CRESTFUNDS(R), INC.
MARYLAND MUNICIPAL BOND FUND -- TRUST CLASS
PROSPECTUS
February 7, 1996
CrestFunds(R) Maryland Municipal Bond Fund (the "Fund") is a bond
fund offered by CrestFunds(R), Inc. (the "Company"), a Maryland
corporation and a registered open-end management investment
company. The Fund offers three classes of shares: Trust Class
shares, Investors Class A Shares ("A Shares") and Investors Class
B Shares ("B Shares" and, together with A Shares, the "Investors
Class Shares"). However, A Shares are available only upon
conversion of B Shares. All classes share a common investment
objective and investment portfolio. This Prospectus relates to
shares of the Trust Class, which are offered to qualified
individual or institutional customers whose assets are managed
and/or administered by Crestar Bank's Trust and Investment
Management Group. Investors Class shares are offered by a
separate prospectus which is available by calling 1-800-273-7827.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, INSURED OR ENDORSED BY, CRESTAR BANK, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTING IN MUTUAL FUNDS INVOLVES
RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED. THE VALUE OF AN INVESTMENT IN THE FUND AND ITS RETURN
WILL FLUCTUATE AND ARE NOT GUARANTEED. WHEN SOLD, THE VALUE OF
AN INVESTMENT MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY
INVESTED.
Please read this Prospectus before investing. This Prospectus
sets forth concisely the information about the Fund that a
prospective investor should know before investing, and is
designed to help investors decide if the Fund's goals match their
own. Retain this document for future reference. A Statement of
Additional Information (dated February 7, 1996) for the Trust
Class of the Fund and an Annual Report for the fiscal year ended
November 30, 1995 have been filed with the Securities and
Exchange Commission ("SEC") and are incorporated herein by
reference. The Statement of Additional Information and the
Annual Report are available without charge upon request by
calling 1-800-273-7827.
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.
No dealer, sales representative or any other person has been
authorized to give any information or to make any
representations, other than those contained in this Prospectus
and in the related Statement of Additional Information, in
connection with the offer contained in this Prospectus. If given
or made, such other information or representations must not be
relied upon as having been authorized by the Fund or by the
Fund's distributor. This Prospectus and the related Statement of
Additional Information do not constitute an offer by the Fund or
the Fund's distributor to sell shares of the Fund to any person
to whom it is unlawful to make such an offer.
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Table of Contents Page
Summary of Fund Expenses. . . . . . . . . . . . . . . . . . 3
CrestFunds(R) . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objectives and Policies. . . . . . . . . . . . . 4
Risk Factors and Investment Considerations. . . . . . . . . 5
Investment Limitations. . . . . . . . . . . . . . . . . . . 8
Fund Management . . . . . . . . . . . . . . . . . . . . . . 9
Pricing of Shares . . . . . . . . . . . . . . . . . . . . . 9
How to Purchase, Exchange and Redeem Shares . . . . . . . . 9
Dividends and Tax Matters . . . . . . . . . . . . . . . . . 11
Performance . . . . . . . . . . . . . . . . . . . . . . . . 13
Portfolio Transactions. . . . . . . . . . . . . . . . . . . 13
Advisory and Related Agreements . . . . . . . . . . . . . . 14
Other Expense Information . . . . . . . . . . . . . . . . . 15
Banking Law Matters . . . . . . . . . . . . . . . . . . . . 15
Description of Common Stock . . . . . . . . . . . . . . . . 16
Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Summary of Bond Ratings*. . . . . . . . . . . . . . . . . . 20
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SUMMARY OF FUND EXPENSES
The expense summary format below was developed for use by all
mutual funds to help investors make their investment decisions.
The purpose of the tables is to assist investors in understanding
the various costs and expenses that an investor in Trust Class
shares would bear directly or indirectly. Investors should
consider this expense information for the Fund along with other
important information in this Prospectus, including the Fund's
investment objective, financial highlights and, where available,
past performance. As is more fully described under the heading
"How to Purchase, Exchange and Redeem Shares," Trust Class shares
of the Fund are currently available, without payment of any sales
charge, to qualified individual or institutional customers whose
assets are managed and/or administered by Crestar Bank's Trust
and Investment Management Group. Such relationships may involve
the payment of account or service fees not reflected in the
tables below.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS)*:
Advisory Fee (after waiver). . . . . . . . . . . . . .10%
12b-1 Fees (after waiver). . . . . . . . . . . . . . 0%
Other Expenses (after waiver). . . . . . . . . . . . .61%
Total Operating Expenses (after waiver) . . . . . . .71%
__________
* Expenses are estimated based on average expenses expected to be
incurred during the period ending November 30, 1996. During
this period, expenses may be more or less than the average amount
shown.
EXAMPLE: You would pay the following expenses on a $1,000
investment in the Fund, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
1 Year . . . . . . . . . . . . . . . . . . . . . . . . . $ 7
3 Years. . . . . . . . . . . . . . . . . . . . . . . . . $23
EXPLANATION OF TABLES:
ANNUAL FUND OPERATING EXPENSES. Advisory fees are paid by the
Fund to Capitoline Investment Services Incorporated ("Capitoline"
or the "Adviser") for managing the Fund's investments and
business affairs (see "Adviser"). Other Expenses for the Fund
are based on estimates for the current fiscal year. The Fund
pays administration fees at an annualized rate of .15% to SEI
Financial Management Corporation ("SFM") for administrative
services.
Absent fee waivers, advisory fees for the Fund would be .60% and
12b-1 fees would be .15%. Absent all fee waivers, Total
Operating Expenses would be 1.36%. Please refer to the sections
"Administrator and Distributor," "Transfer Agent and Custodian"
and "Other Expense Information." The information contained in
the table and example above relates only to Trust Class shares;
expenses for Trust Class shares differ from those of Investors
Class shares. See "Description of Common Stock." Advisory Fees
and Other Expenses are reflected in the Fund's share price and
are not charged directly to individual shareholder accounts.
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EXAMPLE. The hypothetical example illustrates the expenses
associated with a $1,000 investment in Trust Class shares over
periods of 1 and 3 years based on the expenses in the Table above
and an assumed annual return of 5%. THE RETURN OF 5% AND
EXPENSES SHOULD NOT BE CONSIDERED INDICATIONS OF ACTUAL
OR EXPECTED PERFORMANCE OR EXPENSES, BOTH OF WHICH MAY VARY.
CRESTFUNDS(R)
The Fund is one of a variety of money market, bond and equity
funds (the "CrestFunds(R)") offered to investors by the Company.
CrestFunds(R) include the following Money Market Funds: the Cash
Reserve Fund, the U.S. Treasury Money Fund and the Tax Free Money
Fund; the following Bond Funds: the Limited Term Bond Fund, the
Intermediate Term Bond Fund, the Government Bond Fund, the
Maryland Municipal Bond Fund, the Virginia Intermediate Municipal
Bond Fund and the Virginia Municipal Bond Fund; and the following
Equity Funds: the Value Fund, the Capital Appreciation Fund and
the Special Equity Fund. All CrestFunds(R) are managed by
Capitoline and have the same administrator, distributor,
transfer agent and custodian.
The CrestFunds(R) provide investors opportunities for flexibility
and diversification in investment planning, and convenient
exchange privileges give investors access to different investment
vehicles appropriate to changing market conditions. Information
on the CrestFunds(R) may be obtained by calling 1-800-273-7827.
INVESTMENT OBJECTIVES AND POLICIES
Below is a description of the investment objective and policies
of the Fund. The Fund's objective, along with those policies
identified as being fundamental, may not be changed except by
approval of the majority of the outstanding shares of the Fund.
All other investment policies may be changed by the Company's
Board of Directors without shareholder approval. Capitoline will
manage the Fund consistent with the Fund's investment objective
and policies. There is no assurance that the Fund will achieve
its investment objective. For more information regarding the
Fund's investment policies, please refer to the Statement
of Additional Information.
The Fund seeks to provide high current income exempt from federal
and Maryland income tax in a manner consistent with the
preservation of capital by investing in municipal bonds of
investment-grade quality. (See "Investment-grade Securities" in
the Appendix to this Prospectus.) There are no limits on the
dollar-weighted average portfolio maturity of the Fund, and the
Fund may acquire individual securities without regard to their
remaining maturities.
The Fund is non-diversified, which means that it has greater
latitude than a diversified fund with respect to the investment
of its assets in the securities of a relatively few municipal
issuers. As a non-diversified fund, the Fund may present greater
risks than a diversified fund.
As a fundamental policy, at least 80% of the Fund's income will,
under normal circumstances, be exempt from regular federal income
taxes. Interest on some "private activity" municipal obligations
is subject to the federal alternative minimum tax ("AMT bonds").
AMT bonds are municipal obligations that benefit a private or
industrial user or finance a private facility. The Fund reserves
the right to invest up to 100% of its assets in AMT bonds.
As a non-fundamental policy, at least 65% of the Fund's assets
will be invested in bonds that will, under normal circumstances,
produce income that is exempt from Maryland income taxes.
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The Fund will, consistent with its investment objective, purchase
securities which meet the applicable quality characteristics
established for the Fund. In doing so, it will consider the
ratings of Moody's or S&P assigned to various obligations.
The Fund normally will invest primarily in municipal securities
of all types and of investment-grade quality. Investment grade
municipal bonds are considered to be securities rated Baa or
higher by Moody's or BBB or higher by S&P, and unrated securities
that are deemed by Capitoline to meet the Fund's ratings
requirements. (See "Investment-grade Securities" in the Appendix
to this Prospectus.) Municipal securities are issued to raise
money for various public purposes, including general purpose
financing for state and local governments as well as financing
for specific projects or public facilities. Municipal securities
may be backed by the full taxing power of a municipality, by the
revenues derived from a specific project or by the credit of a
private organization. Some municipal securities are insured by
private insurance companies, while others may be supported by
letters of credit furnished by domestic or foreign banks.
Capitoline monitors the financial condition of parties (including
insurance companies, banks, and corporations) whose
creditworthiness is relied upon in determining the credit quality
of securities eligible for purchase by the Fund. The Fund may
invest more than 25% of its assets in industrial development
bonds.
Generally, the Fund's investments in municipal securities may
include fixed, variable, or floating rate general obligation and
revenue bonds (including municipal lease obligations and resource
recovery bonds); zero coupon and asset-backed securities; tax,
revenue, or bond anticipation notes; and tax-exempt commercial
paper. The Fund may buy or sell securities on a when-issued or
delayed-delivery basis (including refunding contracts) and may
acquire standby commitments. See the Appendix.
The Fund may change its investment focus for temporary defensive
purposes. During periods when, in Capitoline's opinion, a
temporary defensive posture in the market is appropriate, the
Fund may hold cash that is not earning interest or may invest in
obligations whose interest may be subject to federal and/or state
tax. The Fund's defensive investments may include short-term
municipal obligations, money market instruments and shares of
money market mutual funds. Should the Fund elect to purchase
shares of money market funds, it will incur additional expenses
charged by that money market fund, such as management fees.
Under such circumstances, the Fund may temporarily invest so that
less than 80% of its income distributions are federally and/or
state tax-free. Federally taxable obligations include, but are
not limited to, obligations issued by the U.S. Government or any
of its agencies or instrumentalities, high-quality commercial
paper, certificates of deposit, and repurchase agreements.
RISK FACTORS AND INVESTMENT CONSIDERATIONS
Individually, the Fund does not constitute a balanced investment
plan. The Fund is likely to provide higher yields than money
market funds; however, unlike money market funds, the Fund does
not seek to maintain a stable $1.00 share price, and may not be
able to return dollar for dollar the money invested. The Fund
emphasizes high tax-free current income by investing primarily in
investment-grade municipal securities. Because the Fund invests
primarily in Maryland obligations, the quality and supply of
eligible securities may present additional risks to those of more
diversified municipal bond funds. As compared to an intermediate
term municipal bond fund, the Fund is likely to experience
greater share price fluctuation and potentially higher tax-free
income due to its investments in longer term municipal bonds.
From time to time the Fund, to the extent consistent with its
investment objective, policies and restrictions, may invest in
securities of companies with which Crestar Bank has a lending
relationship, including industrial development bonds and other
private activity municipal securities backed by the credit and
security of such companies. The investment objectives and
policies for the Fund are supplemented by its investment
limitations. See the Appendix for further discussion of the
Fund's investments.
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The Fund's concentration in the debt obligations of one state
carries a higher risk than a portfolio that is geographically
diversified. Investors should also be aware of certain factors
that might affect the financial condition of issuers of Maryland
municipal securities. In addition to the State of Maryland and
its agencies, there are 23 counties and 156 incorporated
municipalities in Maryland (including Baltimore City, which
functions much like a county), many of which have outstanding
debt. As described below, a number of Maryland public
authorities also issue debt.
ECONOMY. The economy of the State of Maryland continues to
demonstrate relatively strong performance, with personal income
well above the national average. Total State employment was 2.73
million in July, 1995 with the majority of jobs in trade,
service, and government sectors. The national recession caused
a loss of jobs in Maryland since employment levels peaked in
mid-1990 but employment levels began to recover in mid-1992.
Unemployment was 4.9% in October, 1995, compared to a national
average of 5.2%. The State's population in 1994 was
approximately 5 million, with 83% concentrated in the
Baltimore-Washington corridor.
DEBT. The State of Maryland and its political subdivisions issue
four basic types of debt having varying degrees of credit risk:
general obligation bonds backed by the unlimited taxing power of
the issuer, revenue bonds secured by specific pledged taxes or
revenue streams, conduit revenue bonds payable from the
repayment of certain loans to entities such as hospitals and
universities, and tax-exempt lease obligations (including
certificates of participation in the same), the payments under
which are subject to annual appropriation. In 1994,
$3,420,500,000 in state and local debt was issued in Maryland,
with approximately 44% representing general obligation debt and
56% revenue bonds or lease-backed debt, compared to 35%
general obligation and 65% revenue backed bonds nationally.
Total combined tax supported debt outstanding of the State,
Baltimore City, and all of the counties, municipalities, and
special districts within Maryland totaled $12 billion as of June
30, 1994. The State of Maryland had $2.62 billion in general
obligation bonds outstanding as of June 30, 1995. General
obligation debt of the State of Maryland is rated Aaa by Moody's,
AAA by Standard & Poor's and AAA by Fitch; there can be no
assurance that these ratings will continue. There is no general
limit on state general obligation bonds imposed by the State
Constitution or laws; state general obligation bonds are
payable from ad valorem taxes and, under the State Constitution,
may not be issued unless the debt is authorized by a law levying
an annual tax or taxes sufficient to pay the debt service within
15 years and prohibiting the repeal of the tax or taxes or their
use for another purpose until the debt has been paid. State and
local general obligation debt on a per capita basis and as a
percentage of property values have increased by 33.4% and 7.1%,
respectively since 1990. Although the State may borrow up to
$100 million in short-term notes in anticipation of taxes and
revenues, the State has not made use of this authority.
Many agencies and instrumentalities of the State government are
authorized to borrow money under legislation which expressly
provides that the obligations shall not be deemed to constitute a
debt or a pledge of the faith and credit of the State. The
Department of Transportation issues limited, special obligations
payable primarily from fixed-rate excise taxes and other revenues
related mainly to highway use, the amount of which was limited by
the General Assembly to $1.054 billion for fiscal year 1996
(ending June 30, 1996); the principal amount of such bonds
outstanding as of June 30, 1995 was $1,047 million.
The Maryland Transportation Authority, the Community Development
Administration of the Department of Housing and Community
Development, the Maryland Stadium Authority, the Maryland
Environmental Service, the public educational institutions (which
include the University of Maryland System, Morgan State
University, St. Mary's College of Maryland and Baltimore City
Community College), the Maryland Food Center Authority and the
Maryland Water Quality Financing Administration also have issued
and have outstanding bonds, the principal of and interest on
which are payable solely from specified sources, principally fees
or loan payments generated from use of the facilities,
enterprises financed by the bonds, or other dedicated fees. None
of these bonds constitute debts or pledges of the faith and
credit of the State.
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The issuers of these obligations are subject to various economic
risks and uncertainties, and the credit quality of the securities
issued by them may vary considerably from that of the State's
general obligation bonds. Total outstanding revenue and
enterprise debt of these State units at June 30, 1995 was
approximately $3.7 billion.
Certain State agencies also execute capital lease or conditional
purchase agreements to finance certain facilities; all of the
payments under these arrangements are subject to annual
appropriation by the State. In the event that appropriations are
not made, the State and its agencies may not be held
contractually liable for the lease payments. As of June 30, 1995
$125 million of lease and conditional purchase financings
were outstanding.
In addition, the Maryland Health and Higher Educational
Facilities Authority, the Maryland Industrial Development
Financing Authority, the Northeast Maryland Waste Disposal
Authority and the Maryland Economic Development Corporation issue
conduit revenue bonds, the proceeds of which are lent to
borrowers eligible under relevant State and federal law. These
bonds are payable solely from the loan payments made by the
borrowers, and their credit quality vary with the financial
strengths of the respective borrowers.
FINANCIAL. To a large degree, the risk of the portfolio is
dependent upon the financial strength of the State of Maryland,
its political subdivisions and the obligors on conduit revenue
bonds. During the 1991, 1992 and 1993 fiscal years, Maryland
experienced the effects of the national recession and a weakened
economy. During this period, the State experienced unanticipated
shortfalls in revenues. At the same time, the State experienced
increased expenditures for public assistance. To address this
situation, the State reduced appropriations, including aid to
local governments, in several instances.
As a result of successive rounds of cuts in local and other State
expenditures and increases in taxes, the financial situation of
the State stabilized in fiscal year 1993 with revenues coming in
at or above budgeted amounts, permitting the State to conclude
fiscal year 1993 with a general fund surplus (budgetary basis)
of $10.5 million (after $24.5 million of transfers to reserve
accounts) and a $50.9 million balance in the Revenue
Stabilization Account of the State Reserve Fund. Demonstrating
continued improvement, the State ended its fiscal year 1994 with
a general fund surplus of $60 million on a budgetary basis and
$161.8 million on deposit in the Revenue Stabilization Account of
the State Reserve Fund. The State's finances continued to
improve in fiscal year 1995, with revenues exceeding estimate by
$217 million and expenditures at $184 million above budget. The
State ended its fiscal year 1995 with a General Fund undesignated
fund balance of $26.5 million (after reservation of $106 million
for fiscal year 1996 expenses) and an additional $286.1 million
on deposit in the Revenue Stabilization Account of the State
Reserve Fund.
In April, 1995 the State's General Assembly approved a $14.4
billion budget for fiscal year 1996, an 8.2% increase above the
fiscal year 1995 spending level. This budget did not include any
expenditures based upon additional revenue from new or
broad-based taxes but included a $330 million appropriation to
the State Reserve Fund, providing $20 million to its Economic
Development Account, $120 million to the Revenue Stabilization
Account and $190 million to a new Citizen Tax Reduction and
Fiscal Reserve Account, a reserve which may be used either to
effect future income tax reduction or to offset the impact
of federal fiscal policies. When the fiscal year 1996 budget was
enacted, the State projected that it would end the fiscal year
with a general fund surplus of $7.8 million on a budgetary basis.
