------------------------
that it is currently registered with the appropriate Federal agency for the
registration of transfer agents, and that it will remain so registered for the
duration of this Agreement. The Transfer Agent agrees that it will promptly
notify the Fund in the event of any material change in its status as a
registered transfer agent. Should the Transfer Agent fail to be registered with
the appropriate Federal Agency as a transfer agent at any time during this
Agreement, the Fund may, on written notice to the Transfer Agent, immediately
terminate this Agreement as to any or all portfolios of the Fund.
21. Notices. All notices and other communications, including Written
-------
Instructions (collectively referred to as "Notice" or "Notices" in this
Paragraph 21), hereunder shall be in writing or by confirming telegram, cable,
telex or facsimile sending device. Notices shall be addressed (a) if to the
Transfer Agent at P.O. Box 8950, Wilmington, Delaware 19899; (b) if to the Fund,
at the address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such Notice or other
communication. If the location of the sender of a Notice and the address of the
addressee thereof are, at the time of sending, more than 100 miles apart, the
Notice may be sent by first-class mail, in which case it shall be deemed to have
been given five business days after it is sent, or if sent by confirming
telegram, cable, telex or facsimile sending device, it shall be deemed to have
been given immediately, and, if the location of the sender of a Notice and the
address of the addressee thereof are, at the time of sending, not more than 100
miles apart, the Notice may be sent by first-class mail, in which case it shall
be deemed to have been given three business days after it is sent, or if sent by
messenger, it shall be deemed to have been given on the day it is delivered, or
if sent by confirming telegram, cable, telex or facsimile sending device, it
shall be deemed to have been given immediately. All postage, cable, telegram,
telex and facsimile sending device charges arising from the sending of a Notice
hereunder shall be paid by the sender.
<PAGE>
13
22. Further Actions. Each party agrees to perform such further acts
---------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
23. Amendments. This Agreement or any part hereof may be changed or
----------
waived only by an instrument in writing signed by the party against which
enforcement of such change or waiver is sought.
24. Delegation of Duties. On thirty (30) days' prior written notice
--------------------
to the Fund, the Transfer Agent may assign its rights and delegate its duties
hereunder to any wholly owned direct or indirect subsidiary of Provident
National Bank or PNC Financial Corp, provided that (i) the delegate agrees with
the Transfer Agent to comply with all relevant provisions of the 1940 Act; and
(ii) the Transfer Agent and such delegate shall promptly provide such
information as the Fund may request, and respond to such question as the Fund
may ask, relative to the delegation, including (without limitation) the
capabilities of the delegate.
25. Release. The names "The PNC Fund" and "Trustees of The PNC Fund"
-------
refer respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Trust. The obligations of "The
PNC Fund" entered into in the name or on behalf thereof by any of the Trustees,
officers, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, Shareholders,
officers, representatives or agents of the Trust personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Trust must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Trust.
26. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
27. Miscellaneous. This Agreement embodies the entire agreement and
-------------
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof, provided that the
parties hereto may embody in one or more separate documents their agreement, if
any, with respect to Oral or Written Instructions. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. This Agreement shall be deemed to be a contract made in Delaware and
governed by Delaware law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the
<PAGE>
14
remainder of this Agreement shall not be affected thereby. This Agreement shall
be binding on, and shall inure to the benefit of, the parties hereto and their
respective successors, permitted assigns and permitted delegates.
<PAGE>
15
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below on the day and year first above
written.
Attest: THE PNC FUND
_________________________________ By:________________________________
Its: Its:
Attest: PROVIDENT FINANCIAL
PROCESSING CORPORATION
(Corporate Seal)
_________________________________ By:________________________________
Its: Its:
<PAGE>
16
APPENDIX A
----------
Authorized Persons
________________________________ ________________________________
(name) (signature)
________________________________ ________________________________
(name) (signature)
________________________________ ________________________________
(name) (signature)
________________________________ ________________________________
(name) (signature)
________________________________ ________________________________
(name) (signature)
________________________________ ________________________________
(name) (signature)
<PAGE>
17
APPENDIX B
----------
________________________________ ________________________________
President (signature)
________________________________ ________________________________
Secretary (signature)
<PAGE>
EXHIBIT 9(f)
AMENDMENT TO TRANSFER AGENCY AGREEMENT
--------------------------------------
This agreement, dated as of the 6th day of April, 1990, between The
PNC/(R)/ Fund (the "Fund"), a Massachusetts business trust, and Provident
Financial Processing Corporation (the "Transfer Agent"-), a Delaware
Corporation.
WITNESSETH:
WHEREAS, Provident and the Fund wish to amend the Transfer Agency
Agreement between them dated October 4, 1989 (the "Transfer Agency Agreement");
and
WHEREAS, the Fund's Board of Trustees has approved the amendment
effected by this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in the Transfer Agency Agreement, it is agreed between the parties
hereto as follows:
The second paragraph of the first page of the Transfer Agency
Agreement is amended and restated to read in full as follows:
"WHEREAS, the Fund desires to retain the Transfer Agent to serve as
the Fund's transfer agent, registrar, and dividend disbursing agent with respect
to its shares, par value $.001 per share (the "Shares") of its Money Market,
Tax-Free Money Market, Government Money Market, Capital Appreciation, Total
Return, Managed Income, International, Tax-Free Income Portfolios, and any
future portfolio of the Fund, and the Transfer Agent is willing to furnish such
services;"
The PNC/(R)/ Fund
By:________________________________
Provident Financial
Processing Corporation
By:________________________________
<PAGE>
EXHIBIT 9(g)
AMENDMENT NO. 2 TO TRANSFER AGENCY AGREEMENT
--------------------------------------------
This Amendment, dated as of the 3rd day of February, 1992, is entered into
between THE PNC(R) FUND (the "Fund"), a Massachusetts business trust, and
PROVIDENT FINANCIAL PROCESSING CORPORATION ("the Transfer Agent"), a Delaware
corporation which is an indirect wholly-owned subsidiary PNC Financial Corp.
WHEREAS, the Fund and the Transfer Agent have entered into a Transfer
Agency Agreement dated as of October 4, 1989, and amended on April 6, 1990 (the
"Transfer Agency Agreement"), pursuant to which the Fund appointed the Transfer
Agent to act as transfer agent, registrar and dividend disbursing agent to its
investment portfolios;
WHEREAS, the Fund wishes to retain PFPC as transfer agent, registrar and
dividend disbursing agent with respect to shares of the Intermediate Government
Portfolio, Value Equity Portfolio, Index Equity Portfolio, Special Equity
Portfolio, Pennsylvania Tax-Free Income Portfolio, Ohio Tax-Free Income
Portfolio, Pennsylvania Tax-Free Money Market Portfolio, Ohio Tax-Free Money
Market Portfolio ("Portfolio(s)"), and any such future portfolio of the Fund as
listed in Appendix C of the Transfer Agency Agreement with respect to which it
desires to retain the Transfer Agent to act as transfer agent, registrar and
dividend disbursing agent under the Transfer Agency Agreement; and
WHEREAS, the Transfer Agent has notified the Fund that it is willing to
serve as transfer agent for the Portfolios and any such other future portfolio
as listed in Appendix C; and
WHEREAS, the Fund's Board of Directors has approved the amendment effected
by this Agreement.
NOW THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. The second paragraph of the first page of the Transfer Agency Agreement
is amended and restated to read in full as follows:
"WHEREAS, the Fund desires to retain the Transfer Agent to serve as the
Fund's transfer agent, registrar and dividend disbursing agent with respect to
shares, par value $.001 per share (the "Shares"), of its Intermediate Government
Portfolio, Value Equity Portfolio, Index Equity Portfolio, Special Equity
Portfolio, Growth Equity Portfolio, International Equity Portfolio, Balanced
Portfolio, Managed Income Portfolio, Tax-Free Income Portfolio, Pennsylvania
Tax-Free Income Portfolio, Ohio Tax-Free Income Portfolio, Money Market
Portfolio, Tax-Free Money Market Portfolio, Government Money Market Portfolio,
Pennsylvania Tax-Free Money Market Portfolio, Ohio Tax-Free Money Market
<PAGE>
2
Portfolio ("Portfolios"), and any future portfolio of the Fund as listed in
Appendix C hereto, and the Transfer Agent is willing to furnish such services;"
2. Capitalized Terms. From and after the date hereof, the following term
-----------------
as used in the Administration Agreement shall be deemed to include also the
meaning specified herein: "Class" shall be deemed to include the Portfolios and
such classes of shares as listed in Appendix C.
3. Miscellaneous. Except to the extent supplemented hereby, the Transfer
-------------
Agency Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date and year first above written.
THE PNC(R) FUND
(Seal) By:___________________________
Title:
PROVIDENT FINANCIAL
PROCESSING CORPORATION
(Seal) By:___________________________
Title:
<PAGE>
EXHIBIT 9(h)
AMENDMENT NO. 3 TO TRANSFER AGENCY AGREEMENT
--------------------------------------------
This Amendment, dated as of the 1st day of March 1993, is entered into
between THE PNC(R) FUND, a Massachusetts business trust (the "Fund"), and PFPC
INC. (the "Transfer Agent"), a Delaware corporation which is an indirect wholly-
owned subsidiary of PNC Bank Corp.
WHEREAS, the Fund and the Transfer Agent have entered into a Transfer
Agency Agreement dated as of October 4, 1989, as amended (the "Transfer Agency
Agreement"), pursuant to which the Fund appointed the Transfer Agent to act as
transfer agent, registrar and dividend disbursing agent to its investment
portfolios;
WHEREAS, the Fund wishes to retain PFPC as transfer agent, registrar
and dividend disbursing agent with respect to shares of the North Carolina
Municipal Money Market, Short-Term Bond, Intermediate-Term Bond, Small Cap
Growth Equity and Core Equity Portfolios (the "Portfolios"), and any such future
portfolio of the Fund as listed in Appendix C of the Transfer Agency Agreement
with respect to which it desires to retain the Transfer Agent to act as transfer
agent, registrar and dividend disbursing agent under the Transfer Agency
Agreement; and
WHEREAS, the Transfer Agent has notified the Fund that it is willing
to serve as transfer agent for the Portfolios and any such other future
portfolio as listed in Appendix C; and
WHEREAS, the Fund's Board of Trustees has approved the amendment
effected by this Agreement.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. The second paragraph of the first page of the Transfer Agency
Agreement is amended and restated to read in full as follows:
"WHEREAS, the Fund desires to retain the Transfer Agent to serve as
the Fund's transfer agent, registrar and dividend disbursing agent with respect
to shares, par value $.001 per share (the "Shares"), of its Money Market,
Municipal Money Market, Government Money Market, Ohio Municipal Money Market,
Pennsylvania Municipal Money Market, North Carolina Municipal Money Market,
Managed Income, Tax-Free Income, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Short-Term Bond, Intermediate-Term Bond, Value
Equity, Growth Equity, Index Equity, Small Cap Value Equity, International
Equity, Small Cap Growth Equity, Core Equity and Balanced Portfolios (the
"Portfolios"), and any future portfolio of the Fund as listed in Appendix C
hereto, and the Transfer Agent is willing to furnish such services;"
<PAGE>
2
2. Capitalized Terms. From and after the date hereof, the following
-----------------
term as used in the Transfer Agency Agreement shall be deemed to include also
the meaning specified herein: "Class" shall be deemed to include the Portfolios
and such classes of shares as listed in Appendix C.
3. Miscellaneous. Except to the extent supplemented hereby, the
-------------
Transfer Agency Agreement shall remain unchanged and in full force and effect
and is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first above written.