The State projects a year-end General Fund balance of $34.3
million and an additional $518 million in the Revenue
Stabilization Account of the State Reserve Fund.
OTHER MARYLAND ISSUERS. Many local Maryland governments have
also suffered from fiscal stress and general declines in
financial performance. Recessionary impacts have resulted in
downturns in real estate
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related receipts, declines in the growth of income tax revenues,
lower cash positions and reduced interest income. To compensate
for reductions in State aid to local governments, local
governments closed this gap by increasing property and other
taxes, program cuts, and curtailing pay raises. Certain counties
in Maryland are subject to voter approval limitations on property
tax levy increases or on increases in governmental spending which
limits their flexibility in responding to external changes.
Various tax initiatives to reform existing tax structures in
certain counties were placed on the November, 1992 election
ballot and were adopted. Future initiatives, if proposed and
adopted, could create pressure on the counties and other local
governments and their ability to raise revenues. The Fund cannot
predict the impact of any such future tax limitations on debt
quality.
Many Maryland counties have established agencies with bond
issuing authority, such as housing authorities. Maryland
municipalities also have the power to issue conduit revenue
bonds. Maryland local governments and their authorities are
subject to various risks and uncertainties, and the credit
quality of the bonds issued by them may vary considerably from
that of State general obligation bonds.
SECTORS. Certain areas of potential investment concentration
present unique risks. In recent years, 6 to 12% of tax-exempt
debt issues in Maryland has been for public or non-profit
hospitals. A significant portion of the Fund's assets may be
invested in health care issues. Since 1983, the hospital
industry has been under significant pressure to reduce expenses
and limit length of stay, a phenomenon which has negatively
affected the financial health of many hospitals. While each
issue is separately secured by the individual hospital's
revenues, third party reimbursement mechanisms for patient care
are common to the group. At the present time Maryland hospitals
operate under a system which reimburses hospitals according to a
State administered set of rates and charges rather than the
Federal Diagnosis Related Group (DRG) system for Medicare
payments. Since 1983, Maryland hospitals have operated below the
national average in terms of Medicare cost increases, allowing
them to continue operating under a Medicare waiver. However, any
loss of this waiver in the future may have an adverse impact upon
the credit quality of Maryland hospitals. Additionally, national
focus on health care reform and any resulting legislation may
further impact the financial condition of hospitals in Maryland
and other states.
The Fund may from time to time invest in solid waste revenue
bonds which have exposure to environmental, technological and
market risks which could affect the security and value of the
bonds. Such risks include construction delay or shortfalls in
construction funds due to increased regulation, and market
disruption and revenue variability due to recent court decisions
and legislative proposals.
INVESTMENT LIMITATIONS
The following summarizes the Fund's principal investment
limitations. A complete listing is contained in the Statement of
Additional Information. Limitation 2(a) is fundamental and may
not be changed without shareholder approval. Except for the
Fund's percentage limitations concerning borrowings, the
limitations and policies discussed in this Prospectus are
considered at the time of purchase. Accordingly, the sale of
securities is not required in the event of a subsequent change in
circumstances.
1. For federal tax purposes the Fund will limit its investments
so that: (a) with regard to at least 50% of its total assets, no
more than 5% of its total assets are invested in the securities
of a single issuer; and (b) no more than 25% of its total assets
are invested in the securities of a single issuer. This
limitation does not apply to "government securities" as defined
for federal tax purposes.
2. The Fund (a) may borrow money solely for temporary or
emergency purposes, but not in an amount exceeding 33 1/3% of its
total assets; (b) may borrow money only from banks or by engaging
in reverse repurchase agreements; and (c) will not purchase
securities when borrowings exceed 5% of its total assets.
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FUND MANAGEMENT
Boyce G. Reid, CFA, is Senior Vice President and Director of
Fixed-Income Management for Capitoline. Mr. Reid holds primary
responsibility for the management of the Fund. He also manages
other CrestFunds(R) Bond Funds and oversees the investment
management of over $630 million of other pension, endowment,
foundation, union and insurance funds. Mr. Reid has been the
Director of Fixed-Income Management since 1986.
Cheryl L. Page, CFA, is Assistant Vice President and Fixed-Income
Portfolio Manager for Capitoline. Ms. Page shares with Mr. Reid
responsibility for the management of the Fund. She also oversees
the investment management of approximately $32.5 million of other
pension, endowment, foundation, union and insurance funds. Ms.
Page has been with Capitoline since December, 1991; prior to
that, she was a portfolio manager for First American Bank, N.A.
for three years.
PRICING OF SHARES
The net asset value per share ("NAV") of the Fund is determined
as of the close of regular trading hours on the New York Stock
Exchange (the "NYSE"). The Fund's NAV is determined on each day
the NYSE and the Fund's custodian, Crestar Bank, are open for
business. The NAV of the Fund is calculated by adding the value
of all securities and other assets of the Fund, deducting the
liabilities allocated to each class, and dividing the result by
the proportional number of the shares of the Fund outstanding in
a class.
Securities which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which
such securities are primarily traded or at the last sale price on
any national securities exchange. Securities traded only on
over-the-counter markets are valued on the basis of closing
over-the-counter bid prices. Securities for which there were no
such transactions are valued at the average of the current bid
and asked prices. The Fund may also utilize pricing services in
determining the value of its securities. Debt securities with
remaining maturities of 60 days or less at the time of purchase
are valued on an amortized cost basis (unless the Board
determines that such basis does not represent fair value at the
time). Under this method, such securities are valued initially
at cost on the date of purchase. Thereafter, absent unusual
circumstances, the Fund assumes a constant proportionate
amortization of any discount or premium until maturity of the
security.
HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
DISTRIBUTOR. Shares of the Fund are sold on a continuous basis
by the Fund's Distributor, SEI Financial Services Company ("SFS"
or the "Distributor"). SFS is a registered broker-dealer with
principal offices at 680 East Swedesford Road, Wayne,
Pennsylvania 19087.
PURCHASE OF SHARES. Before you buy shares, please read the
following information to make sure your investment is accepted
and credited properly.
Trust Class shares are offered continuously to qualified
individual or institutional customers that have entered into an
agreement for their assets to be managed and/or administered by
Crestar Bank's Trust and Investment Management Group. The
minimum initial investment required of a bank in the Fund is $1
million, except for agency accounts, for which the minimum is
$25,000. There is no minimum for subsequent investments. Banks
may impose initial or subsequent investment minimums on their
customers. Trust Class shares are sold without a sales charge,
although banks may charge their customer accounts for
services provided in connection with the purchase of shares.
Information concerning these services and any charges may be
obtained from the bank. With the exception of agency accounts,
Fund shares may be held of record by the banks, although bank
customers may retain the right to vote them. Generally, shares
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held in agency accounts will be registered in the principal's
name. Confirmations of share purchases and redemptions will be
sent to shareholders of record. Beneficial ownership of Fund
shares will be recorded by the banks and reflected in the account
statements provided by them to their customers. For further
information on opening an account, contact an account officer at
the bank. Sales personnel of financial institutions distributing
the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing
compensation.
Shares of the Fund may be purchased through procedures
established by the banks in connection with the requirements of
customer accounts. Purchases will be effected only on days on
which the purchasing banks and the Fund is open for business
("Business Days"). Before the customer authorizes the purchase
of shares of the Fund, this Prospectus should be read in
conjunction with information from the customer's bank concerning
services and charges. The issuance of shares is recorded on the
books of the Fund, and share certificates will not be issued for
shares of the Fund. The Fund reserves the right to reject any
purchase order.
EFFECTIVE TIME OF PURCHASES. Purchase orders for shares of the
Fund must be received by Crestar Bank before the close of regular
trading hours on the NYSE. Orders are priced according to the
NAV determined on that day. Any orders received after that time
will be processed at the NAV next calculated. All purchases must
be paid for in U.S. dollars and checks must be drawn on U.S.
banks. Purchase orders will be executed by 4:00 p.m., on the
business day on which the purchase order is received in good
order by Crestar Bank. Payment for the purchase is expected at
the time of the order but must be received within 5 business days
of the date of the order. The Fund reserves the right to
withhold redemption proceeds until it is reasonably satisfied
that checks received as payment have cleared (which can take up
to 7 days). If available funds are not received within 5
business days, the order may be canceled and notice thereof will
be provided to the party placing the order.
It is the responsibility of the banks to transmit orders for
purchases by their customers to the Transfer Agent and for the
banks to deliver required funds on a timely basis in accordance
with the above-stated procedures. Any fees and/or losses
incurred due to cancellation of an order will be the
responsibility of the party placing the order.
EXCHANGES. Trust Class shares of the Fund may be exchanged for
Trust Class shares of other CrestFunds(R) approved for sale in an
investor's state and offered through the investor's bank. All
dividends credited to the shareholder up to the date of exchange
are paid to the shareholder at the end of the month.
CrestFunds(R) reserves the right to refuse exchanges if as a
result the particular fund would be unable to invest effectively
in accordance with its investment objective and policies or would
otherwise be affected adversely. CrestFunds(R) further reserves
the right to terminate or modify the exchange privilege in the
future. Exchanges are subject to the same investment minimums
and time frames listed above. An exchange is considered a sale
of shares and may result in a capital gain or loss for federal
income tax purposes.
Trust Class shares of the Fund may be exchanged for B Shares of
the Fund should the holder of Trust Class shares cease to be
eligible to invest in the Trust Class. For example, in the event
that legal title to Trust Class shares passes to a trust
beneficiary, or in the event that a trust, agency or similar
account distributes Trust Class shares, the shares may be held by
the account beneficiary only if they are promptly exchanged for B
Shares. The Fund reserves the right to redeem Trust Class shares
held by shareholders not eligible to purchase such shares if not
converted to B Shares after 30 days.
REDEMPTION OF SHARES. Customers may redeem all or part of their
Trust Class shares of the Fund held through their bank in
accordance with instructions and limitations pertaining to their
account at the bank. It is the responsibility of each bank to
transmit redemption orders to Crestar Bank and to credit the
bank's customers' accounts with the redemption proceeds on a
timely basis. No charge for wiring redemption
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payments is imposed by the Fund, although banks may charge their
customer accounts for services provided in connection with the
redemption of shares of the Fund. Information concerning these
services and any charges are available from the banks. For
further information contact an account officer at the bank.
Redemption orders are effected at the NAV next determined after
receipt of the order in good order by Crestar Bank. All
dividends credited to the shareholder up to the date of
redemption are paid to the shareholder at the end of the month.
Crestar Bank reserves the right to wire redemption proceeds
within 7 days following receipt of the order.
Subject to the Fund's compliance with applicable regulations, the
Fund has reserved the right to pay the redemption, either totally
or partially, by a distribution of securities or other property
(instead of cash) from the Fund's portfolio. The securities or
property distributed in such a distribution would be valued
at the same amount as that assigned to them in calculating the
NAV for the shares being sold. If a shareholder receives a
distribution in kind, brokerage or transaction charges may be
incurred when converting the securities to cash, and the
shareholder may realize a gain or loss for tax purposes on both
the distribution and the subsequent conversion.
A Trust Class shareholder may be required to redeem shares in the
Fund if the balance in the shareholder's account with the Fund
drops below $1 million ($25,000 for agency accounts) as a result
of redemptions and the shareholder does not increase the
account's balance to at least $1 million (or $25,000) on 30 days'
written notice. If the share balance in a customer's account at
a bank falls below any minimum the customer has agreed to
maintain with the bank, the customer may be required to redeem
all or a part of his Fund shares or to increase his holdings of
Fund shares to the extent necessary to maintain the required
minimum balance in the account.
DIVIDENDS AND TAX MATTERS
DISTRIBUTIONS. Income dividends from the Fund are declared daily
and distributed monthly. The Fund distributes substantially all
of its net investment income and capital gains (if any) to
shareholders each year. Unless the Fund is instructed otherwise,
all dividends and distributions of capital gains are
automatically reinvested into additional shares of the Fund
immediately upon payment thereof.
FEDERAL TAXES. Interest earned by the Fund is federally tax-free
when distributed to shareholders as income dividends. If the
Fund earned federally taxable income from any of its investments,
it would be distributed as a taxable dividend. The Fund may
invest in securities the interest on which is subject to the
federal alternative minimum tax for individuals, and to the
extent that the Fund does so, individuals who are subject to the
alternative minimum tax will be required to report a portion of
their dividends as a "tax preference item" in determining their
federal taxes.
The Fund's taxable distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except
that taxable distributions declared in December and paid in
January will be taxable as if paid on December 31. The Fund will
send shareholders a tax statement by January 31 showing the
tax status of the distributions received in the past year and
will file a copy with the Internal Revenue Service ("IRS"). You
should keep all statements you receive to assist in your personal
recordkeeping.
STATE AND LOCAL TAXES. To the extent the Fund qualifies as a
regulated investment company under the Code, it will be subject
to tax only on (1) that portion of its income on which tax is
imposed for federal income tax purposes under Section 852(b)(1)
of the Code and (2) that portion of its income which consists
of federally tax exempt interest on obligations other than
Maryland Exempt Obligations (hereinafter defined) to the extent
such interest is not paid to Fund shareholders in the form of
exempt-interest dividends. To the extent dividends paid by the
Fund represent interest excludable from gross income for
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<PAGE>
federal income tax purposes, that portion of exempt-interest
dividends that represents interest received by the Fund on
obligations issued by the State of Maryland, its political
subdivisions, Puerto Rico, the U.S. Virgin Islands, or Guam and
their respective authorities or municipalities ("Maryland Exempt
Obligations"), will be exempt from Maryland state and local
income taxes when allocated or distributed to a shareholder of
the Fund except in the case of a shareholder that is a financial
institution. Except as noted below, all other dividend
distributions will be subject to Maryland state and local income
taxes.
Capital gains distributed by the Fund to a shareholder or any
gains realized by a shareholder from a redemption or sale of
shares must be recognized for Maryland state and local income tax
purposes to the extent recognized for federal income tax
purposes. However, capital gains distributions included in the
gross income of shareholders for federal income tax purposes are
subtracted from capital gains income for Maryland income tax
purposes to the extent such distributions are derived from the
disposition by the Fund of debt obligations issued by the State
of Maryland, its political subdivisions and authorities.
Except in the case of a shareholder that is a financial
institution, dividends received by a shareholder from
the Fund that are derived from interest on U.S. government
obligations will be exempt from Maryland state and local income
taxes.
In the case of individuals, Maryland presently imposes an income
tax on items of tax preference with reference to such items as
defined in the Code for purposes of calculating the federal
alternative minimum tax. Interest paid on certain private
activity bonds is a preference item for purposes of calculating
the federal alternative minimum tax. Accordingly, if the Fund
holds such bonds, the excess of 50% of that portion of exempt
interest dividends which is attributable to interest on such
bonds over a threshold amount may be taxable by Maryland.
Interest on indebtedness incurred or continued (directly or
indirectly) by a shareholder in order to purchase or carry shares
of the Fund will not be deductible for Maryland state and
local income tax purposes. Individuals will not be subject to
personal property tax on their shares of the Fund. Shares of the
Fund held by a Maryland resident at death may be subject to
Maryland inheritance and estate taxes.
CAPITAL GAINS. Shareholders may realize a capital gain or loss
when they redeem or exchange shares. For most types of accounts,
the Fund will report the proceeds of the redemptions to investors
and the IRS annually. However, because the tax treatment also
depends on an individual's purchase price and his personal tax
position, shareholders should keep their regular account
statements to use in determining their tax.
"BUYING A DIVIDEND." On the ex-dividend date for an income
dividend or distribution from capital gains, the Fund's share
value is reduced by the amount of the distribution. If you buy
shares just before the record date ("buying a dividend"), you
would pay the full price for the shares and then receive a
portion of the share price as a taxable distribution.
OTHER TAX INFORMATION. In addition to federal taxes, you may be
subject to state or local taxes depending on the laws in their
area. Consult your tax adviser concerning the application of
state and local taxes to investments in the Fund, which may
differ from the federal income tax consequences described above.
When you sign your account application, you will be asked to
certify that your social security or taxpayer identification
number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you
violate IRS regulations, the IRS can require the Fund to withhold
31% of your taxable distributions and redemptions.
Please refer to the Statement of Additional Information for more
information regarding taxes.
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<PAGE>
PERFORMANCE
Performance of each class of Fund shares may be quoted in
advertising in terms of YIELD, EFFECTIVE YIELD, TAX EQUIVALENT
YIELD OR TOTAL RETURN, as appropriate. Performance figures are
based on historical results and are not intended to indicate
future performance.
The YIELD of each class of shares is calculated by dividing the
net investment income (net of expenses) (as defined by the SEC)
earned by the Fund over a 30-day period by the average number of
shares entitled to receive distributions, expressed as an
annualized percentage rate. The EFFECTIVE YIELD is calculated
similarly, but assumes that the income earned from the investment
is reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed
reinvestment. Because yield accounting methods differ from the
methods used for other accounting purposes, the Fund's yield may
not equal its distribution rate, the income paid to an account or
the income reported in the Fund's financial statements.
The Fund also may quote TAX-EQUIVALENT YIELD, which shows the
approximate taxable yield an investor would have to earn, before
taxes, to equal the Fund's tax-free yield. A tax-equivalent
yield is calculated by dividing the tax-exempt yield by the
result of one minus a stated federal and/or state tax rate. If
only a portion of the Fund's income was tax-exempt, only that
portion is adjusted in the calculation.
TOTAL RETURNS are based on the overall dollar or percentage
change in value of a hypothetical investment in the Fund and
assumes that all dividends and capital gain distributions are
reinvested. A CUMULATIVE TOTAL RETURN reflects the Fund's
performance over a stated period of time. An AVERAGE ANNUAL
TOTAL RETURN reflects the hypothetical annually compounded return
that would have produced the same cumulative total return if the
Fund's performance had been constant over the entire period.
Because average annual total returns tend to smooth out
variations in the Fund's returns, investors should recognize that
they are not the same as actual year-by-year results. The yield
and total return of the two classes of shares are calculated
separately; the yields and total returns of B Shares will be
lower than that of Trust Shares. When a class quotes an average
annual total return covering a period of less than one year, the
calculation assumes the performance will remain constant for the
rest of the year. Since this may or may not occur, these average
annual total returns should be viewed as hypothetical returns
rather than actual performance. To illustrate the components of
overall performance, the Fund may separate its cumulative and
average annual total returns into income results and capital gain
or loss. The Fund may quote its total returns on a before tax or
after tax basis.
PORTFOLIO TRANSACTIONS
Capitoline may place portfolio transactions with broker-dealers
who provide research or execution services to the Fund or other
accounts over which Capitoline or its affiliates exercise
investment discretion. Such services may include advice
concerning the value of securities; the availability of
securities or purchasers or sellers of securities; furnishing
analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance
of accounts; and effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement).
The selection of such broker-dealers is generally made by
Capitoline (to the extent possible consistent with execution
considerations) in accordance with a ranking of broker-dealers
determined periodically by Capitoline's investment staff based
upon the qualify of research or execution services provided. The
Fund may execute brokerage or other agency transactions through
its distributor or an affiliate of its distributor or through an
affiliate of Capitoline, which are registered broker-dealers.
The frequency of portfolio transactions, the Fund's portfolio
turnover rate, will vary from year to year depending on market
conditions.
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<PAGE>
ADVISORY AND RELATED AGREEMENTS
ADVISER. Capitoline Investment Services Incorporated, 919 East
Main Street, Richmond, Virginia 23219, provides investment
advisory services to the Fund subject to the general control of
the Company's Board of Directors.
The Company has entered into an Investment Advisory Agreement
with Capitoline (the "Advisory Agreement") on behalf of the Fund.
Capitoline is paid a fee of .60% of average daily net assets for
its advisory services to the Fund. Capitoline, in its sole
discretion, may waive all or any portion of its advisory fee.
Any waiver, which may be discontinued at any time, has the effect
of increasing the Fund's yield for the period during which the
waiver was in effect and may not be recouped at a later date.
Capitoline, at its sole discretion, may pay financial
institutions or other industry professionals such as investment
advisers, accountants, banks, and estate planning firms
("Qualified Recipients") for shareholder support services.
Capitoline may engage banks and brokers, including Crestar Bank
and Crestar Securities Corporation, as Qualified Recipients to
perform certain shareholder support services. In addition, such
Qualified Recipients may impose charges or other requirements on
their customers for automatic investment and other cash
management services which an investor utilizing such Qualified
Recipients should take into consideration when determining the
effective yield of an investment in a Fund.
Capitoline is a wholly-owned subsidiary of Crestar Bank, which is
a subsidiary of Crestar Financial Corporation, a MidAtlantic
Region banking organization. Crestar Financial Corporation had
total assets of approximately $18.3 billion as of December 31,
1995. Crestar Financial Corporation was organized in 1962 as a
bank holding company registered under the federal Bank Holding
Company Act of 1956 and files annual and periodic reports with
the Securities and Exchange Commission under the Securities
Exchange Act of 1934. (See "Banking Law Matters.")
Capitoline was organized in 1973 and is one of the largest
investment advisory organizations in Virginia. As of December
31, 1995, Capitoline managed trust and investment assets of
approximately $11.4 billion.
ADMINISTRATOR AND DISTRIBUTOR. SEI Financial Management
Corporation (the "Administrator"), a wholly-owned subsidiary of
SEI Corporation ("SEI"), provides the Company with administrative
services, including fund accounting, regulatory reporting,
necessary office space, equipment, personnel, and facilities.
The Administrator is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .15% of the average daily
net assets of the Fund. SEI Financial Services Company, a
wholly-owned subsidiary of SEI, will serve as distributor. The
Fund may execute brokerage or other agency transactions through
the Distributor for which the Distributor receives compensation.
DISTRIBUTION AND SERVICE PLANS. The Board of Directors of the
Company has approved an Amended and Restated Distribution and
Service Plan (the "Plan") pursuant to Rule 12b-1 of the 1940 Act
( the "Rule"). Under this Plan the Distributor is compensated at
the annual rate of .15% of the aggregate average daily net assets
of the Trust Class Shares of the Fund. The Distributor will be
compensated for distribution services provided to the Trust Class
shares including the printing and distribution of Prospectuses,
Statements of Additional Information or reports prepared for the
use in connection with the offering of shares of the Fund (other
than to existing shareholders at the time of such mailing), the
expenses incurred for the preparation of any other literature
used by the Distributor in connection with any such offering.
The Distributor has agreed to waive any fees payable pursuant to
the Plan, and will bear the costs of other distribution-related
activities. The Distributor reserves the right to terminate its
waiver at any time at its sole discretion.
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The Plan also permits Capitoline, at its sole discretion, to use
all or a portion of the advisory fee received, as well as its
past profits or other resources, to pay financial institutions or
other industry professionals such as investment advisers,
accountants, banks, and estate planning firms for shareholder
support services. Capitoline may engage banks and
broker-dealers, including Crestar Bank and Crestar Securities
Corporation, as Qualified Recipients to perform certain
shareholder support services. Such Qualified Recipients may
impose charges or other requirements on their customers for
automatic investment and other cash management services which an
investor utilizing such services through a Qualified Recipient
should take into consideration when determining the effective
yield of an investment in the Fund.
The Distributor may pay all or a portion of the distribution fee
to Qualified Recipients who sell shares of the Fund. Qualified
Recipients who provide enhanced inquiry, order entry and sales
facilities in connection with transactions in Fund shares by
their clients may receive a fee up to the maximum applicable
asset based sales charges. In addition, the Distributor will, at
its expense provide promotional incentives such as sales contests
and trips to investment professionals who support the sale of
shares of the Fund. In some instances, these incentives will be
offered only to certain types of investment professionals, such
as bank-affiliated or non-bank affiliated broker-dealers, or to
investment professionals whose representatives provide services
in connection with the sale or expected sale of significant
amounts of shares.
TRANSFER AGENT AND CUSTODIAN. Crestar Bank (the "Transfer
Agent"), 919 East Main Street, Richmond, VA 23219, acts as the
Fund's transfer agent, dividend paying agent and custodian. As
transfer agent, Crestar Bank maintains shareholder accounts and
records for the Fund. For its services as transfer agent,
Crestar Bank is paid a monthly fee at the annual rate of .05% of
average net assets of the Trust Class of the Fund.
As custodian, Crestar Bank safeguards and controls the Fund's
cash and securities, handles the receipt and delivery of
securities and collects income on Fund investments. For these
services, Crestar Bank is paid a monthly fee at an annual rate of
up to .04% of the Fund's average net assets.
Crestar Bank is permitted to subcontract any or all of its
functions to one or more qualified sub-transfer agents,
sub-custodians or other persons. Crestar Bank is permitted to
compensate those agents for their services, but no such
compensation may increase the aggregate amount of payments by the
Fund to Crestar Bank pursuant to the Transfer Agent or Custodian
Agreements.
OTHER EXPENSE INFORMATION
The Fund may elect not to qualify its shares for sale in every
state. For the purpose of Capitoline's obligation to reimburse
expenses, the Fund's annual expenses are estimated and accrued
daily, and any appropriate estimated payments will be made by
Capitoline monthly. The Fund's expenses include Company expenses
attributable and allocated to the Fund, and those not
attributable to the Fund, which are allocated among the
CrestFunds(R) Funds, including the Fund, in proportion to their
average net assets. Expenses attributable to a particular class
of shares are paid by that class.
Subject to the obligations of Capitoline under the Advisory
Agreement to reimburse the Fund for its expenses in excess of the
lowest applicable state limitations, the Fund has confirmed its
obligation to pay all of its other expenses.
BANKING LAW MATTERS
Banking laws and regulations, including the Glass-Steagall Act
(as currently interpreted by the Board of Governors of the
Federal Reserve System), prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any
affiliate thereof from sponsoring, organizing, controlling, or
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<PAGE>
distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares and
prohibit banks generally from issuing, underwriting, selling or
distributing securities. The same laws and regulations generally
permit a bank or bank affiliate to act as an investment adviser
and to purchase shares of the investment company as agent for and
upon the order of a customer. Upon advice of counsel, the
Company's Board of Directors believes that Capitoline, Crestar
Bank and any bank or bank affiliate may perform processing or
transfer agency or similar services described in this Prospectus
for the Fund and its shareholders without violating applicable
federal banking laws or regulations.
However, judicial or administrative decisions or interpretations
of, as well as changes in, either federal or state statutes or
regulations relating to the activities of banks and their
affiliates could prevent a bank or bank affiliate from continuing
to perform all or a part of the activities contemplated by this
Prospectus. If banks or bank affiliates were prohibited from so
acting, the Company would change its existing policies to permit
bank customers who are shareholders to remain shareholders of the
Fund and would implement alternative means for continuing the
servicing of such shareholders. In such event, changes in the
operation of the Fund might occur and a shareholder serviced by
such bank or bank affiliates may no longer be able to avail
itself of the bank's or its affiliates' services. It is not
expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
DESCRIPTION OF COMMON STOCK
The Fund is a non-diversified portfolio of the Company. The
authorized capital stock of the Company, which was incorporated
as a Maryland corporation on March 17, 1986, consists of 20
billion shares of stock having a par value of one tenth of one
cent ($.001) per share. The Board of Directors may, without
shareholder approval and at the Company's expense, divide the
authorized stock into an unlimited number of separate series, and
the costs of doing so will be borne by the Company. Currently
all the authorized stock of the Company is divided into 13
separate series: Cash Reserve Fund Common Stock, U.S. Treasury
Money Fund Common Stock, Tax Free Money Fund Common Stock,
Limited Term Bond Fund Common Stock, Intermediate Bond Fund
Common Stock, Government Bond Fund Common Stock, Maryland
Municipal Bond Fund Common Stock, Virginia Intermediate Municipal
Bond Fund Common Stock, Virginia Municipal Bond Fund Common
Stock, Capital Appreciation Fund Common Stock, Value Fund Common
Stock, and Special Equity Fund Common Stock, representing shares
for each of the 13 CrestFunds(R). The CrestFunds(R) offer one or
more of three classes of shares. Trust Class shares of the
Fund are offered by this Prospectus. Investors Class shares of
the Fund and all classes of shares of other CrestFunds(R) are
offered by separate prospectuses.
Shares of all CrestFunds(R), including the Fund, are offered
continuously to individual and institutional customers investing
directly in CrestFunds(R). Such shares are offered at prices
that include sales charges or contingent deferred sales charges,
and in some cases pay distribution related or shareholder service
fees, or higher transfer agency service fees than those paid by
Trust Class shares. Performance of A Shares and B Shares is
lower than that of Trust Class shares of the same Fund due to A
Shares' and B Shares' higher total expenses. Published yields
and total returns of A Shares and B Shares of certain funds
generally include the effects of the maximum applicable sales
charge, or contingent deferred sales charge, which has
the effect of lowering the yield and total return figures.
All shares of the Company have equal voting and liquidation
rights, and fractional shares have those rights proportionately.
Generally, shares will be voted in the aggregate without
reference to a particular fund or class, unless the matter
affects only one fund or class or voting by a fund or class
is required by law, in which case shares will be voted separately
by the fund or class, as the case may be. Maryland law does
not require the Company to hold annual meetings of shareholders
and the Company does not intend to do so, though special meetings
will be held when required by law. Shareholders representing 25%
or more of the Company or a Fund may, as set forth in the
Company's By-laws, call meetings of the Company or a fund, as the
case may be, including, in the case of a meeting of the entire
Company, the purpose of
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<PAGE>
voting on removal of one or more Directors. There are no
conversion or preemptive rights in connection with shares of each
fund. All shares, when issued and paid for, in accordance with
the terms of the offering will be fully paid and non-assessable.
APPENDIX
The following briefly describes the securities in which the Fund
may invest and the transactions it may enter into. The Fund is
not limited by this discussion, however, and may purchase other
types of securities and enter into other types of transactions if
they meet the Fund's quality and liquidity requirements.
A complete listing of the Fund's policies and limitations and
more detailed information about the Fund's investments is
contained in the Fund's Statement of Additional Information.
Current holdings and recent investment strategies are described
in the Fund's financial reports.
ASSET-BACKED SECURITIES. Asset-backed securities represent
interests in pools of consumer loans (generally unrelated to
mortgage loans) and most often are structured as pass-through
securities. Interest and principal payments ultimately depend on
payment of the underlying loans by individuals, although the
securities may be supported by letters of credit or other credit
enhancements. The value of asset-backed securities may also
depend on the creditworthiness of the servicing agent for the
loan pool, the originator of the loans, or the financial
institution providing the credit enhancement. A Fund may
purchase units of beneficial interest in pools of purchase
contracts, financing leases, and sales agreements entered into by
municipalities. These municipal obligations may be created when
a municipality enters into an installment purchase contract or
lease with a vendor and may be secured by the assets purchased or
leased by the municipality. However, except in very limited
circumstances, there will be no recourse against the vendor
if the municipality stops making payments. The market for
tax-exempt asset-backed securities is still relatively new.
These obligations are likely to involve unscheduled prepayments
of principal.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell
obligations on a when-issued or delayed-delivery basis, with
payment and delivery taking place at a future date. The market
value of obligations purchased in this way may change before the
delivery date, which could increase fluctuations in a bond
fund's yield. Ordinarily, the Fund will not earn interest on
securities purchased until they are delivered.
GOVERNMENT SECURITIES. Securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities are referred
to as government securities. They may be backed by the credit of
the U.S. Government as a whole or only by the issuing agency.
For example, securities issued by the Federal Home Loan Banks and
the Federal Home Loan Mortgage Corporation are supported only by
the credit of the issuing agency, and not by the U.S. Government.
Securities issued by the Federal Farm Credit System, the Federal
Land Banks and the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. U.S. Treasury securities
and some agency securities, such as those issued by the Federal
Housing Administration and the Government National Mortgage
Association, are backed by the full faith and credit of the U.S.
Government and are the highest quality government securities.
ILLIQUID SECURITIES. Illiquid securities are securities which
cannot be disposed of within seven days at approximately the
price at which they are being carried on the Fund's books. An
illiquid security includes a demand instrument with a demand
notice period exceeding seven days, where there is no secondary
market for such security, and repurchase agreements of over 7
days in length.
INDEXED SECURITIES. The Fund may invest in indexed securities
whose value is linked to currencies, interest rates, commodities,
indices, or other financial indicators. Most indexed securities
are short to intermediate term fixed-income securities whose
values at maturity or interest rates rise or fall according
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<PAGE>
to the change in one or more specified underlying instruments.
Indexed securities may be positively or negatively indexed (i.e.,
their value may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to
direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself.
INVESTMENT-GRADE SECURITIES. Investment-grade securities include
securities rated BBB or higher by S&P or Baa or higher by Moody's
which generally provide adequate to strong protection of
principal and interest payments. Securities rated BBB or Baa may
be more susceptible to potential adverse changes in circumstances
which may lead to a weakened capacity to make principal
and interest payments, and may have speculative characteristics
as well. If a security is rated investment-grade by one rating
agency and below investment-grade by another rating agency,
Capitoline may make a determination as to the security's
investment-grade quality.
LETTERS OF CREDIT. Issuers or financial intermediaries who
provide demand features or standby commitments often support
their ability to buy securities on demand by obtaining letters of
credit ("LOCs") or other guarantees from banks. LOCs also may be
used as credit supports for other types of municipal instruments.
Capitoline may rely upon its evaluation of a bank's credit in
determining whether to purchase an instrument supported by an
LOC. In evaluating a foreign bank's credit, Capitoline will
consider whether adequate public information about the bank is
available and whether the bank may be subject to unfavorable
political or economic developments, currency controls, or other
governmental restrictions that might affect the bank's ability to
honor its credit commitment.
MORTGAGE-BACKED SECURITIES. The Fund may purchase
mortgage-backed securities issued by government entities. A
mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in
an underlying pool of mortgages. Some mortgage-backed
securities, such as collateralized mortgage obligations, or CMOs,
make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a
typical bond). Mortgage-backed securities are based on different
types of mortgages including those on commercial real estate or
residential properties.
The market volatility of mortgage-backed securities can be
greater than the market volatility of other bonds. The value of
mortgage-backed securities may change due to shifts in
the market's perception of issuers. In addition, regulatory or
tax changes may adversely affect the mortgage securities market
as a whole. Mortgage-backed securities are subject to prepayment
risk. Prepayment, which occurs when unscheduled or early
payments are made on the underlying mortgages, may shorten the
effective maturities of these securities and may lower their
total returns. During periods of declining interest rates,
prepayment of mortgages underlying mortgage securities can be
expected to accelerate. Prepayment of mortgages which underlie
securities purchased at a premium often results in capital
losses, while prepayment of mortgages purchased at a discount
often results in capital gains. Because of these unpredictable
prepayment characteristics, it is often not possible to predict
accurately the average life or realized yield or total return
of a particular issue. In the absence of a known maturity,
market participants generally refer to a security's estimated
average life. An average life estimate is a function of an
assumption regarding anticipated prepayment patterns, based upon
current interest rates, current conditions in the relevant
housing markets and other factors. The assumption is necessarily
subjective, and thus different market participants can produce
different average life estimates with regard to the same
security. There can be no assurance that estimated average life
will be a security's actual average life.
STRIPPED MORTGAGE-BACKED SECURITIES. Securities created when a
U.S. Government agency or a financial institution separates the
interest and principal components of a mortgage-backed security
and sells them as individual securities are stripped mortgage-
backed securities. The holder of the "principal-only" security
18
<PAGE>
(PO) receives the principal payments made by the underlying
mortgage-backed security, while the holder of the "interest-only"
security (IO) receives interest payments from the same underlying
security. The prices of stripped mortgage-backed securities may
be particularly affected by changes in interest rates. As
interest rates fall, prepayment rates tend to increase, which
tends to reduce prices of IOs and increase prices of POs. Rising
interest rates can have the opposite effect. The market
volatility of stripped mortgage-backed securities tends to be
greater than the market volatility of other types of
mortgage-backed securities in which the Funds may invest. If the
mortgage assets which underlie the stripped mortgage-backed
securities were to experience greater than anticipated
prepayments of principal, a Fund could fail to fully recoup its
initial investment in these securities, even if they are rated in
the highest rating categories (e.g., AAA or Aaa by S&P or
Moody's, respectively).
MUNICIPAL SECURITIES. Municipal securities include general
obligation securities, which are backed by the full taxing power
of a municipality, and revenue securities, which are backed by
the revenues of a specific tax, project, or facility. Industrial
development, or private activity, bonds are a type of revenue
bond backed by the credit and security of a private entity and
may involve greater risk; such securities, which may be subject
to the federal alternative minimum tax, include securities issued
to finance housing projects, many hospital and university
facilities, student loans, and privately owned solid waste
disposal and water and sewage treatment facilities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase
agreements. In a repurchase agreement, a fund buys a security at
one price and simultaneously agrees to sell it back at a higher
price. In the event of bankruptcy of the other party to a
repurchase agreement, the Fund could experience delays in
recovering its cash. To the extent that, in the meantime, the
value of securities purchased had decreased, the Fund could
experience a loss. In all cases, Capitoline must find the
creditworthiness of the other party to the transaction
satisfactory.
RESOURCE RECOVERY BONDS. The Fund may purchase resource recovery
bonds, which are a type of revenue bond issued to build
facilities such as solid waste incinerators or waste-to-energy
plants. Typically, a private corporation will be involved, at
least during the construction phase, and the revenue stream will
be secured by fees or rents paid by municipalities for use of the
facilities. The viability of a resource recovery project,
environmental protection regulations, and project operator tax
incentives may affect the value and credit quality of resource
recovery bonds.
REFUNDING CONTRACTS. The Fund may invest in refunding contracts
which require the issuer to sell and the Fund to buy refunded
municipal obligations at a stated price and yield on a settlement
date that may be several months or several years in the future.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase
agreement, the Fund temporarily transfers possession of a
portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash. At the same time, the Fund
agrees to repurchase the instrument at an agreed-upon price and
time. The Fund expects that it will engage in reverse repurchase
agreements for temporary purposes such as to fund redemptions.
Reverse repurchase agreements may increase the risk of
fluctuation in the market value of the Fund's assets or in its
yield.