THE PNC(R) FUND
(SEAL) By:_____________________________
Title:
PFPC INC.
(SEAL) By:_____________________________
Title:
<PAGE>
EXHIBIT 9(i)
AMENDMENT NO. 4 TO TRANSFER AGENCY AGREEMENT
--------------------------------------------
This Amendment, dated as of the 18th day of October, 1994, is entered
into between The PNC(R) Fund (the "Fund"), a Massachusetts business trust, and
PFPC Inc. (the "Transfer Agent"), a Delaware corporation which is an indirect
wholly-owned subsidiary of PNC Bank Corp
WHEREAS, the Fund and the Transfer Agent have entered into a Transfer
Agency Agreement dated as of October 4, 1989, and amended on April 6, 1990,
February 3, 1992 and March 1, 1993 (the "Transfer Agency Agreement"), pursuant
to which the Fund appointed the Transfer Agent to act as transfer agent,
registrar and dividend disbursing agent to the Fund;
WHEREAS, the Fund and the Transfer Agent wish to amend the Transfer
Agency Agreement to set forth additional responsibilities of the Transfer Agent
relating to the issuance, offering, sale and redemption of Series B Investor
Shares in the investment portfolios of the Fund;
WHEREAS, the Fund's Board of Trustees has approved the amendment
effected by this Agreement;
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, hereby agree as follows:
1. Paragraphs (m) and (n) of Section 2 of the Transfer Agency
Agreement (relating to the delivery of documents) are amended and restated to
read in full as follows:
(m) The Fund's non-12b-1 Service Plan and form of Servicing Agreement
and non-12b-1 Series B Service Plan and form of Series B Servicing
Agreement relating to Service Class Shares and Series B Investor Class
Shares, respectively, of the Fund's investment portfolios;
(n) The Fund's Distribution and Service Plan and form of Distribution
and Servicing Agreement and Series B Distribution Plan relating to
Series A Investor Class Shares and Series B Investor Class Shares,
respectively, of the Fund's investment portfolios, and the Fund's form
of dealer agreement;
2. Paragraph (d) of Section 5 of the Transfer Agency Agreement
(relating to transactions not requiring instructions) is amended and restated to
read in full as follows:
(d) Redemption of Shares. Upon receipt of a redemption order from a
--------------------
Shareholder in the manner and form specified in the Prospectus
relating to such Shares, the Transfer Agent shall redeem the number of
Shares so indicated from the redeeming Shareholder's
<PAGE>
2
account and disburse, either directly or indirectly through the
Custodian: i) the amount of any deferred sales charges payable to the
Fund's distributor with respect to Series B Investor Class Shares, and
ii) the balance of the redemption proceeds to the person entitled to
such proceeds.
3. Paragraph (c) of Section 9 (relating to the maintenance of
records) has been amended and restated to read in full as follows:
(c) historical information regarding the account of each Shareholder,
including: i) information relating to dividends and distributions
paid, ii) the date and price for all transactions relating to a
Shareholder's account, and iii) information necessary to calculate, in
accordance with the Fund's registration statement, the appropriate
contingent deferred sales charge ("CDSC") payable with respect to
Series B Investor Class Shares;
4. Paragraph (d) of Section 10 (relating to ongoing functions of the
Transfer Agent) has been amended and restated to read in full as follows:
(d) calculate front-end sales charges and deferred sales charges
payable in connection with the purchase of Series A Investor Class
Shares and Series B Investor Class Shares, respectively, and provide
for the payment of all such sales charges to the Fund's distributor
(subject to the applicable limitations of the National Association of
Securities Dealers, Inc. on asset-based sales charges);
5. Miscellaneous. Except to the extent supplemented hereby, the
-------------
Transfer Agency Agreement shall remain unchanged and in full Force and effect
and is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first above written.
THE PNC(R) FUND
By:_____________________________
Vice President and Treasurer
PFPC INC.
By:________________________________
Title:
<PAGE>
EXHIBIT 9(j)
Compass Capital Funds(SM)
(previously named The PNC(R) Fund)
Appendix C to the
Transfer Agency Agreement dated
as of October 4, 1989
The Fund desires to retain the Transfer Agent to serve as the Fund's
transfer agent, registrar and dividend disbursing agent with respect to Shares,
par value $.001 per Share, of the Portfolios listed below and the Transfer Agent
is willing to furnish such services.
The Portfolios are as follows:
. Money Market Portfolio
. U.S Treasury Money Market Portfolio
. Municipal Money Market Portfolio
. Large Cap Growth Equity Portfolio
. Balanced Portfolio
. Managed Income Portfolio
. International Equity Portfolio
. Tax-Free Income Portfolio
. Ohio Municipal Money Market Portfolio
. Pennsylvania Municipal Money Market Portfolio
. Intermediate Government Bond Portfolio
. Ohio Tax-Free Income Portfolio
. Pennsylvania Tax-Free Income Portfolio
. Large Cap Value Equity Portfolio
. Index Equity Portfolio
. Small Cap Value Equity Portfolio
. North Carolina Municipal Money Market Portfolio
. Low Duration Bond Portfolio
. Intermediate Bond Portfolio
. Small Cap Growth Equity Portfolio
. Select Equity Portfolio
. Government Income Portfolio
. International Emerging Markets Portfolio
. International Bond Portfolio
. Virginia Municipal Money Market Portfolio
. New Jersey Municipal Money Market Portfolio
. New Jersey Tax-Free Income Portfolio
. Core Bond Portfolio
. Multi-Sector Mortgage Securities Portfolio III
. Mid-Cap Value Equity Portfolio
. Mid-Cap Growth Equity Portfolio
. BlackRock Strategic Portfolio I
. BlackRock Strategic Portfolio II
. International Small Cap Equity Portfolio
<PAGE>
2
. Micro-Cap Equity Portfolio
. GNMA Portfolio
. Delaware Tax-Free Income Portfolio
. Kentucky Tax-Free Income Portfolio
The Fund and the Transfer Agent agree that the Transfer Agent shall
provide the services contemplated by the Transfer Agency Agreement with respect
to the Institutional, Service, Investor A, Investor B, Investor C and BlackRock
Classes of Shares of each Portfolio covered by such Agreement (including, with
respect to any class of Shares, the services described therein relating to
front-end and deferred sales loads).