While a reverse repurchase agreement is outstanding, the Fund
will maintain appropriate liquid assets such as cash, U.S.
Government securities, or other liquid high grade debt securities
in a segregated custodial account to cover its obligations under
the agreement. The Fund will enter into reverse repurchase
agreements only with those parties whose creditworthiness is
deemed satisfactory by Capitoline.
STRIPPED GOVERNMENT SECURITIES. Stripped securities are created
by separating the income and principal components of a debt
instrument and selling them separately. The Fund may purchase
U.S. Treasury
19
<PAGE>
STRIPS (Separate Trading of Registered Interest and
Principal of Securities), that are created when the coupon
payments and the principal payment are stripped from an
outstanding Treasury bond by the Federal Reserve Bank. Bonds
issued by the Resolution Funding Corporation (REFCORP) can also
be stripped in this fashion. REFCORP STRIPS are eligible
investments for the Fund.
The Fund may purchase privately stripped government securities,
which are created when a dealer deposits a Treasury security or
federal agency security with a custodian for safekeeping and then
sells the coupon payments and principal payments that will be
generated by this security. Proprietary receipts, such as
Certificates of Accrual on Treasury Securities (CATS), Treasury
Investment Growth Receipts (TIGRs), and generic Treasury Receipts
(TRs), are stripped U.S. Treasury securities that are separated
into their component parts through trusts created by their broker
sponsors. Bonds issued by the Financing Corporation (FICO) can
also be stripped in this fashion.
Because of the SEC's views on privately stripped government
securities, the Fund must treat them as it would non-government
securities pursuant to regulatory guidelines applicable to all
money market funds. Accordingly, the Fund currently intends to
purchase only those privately stripped government securities
that have either received the highest rating from two nationally
recognized rating services (or one, if only one has rated the
security), or, if unrated, been judged to be of equivalent
quality by Capitoline.
TAX AND REVENUE ANTICIPATION NOTES. Tax and revenue anticipation
notes are issued by municipalities in expectation of future tax
or other revenues, and are payable from those specific taxes or
revenues. Bond anticipation notes normally provide interim
financing in advance of an issue of bonds or notes, the proceeds
of which are used to repay the anticipation notes. Tax-exempt
commercial paper is issued by municipalities to help finance
short-term capital or operating needs.
TIME DEPOSITS. Time deposits are non-negotiable deposits in a
banking institution earning a specified interest rate over a
given period of time. Time deposits with a maturity of seven
business days or more are considered illiquid.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Fund may purchase
variable and floating rate instruments, including certain
participation interests in municipal obligations, which have
interest rate adjustment formulas that help to stabilize their
market values. Many variable and floating rate instruments also
carry demand features that permit the Fund to sell them at par
value plus accrued interest on short notice. When determining
the maturity of a variable or floating rate instrument, the Fund
may look to the date the demand feature can be exercised, or to
the date the interest rate is readjusted, rather than to the
final maturity of the instrument.
SUMMARY OF BOND RATINGS*
Rating Services
Investment Grade Moody's S&P
Highest quality Aaa AAA
High quality Aa AA
Upper medium grade A A
Medium grade, some
speculative characteristics Baa BBB
__________
* Please refer to the Statement of Additional Information for a
more complete discussion of these ratings.
20
<PAGE>
CRESTFUNDS(R), INC.
MARYLAND MUNICIPAL BOND FUND -- INVESTORS CLASS
PROSPECTUS
February 7, 1996
CrestFunds(R) Maryland Municipal Bond Fund (the "Fund") is a bond
fund offered by CrestFunds(R), Inc. (the "Company"), a Maryland
corporation and a registered open-end management investment
company. The Fund offers three classes of shares: Trust Class
shares, Investors Class A shares ("A Shares") and Investors Class
B shares ("B Shares" and, together with A Shares, the "Investors
Class Shares"). However, A Shares are available only upon
conversion of B Shares. See "How to Purchase, Exchange
and Redeem Shares." All classes share a common investment
objective and investment portfolio. This Prospectus relates to
the Investors Class Shares. Trust Class shares are offered by a
separate prospectus which is available by calling 1-800-273-7827.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, INSURED OR ENDORSED BY, CRESTAR BANK, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTING IN MUTUAL FUNDS INVOLVES
RISKS, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED. THE VALUE OF AN INVESTMENT IN THE FUND AND ITS RETURN
WILL FLUCTUATE AND ARE NOT GUARANTEED. WHEN SOLD, THE VALUE OF
AN INVESTMENT MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY
INVESTED.
Please read this Prospectus before investing. This Prospectus
sets forth concisely the information about the Fund that a
prospective investor should know before investing, and is
designed to help investors decide if the Fund's goals match their
own. Retain this document for future reference. A Statement of
Additional Information (dated February 7, 1996) for the
Investors Class Shares of the Fund and an Annual Report
for the fiscal year ended November 30, 1995 have been filed with
the Securities and Exchange Commission ("SEC") and are
incorporated herein by reference. The Statement of Additional
Information and the Annual Report are available without charge
upon request by calling 1-800-273-7827.
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.
No dealer, sales representative or any other person has been
authorized to give any information or to make any
representations, other than those contained in this Prospectus
and in the related Statement of Additional Information, in
connection with the offer contained in this Prospectus. If given
or made, such other information or representations must not be
relied upon as having been authorized by the Fund or by the
Fund's distributor. This Prospectus and the related Statement of
Additional Information do not constitute an offer by the Fund or
the Fund's distributor to sell shares of the Fund to any person
to whom it is unlawful to make such an offer.
<PAGE>
Table of Contents Page
Summary of Fund Expenses . . . . . . . . . . . . . . . . . . 3
CrestFunds(R) . . . . . . . . . . . . . . . . . . . . . . . 5
Investment Objectives and Policies . . . . . . . . . . . . . 5
Risk Factors and Investment Considerations . . . . . . . . . 6
Investment Limitations . . . . . . . . . . . . . . . . . . . 9
Fund Management. . . . . . . . . . . . . . . . . . . . . . . 10
Pricing of Shares. . . . . . . . . . . . . . . . . . . . . . 10
How to Purchase, Exchange and Redeem Shares. . . . . . . . . 10
Dividends and Tax Matters. . . . . . . . . . . . . . . . . . 16
Performance. . . . . . . . . . . . . . . . . . . . . . . . . 18
Portfolio Transactions . . . . . . . . . . . . . . . . . . . 19
Advisory and Related Agreements. . . . . . . . . . . . . . . 19
Other Expense Information. . . . . . . . . . . . . . . . . . 21
Banking Law Matters. . . . . . . . . . . . . . . . . . . . . 21
Description of Common Stock. . . . . . . . . . . . . . . . . 21
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Summary of Bond Ratings* . . . . . . . . . . . . . . . . . . 26
2
<PAGE>
SUMMARY OF FUND EXPENSES
The expense summary format below was developed for use by all
mutual funds to help investors make their investment decisions.
The purpose of the tables is to assist investors in understanding
the various costs and expenses that an investor in A Shares or B
Shares would bear directly or indirectly. Investors should
consider this expense information for the Fund along with other
important information in this Prospectus, including the Fund's
investment objective.
SHAREHOLDER TRANSACTION EXPENSES:
A SHARES (1)
Maximum Sales Charge on Purchases (as a percentage
of the offering price). . . . . . . . . . . . . . . None (1)
Sales Charge on Reinvested Distributions . . . . . None
Deferred Sales Charge Imposed on Redemptions. . . . None
Redemption Fee . . . . . . . . . . . . . . . . . . None (2)
Exchange Fee . . . . . . . . . . . . . . . . . . . None
B SHARES
Maximum Contingent Deferred Sales Charge
on Purchases (as a percentage of the offering
price). . . . . . . . . . . . . . . . . . . . . . . 5.0% (3)
Sales Charge on Reinvested Distributions. . . . . . None
Redemption Fee. . . . . . . . . . . . . . . . . . . None (2)
Exchange Fee . . . . . . . . . . . . . . . . . . . None
_________________
(1) A Shares are available only upon conversion of B Shares
after seven years. Accordingly, there is no upfront sales charge
applicable to the A Shares received by holders of B Shares upon
conversion.
(2) You may be charged a nominal fee for wiring redemption
proceeds.
(3) Declines from 5.0% in year 1 to 0.0% in year 7.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS) -- NET OF WAIVERS AND/OR REIMBURSEMENT*:
A SHARES
Advisory Fee (after waiver). . . . . . . . . . . . .10%
12b-1 Fees (after waiver). . . . . . . . . . . . . .0%
Other Expenses (after waiver). . . . . . . . . . . .62%
Total Operating Expenses (after waiver). . . . . . .72%
B SHARES
Advisory Fee (after waiver). . . . . . . . . . . . .10%
12b-1 Fees (after waiver). . . . . . . . . . . . . .65%
Other Expenses (after waiver). . . . . . . . . . . .82%
Total Operating Expenses (after waiver). . . . . . .1.57%
_________________
* Expenses are estimated based on average expenses expected to
be incurred during the period ending November 30, 1996. During
this period, expenses may be more or less than the average amount
shown.
3
<PAGE>
EXAMPLE: You would pay the following expenses on a $1,000
investment in the Fund, assuming 5% annual return and:
ASSUMING FULL REDEMPTION AT THE END OF EACH TIME PERIOD:
B SHARES (1)
1 Year . . . . . . . . . . . . . . . . . . . . . . . $ 66
3 Years. . . . . . . . . . . . . . . . . . . . . . . 80
ASSUMING NO REDEMPTION (2):
B SHARES
1 Year . . . . . . . . . . . . . . . . . . . . . . . $ 16
3 Years. . . . . . . . . . . . . . . . . . . . . . . 50
________________
(1) Reflects deduction of applicable Contingent Deferred Sales
Charge.
(2) A Shares expenses are the same whether or not A Shares are
redeemed.
EXPLANATION OF TABLES:
SHAREHOLDER TRANSACTION EXPENSES represent charges paid when you
purchase, redeem or exchange shares of the Fund.
ANNUAL FUND OPERATING EXPENSES. Advisory fees are paid by the
Fund to Capitoline Investment Services Incorporated ("Capitoline"
or the "Adviser") for managing the Fund's investments and
business affairs (see "Adviser"). Other Expenses for the Fund are
based on estimates for the current fiscal year. The Fund pays
administration fees at an annualized rate of .15% to SEI
Financial Management Corporation ("SFM") for administrative
services. In addition to the .15% 12b-1 fee for the A Shares,
12b-1 fees include a distribution fee of .75% for the B Shares.
As reflected under Other Expenses for the B Shares, shareholder
service fees of .25% are paid by the B Shares to investment
professionals for services provided and expenses incurred in
connection with personal service extended and/or maintenance of B
Shares shareholder accounts. Long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales
charges permitted by the NASD. Due to the level of 12b-1
payments, it is unlikely that such fees will aggregate more than
the maximum sales charge permitted by the NASD.
Absent fee waivers, advisory fees for the Fund would be .60%.
Absent fee waivers, 12b-1 fees would be .15% for the A Shares and
.75% for the B Shares. Absent the waiver of shareholder service
fees, Other Expenses for the B Shares would be .87%. Absent all
fee waivers, Total Operating Expenses would be 1.37% for the A
Shares and 2.22% for the B Shares. Please refer to the sections
"Administrator and Distributor," "Transfer Agent and Custodian,"
and "Other Expense Information." The information contained in the
tables and example above relates only to A Shares and B Shares;
expenses for A Shares and B Shares differ from those of Trust
Class. See "Description of Common Stock." Advisory Fees, 12b-1
Fees, Shareholder Servicing Fees and Other Expenses are reflected
in the Fund's share price and are not charged directly to
individual shareholder accounts.
4
<PAGE>
EXAMPLE. The hypothetical examples illustrate the expenses
including the maximum sales charge or contingent deferred sales
charge ("CDSC"), as applicable, associated with a
$1,000 investment in each class of shares over periods of 1 and 3
years, based on the expenses detailed in the table above and an
assumed annual return of 5%. A CDSC IS IMPOSED ONLY IF YOU SELL
B SHARES WITHIN 7 YEARS. SEE "CONTINGENT DEFERRED SALES CHARGE."
THE RETURN OF 5% AND EXPENSES SHOULD NOT BE CONSIDERED
INDICATIONS OF ACTUAL OR EXPECTED CLASS PERFORMANCE OR EXPENSES,
BOTH OF WHICH MAY VARY.
CRESTFUNDS(R)
The Fund is one of a variety of money market, bond and equity
funds (the "CrestFunds(R)") offered to investors by the Company.
CrestFunds(R) include the following Money Market Funds: the Cash
Reserve Fund, the U.S. Treasury Money Fund and the Tax Free Money
Fund; the following Bond Funds: the Limited Term Bond Fund, the
Intermediate Term Bond Fund, the Government Bond Fund, the
Maryland Municipal Bond Fund, the Virginia Intermediate Municipal
Bond Fund and the Virginia Municipal Bond Fund; and the following
Equity Funds: the Value Fund, the Capital Appreciation Fund and
the Special Equity Fund. All CrestFunds(R) are managed by
Capitoline and have the same administrator, distributor, transfer
agent and custodian. The CrestFunds(R) provide investors
opportunities for flexibility and diversification in investment
planning, and convenient exchange privileges give investors
access to different investment vehicles appropriate to changing
market conditions. Information on the CrestFunds(R) may be
obtained by calling 1-800-273-7827.
INVESTMENT OBJECTIVES AND POLICIES
Below is a description of the investment objective and policies
of the Fund. The Fund's objective, along with those policies
identified as being fundamental, may not be changed except by
approval of the majority of the outstanding shares of the Fund.
All other investment policies may be changed by the Company's
Board of Directors without shareholder approval. Capitoline will
manage the Fund consistent with the Fund's investment objective
and policies. There is no assurance that the Fund will achieve
its investment objective. For more information regarding the
Fund's investment policies, please refer to the Statement of
Additional Information.
The Fund seeks to provide high current income exempt from federal
and Maryland income tax in a manner consistent with the
preservation of capital by investing in municipal bonds of
investment-grade quality. (See "Investment-grade Securities" in
the Appendix to this Prospectus.) There are no limits on the
dollar-weighted average portfolio maturity of the Fund, and the
Fund may acquire individual securities without regard to their
remaining maturities.
The Fund is non-diversified, which means that it has greater
latitude than a diversified fund with respect to the investment
of its assets in the securities of a relatively few municipal
issuers. As a non-diversified fund, the Fund may present greater
risks than a diversified fund.
As a fundamental policy, at least 80% of the Fund's income will,
under normal circumstances, be exempt from regular federal income
taxes. Interest on some "private activity" municipal obligations
is subject to the federal alternative minimum tax ("AMT bonds").
AMT bonds are municipal obligations that benefit a private or
industrial user or finance a private facility. The Fund reserves
the right to invest up to 100% of its assets in AMT bonds.
As a non-fundamental policy, at least 65% of the Fund's assets
will be invested in bonds that will, under normal circumstances,
produce income that is exempt from Maryland income taxes.
5
<PAGE>
The Fund will, consistent with its investment objective, purchase
securities which meet the applicable quality characteristics
established for the Fund. In doing so, it will consider the
ratings of Moody's or S&P assigned to various obligations.
The Fund normally will invest primarily in municipal securities
of all types and of investment-grade quality. Investment grade
municipal bonds are considered to be securities rated Baa or
higher by Moody's or BBB or higher by S&P, and unrated securities
that are deemed by Capitoline to meet the Fund's ratings
requirements. (See "Investment-grade Securities" in the Appendix
to this Prospectus.) Municipal securities are issued to raise
money for various public purposes, including general purpose
financing for state and local governments as well as financing
for specific projects or public facilities. Municipal securities
may be backed by the full taxing power of a municipality, by the
revenues derived from a specific project or by the credit of a
private organization. Some municipal securities are insured by
private insurance companies, while others may be supported by
letters of credit furnished by domestic or foreign banks.
Capitoline monitors the financial condition of parties (including
insurance companies, banks, and corporations) whose
creditworthiness is relied upon in determining the credit quality
of securities eligible for purchase by the Fund. The Fund may
invest more than 25% of its assets in industrial development
bonds.
Generally, the Fund's investments in municipal securities may
include fixed, variable, or floating rate general obligation and
revenue bonds (including municipal lease obligations and resource
recovery bonds); zero coupon and asset-backed securities; tax,
revenue, or bond anticipation notes; and tax-exempt commercial
paper. The Fund may buy or sell securities on a when-issued or
delayed-delivery basis (including refunding contracts) and may
acquire standby commitments. See the Appendix.
The Fund may change its investment focus for temporary defensive
purposes. During periods when, in Capitoline's opinion, a
temporary defensive posture in the market is appropriate, the
Fund may hold cash that is not earning interest or may invest in
obligations whose interest may be subject to federal and/or state
tax. The Fund's defensive investments may include short-term
municipal obligations, money market instruments and shares of
money market mutual funds. Should the Fund elect to purchase
shares of money market funds, it will incur additional expenses
charged by that money market fund, such as management fees.
Under such circumstances, the Fund may temporarily invest so that
less than 80% of its income distributions are federally and/or
state tax-free. Federally taxable obligations include, but are
not limited to, obligations issued by the U.S. Government or any
of its agencies or instrumentalities, high-quality commercial
paper, certificates of deposit, and repurchase agreements.
RISK FACTORS AND INVESTMENT CONSIDERATIONS
Individually, the Fund does not constitute a balanced investment
plan. The Fund is likely to provide higher yields than money
market funds; however, unlike money market funds, the Fund does
not seek to maintain a stable $1.00 share price, and may not be
able to return dollar for dollar the money invested. The Fund
emphasizes high tax-free current income by investing primarily in
investment-grade municipal securities. Because the Fund invests
primarily in Maryland obligations, the quality and supply of
eligible securities may present additional risks to those of more
diversified municipal bond funds. As compared to an intermediate
term municipal bond fund, the Fund is likely to experience
greater share price fluctuation and potentially higher tax-free
income due to its investments in longer term municipal bonds.
From time to time the Fund, to the extent consistent with its
investment objective, policies and restrictions, may invest in
securities of companies with which Crestar Bank has a lending
relationship, including industrial development bonds and other
private activity municipal securities backed by the credit and
security of such companies. The investment objectives and
policies for the Fund are supplemented by its investment
limitations. See the Appendix for further discussion of the
Fund's investments.
6
<PAGE>
The Fund's concentration in the debt obligations of one state
carries a higher risk than a portfolio that is geographically
diversified. Investors should also be aware of certain factors
that might affect the financial condition of issuers of Maryland
municipal securities. In addition to the State of Maryland and
its agencies, there are 23 counties and 156 incorporated
municipalities in Maryland (including Baltimore City, which
functions much like a county), many of which have outstanding
debt. As described below, a number of Maryland public
authorities also issue debt.
ECONOMY. The economy of the State of Maryland continues to
demonstrate relatively strong performance, with personal income
well above the national average. Total State employment was 2.73
million in July, 1995 with the majority of jobs in trade,
service, and government sectors. The national recession caused
a loss of jobs in Maryland since employment levels peaked in
mid-1990 but employment levels began to recover in mid-1992.
Unemployment was 4.9% in October, 1995, compared to a national
average of 5.2%. The State's population in 1994 was
approximately 5 million, with 83% concentrated in the
Baltimore-Washington corridor.
DEBT. The State of Maryland and its political subdivisions issue
four basic types of debt having varying degrees of credit risk:
general obligation bonds backed by the unlimited taxing power of
the issuer, revenue bonds secured by specific pledged taxes or
revenue streams, conduit revenue bonds payable from the
repayment of certain loans to entities such as hospitals and
universities, and tax-exempt lease obligations (including
certificates of participation in the same), the payments under
which are subject to annual appropriation. In 1994,
$3,420,500,000 in state and local debt was issued in Maryland,
with approximately 44% representing general obligation debt and
56% revenue bonds or lease-backed debt, compared to 35% general
obligation and 65% revenue backed bonds nationally.
Total combined tax supported debt outstanding of the State,
Baltimore City, and all of the counties, municipalities, and
special districts within Maryland totaled $12 billion as of June
30, 1994. The State of Maryland had $2.62 billion in general
obligation bonds outstanding as of June 30, 1995. General
obligation debt of the State of Maryland is rated Aaa by Moody's,
AAA by Standard & Poor's and AAA by Fitch; there can be no
assurance that these ratings will continue. There is no general
limit on state general obligation bonds imposed by the State
Constitution or laws; state general obligation bonds are
payable from ad valorem taxes and, under the State Constitution,
may not be issued unless the debt is authorized by a law levying
an annual tax or taxes sufficient to pay the debt service within
15 years and prohibiting the repeal of the tax or taxes or their
use for another purpose until the debt has been paid. State and
local general obligation debt on a per capita basis and as a
percentage of property values have increased by 33.4% and 7.1%,
respectively since 1990. Although the State may borrow up to
$100 million in short-term notes in anticipation of taxes and
revenues, the State has not made use of this authority.
Many agencies and instrumentalities of the State government are
authorized to borrow money under legislation which expressly
provides that the obligations shall not be deemed to constitute a
debt or a pledge of the faith and credit of the State. The
Department of Transportation issues limited, special obligations
payable primarily from fixed-rate excise taxes and other revenues
related mainly to highway use, the amount of which was limited by
the General Assembly to $1.054 billion for fiscal year 1996
(ending June 30, 1996); the principal amount of such bonds
outstanding as of June 30, 1995 was $1,047 million. The Maryland
Transportation Authority, the Community Development
Administration of the Department of Housing and Community
Development, the Maryland Stadium Authority, the Maryland
Environmental Service, the public educational institutions (which
include the University of Maryland System, Morgan State
University, St. Mary's College of Maryland and Baltimore City
Community College), the Maryland Food Center Authority and the
Maryland Water Quality Financing Administration also have issued
and have outstanding bonds, the principal of and interest on
which are payable solely from specified sources, principally fees
or loan payments generated from use of the facilities,
enterprises financed by the bonds, or other dedicated fees. None
of these bonds constitute debts or pledges of the faith and
credit of the State.
7
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The issuers of these obligations are subject to various economic
risks and uncertainties, and the credit quality of the securities
issued by them may vary considerably from that of the State's
general obligation bonds. Total outstanding revenue and
enterprise debt of these State units at June 30, 1995 was
approximately $3.7 billion.
Certain State agencies also execute capital lease or conditional
purchase agreements to finance certain facilities; all of the
payments under these arrangements are subject to annual
appropriation by the State. In the event that appropriations are
not made, the State and its agencies may not be held
contractually liable for the lease payments. As of June 30, 1995
$125 million of lease and conditional purchase financings
were outstanding.
In addition, the Maryland Health and Higher Educational
Facilities Authority, the Maryland Industrial Development
Financing Authority, the Northeast Maryland Waste Disposal
Authority and the Maryland Economic Development Corporation issue
conduit revenue bonds, the proceeds of which are lent to
borrowers eligible under relevant State and federal law. These
bonds are payable solely from the loan payments made by the
borrowers, and their credit quality vary with the financial
strengths of the respective borrowers.
FINANCIAL. To a large degree, the risk of the portfolio is
dependent upon the financial strength of the State of Maryland,
its political subdivisions and the obligors on conduit revenue
bonds. During the 1991, 1992 and 1993 fiscal years, Maryland
experienced the effects of the national recession and a weakened
economy. During this period, the State experienced unanticipated
shortfalls in revenues. At the same time, the State
experienced increased expenditures for public assistance. To
address this situation, the State reduced appropriations,
including aid to local governments, in several instances.
As a result of successive rounds of cuts in local and other State
expenditures and increases in taxes, the financial situation of
the State stabilized in fiscal year 1993 with revenues coming in
at or above budgeted amounts, permitting the State to conclude
fiscal year 1993 with a general fund surplus (budgetary basis)
of $10.5 million (after $24.5 million of transfers to reserve
accounts) and a $50.9 million balance in the Revenue
Stabilization Account of the State Reserve Fund. Demonstrating
continued improvement, the State ended its fiscal year 1994 with
a general fund surplus of $60 million on a budgetary basis and
$161.8 million on deposit in the Revenue Stabilization Account of
the State Reserve Fund. The State's finances continued to
improve in fiscal year 1995, with revenues exceeding estimate by
$217 million and expenditures at $184 million above budget. The
State ended its fiscal year 1995 with a General Fund undesignated
fund balance of $26.5 million (after reservation of $106 million
for fiscal year 1996 expenses) and an additional $286.1 million
on deposit in the Revenue Stabilization Account of the State
Reserve Fund.
In April, 1995 the State's General Assembly approved a $14.4
billion budget for fiscal year 1996, an 8.2% increase above the
fiscal year 1995 spending level. This budget did not include any
expenditures based upon additional revenue from new or
broad-based taxes but included a $330 million appropriation to
the State Reserve Fund, providing $20 million to its Economic
Development Account, $120 million to the Revenue Stabilization
Account and $190 million to a new Citizen Tax Reduction and
Fiscal Reserve Account, a reserve which may be used either to
effect future income tax reduction or to offset the impact
of federal fiscal policies. When the fiscal year 1996 budget was
enacted, the State projected that it would end the fiscal year
with a general fund surplus of $7.8 million on a budgetary basis.
The State projects a year-end General Fund balance of $34.3
million and an additional $518 million in the Revenue
Stabilization Account of the State Reserve Fund.
OTHER MARYLAND ISSUERS. Many local Maryland governments have
also suffered from fiscal stress and general declines in
financial performance. Recessionary impacts have resulted in
downturns in real estate
8
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related receipts, declines in the growth of income tax revenues,
lower cash positions and reduced interest income. To compensate
for reductions in State aid to local governments, local
governments closed this gap by increasing property and other
taxes, program cuts, and curtailing pay raises. Certain counties
in Maryland are subject to voter approval limitations on property
tax levy increases or on increases in governmental spending which
limits their flexibility in responding to external changes.
Various tax initiatives to reform existing tax structures in
certain counties were placed on the November, 1992 election
ballot and were adopted. Future initiatives, if proposed and
adopted, could create pressure on the counties and other local
governments and their ability to raise revenues. The Fund cannot
predict the impact of any such future tax limitations on debt
quality.
Many Maryland counties have established agencies with bond
issuing authority, such as housing authorities. Maryland
municipalities also have the power to issue conduit revenue
bonds. Maryland local governments and their authorities are
subject to various risks and uncertainties, and the credit
quality of the bonds issued by them may vary considerably from
that of State general obligation bonds.
SECTORS. Certain areas of potential investment concentration
present unique risks. In recent years, 6 to 12% of tax-exempt
debt issues in Maryland has been for public or non-profit
hospitals. A significant portion of the Fund's assets may be
invested in health care issues. Since 1983, the hospital
industry has been under significant pressure to reduce expenses
and limit length of stay, a phenomenon which has negatively
affected the financial health of many hospitals. While each
issue is separately secured by the individual hospital's
revenues, third party reimbursement mechanisms for patient care
are common to the group. At the present time Maryland hospitals
operate under a system which reimburses hospitals according to a
State administered set of rates and charges rather than the
Federal Diagnosis Related Group (DRG) system for Medicare
payments. Since 1983, Maryland hospitals have operated below the
national average in terms of Medicare cost increases, allowing
them to continue operating under a Medicare waiver. However, any
loss of this waiver in the future may have an adverse impact upon
the credit quality of Maryland hospitals. Additionally, national
focus on health care reform and any resulting legislation may
further impact the financial condition of hospitals in Maryland
and other states.
The Fund may from time to time invest in solid waste revenue
bonds which have exposure to environmental, technological and
market risks which could affect the security and value of the
bonds. Such risks include construction delay or shortfalls in
construction funds due to increased regulation, and market
disruption and revenue variability due to recent court decisions
and legislative proposals.
INVESTMENT LIMITATIONS
The following summarizes the Fund's principal investment
limitations. A complete listing is contained in the Statement of
Additional Information. Limitation 2(a) is fundamental and may
not be changed without shareholder approval. Except for the
Fund's percentage limitations concerning borrowings, the
limitations and policies discussed in this Prospectus are
considered at the time of purchase. Accordingly, the sale of
securities is not required in the event of a subsequent change in
circumstances.
1. For federal tax purposes the Fund will limit its investments
so that: (a) with regard to at least 50% of its total assets, no
more than 5% of its total assets are invested in the securities
of a single issuer; and (b) no more than 25% of its total assets
are invested in the securities of a single issuer. This
limitation does not apply to "government securities" as defined
for federal tax purposes.
2. The Fund (a) may borrow money solely for temporary or
emergency purposes, but not in an amount exceeding 33 1/3% of its
total assets; (b) may borrow money only from banks or by engaging
in reverse repurchase agreements; and (c) will not purchase
securities when borrowings exceed 5% of its total assets.
9
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FUND MANAGEMENT
Boyce G. Reid, CFA, is Senior Vice President and Director of
Fixed-Income Management for Capitoline. Mr. Reid holds primary
responsibility for the management of the Fund. He also manages
other CrestFunds(R) Bond Funds and oversees the investment
management of over $630 million of other pension, endowment,
foundation, union and insurance funds. Mr. Reid has been the
Director of Fixed-Income Management since 1986.
Cheryl L. Page, CFA, is Assistant Vice President and Fixed-Income
Portfolio Manager for Capitoline. Ms. Page shares with Mr. Reid
responsibility for the management of the Fund. She also oversees
the investment management of approximately $32.5 million of other
pension, endowment, foundation, union and insurance funds. Ms.
Page has been with Capitoline since December, 1991; prior to
that, she was a portfolio manager for First American Bank, N.A.
for three years.
PRICING OF SHARES
The net asset value per share ("NAV") of the Fund is determined
as of the close of regular trading hours on the New York Stock
Exchange (the "NYSE"). The Fund's NAV is determined on each day
the NYSE and the Fund's custodian, Crestar Bank, are open for
business. The NAV of the Fund is calculated by adding the value
of all securities and other assets of the Fund, deducting the
liabilities allocated to each class, and dividing the result by
the proportional number of the shares of the Fund outstanding in
a class.
Securities which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on which
such securities are primarily traded or at the last sale price on
any national securities exchange. Securities traded only on
over-the-counter markets are valued on the basis of closing
over-the-counter bid prices. Securities for which there were no
such transactions are valued at the average of the current bid
and asked prices. The Fund may also utilize pricing services in
determining the value of its securities. Debt securities with
remaining maturities of 60 days or less at the time of purchase
are valued on an amortized cost basis (unless the Board
determines that such basis does not represent fair value at the
time). Under this method, such securities are valued initially
at cost on the date of purchase. Thereafter, absent unusual
circumstances, the Fund assumes a constant proportionate
amortization of any discount or premium until maturity of the
security.
HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES
While CrestFunds(R) Investors Class shares generally offer
alternative investment options, A Shares and B Shares, only B
Shares of the Maryland Municipal Bond Fund are immediately
available. A Shares are available only through conversion of B
Shares. A Shares pay a sales charge at the time of purchase; that
is, A Shares are offered at NAV plus a sales charge. B Shares are
offered on a contingent deferred sales charge basis. This means
that investors do not pay a sales charge at the time of their
initial investment, but pay a sales charge if they redeem from
the Funds. The amount of deferred sales charge is reduced
over time and is eliminated after seven years. In addition, B
Shares pay distribution and shareholder servicing fees, which
will have the effect of making the annual expense ratio of the B
Shares of the Fund higher than that of the A Shares. Exchanges
are permitted freely among A Shares and B Shares of the
CrestFunds(R) Funds, except that exchanges of A Shares for B
Shares, and vice versa, are generally not permitted. After the
seventh year, B Shares automatically convert to A Shares. B
Shares are available in only the following other CrestFunds(R)
Funds: Virginia Municipal Bond Fund, Government Bond Fund,
Value Fund and Special Equity Fund. Cash Reserve Fund is
available for B Shares purchased by exchange only from the B
Shares of another Fund. For a description of contingent deferred
sales charges applicable to B Shares, see "Contingent Deferred
Sales Charge."
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<PAGE>
HOW TO BUY SHARES. B Shares are offered continuously, and may be
purchased by mail, telephone, wire or through a Crestar
Securities Corporation Investment Representative ("CSC Investment
Representative"). You must complete and return a signed account
application for each account you open. The issuance of
B Shares is recorded on the books of the Fund, and share
certificates will not be issued for such Shares. For information
on opening an account, please consult a CSC Investment
Representative or the CrestFunds(R) Customer Service Center at
1-800-273-7827. Before you buy shares, please read the following
information to make sure your investment is accepted and credited
properly. If you are purchasing through a CSC Investment
Representative, please read any program materials in conjunction
with this prospectus. Certain features may be modified, and
additional charges and limitations may apply.
A Shares are available only through conversion of B Shares. B
Shares are offered at NAV without an initial sales charge and may
be subject to a CDSC at redemption. For more complete
information on how the CDSC is calculated, see "How to Redeem."
The minimum initial investment for the Fund is $1,000 ($500 for
IRAs and "CrestFunds(R) Account Builder" Accounts). All
subsequent purchases must be at least $100 ($50 for IRAs and
CrestFunds(R) "Account Builder" Accounts).
EFFECTIVE TIME OF PURCHASES. Shares of the Fund may be purchased
at the public offering price (the "offering price") next
determined after the purchase order is received in good order.
Purchase orders must be received in good order before the close
of regular trading hours on the NYSE to receive the offering
price determined at close of business on that day. Any orders
received after 4:00 p.m. will be processed at the offering price
next calculated. Financial institutions may impose different
cut-off times for receipt of purchase orders on both the
distribution and the subsequent conversion.
BY MAIL. Please make your check payable to the name of the Fund
and mail it to the address indicated on the application.
For additional purchases, please make your check payable to the
name of the Fund. Indicate your account number on the check and
mail it to the address printed on your account statement.
BY TELEPHONE. Initial investments in the Fund may not be made by
telephone unless you are exchanging shares of another Fund and
are establishing the new account with the same name(s), address
and taxpayer identification number.
If you applied for the electronic funds transfer service, you may
make additional investments in the Fund by calling the
CrestFunds(R) Customer Service Center 1-800-273-7827. Your
shares will be purchased on the day that funds are received in
good order. Allow 2-3 business days after the call for the
transfer to take place.
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<PAGE>
BY WIRE. You also may make additional investments in the Fund by
wiring Federal funds from your bank account. You must call the
CrestFunds(R) Customer Service Center at 1-800-273-7827 before
wiring funds. Federal funds should be wired to:
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
ABA #021000021
DDA #910-2-733368
Attn: CrestFunds
Ref [Portfolio name,
your account name,
your account number]
Together with the name of the Fund, your account number, your
name(s) and the control number assigned by the CrestFunds(R)
Customer Service Center representative. To receive that day's
NAV, you must notify the CrestFunds(R) Customer Service Center of
the wire by 12:00 noon and the Federal funds must be received by
4:00 p.m.
SALES CHARGES. No sales charge applies to B Shares at the time
of purchase. However, a CDSC may apply on redemption.
CONTINGENT DEFERRED SALES CHARGE (CDSC). B Shares may, upon
redemption, be assessed a charge based on the following schedule:
From Contingent
Date of Deferred
Purchase Sales Charge
Year 1 5.00%
Year 2 4.00
Year 3 3.00
Year 4 3.00
Year 5 2.00
Year 6 1.00
Year 7 0.00
The CDSC is calculated based on the lesser of the cost of B
Shares at the initial date of purchase or the value of B Shares
at redemption, not including any reinvested dividends or capital
gains. In determining the applicability and rate of any CDSC at
redemption, B Shares representing reinvested dividends and
capital gains, if any, will be redeemed first, followed by B
Shares that have been held for the longest period of time. B
Shares acquired through distributions (dividends or capital
gains) will not be subject to a CDSC. In addition, the holding
period of any B Shares tendered for redemption will be deemed to
include the shareowner's holding period for B Shares of another
CrestFunds(R) Fund(s) that were exchanged for the B Shares
tendered for redemption.
CDSC WAIVERS. The CDSC may be waived (i) in cases of death or
disability, provided that the redemption is made within one year
following the death or initial determination of disability, (ii)
in connection with a total or partial redemption made in
connection with required distributions made after age 70 1/2 from
retirement plans or accounts, or (iii) in connection with a total
or partial redemption of Trust Class shares and concurrent
purchase of B Shares. For more complete information about the
CDSC, including the Conversion Feature and the permitted
circumstances for CDSC waivers, contact your
investment professional.
CONVERSION FEATURE. After a holding period of seven years from
the initial date of purchase (or exchange from B Shares or Trust
shares of another Fund), B Shares convert automatically to A
Shares of the Fund.
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<PAGE>
Conversion to A Shares will be made at NAV. At the time of
conversion, a portion of the B Shares purchased through the
reinvestment of dividends or capital gains ("Dividend Shares")
will also convert to A Shares. The portion of Dividend Shares
that will convert is determined by the ratio of the current value
of your converting B Shares to the current value of your total B
Shares, excluding Dividend Shares in each case. (A portion of
your B Shares acquired previously by exchange also may convert,
representing the appreciated value of, and/or reinvested
dividends or capital gains earned on, B Shares prior to their
exchange.)
ADDITIONAL PURCHASE INFORMATION. All purchases must be paid for
in U.S. dollars (checks must be drawn on U.S. banks), by
electronic transfer from your checking, savings, or money market
account, or by wire. The Fund reserves the right to limit the
number of your checks processed at one time. If a check or
electronic transfer does not clear, the Fund may cancel the
purchase and you could be held liable for any fees and/or losses
incurred. Payment for the purchase is expected at the time of
the order. If payment is not received within 5 business days of
the date of the order, the order may be canceled and you could
be held liable for any fees and/or losses incurred. The Fund
reserves the right to suspend the offering of shares for a period
of time and to reject any order for the purchase of shares,
including certain purchases by exchange (see "Exchanges").
Purchase orders may be refused if, in Capitoline's opinion, they
are of a size that would disrupt the management of the Fund.
DIVIDEND AND DISTRIBUTION OPTIONS. You have a choice of
distribution options when completing your account application.