Release. "Compass Capital Funds" and "Trustees of Compass Capital Funds" refer
- -------
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Fund must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Fund.
Agreed to and accepted as of ______________, 1998.
Compass Capital Funds(SM)
By:_____________________
PFPC Inc.
By:_____________________
<PAGE>
Exhibit 10
ROPES & GRAY
One International Place
Boston, Massachusetts 02110-2624
January 26, 1998
Compass Capital Funds
345 Park Avenue, 30th Fl.
New York, NY 10154
Re: Shares of Beneficial Interest, Classes II-1, II-2, II-3, II-4, II-5
and S-6
-------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as special Massachusetts counsel for Compass Capital
Funds, a Massachusetts business trust (the "Trust"). You have informed us that
you intend to register under the Securities Act of 1933, as amended (the "Act"),
and offer and sell from time to time your shares of beneficial interest, $.001
par value, of Classes II-1, II-2, II-3, II-4, II-5 and S-6 ("Shares").
In connection with this opinion, we have examined:
(i) A copy of your Declaration of Trust dated as of December 22,
1988, as amended (the "Declaration of Trust").
(ii) A certificate of the Secretary of State of the Commonwealth of
even date herewith certifying as to your authority to exercise
in the Commonwealth all of the powers recited in the Declaration
of Trust and to transact business in the Commonwealth.
(iii) A copy of your Code of Regulations (the "Code of Regulations"),
certified by your Secretary.
(iv) A certificate of your Secretary dated Janury 22, 1998 as to
certain actions of the trustees of the Trust (including their
due adoption of resolutions establishing Classes II-1, II-2,
II-3, II-4, II-5 and S-6 and authorizing the issuance of Shares
from time to time for the consideration described in your
registration statement under the Act (the "Registration
Statement")), and certifying, among other things, that the
original Declaration of Trust was executed within the
Commonwealth of Massachusetts and that you have maintained an
office in Massachusetts since your organization.
(v) A copy of your Certificate of Classification of Shares relating
to Classes II-1, II-2, II-3, II-4, II-5 and S-6, certified by
your Secretary.
<PAGE>
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to the original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of such original documents.
We have made such examination of Massachusetts law as we have deemed
relevant for purposes of this opinion. We express no opinion as to the effect
of laws, rules or regulations of any state or jurisdiction other than the
Commonwealth of Massachusetts.
Based on the forgoing, we are of the opinion that the issue and sale
of an unlimited number of Shares has been duly authorized under Massachusetts
law, and that, upon the original issue and sale of any of such authorized Shares
and upon receipt by the Trust of the consideration therefor specified in the
Registration Statement as from time to time in effect (which consideration shall
in each case be at least equal to the applicable net asset value and the par
value of the Shares), the Shares so issued will by validly issued, fully paid
and nonassessable by the Trust.
Under Massachusetts law, shareholders of a Massachusetts business
trust could, under certain circumstances, be held personally liable for the
obligations of the trust. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in every note, bond, contract, order or other
undertaking issued by or on behalf of the Trust or its Trustees, and in the
stationery used by the Trust. The Declaration of Trust provides for
indemnification out of the assets of the Trust belonging to the class(es) of
shares owned by such shareholder (and other classes having the same alphabetical
designation) for all loss and expense of any shareholder held personally liable
solely by reason of his or her being or having been a shareholder. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the relevant class of shares
itself (and other classes having the same alphabetical designation) would be
unable to meet its obligations.
We understand that this opinion is to be used in connection with the
registration of an indefinite number of Shares for offering and sale pursuant to
the Act. We consent to the filing of this opinion with and as part of the
Registration Statement (File No. 033-26305).
Very truly yours,
/s/ Ropes & Gray
ROPES & GRAY
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of the following reports in this
Post-Effective Amendment No. 33 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 14, 1997 for the Compass Capital Funds'
Bond Portfolios.
* Our report dated November 14, 1997 for the Compass Capital Funds'
Equity Portfolios.
* Our report dated November 14, 1997 for the Compass Capital Funds'
Money Market Portfolios.
* Our report dated November 14, 1997 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.
We also consent to the reference to our Firm under the headings "Miscellaneous -
Independent Accountants" in the Statement of Additional Information.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 26, 1998
<PAGE>
EXHIBIT 13(f)
PURCHASE AGREEMENT
------------------
The PNC(R) Fund (the "Fund"), a Massachusetts business trust, and Provident
Distributors, Inc. ("PDI"), a Delaware corporation, hereby agree as follows:
1. The Fund hereby offers PDI and PDI hereby purchases ten Series B
Investor Shares of the Fund's Money Market Portfolio (the "Series B
Investor Money Market Shares") for $1 per share. The Fund hereby
acknowledges receipt from PDI of funds in the total amount of $10 in
full payment for the Series B Investor Money Market Shares.
2. The Fund hereby offers PDI and PDI hereby purchases one Series B
Investor Share of each of the Fund's Managed Income, Tax-Free Income,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Value Equity, Growth Equity, Index Equity, Small Cap Value
Equity, Short-Term Bond, Intermediate-Term Bond, Small Cap Growth
Equity, Core Equity, International Fixed Income, Government Income,
International Emerging Markets, International Equity and Balanced
Portfolios (the "Series B Investor Non-Money Market Shares") at the
prices per share set forth in Appendix A hereto. The Fund hereby
acknowledges receipt from PDI of funds in the total amount of $186.78
for the Series B Investor Non-Money Market Shares.