The Share Option reinvests your income dividends and capital gain
distributions (if any) in additional A Shares or B Shares.
Income dividends and capital gain distributions will be
reinvested at the NAV as of the record date for the distribution.
The Income-Earned Option reinvests your capital gain
distributions (if any) and pays your income dividends
in cash.
With the Cash Option, you receive both income dividends and
capital gain distributions (if any) in cash. Cash distributions
will be sent to you by check on the payable date, which may be
more than seven days after the reinvestment date. You may also
receive your distribution by electronic funds transfer. Allow
2 to 3 business days for the transfer to take place.
If you select the Income-Earned Option or the Cash Option and the
U.S. Postal Service cannot deliver your checks and the checks are
returned for non-delivery, your distributions will be held by the
Fund without interest.
You may choose the Targeted Dividends Option to have
distributions from the Fund automatically invested in A Shares or
B Shares, when applicable, of another CrestFunds(R) Fund. Note
that distributions may only be directed to an existing account
with a registration identical to your account in the originating
Fund and that meets investment minimum requirements. Certain
sales charges and restrictions may apply. If no distribution
option is selected when an account is opened, all dividends and
capital gains will automatically be reinvested into the Fund of
origin.
You may change your distribution option at any time by notifying
the Fund in writing at the address on your statement or by
contacting your CSC Investment Representative at least five days
prior to the next payable date. On the day the Fund goes
ex-dividend, the amount of the distribution is deducted from the
share price. Reinvestment of distributions will be made at that
day's NAV. Distribution checks normally will be mailed within
seven days after the last day of the month.
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<PAGE>
EXCHANGES. A Shares may be exchanged for A Shares of other
CrestFunds(R) that are currently available for purchase and
approved for sale in your state. A sales charge differential may
apply to exchanges from the money market funds or exchanges among
bond funds or from a bond to one of the equity funds that
has a higher initial sales charge. B Shares of the Fund may be
exchanged for B Shares of other CrestFunds(R) that are currently
available for purchase and approved for sale in your state. A
CDSC will not apply to B Shares redeemed for exchange.
CrestFunds(R) reserves the right to refuse exchanges if as a
result the particular fund would be unable to invest effectively
in accordance with its investment objective and policies or would
otherwise be affected adversely. CrestFunds(R) further reserves
the right to terminate or modify the exchange privilege in the
future. Exchanges are subject to the same investment minimums
and time frames listed above. An exchange is considered a sale
of shares and may result in a capital gain or loss for federal
income tax purposes. For information on making A Shares or B
Shares exchanges, please consult your CSC Investment
Representative or, to exchange shares into a Fund in which you
already have an account, contact the CrestFunds(R) Customer
Service Center at 1-800-273-7827.
SHAREHOLDER SERVICES. The following services are available to
certain shareholders of the Fund. Please check with your CSC
Investment Representative regarding your eligibility.
ELECTRONIC FUNDS TRANSFER SERVICE. Electronic Funds Transfer
Service lets you authorize electronic transfers of money to buy
or sell B Shares or move money between your bank account and your
Fund account with one phone call. Allow two to three business
days after the call for the transfer to take place. For money
recently invested, allow normal check-clearing time (up to seven
days) before redemption proceeds are sent to your bank.
CRESTFUNDS(R) ACCOUNT BUILDER. CrestFunds(R) Account Builder is
a simple way to maintain a regular investment program. The
minimum initial investment is $500. After that, you may arrange
automatic transfers (minimum $50 per monthly transaction) from
your bank account to your Fund account on a periodic basis. You
will be sent a written confirmation of each transaction and a
debit entry will appear on your bank statement. You may change
the amount of your investment, skip an investment, or stop
CrestFunds(R) Account Builder by notifying the Fund in writing at
least 5 business days prior to your next scheduled investment
date.
If you have purchased B Shares of the Fund through a retirement
plan, you may use CrestFunds(R) Account Builder to make regular
contributions to your retirement account.
IRAS. You may purchase B Shares through an IRA. The minimum
initial investment for these accounts is $500. IRAs help
investors save for retirement and shelter investment income from
current taxes.
For more information about IRAs and other tax-sheltered
retirement plans, including eligibility requirements and tax
considerations, consult your financial planner or tax advisor.
Other fees may be charged by the IRA custodian or trustee.
STATEMENTS AND REPORTS. You will be sent a confirmation after
every transaction that affects your share balance or your account
registration. In addition, you will be sent a consolidated
statement. At least twice a year you will receive the financial
statements of the Fund, with a summary of its investments and
performance. To reduce expenses, only one copy of most
shareholder reports (such as the Fund's Annual Report) may be
mailed to your household. Please call the CrestFunds(R) Customer
Service Center at 1-800-273-7827 if you need additional copies of
a particular report.
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<PAGE>
The Fund pays for shareholder services, but not for special
services such as producing and mailing historical account
documents. You may be required to pay fees for these special
services. Consult your CSC Investment Representative or the
CrestFunds(R) Customer Service Center for details.
HOW TO REDEEM SHARES. At the time you complete your account
application, you will designate the method by which you wish to
receive redemption payments. This designation and other changes
to your account registration may only be changed by written
notification to the Fund at the address indicated on
your statement. Allow 5 business days for any change to be
effected. Appropriate endorsement and signature guarantees are
required.
Investors Class Shares may be redeemed by mail, by telephone, by
wire or through your CSC Investment Representative. To ensure
acceptance of your redemption request, please follow the
procedures described below.
You may redeem all or a portion of your shares on any business
day. Your shares will be redeemed at the next NAV calculated
after your redemption request has been received and accepted and
less any applicable CDSC for the B Shares. Shares will earn
dividends through the date of redemption; however, shares
redeemed at the market close on a Friday or prior to a holiday
will continue to earn dividends until the next business day.
The Fund reserves the right to withhold redemption proceeds until
the Fund is reasonably satisfied that checks or electronic
transfers received as payment have cleared (which can take up to
7 days). A delay in receiving redemption proceeds may be avoided
by purchasing B Shares with a cashier's check or other guaranteed
form of payment.
Subject to the Fund's compliance with applicable regulations, the
Fund has reserved the right to pay redemptions, either totally or
partially, by a distribution of securities or other property
(instead of cash) from its portfolio. The securities or property
distributed in such a distribution would be valued at the same
amount as that assigned to them in calculating the NAV for the
shares being sold. If you receive such a distribution you will
incur brokerage or transaction charges when converting the
securities to cash, and you may realize a gain or loss for tax
purposes on both the distribution and the subsequent conversion.
BY MAIL. To have redemption proceeds mailed to the address
printed on your account statement you must send a "letter of
instruction" specifying the name of the Fund, the number of
shares to be redeemed, your name and your account number.
Your letter of instruction must be signed by all persons
authorized to sign for the account, exactly as it is
registered, accompanied by signature guarantee(s).
BY TELEPHONE OR WIRE. You may redeem shares by calling
1-800-273-7827. If on your account application you chose to
receive your redemption proceeds in the form of a check,
redemption proceeds will be sent to the record address. If you
choose the electronic funds transfer service on your account
application, you may redeem B Shares by calling the CrestFunds(R)
Customer Service Center. Allow two to three business days after
your call for the transfer to take place. Accounts cannot be
closed by this service.
If you selected the wire feature, you may receive redemption
proceeds by wire by calling the CrestFunds(R) Customer Service
Center. Your money normally will be wired to your bank on the
next business day. You may be charged a nominal fee for wiring
redemption proceeds.
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<PAGE>
Neither the Fund's Transfer Agent nor the Fund will be
responsible for any loss, liability, cost or expense for acting
upon telephone or wire instructions reasonably believed to be
genuine and the investor will bear all risk of loss. The Fund
and Transfer Agent maintain procedures, including identification
methods and other means, for ascertaining the identity of callers
and authenticity of instructions.
ADDITIONAL REDEMPTION INFORMATION - REINSTATEMENT PRIVILEGE (A
SHARES ONLY) If you have redeemed all or part of your A Shares,
you may reinvest an amount equal to all or a portion of the
redemption proceeds in the Fund or in any of the other
CrestFunds(R), at the NAV next determined after receipt of your
investment order, without a sales charge, provided that such
reinvestment is made within 30 days of redemption. You must
reinstate your shares into an account with the same registration.
This privilege may be exercised only once by a shareholder with
respect to a particular fund. Contact your CSC Investment
Representative for more information.
SYSTEMATIC WITHDRAWAL PLAN (A SHARES ONLY) You can have monthly,
quarterly or semi-annual checks sent from your account to you, to
a person named by you, or to your bank checking account. Your
Systematic Withdrawal Plan payments are drawn from share
redemptions and must be in the amount of $250 or more per month.
Contact your CSC Investment Representative for more information.
Systematic Withdrawal is not available for B Shares.
MAINTENANCE BALANCES You may be required to redeem A Shares if
the balance in the Fund drops below $500 as a result of
redemptions, and you do not increase the account's balance to the
minimum on 30 days' written notice. You must maintain an account
balance of $1,000 in B Shares ($500 for IRAs). If your
account falls below $500 due to redemption, the Transfer Agent
may waive the CDSC and close your account at the NAV next
determined on the day your account is closed and mail you the
proceeds at the address shown on the Transfer Agent's records.
DIVIDENDS AND TAX MATTERS
DISTRIBUTIONS. Income dividends from the Fund are declared daily
and distributed monthly. The Fund distributes substantially all
of its net investment income and capital gains (if any) to
shareholders each year. Unless the Fund is instructed otherwise,
all dividends and distributions of capital gains are
automatically reinvested into additional shares of the Fund
immediately upon payment thereof.
FEDERAL TAXES. Interest earned by the Fund is federally tax-free
when distributed to shareholders as income dividends. If the
Fund earned federally taxable income from any of its investments,
it would be distributed as a taxable dividend. The Fund may
invest in securities the interest on which is subject to the
federal alternative minimum tax for individuals, and to the
extent that the Fund does so, individuals who are subject to the
alternative minimum tax will be required to report a portion of
their dividends as a "tax preference item" in determining their
federal taxes.
The Fund's taxable distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except
that taxable distributions declared in December and paid in
January will be taxable as if paid on December 31. The Fund will
send shareholders a tax statement by January 31 showing the tax
status of the distributions received in the past year and will
file a copy with the Internal Revenue Service ("IRS"). You
should keep all statements you receive to assist in your personal
recordkeeping.
The B Shares automatically convert to A Shares after seven years
from purchase. The Company has received the advice of counsel
that the conversion from B to A Shares will not be a taxable
event for the Fund or the shareholder. In the event that, in the
opinion of counsel, this advice subsequently may not be relied
upon due to a change in the law, applicable regulations, or other
factors, the Directors of the
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<PAGE>
Company will then consider whether to terminate the conversion
privilege or take such other steps as they determine to be in the
best interest of shareholders.
STATE AND LOCAL TAXES. To the extent the Fund qualifies as a
regulated investment company under the Code, it will be subject
to tax only on (1) that portion of its income on which tax is
imposed for federal income tax purposes under Section 852(b)(1)
of the Code and (2) that portion of its income which consists
of federally tax exempt interest on obligations other than
Maryland Exempt Obligations (hereinafter defined) to the extent
such interest is not paid to Fund shareholders in the form of
exempt-interest dividends. To the extent dividends paid by the
Fund represent interest excludable from gross income for
federal income tax purposes, that portion of exempt-interest
dividends that represents interest received by the Fund on
obligations issued by the State of Maryland, its political
subdivisions, Puerto Rico, the U.S. Virgin Islands, or Guam and
their respective authorities or municipalities ("Maryland Exempt
Obligations"), will be exempt from Maryland state and local
income taxes when allocated or distributed to a shareholder of
the Fund except in the case of a shareholder that is a financial
institution. Except as noted below, all other dividend
distributions will be subject to Maryland state and local income
taxes.
Capital gains distributed by the Fund to a shareholder or any
gains realized by a shareholder from a redemption or sale of
shares must be recognized for Maryland state and local income tax
purposes to the extent recognized for federal income tax
purposes. However, capital gains distributions included in the
gross income of shareholders for federal income tax purposes are
subtracted from capital gains income for Maryland income tax
purposes to the extent such distributions are derived from the
disposition by the Fund of debt obligations issued by the State
of Maryland, its political subdivisions and authorities.
Except in the case of a shareholder that is a financial
institution, dividends received by a shareholder from the Fund
that are derived from interest on U.S. government obligations
will be exempt from Maryland state and local income taxes.
In the case of individuals, Maryland presently imposes an income
tax on items of tax preference with reference to such items as
defined in the Code for purposes of calculating the federal
alternative minimum tax. Interest paid on certain private
activity bonds is a preference item for purposes of calculating
the federal alternative minimum tax. Accordingly, if the Fund
holds such bonds, the excess of 50% of that portion of exempt
interest dividends which is attributable to interest on such
bonds over a threshold amount may be taxable by Maryland.
Interest on indebtedness incurred or continued (directly or
indirectly) by a shareholder in order to purchase or carry shares
of the Fund will not be deductible for Maryland state and
local income tax purposes. Individuals will not be subject to
personal property tax on their shares of the Fund. Shares of the
Fund held by a Maryland resident at death may be subject to
Maryland inheritance and estate taxes.
CAPITAL GAINS. Shareholders may realize a capital gain or loss
when they redeem or exchange shares. For most types of accounts,
the Fund will report the proceeds of the redemptions to investors
and the IRS annually. However, because the tax treatment also
depends on an individual's purchase price and his personal tax
position, shareholders should keep their regular account
statements to use in determining their tax.
"BUYING A DIVIDEND." On the ex-dividend date for an income
dividend or distribution from capital gains, the Fund's share
value is reduced by the amount of the distribution. If you buy
shares just before the record date ("buying a dividend"), you
would pay the full price for the shares and then receive a
portion of the share price as a taxable distribution.
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OTHER TAX INFORMATION. In addition to federal taxes, you may be
subject to state or local taxes depending on the laws in their
area. Consult your tax adviser concerning the application of
state and local taxes to investments in the Fund, which may
differ from the federal income tax consequences described above.
When you sign your account application, you will be asked to
certify that your social security or taxpayer identification
number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you
violate IRS regulations, the IRS can require the Fund to withhold
31% of your taxable distributions and redemptions.
Please refer to the Statement of Additional Information for more
information regarding taxes.
PERFORMANCE
Performance of each class of Fund shares may be quoted in
advertising in terms of YIELD, EFFECTIVE YIELD, TAX EQUIVALENT
YIELD OR TOTAL RETURN, as appropriate. Performance figures are
based on historical results and are not intended to indicate
future performance.
The YIELD of each class of shares is calculated by dividing the
net investment income (net of expenses) (as defined by the SEC)
earned by the Fund over a 30-day period by the average number of
shares entitled to receive distributions, expressed as an
annualized percentage rate. The EFFECTIVE YIELD is calculated
similarly, but assumes that the income earned from the investment
is reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed
reinvestment. Because yield accounting methods differ from the
methods used for other accounting purposes, the Fund's yield may
not equal its distribution rate, the income paid to an account or
the income reported in the Fund's financial statements.
The Fund also may quote TAX-EQUIVALENT YIELD, which shows the
approximate taxable yield an investor would have to earn, before
taxes, to equal the Fund's tax-free yield. A tax-equivalent
yield is calculated by dividing the tax-exempt yield by the
result of one minus a stated federal and/or state tax rate. If
only a portion of the Fund's income was tax-exempt, only that
portion is adjusted in the calculation.
TOTAL RETURNS are based on the overall dollar or percentage
change in value of a hypothetical investment in the Fund and
assumes that all dividends and capital gain distributions are
reinvested. A CUMULATIVE TOTAL RETURN reflects the Fund's
performance over a stated period of time. An AVERAGE ANNUAL
TOTAL RETURN reflects the hypothetical annually compounded return
that would have produced the same cumulative total return if the
Fund's performance had been constant over the entire period.
Because average annual total returns tend to smooth out
variations in the Fund's returns, investors should recognize that
they are not the same as actual year-by-year results. The yield
and total return of the two classes of shares are calculated
separately; the yields and total returns of A Shares and B Shares
will be lower than that of Trust Shares. When a class quotes an
average annual total return covering a period of less than one
year, the calculation assumes the performance will remain
constant for the rest of the year. Since this may or may not
occur, these average annual total returns should be viewed as
hypothetical returns rather than actual performance. To
illustrate the components of overall performance, the Fund may
separate its cumulative and average annual total returns into
income results and capital gain or loss. The Fund may quote its
total returns on a before tax or after tax basis.
For advertising purposes, A Shares and B Shares yields and total
returns generally include the effects of the maximum applicable
charges and fees applicable, which is the maximum applicable
sales charge and 12b-1 fee for A Shares, and the maximum CDSC for
the period and 12b-1 and shareholder servicing fees for the B
Shares. Excluding the sales charge from the calculation would
result in higher yield and total return figures.
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PORTFOLIO TRANSACTIONS
Capitoline may place portfolio transactions with broker-dealers
who provide research or execution services to the Fund or other
accounts over which Capitoline or its affiliates exercise
investment discretion. Such services may include advice
concerning the value of securities; the availability of
securities or purchasers or sellers of securities; furnishing
analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance
of accounts; and effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement).
The selection of such broker-dealers is generally made by
Capitoline (to the extent possible consistent with execution
considerations) in accordance with a ranking of broker-dealers
determined periodically by Capitoline's investment staff based
upon the qualify of research or execution services provided. The
Fund may execute brokerage or other agency transactions through
its distributor or an affiliate of its distributor or through an
affiliate of Capitoline, which are registered broker-dealers.
The frequency of portfolio transactions, the Fund's portfolio
turnover rate, will vary from year to year depending on market
conditions.
ADVISORY AND RELATED AGREEMENTS
ADVISER. Capitoline Investment Services Incorporated, 919 East
Main Street, Richmond, Virginia 23219, provides investment
advisory services to the Fund subject to the general control of
the Company's Board of Directors.
The Company has entered into an Investment Advisory Agreement
with Capitoline (the "Advisory Agreement") on behalf of the Fund.
Capitoline is paid a fee of .60% of average daily net assets for
its advisory services to the Fund. Capitoline, in its sole
discretion, may waive all or any portion of its advisory fee.
Any waiver, which may be discontinued at any time, has the effect
of increasing the Fund's yield for the period during which the
waiver was in effect and may not be recouped at a later date.
Capitoline, at its sole discretion, may pay financial
institutions or other industry professionals such as investment
advisers, accountants, banks, and estate planning firms
("Qualified Recipients") for shareholder support services.
Capitoline may engage banks and brokers, including Crestar Bank
and Crestar Securities Corporation, as Qualified Recipients to
perform certain shareholder support services. In addition, such
Qualified Recipients may impose charges or other requirements on
their customers for automatic investment and other cash
management services which an investor utilizing such Qualified
Recipients should take into consideration when determining the
effective yield of an investment in a Fund.
Capitoline is a wholly-owned subsidiary of Crestar Bank, which is
a subsidiary of Crestar Financial Corporation, a MidAtlantic
Region banking organization. Crestar Financial Corporation had
total assets of approximately $18.3 billion as of December 31,
1995. Crestar Financial Corporation was organized in 1962 as a
bank holding company registered under the federal Bank Holding
Company Act of 1956 and files annual and periodic reports with
the Securities and Exchange Commission under the Securities
Exchange Act of 1934. (See "Banking Law Matters.")