3. PDI represents and warrants to the Fund that the Series B Investor
Money Market Shares and the Series B Investor Non-Money Market Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed this Agreement as of September 30, 1994.
THE PNC(R)FUND
By:
-----------------------------
its:
PROVIDENT DISTRIBUTORS, INC.
By:
-----------------------------
its:
<PAGE>
2
APPENDIX A
----------
PRICE PER
PORTFOLIO SERIES B INVESTOR SHARE(1)
--------- --------------------------
Managed Income $ 9.79
Tax-Free Income $10.04
Intermediate Government $ 9.64
Ohio Tax-Free Income $ 9.60
Pennsylvania Tax-Free Income $ 9.83
Value Equity $11.62
Growth Equity $10.16
Index Equity $10.93
Small Cap Value Equity $13.58
Short-Term Bond $ 9.58
Intermediate-Term Bond $ 9.05
Small Cap Growth Equity $10.12
Core Equity $ 9.92
International Fixed Income $10.00
Government Income $10.00
International Emerging Markets $10.54
International Equity $10.40
Balanced $11.98
- -----------------
(1) equal to the net asset value per Series B Investor Share on September
30, 1994
<PAGE>
EXHIBIT 13(g)
PURCHASE AGREEMENT
------------------
The PNC/(R)/ Fund (the "Fund"), a Massachusetts business trust, and
Pennsylvania Merchant Group Ltd ("PMG"), a Delaware corporation, hereby agree
with each other as follows:
1. The Fund hereby offers PMG and PMG hereby purchases ten Service,
Investor and Institutional Shares of the Fund's Virginia Municipal
Money Market Portfolio (the "Money Market Shares") for $1 per share.
The Fund hereby acknowledges receipt from PMG of funds in the total
amount of $30 in full payment for the Money Market Shares.
2. The Fund hereby offers PMG and PMG hereby purchases ten Service,
Investor and Institutional Shares of each of the Fund's Government
Income, International Emerging Markets and International Fixed Income
Portfolios (the "Non-Money Market Shares") for $10 per share. The
Fund hereby acknowledges receipt from PMG of funds in the total amount
of $900 for the Non-Money Market Shares.
3. PMG represents and warrants to the Fund that the Money Market and Non-
Money Market Shares are being acquired for investment purchases and
not with a view to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed this Agreement as of the 1st day of February, 1994.
THE PNC/(R)/ FUND
By: /s/ Edward J. Roach
-------------------
its: Treasurer
PENNSYLVANIA MERCHANT
GROUP LTD
By: /s/ Nancy A. Wolfe
-------------------
its: Corporate
Secretary
<PAGE>
EXHIBIT 13(h)
PURCHASE AGREEMENT
------------------
The PNC/(R)/ Fund, a Massachusetts business trust, and Provident
Distributors, Inc. ("PDI"), a Delaware corporation, hereby agree as follows:
1. The Fund hereby offers PDI and PDI hereby purchases ten Service,
Series A Investor and Institutional Shares of the Fund's New Jersey
Municipal Money Market Portfolio (the "New Jersey Municipal Money
Market Shares") for $1 per share. The Fund hereby acknowledges
receipt from PDI of funds in the total amount of $30 in full payment
for the New Jersey Municipal Money Market Shares.
2. PDI represents and warrants to the Fund that the New Jersey Municipal
Money Market Shares are being acquired for investment purposes and not
with a view to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Agreement as of _______________ 1995.
THE PNC/(R)/ FUND
By:
-----------------------------
its:
PROVIDENT DISTRIBUTORS, INC.
By:
-----------------------------
its:
<PAGE>
EXHIBIT 13(m)
PURCHASE AGREEMENT
------------------
Compass Capital Funds(SM) (the "Fund"), a Massachusetts business
trust, and Compass Distributors, Inc. ("CDI"), a Delaware corporation, hereby
agree as follows:
1. The Fund hereby offers CDI and CDI hereby purchases ten shares of
each of the (i) Institutional, (ii) Service, (iii) Investor A, (iv) Investor B
and (v) Investor C classes of shares of the Fund's Micro-Cap Equity Portfolio
(collectively, the "Shares") for $10 per Share. The Fund hereby acknowledges
receipt from CDI of funds in full payment for the foregoing Shares.
2. CDI represents and warrants to the Fund that the foregoing Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
3. "Compass Capital Funds" and "Trustees of Compass Capital Funds"
refer respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Fund must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Fund.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Purchase Agreement as of _________, 1998.
COMPASS CAPITAL FUNDS(SM)
By:__________________________
Name:
Title:
COMPASS DISTRIBUTORS, INC.
By:__________________________
Name:
Title:
<PAGE>
EXHIBIT 13(n)
PURCHASE AGREEMENT
------------------
Compass Capital Funds(SM) (the "Fund"), a Massachusetts business
trust, and Compass Distributors, Inc. ("CDI"), a Delaware corporation, hereby
agree as follows:
1. The Fund hereby offers CDI and CDI hereby purchases ten shares of
the BlackRock class of shares of the Fund's Intermediate Bond Portfolio
(collectively, the "Shares") for $10 per Share. The Fund hereby acknowledges
receipt from CDI of funds in full payment for the foregoing Shares.
2. CDI represents and warrants to the Fund that the foregoing Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
3. "Compass Capital Funds" and "Trustees of Compass Capital Funds"
refer respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Fund must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Fund.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the
parties hereto have executed this Purchase Agreement as of _________, 1998.
COMPASS CAPITAL FUNDS(SM)
By:__________________________
Name:
Title:
COMPASS DISTRIBUTORS, INC.