Capitoline was organized in 1973 and is one of the largest
investment advisory organizations in Virginia. As of December
31, 1995, Capitoline managed trust and investment assets of
approximately $11.4 billion.
ADMINISTRATOR AND DISTRIBUTOR. SEI Financial Management
Corporation (the "Administrator"), a wholly-owned subsidiary of
SEI Corporation ("SEI"), provides the Company with administrative
services, including fund accounting, regulatory reporting,
necessary office space, equipment, personnel, and facilities.
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The Administrator is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .15% of the average daily
net assets of the Fund. SEI Financial Services Company (the
"Distributor"), a wholly-owned subsidiary of SEI, will serve as
distributor. The Fund may execute brokerage or other agency
transactions through the Distributor for which the Distributor
receives compensation.
DISTRIBUTION AND SERVICE PLANS. The Board of Directors of the
Company has approved an Amended and Restated Distribution and
Service Plan (the "Plan") pursuant to Rule 12b-1 of the 1940 Act
(the "Rule"). Under this Plan the Distributor is compensated at
the annual rate of .15% of the aggregate average daily net assets
of the Trust Class shares and A Shares of the Fund. The
Distributor will be compensated for distribution services
provided to the Trust Class shares including the printing and
distribution of Prospectuses, Statements of Additional
Information or reports prepared for the use in connection with
the offering of shares of the Fund (other than to existing
shareholders at the time of such mailing), the expenses incurred
for the preparation of any other literature used by the
Distributor in connection with any such offering. The Distributor
has agreed to waive any fees payable pursuant to the Plan, and
will bear the costs of other distribution-related activities. The
Distributor reserves the right to terminate its waiver at any
time at its sole discretion.
The Plan also permits Capitoline, at its sole discretion, to use
all or a portion of the advisory fee received, as well as its
past profits or other resources, to pay financial institutions or
other industry professionals such as investment advisers,
accountants, banks, and estate planning firms for shareholder
support services. Capitoline may engage banks and
broker-dealers, including Crestar Bank and Crestar Securities
Corporation, as Qualified Recipients to perform certain
shareholder support services. Such Qualified Recipients may
impose charges or other requirements on their customers for
automatic investment and other cash management services which an
investor utilizing such services through a Qualified Recipient
should take into consideration when determining the effective
yield of an investment in the Fund.
The Distributor may pay all or a portion of the distribution fee
to Qualified Recipients who sell shares of the Fund. Qualified
Recipients who provide enhanced inquiry, order entry and sales
facilities in connection with transactions in Fund shares by
their clients may receive a fee up to the maximum applicable
asset based sales charges. In addition, the Distributor will, at
its expense provide promotional incentives such as sales contests
and trips to investment professionals who support the sale of
shares of the Funds. In some instances, these incentives will be
offered only to certain types of investment professionals, such
as bank-affiliated or non-bank affiliated broker-dealers, or to
investment professionals whose representatives provide services
in connection with the sale or expected sale of significant
amounts of shares.
Further, the Company's Board of Directors has approved an
additional Distribution and Service Plan with the Distributor
pursuant to the Rule applying to B Shares (the "B Shares Plan")
that authorizes payment of a distribution fee and a shareholder
servicing fee. B Shares are authorized to pay a monthly
distribution fee of .75% of B Shares' average daily net assets of
such class. Also, pursuant to the B Shares Plan, the Distributor
is compensated at an annual rate of .25% of B Shares' average net
assets for providing ongoing shareholder support services to
investors in B Shares. B Shares bear the fees pursuant to the
Plan. Compensation may be paid by the Distributor to persons and
institutions who provide administrative or accounting services
not otherwise provided by the Adviser, Transfer Agent or
Administrator. Distribution fees and shareholder services fees
will reduce the net investment income and total return of the B
Shares.
TRANSFER AGENT AND CUSTODIAN. Crestar Bank (the "Transfer
Agent"), 919 East Main Street, Richmond, VA 23219, acts as the
Fund's transfer agent, dividend paying agent and custodian. As
transfer agent, Crestar Bank maintains shareholder accounts and
records for the Fund. For its services as transfer agent,
Crestar Bank is paid a monthly fee at the annual rate of .06% of
average net assets of the Investors Class shares.
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As custodian, Crestar Bank safeguards and controls the Fund's
cash and securities, handles the receipt and delivery of
securities and collects income on Fund investments. For these
services, Crestar Bank is paid a monthly fee at an annual rate of
up to .04% of the Fund's average net assets.
Crestar Bank is permitted to subcontract any or all of its
functions to one or more qualified sub-transfer agents,
sub-custodians or other persons. Crestar Bank is permitted to
compensate those agents for their services, but no such
compensation may increase the aggregate amount of payments by the
Fund to Crestar Bank pursuant to the Transfer Agent or Custodian
Agreements.
OTHER EXPENSE INFORMATION
The Fund may elect not to qualify its shares for sale in every
state. For the purpose of Capitoline's obligation to reimburse
expenses, the Fund's annual expenses are estimated and accrued
daily, and any appropriate estimated payments will be made by
Capitoline monthly. The Fund's expenses include Company expenses
attributable and allocated to the Fund, and those not
attributable to the Fund, which are allocated among the
CrestFunds(R), including the Fund, in proportion to their average
net assets. Expenses attributable to a particular class of shares
are paid by that class.
Subject to the obligations of Capitoline under the Advisory
Agreement to reimburse the Fund for its expenses in excess of the
lowest applicable state limitations, the Fund has confirmed its
obligation to pay all of its other expenses.
BANKING LAW MATTERS
Banking laws and regulations, including the Glass-Steagall Act
(as currently interpreted by the Board of Governors of the
Federal Reserve System), prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any
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 issuing, underwriting, selling or
distributing securities. The same laws and regulations generally
permit a bank or bank affiliate to act as an investment adviser
and to purchase shares of the investment company as agent for and
upon the order of a customer. Upon advice of counsel, the
Company's Board of Directors believes that Capitoline, Crestar
Bank and any bank or bank affiliate may perform processing or
transfer agency or similar services described in this Prospectus
for the Fund and its shareholders without violating applicable
federal banking laws or regulations.
However, judicial or administrative decisions or interpretations
of, as well as changes in, either federal or state statutes or
regulations relating to the activities of banks and their
affiliates could prevent a bank or bank affiliate from continuing
to perform all or a part of the activities contemplated by this
Prospectus. If banks or bank affiliates were prohibited from so
acting, the Company would change its existing policies to permit
bank customers who are shareholders to remain shareholders of the
Fund and would implement alternative means for continuing the
servicing of such shareholders. In such event, changes in the
operation of the Fund might occur and a shareholder serviced by
such bank or bank affiliates may no longer be able to avail
itself of the bank's or its affiliates' services. It is not
expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
DESCRIPTION OF COMMON STOCK
The Fund is a non-diversified portfolio of the Company. The
authorized capital stock of the Company, which was incorporated
as a Maryland corporation on March 17, 1986, consists of 20
billion shares of stock having a par value of one tenth of one
cent ($.001) per share. The Board of Directors may, without
shareholder approval and at the Company's expense, divide the
authorized stock into an unlimited number of separate series, and
the costs of doing so will be borne by the Company. Currently
all the authorized
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stock of the Company is divided into 13 separate series: Cash
Reserve Fund Common Stock, U.S. Treasury Money Fund Common Stock,
Tax Free Money Fund Common Stock, Limited Term Bond Fund Common
Stock, Intermediate Bond Fund Common Stock, Government Bond Fund
Common Stock, Maryland Municipal Bond Fund Common Stock, Virginia
Intermediate Municipal Bond Fund Common Stock, Virginia Municipal
Bond Fund Common Stock, Capital Appreciation Fund Common Stock,
Value Fund Common Stock, and Special Equity Fund Common Stock,
representing shares for each of the 13 CrestFunds(R). The
CrestFunds(R) offer one or more of three classes of shares. A
Shares and B Shares of the Fund are offered by this Prospectus.
Trust Class shares of the Fund and all classes of shares of other
CrestFunds(R) are offered by separate prospectuses.
Shares of all CrestFunds(R), including the Fund, are offered
continuously to individual and institutional customers investing
directly in CrestFunds(R). Such shares are offered at prices
that include sales charges or contingent deferred sales charges,
and in some cases pay distribution related or shareholder service
fees, or higher transfer agency service fees than those paid by B
Shares. Performance of A Shares and B Shares is lower than that
of Trust Class shares of the same Fund due to A Shares' and B
Shares' higher total expenses. Published yields and total
returns of A Shares and B Shares of certain funds generally
include the effects of the maximum applicable sales charge, or
contingent deferred sales charge, which has the effect of
lowering the yield and total return figures.
All shares of the Company have equal voting and liquidation
rights, and fractional shares have those rights proportionately.
Generally, shares will be voted in the aggregate without
reference to a particular fund or class, unless the matter
affects only one fund or class or voting by a fund or class is
required by law, in which case shares will be voted separately by
the fund or class, as the case may be. Maryland law does not
require the Company to hold annual meetings of shareholders and
the Company does not intend to do so, though special meetings
will be held when required by law. Shareholders representing 25%
or more of the Company or a fund may, as set forth in the
Company's By-laws, call meetings of the Company or a fund, as the
case may be, including, in the case of a meeting of the entire
Company, the purpose of voting on removal of one or more
Directors. There are no conversion or preemptive rights in
connection with shares of each fund. All shares, when issued and
paid for, in accordance with the terms of the offering will be
fully paid and non-assessable.
APPENDIX
The following briefly describes the securities in which the Fund
may invest and the transactions it may enter into. The Fund is
not limited by this discussion, however, and may purchase other
types of securities and enter into other types of transactions if
they meet the Fund's quality and liquidity requirements.
A complete listing of the Fund's policies and limitations and
more detailed information about the Fund's investments is
contained in the Fund's Statement of Additional Information.
Current holdings and recent investment strategies are described
in the Fund's financial reports.
ASSET-BACKED SECURITIES. Asset-backed securities represent
interests in pools of consumer loans (generally unrelated to
mortgage loans) and most often are structured as pass-through
securities. Interest and principal payments ultimately depend on
payment of the underlying loans by individuals, although the
securities may be supported by letters of credit or other credit
enhancements. The value of asset-backed securities may also
depend on the creditworthiness of the servicing agent for the
loan pool, the originator of the loans, or the financial
institution providing the credit enhancement. A Fund may
purchase units of beneficial interest in pools of purchase
contracts, financing leases, and sales agreements entered into by
municipalities. These municipal obligations may be created when
a municipality enters into an installment purchase contract or
lease with a vendor and may be secured by the assets purchased or
leased by the municipality. However, except in very limited
circumstances, there will be no recourse against the vendor
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if the municipality stops making payments. The market for
tax-exempt asset-backed securities is still relatively new.
These obligations are likely to involve unscheduled prepayments
of principal.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell
obligations on a when-issued or delayed-delivery basis, with
payment and delivery taking place at a future date. The market
value of obligations purchased in this way may change before the
delivery date, which could increase fluctuations in a bond fund's
yield. Ordinarily, the Fund will not earn interest on securities
purchased until they are delivered.
GOVERNMENT SECURITIES. Securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities are referred
to as government securities. They may be backed by the credit of
the U.S. Government as a whole or only by the issuing agency.
For example, securities issued by the Federal Home Loan Banks and
the Federal Home Loan Mortgage Corporation are supported only by
the credit of the issuing agency, and not by the U.S. Government.
Securities issued by the Federal Farm Credit System, the Federal
Land Banks and the Federal National Mortgage Association are
supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. U.S. Treasury securities
and some agency securities, such as those issued by the Federal
Housing Administration and the Government National Mortgage
Association, are backed by the full faith and credit of the U.S.
Government and are the highest quality government securities.
ILLIQUID SECURITIES. Illiquid securities are securities which
cannot be disposed of within seven days at approximately the
price at which they are being carried on the Fund's books. An
illiquid security includes a demand instrument with a demand
notice period exceeding seven days, where there is no secondary
market for such security, and repurchase agreements of over 7
days in length.
INDEXED SECURITIES. The Fund may invest in indexed securities
whose value is linked to currencies, interest rates, commodities,
indices, or other financial indicators. Most indexed securities
are short to intermediate term fixed-income securities whose
values at maturity or interest rates rise or fall according
to the change in one or more specified underlying instruments.
Indexed securities may be positively or negatively indexed (i.e.,
their value may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to
direct investments in the underlying instrument or to one or more
options on the underlying instrument. Indexed securities may be
more volatile than the underlying instrument itself.
INVESTMENT-GRADE SECURITIES. Investment-grade securities include
securities rated BBB or higher by S&P or Baa or higher by Moody's
which generally provide adequate to strong protection of
principal and interest payments. Securities rated BBB or Baa may
be more susceptible to potential adverse changes in circumstances
which may lead to a weakened capacity to make principal and
interest payments, and may have speculative characteristics as
well. If a security is rated investment-grade by one rating
agency and below investment-grade by another rating agency,
Capitoline may make a determination as to the security's
investment-grade quality.
LETTERS OF CREDIT. Issuers or financial intermediaries who
provide demand features or standby commitments often support
their ability to buy securities on demand by obtaining letters of
credit ("LOCs") or other guarantees from banks. LOCs also may be
used as credit supports for other types of municipal instruments.
Capitoline may rely upon its evaluation of a bank's credit in
determining whether to purchase an instrument supported by an
LOC. In evaluating a foreign bank's credit, Capitoline will
consider whether adequate public information about the bank is
available and whether the bank may be subject to unfavorable
political or economic developments, currency controls, or other
governmental restrictions that might affect the bank's ability to
honor its credit commitment.
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MORTGAGE-BACKED SECURITIES. The Fund may purchase
mortgage-backed securities issued by government entities. A
mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in
an underlying pool of mortgages. Some mortgage-backed
securities, such as collateralized mortgage obligations, or CMOs,
make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a
typical bond). Mortgage-backed securities are based on different
types of mortgages including those on commercial real estate or
residential properties.
The market volatility of mortgage-backed securities can be
greater than the market volatility of other bonds. The value of
mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax
changes may adversely affect the mortgage securities market as a
whole. Mortgage-backed securities are subject to prepayment
risk. Prepayment, which occurs when unscheduled or early
payments are made on the underlying mortgages, may shorten the
effective maturities of these securities and may lower their
total returns. During periods of declining interest rates,
prepayment of mortgages underlying mortgage securities can be
expected to accelerate. Prepayment of mortgages which
underlie securities purchased at a premium often results in
capital losses, while prepayment of mortgages purchased at a
discount often results in capital gains. Because of these
unpredictable prepayment characteristics, it is often not
possible to predict accurately the average life or realized yield
or total return of a particular issue. In the absence of a known
maturity, market participants generally refer to a security's
estimated average life. An average life estimate is a function
of an assumption regarding anticipated prepayment patterns, based
upon current interest rates, current conditions in the relevant
housing markets and other factors. The assumption is necessarily
subjective, and thus different market participants can produce
different average life estimates with regard to the same
security. There can be no assurance that estimated average life
will be a security's actual average life.
STRIPPED MORTGAGE-BACKED SECURITIES. Securities created when a
U.S. Government agency or a financial institution separates the
interest and principal components of a mortgage-backed security
and sells them as individual securities are stripped
mortgage-backed securities. The holder of the "principal-only"
security (PO) receives the principal payments made by the
underlying mortgage-backed security, while the holder of the
"interest-only" security (IO) receives interest payments from the
same underlying security. The prices of stripped mortgage-backed
securities may be particularly affected by changes in interest
rates. As interest rates fall, prepayment rates tend to
increase, which tends to reduce prices of IOs and increase prices
of POs. Rising interest rates can have the opposite effect. The
market volatility of stripped mortgage-backed securities tends to
be greater than the market volatility of other types of
mortgage-backed securities in which the Funds may invest. If the
mortgage assets which underlie the stripped mortgage-backed
securities were to experience greater than anticipated
prepayments of principal, a Fund could fail to fully recoup its
initial investment in these securities, even if they are rated in
the highest rating categories (e.g., AAA or Aaa by S&P or
Moody's, respectively).
MUNICIPAL SECURITIES. Municipal securities include general
obligation securities, which are backed by the full taxing power
of a municipality, and revenue securities, which are backed by
the revenues of a specific tax, project, or facility. Industrial
development, or private activity, bonds are a type of revenue
bond backed by the credit and security of a private entity and
may involve greater risk; such securities, which may be subject
to the federal alternative minimum tax, include securities issued
to finance housing projects, many hospital and university
facilities, student loans, and privately owned solid waste
disposal and water and sewage treatment facilities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase
agreements. In a repurchase agreement, a fund buys a security at
one price and simultaneously agrees to sell it back at a higher
price. In the event of bankruptcy of the other party to a
repurchase agreement, the Fund could experience delays in
recovering its cash. To the extent that, in the meantime, the
value of securities purchased had decreased, the Fund
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<PAGE>
could experience a loss. In all cases, Capitoline must find the
creditworthiness of the other party to the transaction
satisfactory.
RESOURCE RECOVERY BONDS. The Fund may purchase resource recovery
bonds, which are a type of revenue bond issued to build
facilities such as solid waste incinerators or waste-to-energy
plants. Typically, a private corporation will be involved, at
least during the construction phase, and the revenue stream will
be secured by fees or rents paid by municipalities for use of the
facilities. The viability of a resource recovery project,
environmental protection regulations, and project operator tax
incentives may affect the value and credit quality of resource
recovery bonds.
REFUNDING CONTRACTS. The Fund may invest in refunding contracts
which require the issuer to sell and the Fund to buy refunded
municipal obligations at a stated price and yield on a settlement
date that may be several months or several years in the future.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase
agreement, the Fund temporarily transfers possession of a
portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash. At the same time, the Fund
agrees to repurchase the instrument at an agreed-upon price and
time. The Fund expects that it will engage in reverse repurchase
agreements for temporary purposes such as to fund redemptions.
Reverse repurchase agreements may increase the risk of
fluctuation in the market value of the Fund's assets or in its
yield.
While a reverse repurchase agreement is outstanding, the Fund
will maintain appropriate liquid assets such as cash, U.S.
Government securities, or other liquid high grade debt securities
in a segregated custodial account to cover its obligations under
the agreement. The Fund will enter into reverse repurchase
agreements only with those parties whose creditworthiness is
deemed satisfactory by Capitoline.
STRIPPED GOVERNMENT SECURITIES. Stripped securities are created
by separating the income and principal components of a debt
instrument and selling them separately. The Fund may purchase
U.S. Treasury STRIPS (Separate Trading of Registered Interest and
Principal of Securities), that are created when the coupon
payments and the principal payment are stripped from an
outstanding Treasury bond by the Federal Reserve Bank. Bonds
issued by the Resolution Funding Corporation (REFCORP) can also
be stripped in this fashion. REFCORP STRIPS are eligible
investments for the Fund.