By:__________________________
Name:
Title:
<PAGE>
EXHIBIT 15(b)
APPENDIX A
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Small Cap Value Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Small Cap Growth Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Growth Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Value Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Select Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Index Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Emerging Service 0% .15% .15%
Markets Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Balanced Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Low Duration Institutional 0% 0% 0%
Bond Portfolio BlackRock 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Bond Portfolio BlackRock 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Government Bond Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Core Bond Institutional 0% 0% 0%
Portfolio BlackRock 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Managed Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Bond Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Tax-Free Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Pennsylvania Institutional 0% 0% 0%
Tax-Free Service 0% .15% .15%
Income Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Tax Institutional 0% 0% 0%
Free Income Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Tax-Free Institutional 0% 0% 0%
Income Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Money Market Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Municipal Money Institutional 0% 0% 0%
Market Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Municipal Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Pennsylvania Institutional 0% 0% 0%
Municipal Money Service 0% .15% .15%
Market Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
North Carolina Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Virginia Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Multi-Sector Institutional 0% 0% 0%
Mortgage
Securities
Portfolio III
Mid-Cap Growth Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Mid-Cap Value Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Small Cap Service 0% .15% .15%
Equity Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Micro-Cap Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
GNMA Portfolio Institutional 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Delaware Tax-Free Instutional 0% 0% 0%
Income Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Kentucky Tax-Free Institutional 0% 0% 0%
Income Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
BlackRock Institutional 0% 0% 0%
Strategic
Portfolio I
BlackRock Institutional 0% 0% 0%
Strategic
Portfolio II
</TABLE>
"Compass Capital Funds" and "Trustees of Compass Capital Funds" refer
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988 which is hereby referred to and a copy of which is
on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Fund. The obligations of
"Compass Capital Funds" entered into in the name or on behalf thereof by any of
the Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees, shareholders,
officers, representatives or agents of the Fund personally, but bind only the
Trust Property (as defined in the Declaration of Trust), and all persons dealing
with any class of shares of the Fund must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Fund.
Agreed to and accepted as of _____________, 1998.
COMPASS CAPITAL FUNDS
By:
--------------------------
Name:
Title:
A-5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 011
<NAME> COMPASS CAPITAL MONEY MARKET - INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 2,743,632,598
<INVESTMENTS-AT-VALUE> 2,743,632,598
<RECEIVABLES> 15,269,369
<ASSETS-OTHER> 91,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,758,993,574
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,833,533
<TOTAL-LIABILITIES> 13,833,533
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,745,167,811
<SHARES-COMMON-STOCK> 2,745,160,041
<SHARES-COMMON-PRIOR> 2,325,064,818
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,770)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,745,160,041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 149,601,144
<OTHER-INCOME> 0
<EXPENSES-NET> 14,063,629
<NET-INVESTMENT-INCOME> 135,537,515
<REALIZED-GAINS-CURRENT> (13,172)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 135,524,343
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 135,537,515
<DISTRIBUTIONS-OF-GAINS> 33,448
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,830,675,009
<NUMBER-OF-SHARES-REDEEMED> 5,428,640,598
<SHARES-REINVESTED> 18,140,860
<NET-CHANGE-IN-ASSETS> 420,128,651
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 38,850
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,003,972
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,738,863
<AVERAGE-NET-ASSETS> 2,667,725,855
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 012
<NAME> COMPASS CAPITAL MONEY MARKET - SERVICE CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 2,743,632,598
<INVESTMENTS-AT-VALUE> 2,743,632,598
<RECEIVABLES> 15,269,369
<ASSETS-OTHER> 91,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,758,993,574
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,833,533
<TOTAL-LIABILITIES> 13,833,533
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,745,167,811
<SHARES-COMMON-STOCK> 2,745,160,041
<SHARES-COMMON-PRIOR> 2,325,064,818
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,770)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,745,160,041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 149,601,144
<OTHER-INCOME> 0
<EXPENSES-NET> 14,063,629
<NET-INVESTMENT-INCOME> 135,537,515
<REALIZED-GAINS-CURRENT> (13,172)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 135,524,343
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 135,537,515
<DISTRIBUTIONS-OF-GAINS> 33,448
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,830,675,009
<NUMBER-OF-SHARES-REDEEMED> 5,428,640,598
<SHARES-REINVESTED> 18,140,860
<NET-CHANGE-IN-ASSETS> 420,128,651
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 38,850
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,003,972
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,738,863
<AVERAGE-NET-ASSETS> 2,667,725,855
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 013
<NAME> COMPASS CAPITAL MONEY MARKET - INVESTOR A CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 2,743,632,598
<INVESTMENTS-AT-VALUE> 2,743,632,598
<RECEIVABLES> 15,269,369
<ASSETS-OTHER> 91,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,758,993,574
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,833,533
<TOTAL-LIABILITIES> 13,833,533
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,745,167,811
<SHARES-COMMON-STOCK> 2,745,160,041
<SHARES-COMMON-PRIOR> 2,325,064,818
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,770)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,745,160,041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 149,601,144
<OTHER-INCOME> 0
<EXPENSES-NET> 14,063,629
<NET-INVESTMENT-INCOME> 135,537,515
<REALIZED-GAINS-CURRENT> (13,172)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 135,524,343
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 135,537,515
<DISTRIBUTIONS-OF-GAINS> 33,448
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,830,675,009
<NUMBER-OF-SHARES-REDEEMED> 5,428,640,598
<SHARES-REINVESTED> 18,140,860
<NET-CHANGE-IN-ASSETS> 420,128,651
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 38,850
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,003,972
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,738,863
<AVERAGE-NET-ASSETS> 2,667,725,855
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 014
<NAME> COMPASS CAPITAL MONEY MARKET - INVESTOR B CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 2,743,632,598
<INVESTMENTS-AT-VALUE> 2,743,632,598
<RECEIVABLES> 15,269,369
<ASSETS-OTHER> 91,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,758,993,574
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,833,533
<TOTAL-LIABILITIES> 13,833,533
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,745,167,811
<SHARES-COMMON-STOCK> 2,745,160,041
<SHARES-COMMON-PRIOR> 2,325,064,818
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,770)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,745,160,041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,49,601,144
<OTHER-INCOME> 0
<EXPENSES-NET> 14,063,629
<NET-INVESTMENT-INCOME> 135,537,515
<REALIZED-GAINS-CURRENT> (13,172)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 135,524,343
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 135,537,515
<DISTRIBUTIONS-OF-GAINS> 33,448
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,830,675,009
<NUMBER-OF-SHARES-REDEEMED> 5,428,640,598
<SHARES-REINVESTED> 18,140,860
<NET-CHANGE-IN-ASSETS> 420,128,651
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 38,850
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,003,972
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,738,863
<AVERAGE-NET-ASSETS> 2,667,725,855
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.39
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 015
<NAME> COMPASS CAPITAL MONEY MARKET - INVESTOR C CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 2,743,632,598
<INVESTMENTS-AT-VALUE> 2,743,632,598
<RECEIVABLES> 15,269,369
<ASSETS-OTHER> 91,607
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,758,993,574
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,833,533
<TOTAL-LIABILITIES> 13,833,533
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,745,167,811
<SHARES-COMMON-STOCK> 2,745,160,041
<SHARES-COMMON-PRIOR> 2,325,064,818
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,770)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,745,160,041
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 149,601,144
<OTHER-INCOME> 0
<EXPENSES-NET> 14,063,629
<NET-INVESTMENT-INCOME> 135,537,515
<REALIZED-GAINS-CURRENT> (13,172)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 135,524,343
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 135,537,515
<DISTRIBUTIONS-OF-GAINS> 33,448
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,830,675,009
<NUMBER-OF-SHARES-REDEEMED> 5,428,640,598
<SHARES-REINVESTED> 18,140,860
<NET-CHANGE-IN-ASSETS> 420,128,651
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 38,850
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,003,972
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 22,738,863
<AVERAGE-NET-ASSETS> 2,667,725,855
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 021
<NAME> MUNICIPAL MONEY MARKET - INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 394,554,553
<INVESTMENTS-AT-VALUE> 394,554,553
<RECEIVABLES> 1,873,882
<ASSETS-OTHER> 75,651
<OTHER-ITEMS-ASSETS> 0
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<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 022
<NAME> MUNICIPAL MONEY MARKET - SERVICE CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 023
<NAME> MUNICIPAL MONEY MARKET - INVESTOR A CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 024
<NAME> MUNICIPAL MONEY MARKET - INVESTOR C CLASS
<S> <C>
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<PAGE>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 031
<NAME> COMPASS CAPITAL U.S. TREASURY MONEY MARKET - INSTITUTIONAL CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 032
<NAME> COMPASS CAPITAL U.S. TREASURY MONEY MARKET - SERVICE CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 033
<NAME> COMPASS CAPITAL U.S. TREASURY MONEY MARKET - INVESTOR A CLASS
<S> <C>
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<PAGE>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 041
<NAME> LARGE CAP GROWTH EQUITY - INSTITUTIONAL CLASS
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 042
<NAME> LARGE CAP GROWTH EQUITY - SERVICE CLASS
<S> <C>
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<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 043
<NAME> LARGE CAP GROWTH EQUITY - INVESTOR A CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 044
<NAME> LARGE CAP GROWTH EQUITY - INVESTOR B CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 045
<NAME> LARGE CAP GROWTH EQUITY - INVESTOR C CLASS
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 051
<NAME> COMPASS CAPITAL MANAGED INCOME - INSTITUTIONAL CLASS
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 052
<NAME> COMPASS CAPITAL MANAGED INCOME - SERVICE CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 053
<NAME> COMPASS CAPITAL MANAGED INCOME - INVESTOR A CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 054
<NAME> COMPASS CAPITAL MANAGED INCOME - INVESTOR B CLASS
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 061
<NAME> COMPASS BALANCED FUND - INSTITUTIONAL CLASS
<S> <C>
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<NET-ASSETS> 318,650,869
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<NET-INVESTMENT-INCOME> 7,571,920
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<NUMBER-OF-SHARES-SOLD> 4,888,552
<NUMBER-OF-SHARES-REDEEMED> 4,849,549
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<NAME> COMPASS CAPITAL FUNDS
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<NUMBER> 062
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<NUMBER> 063
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<NUMBER> 064
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<SERIES>
<NUMBER> 071
<NAME> TAX FREE INCOME - INSTITUTIONAL CLASS
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<PAGE>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 075
<NAME> TAX FREE INCOME - INVESTOR C CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 74,823,548
<INVESTMENTS-AT-VALUE> 77,454,666
<RECEIVABLES> 8,522,943
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<TOTAL-ASSETS> 85,909,339
<PAYABLE-FOR-SECURITIES> 10,915,420
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 340,179
<TOTAL-LIABILITIES> 11,255,599
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71,966,098
<SHARES-COMMON-STOCK> 6,583,977
<SHARES-COMMON-PRIOR> 4,558,039
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (22,136)
<ACCUMULATED-NET-GAINS> 78,660
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,631,118
<NET-ASSETS> 74,653,740
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,155,269
<OTHER-INCOME> 0
<EXPENSES-NET> 463,939
<NET-INVESTMENT-INCOME> 2,691,330
<REALIZED-GAINS-CURRENT> 964,362
<APPREC-INCREASE-CURRENT> 1,610,054
<NET-CHANGE-FROM-OPS> 5,265,746
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,725,435)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,092,516
<NUMBER-OF-SHARES-REDEEMED> 1,093,251
<SHARES-REINVESTED> 26,473
<NET-CHANGE-IN-ASSETS> 25,259,573
<ACCUMULATED-NII-PRIOR> 11,969
<ACCUMULATED-GAINS-PRIOR> (885,702)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 281,147
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 662,555
<AVERAGE-NET-ASSETS> 56,229,507
<PER-SHARE-NAV-BEGIN> 11.04
<PER-SHARE-NII> .28
<PER-SHARE-GAIN-APPREC> .27
<PER-SHARE-DIVIDEND> (.25)
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<PER-SHARE-NAV-END> 11.34
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 081
<NAME> INTERNATIONAL EQUITY - INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 553,435,071
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<RECEIVABLES> 5,074,153
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 672,946,871
<PAYABLE-FOR-SECURITIES> 2,867,828
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,665,220
<TOTAL-LIABILITIES> 11,533,048
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 45,222,234
<SHARES-COMMON-PRIOR> 42,688,687
<ACCUMULATED-NII-CURRENT> 552,757,802
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 648,299
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 102,968,505
<NET-ASSETS> 661,413,823
<DIVIDEND-INCOME> 11,219,395
<INTEREST-INCOME> 1,236,262
<OTHER-INCOME> 0
<EXPENSES-NET> 7,903,994
<NET-INVESTMENT-INCOME> 5,191,778
<REALIZED-GAINS-CURRENT> 4,819,992
<APPREC-INCREASE-CURRENT> 78,295,163
<NET-CHANGE-FROM-OPS> 88,306,933
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11,494,279
<DISTRIBUTIONS-OF-GAINS> 17,436,267
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<NUMBER-OF-SHARES-SOLD> 29,230,648
<NUMBER-OF-SHARES-REDEEMED> 28,476,833
<SHARES-REINVESTED> 1,779,732
<NET-CHANGE-IN-ASSETS> 88,971,071
<ACCUMULATED-NII-PRIOR> 13,013,962
<ACCUMULATED-GAINS-PRIOR> 11,592,332
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,656,917
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,703,994
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<PER-SHARE-NAV-BEGIN> 13.43
<PER-SHARE-NII> .14
<PER-SHARE-GAIN-APPREC> 1.77
<PER-SHARE-DIVIDEND> (.28)
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.65
<EXPENSE-RATIO> 1.06
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 082
<NAME> INTERNATIONAL EQUITY - SERVICE CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
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<SHARES-COMMON-PRIOR> 42,688,687
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 102,968,505
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<DIVIDEND-INCOME> 11,219,395
<INTEREST-INCOME> 1,236,262
<OTHER-INCOME> 0
<EXPENSES-NET> 7,903,994
<NET-INVESTMENT-INCOME> 5,191,778
<REALIZED-GAINS-CURRENT> 4,819,992
<APPREC-INCREASE-CURRENT> 78,295,163
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<NUMBER-OF-SHARES-SOLD> 29,230,648
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<SHARES-REINVESTED> 1,779,732
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<PER-SHARE-NAV-BEGIN> 13.37
<PER-SHARE-NII> .10
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<PER-SHARE-DIVIDEND> (.24)
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<PER-SHARE-NAV-END> 14.58
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 083
<NAME> INTERNATIONAL EQUITY - INVESTOR A CLASS
<S> <C>
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
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<PAYABLE-FOR-SECURITIES> 2,867,828
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<SHARES-COMMON-PRIOR> 42,688,687
<ACCUMULATED-NII-CURRENT> 552,757,802
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<ACCUMULATED-NET-GAINS> 648,299
<OVERDISTRIBUTION-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 29,230,648
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<SHARES-REINVESTED> 1,779,732
<NET-CHANGE-IN-ASSETS> 88,971,071
<ACCUMULATED-NII-PRIOR> 13,013,962
<ACCUMULATED-GAINS-PRIOR> 11,592,332
<OVERDISTRIB-NII-PRIOR> 0
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<PER-SHARE-NII> .07
<PER-SHARE-GAIN-APPREC> 1.77
<PER-SHARE-DIVIDEND> (.22)
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<PER-SHARE-NAV-END> 14.57
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</TABLE>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 083
<NAME> INTERNATIONAL EQUITY - INVESTOR A CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 084
<NAME> INTERNATIONAL EQUITY - INVESTOR B CLASS
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 085
<NAME> INTERNATIONAL EQUITY - INVESTOR C CLASS
<S> <C>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 091
<NAME> OHIO MUNICIPAL MONEY MARKET - INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 6-MOS
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<INVESTMENTS-AT-COST> 97,264,934
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</TABLE>
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<PAGE>
<ARTICLE> 6
<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 092
<NAME> OHIO MUNICIPAL MONEY MARKET - SERVICE CLASS
<S> <C>
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<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 115
<NAME> LARGE CAP VALUE EQUITY - INVESTOR C CLASS
<S> <C>
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<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 121
<NAME> COMPASS CAPITAL INDEX EQUITY - INSTITUTIONAL CLASS
<S> <C>
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<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 122
<NAME> COMPASS CAPITAL INDEX EQUITY - SERVICE CLASS
<S> <C>
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<NAME> COMPASS CAPITAL FUNDS
<SERIES>
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<NAME> COMPASS CAPITAL INDEX EQUITY - INVESTOR A CLASS
<S> <C>
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<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 124
<NAME> COMPASS CAPITAL INDEX EQUITY - INVESTOR B CLASS
<S> <C>
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<NAME> COMPASS CAPITAL FUNDS
<SERIES>
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<NAME> COMPASS CAPITAL INDEX EQUITY - INVESTOR C CLASS
<S> <C>
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 131
<NAME> SMALL CAP VALUE EQUITY - INSTITUTIONAL CLASS
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<CIK> 0000844779
<NAME> COMPASS CAPITAL FUNDS
<SERIES>
<NUMBER> 132
<NAME> SMALL CAP VALUE EQUITY - SERVICE CLASS
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<GROSS-EXPENSE> 3,733,103
<AVERAGE-NET-ASSETS> 371,647,810
<PER-SHARE-NAV-BEGIN> 15.98
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> 6.39
<PER-SHARE-DIVIDEND> (.13)
<PER-SHARE-DISTRIBUTIONS> (2.17)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.20
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