The Fund may purchase privately stripped government securities,
which are created when a dealer deposits a Treasury security or
federal agency security with a custodian for safekeeping and then
sells the coupon payments and principal payments that will be
generated by this security. Proprietary receipts, such as
Certificates of Accrual on Treasury Securities (CATS), Treasury
Investment Growth Receipts (TIGRs), and generic Treasury Receipts
(TRs), are stripped U.S. Treasury securities that are separated
into their component parts through trusts created by their broker
sponsors. Bonds issued by the Financing Corporation (FICO) can
also be stripped in this fashion.
Because of the SEC's views on privately stripped government
securities, the Fund must treat them as it would non-government
securities pursuant to regulatory guidelines applicable to all
money market funds. Accordingly, the Fund currently intends to
purchase only those privately stripped government securities
that have either received the highest rating from two nationally
recognized rating services (or one, if only one has rated the
security), or, if unrated, been judged to be of equivalent
quality by Capitoline.
TAX AND REVENUE ANTICIPATION NOTES. Tax and revenue anticipation
notes are issued by municipalities in expectation of future tax
or other revenues, and are payable from those specific taxes or
revenues. Bond anticipation notes normally provide interim
financing in advance of an issue of bonds or notes, the proceeds
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of which are used to repay the anticipation notes. Tax-exempt
commercial paper is issued by municipalities to help finance
short-term capital or operating needs.
TIME DEPOSITS. Time deposits are non-negotiable deposits in a
banking institution earning a specified interest rate over a
given period of time. Time deposits with a maturity of seven
business days or more are considered illiquid.
VARIABLE AND FLOATING RATE INSTRUMENTS. The Fund may purchase
variable and floating rate instruments, including certain
participation interests in municipal obligations, which have
interest rate adjustment formulas that help to stabilize their
market values. Many variable and floating rate instruments also
carry demand features that permit the Fund to sell them at par
value plus accrued interest on short notice. When determining
the maturity of a variable or floating rate instrument, the Fund
may look to the date the demand feature can be exercised, or to
the date the interest rate is readjusted, rather than to the
final maturity of the instrument.
SUMMARY OF BOND RATINGS*
Rating Services
Investment Grade Moody's S&P
Highest quality Aaa AAA
High quality Aa AA
Upper medium grade A A
Medium grade, some speculative
characteristics Baa BBB
__________
* Please refer to the Statement of Additional Information for a
more complete discussion of these ratings.
26
<PAGE>
CRESTFUNDS(R), INC.
TRUST CLASS SHARES
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 7, 1996
This Statement is not a prospectus but should be read in
conjunction with (a) the current Trust Class Prospectus (dated
March 29, 1995) for CrestFunds(R), Inc. (the "Company") and (b)
the current Prospectus (dated February 7, 1996) for the
Trust Class shares of the Company's Maryland Municipal Bond Fund.
Please retain this document for future reference.
The financial statements and financial highlights, included in
the Annual Report for the fiscal year ended November 30, 1995
for Cash Reserve Fund, U.S. Treasury Money Fund, Tax Free Money
Fund, Limited Term Bond Fund (formerly known
as Short/Intermediate Bond Fund), Intermediate Bond Fund
(formerly known as Bond Fund), Government Bond Fund,
Virginia Intermediate Municipal Bond Fund (formerly known as
Virginia Municipal Bond Fund), Virginia Municipal Bond
Fund, Value Fund, Capital Appreciation Fund and Special Equity
Fund, are incorporated herein by reference. To obtain
without charge additional copies of the Trust Class Prospectus,
the Annual Report, or the Investors Class A Shares ("A
Shares") and Investors Class B Shares ("B Shares") Prospectus or
Statement of Additional Information, please call 1-800-273-
7827.
TABLE OF CONTENTS PAGE
INVESTMENT POLICIES AND LIMITATIONS . . . . . . . . . . . 3
INVESTMENT PRACTICES. . . . . . . . . . . . . . . . . . . 7
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . 11
VALUATION OF PORTFOLIO SECURITIES . . . . . . . . . . . . 13
FUND PERFORMANCE. . . . . . . . . . . . . . . . . . . . . 14
ADDITIONAL INFORMATION REGARDING PRICING AND
REDEMPTIONS . . . . . . . . . . . . . . . . . . . . . . 19
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . 19
DIRECTORS AND OFFICERS AND AFFILIATED PERSONS . . . . . . 23
THE ADVISER . . . . . . . . . . . . . . . . . . . . . . . 24
ADMINISTRATOR AND DISTRIBUTOR . . . . . . . . . . . . . . 26
TRANSFER AGENT. . . . . . . . . . . . . . . . . . . . . . 30
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . 30
AUDITOR . . . . . . . . . . . . . . . . . . . . . . . . . 30
PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . . . . 30
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . 31
APPENDIX. . . . . . . . . . . . . . . . . . . . . . . . . 32
<PAGE>
Adviser:
Capitoline Investment Services, Incorporated ("Capitoline" or the
"Adviser")
Transfer Agent:
Crestar Bank (the "Transfer Agent")
Custodian:
Crestar Bank (the "Custodian")
Administrator:
SEI Financial Management Corporation ("SFM")
Distributor:
SEI Financial Services Company ("SFS")
2
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth
in the Prospectus. Unless otherwise noted, whenever an
investment policy or limitation states a maximum percentage of a
Fund's assets that may be invested in any security or other
asset, or sets forth a policy regarding quality standards, such
standard or percentage limitation shall be determined immediately
after and as a result of the Fund's acquisition of such security
or other asset. Accordingly, any subsequent changes in values,
net assets, or other circumstances will not be considered when
determining whether the investment complies with a Fund's
investment policies and limitations.
Each Fund's fundamental investment policies and limitations
cannot be changed without approval by a "majority of the
outstanding voting securities," of the Fund (67% or more of the
voting securities present or 50% of the outstanding voting
securities, whichever is less) as defined in the Investment
Company Act of 1940 (the "1940 Act"). However, except for
the fundamental investment limitations set forth below, the
investment policies and limitations described in this Statement
of Additional Information are not fundamental and may be changed
without shareholder approval.
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT LIMITATIONS OF CASH
RESERVE FUND, U.S. TREASURY MONEY FUND, AND TAX FREE MONEY FUND
SET FORTH IN THEIR ENTIRETY. EACH MONEY MARKET FUND MAY NOT:
1. with respect to 75% of the Fund's assets (50% in the case
of Tax Free Money Fund), invest more than 5% of the total
market value of its assets (determined at the time of
investment) in the securities of any one issuer other than
the United States Government, its agencies or
instrumentalities;
2. issue senior securities;
3. make short sales of securities;
4. purchase securities on margin or write put and call
options;
5. borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests
which might require the untimely disposition of securities.
Borrowing in the aggregate may not exceed 10%, and
borrowing for purposes other than meeting redemptions may
not exceed 5%, of the value of the Fund's total assets
(including the amount borrowed) at the time the borrowing
is made. Outstanding borrowings in excess of 5% of the
value of the Fund's total assets will be repaid before any
subsequent investments are made by the Fund;
6. act as an underwriter of securities;
7. invest in the aggregate more than 10% of the value of its
net assets in securities, including municipal lease
agreements, for which there is no readily available market
and in repurchase agreements maturing in more than 7 days;
8. invest more than 25% of the total market value of its
assets (determined at the time of investment) in the
securities of foreign banks and foreign branches of
domestic banks, in the securities of foreign governments or
in the securities of issuers conducting their principal
business activities in any one industry; provided, (i)
there is no limitation on the aggregate of the Fund's
investment in obligations (excluding commercial paper) of
domestic commercial banks and in obligations of the United
States Government, its agencies or its instrumentalities;
and (ii) consumer finance companies, industrial finance
companies and gas, electric, water and telephone utility
companies are each considered to be separate industries;
9. invest in real estate (other than debt obligations secured
by real estate or interests therein or debt obligations
issued by companies which invest in real estate or
interests therein);
10. make loans, except that a Fund may (i) purchase publicly
issued debt securities for its portfolio, (ii) enter into
repurchase agreements, (iii) with respect to Tax Free Money
Fund, lend its portfolio securities in an amount up to 10%
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<PAGE>
of the value of its total assets, and (iv) with respect to
Cash Reserve Fund and U.S. Treasury Money Fund, lend its
portfolio securities in an amount up to 33 1/3% of the
value of its total assets;
11. purchase securities having voting rights except, in the
case of Tax Free Money Fund, securities of other investment
companies (to the extent permitted by the 1940 Act).
Subject to certain exceptions, including a merger,
acquisition, consolidation or reorganization involving an
investment company, the 1940 Act contains a prohibition
against a Fund (i) investing more than 5% of its total
assets in the securities of another single investment
company, (ii) investing more than 10% of its total assets
in securities of investment companies, and (iii) purchasing
more than 3% of the total outstanding voting stock of
another investment company;
12. invest in securities issued, or guaranteed as to principal
and interest, by companies that have conducted operations
for less than three years, including the operations of
predecessors;
13. invest in interest in oil or gas or interests in other
mineral exploration or development programs;
14. invest in or hold securities of any issuer if officers and
directors of the Company or Capitoline, individually owning
beneficially more than 1/2 of 1% of the securities of the
issuer, in the aggregate own more than 5% of the issuer's
securities;
15. purchase Restricted Securities (as defined in Rule 144
under the Securities Act of 1933 (the "Securities Act"));
16. make investments for the purpose of exercising control over
any issuer or other person; and
17. pledge, mortgage, assign or encumber any of its assets
except to the extent necessary to secure a borrowing
permitted by clause (5).
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT LIMITATIONS OF
LIMITED TERM BOND FUND, INTERMEDIATE BOND FUND, GOVERNMENT BOND
FUND, MARYLAND MUNICIPAL BOND FUND, VIRGINIA INTERMEDIATE
MUNICIPAL BOND FUND, AND VIRGINIA MUNICIPAL BOND FUND SET FORTH
IN THEIR ENTIRETY. EACH BOND FUND MAY NOT:
1. with respect to 75% of its total assets (50% in the case of
Maryland Municipal Bond Fund, Virginia Intermediate
Municipal Bond Fund and Virginia Municipal Bond Fund),
purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government, or
any of its agencies or instrumentalities) if, as a result
thereof, (a) more than 5% of the Fund's total assets would
be invested in the securities of that issuer, or (b) the
Fund would hold more than 10% of the outstanding voting
securities of that issuer;
2. issue senior securities, except as permitted under the 1940
Act;
3. borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of its total
assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation;
4. underwrite securities issued by others, except to the
extent that the Fund may be considered an underwriter
within the meaning of the Securities Act in the disposition
of restricted securities;
5. purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments, but this
shall not prevent the Fund from investing in securities or
other instruments backed by real estate or securities of
companies engaged in the real estate business;
6. purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments;
4
<PAGE>
7. lend any security or make any other loan if, as a result,
more than 33 1/3% of its total assets would be lent to
other parties, but this limitation does not apply to
purchases of debt securities or to repurchase agreements;
8. Maryland Municipal Bond Fund, Virginia Intermediate
Municipal Bond Fund and Virginia Municipal Bond Fund may
not purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities, or tax-exempt
obligations issued or guaranteed by a U.S. territory or
possession or a state or local government, or a political
subdivision of any of the foregoing) if, as a result, more
than 25% of each Fund's total assets would be invested in
securities of companies whose principal business activities
are in the same industry; and
9. Limited Term Bond Fund, Intermediate Bond Fund and
Government Bond Fund may not purchase the securities of
any issuer (other than securities issued or guaranteed by
the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of each
Fund's total assets would be invested in the securities of
companies whose principal business activities are in the
same industry.
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT LIMITATIONS OF VALUE
FUND, CAPITAL APPRECIATION FUND AND SPECIAL EQUITY FUND SET FORTH
IN THEIR ENTIRETY. EACH EQUITY FUND MAY NOT:
1. with respect to 75% of its total assets, purchase the
securities of any issuer (other than securities issued or
guaranteed by the U.S. Government, or any of its agencies
or instrumentalities) if, as a result thereof, (a) more
than 5% of the Fund's total assets would be invested in the
securities of that issuer, or (b) the Fund would hold more
than 10% of the outstanding voting securities of that
issuer;
2. issue senior securities, except as permitted under the 1940
Act;
3. borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of its total
assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to
exceed this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation;
4. underwrite securities issued by others, except to the
extent that the Fund may be considered an underwriter
within the meaning of the Securities Act in the disposition
of restricted securities;
5. purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities) if, as a result,
more than 25% of the Fund's total assets would be invested
in the securities of companies whose principal business
activities are in the same industry;
6. purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this
shall not prevent the Fund from investing in securities or
other instruments backed by real estate or securities of
companies engaged in the real estate business);
7. purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments; and
8. lend any security or make any other loan if, as a result,
more than 33 1/3% of its total assets would be lent to
other parties, but this limitation does not apply to
purchases of debt securities or to repurchase agreements.
THE FOLLOWING LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
MONEY MARKET FUNDS:
i. Tax Free Money Fund does not currently intend to purchase
a security (other than a security issued or guaranteed
by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 5% of its
total assets
5
<PAGE>
would be invested in the securities of a single issuer,
provided that the Fund may invest up to 50% of its total
assets in the first tier securities of a single issuer for
up to three business days.
ii. Cash Reserve Fund does not currently intend to purchase a
security (other than a security issued or guaranteed by
the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 5% of its
total assets would be invested in the securities of a
single issuer, provided that the Fund may invest up to 25%
of its total assets in the first tier securities of a
single issuer for up to three business days.
iii. Each Fund does not currently intend to lend any security
or make any other loan if, as a result, more than 10% of
the value of its total assets would be lent to other
parties, but this limitation does not apply to the
purchase of debt securities or to repurchase agreements.
iv. Tax Free Money Fund does not currently intend to lend any
security or make any other loan.
v. To meet federal requirements for qualification as a
"regulated investment company" the Tax Free Money Fund
limits its investments so that at the close of each
quarter of its taxable year: (a) with regard to at least
50% of total assets, no more than 5% of total assets are
invested in the securities of a single issuer, and (b) no
more than 25% of total assets are invested in the
securities of a single issuer. These limitations do not
apply to "government securities" as defined for federal
tax purposes.
ALL BOND AND EQUITY FUNDS
vi. Each Fund does not currently intend to purchase securities
on margin, except that a Fund may obtain such short-term
credits as are necessary for the clearance of
transactions.
vii. Each Fund may borrow money only from a bank or by engaging
in reverse repurchase agreements with any party (reverse
repurchase agreements are treated as borrowings for
purposes of fundamental limitation 3). Each Fund will not
purchase any security while borrowings representing more
than 5% of its total assets are outstanding.
viii. Each Fund does not currently intend to purchase any
security if, as a result, more than 10% of its net assets
would be invested in securities that are deemed to be
illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at
approximately the prices at which they are valued.
ix. Each Fund does not currently intend to purchase securities
of other investment companies except pursuant to the
provisions of the 1940 Act.
x. Each Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of
business enterprises that, including predecessors, have a
record of less than three years of continuous operation.
xi. Each Fund does not currently intend to invest in oil, gas,
or other mineral exploration or development programs or
leases.
xii. Each Fund does not currently intend to purchase or hold
the securities of any issuer if those officers and
Directors of a Fund who individually own more than 1/2 of
1% of the securities of such issuer together own more than
5% of such issuer's securities.
xiii. Each Fund does not currently intend to sell securities
short.
6
<PAGE>
CORPORATE BOND FUNDS, GOVERNMENT BOND FUND, AND EQUITY FUNDS ONLY
xiv. With respect to 100% of its total assets, each Fund does
not currently intend to purchase the securities of any
issuer (other than securities issued or guaranteed by the
U.S. Government or any of its agencies or
instrumentalities) if, as a result thereof, a Fund would
own more than 10% of the outstanding voting securities of
such issuer.
xv. Each of the corporate bond and government bond funds does
not currently intend to purchase warrants. Warrants
acquired by a Fund in units or attached to securities are
not subject to this restriction.
xvi. Each Fund does not currently intend to purchase or sell
futures contracts or put or call options. This limitation
does not apply to options attached to, or acquired or
traded together with, their underlying securities, and
does not apply to securities that incorporate features
similar to options or futures contracts.
MARYLAND MUNICIPAL BOND FUND, VIRGINIA INTERMEDIATE MUNICIPAL
BOND FUND AND VIRGINIA MUNICIPAL BOND FUND ONLY
xvii. To meet federal tax requirements for qualification as a
"regulated investment company," Maryland Municipal Bond
Fund, Virginia Intermediate Municipal Bond Fund and
Virginia Municipal Bond Fund each limits its investments
so that at the close of each quarter of its taxable year:
(a) with regard to at least 50% of total assets, no more
than 5% of total assets are invested in the securities of
a single issuer, and (b) no more than 25% of total assets
are invested in the securities of a single issuer.
Limitations (a) and (b) do not apply to "government
securities" as defined for federal tax purposes.
xviii. Each Fund does not currently intend to engage in
repurchase agreements or make loans, but this limitation
does not apply to purchases of debt securities.
xix. Each Fund does not currently intend to purchase or sell
futures contracts or call options. This limitation does
not apply to options attached to, or acquired or traded
together with, their underlying securities, and does not
apply to securities that incorporate features similar to
options or futures contracts.
INVESTMENT PRACTICES
Each Fund's investments must be consistent with its investment
objective and policies. Accordingly, not all of the security
types and investment techniques discussed below are eligible
investments for each of the Funds.
REPURCHASE AGREEMENTS. In a repurchase agreement, a Fund
purchases a security and simultaneously commits to resell
that security to the seller at an agreed upon price. The resale
price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon
price, which obligation is in effect secured by the value (at
least equal to the amount of the agreed upon resale price and
marked to market daily) of the underlying security. Each fund
may engage in a repurchase agreement with respect to any security
in which it is authorized to invest (except that, with respect
to the money market funds, the security may have a maturity in
excess of 397 days). While it does not presently appear
possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the
Funds in connection with bankruptcy proceedings), it is the
Funds' current policy to limit repurchase agreements to those
parties whose creditworthiness has been reviewed and found
satisfactory by Capitoline pursuant to procedures established by
the Board of Directors.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement
a Fund sells a portfolio instrument to another party, such as a
bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time. While
a reverse repurchase agreement is outstanding, a Fund will
maintain appropriate liquid assets in a segregated custodial
account to cover its obligation under the agreement. A Fund will
enter into reverse repurchase agreements only with parties
7
<PAGE>
whose creditworthiness has been found satisfactory by Capitoline.
Such transactions may increase fluctuations in the market value
of a Fund's assets and may be viewed as a form of leverage.
SECURITIES LENDING. The Funds (except Tax Free Money Fund,
Maryland Municipal Bond Fund, Virginia Intermediate Municipal
Bond Fund and Virginia Municipal Bond Fund) may lend securities
to parties such as broker-dealers or institutional investors.
Securities lending allows a Fund to retain ownership of the
securities loaned and, at the same time, to earn additional
income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied
should the borrower fail financially, loans will be made only to
parties deemed by Capitoline to be creditworthy pursuant to
procedures established by the Board of Directors. Furthermore,
they will only be made if, in Capitoline's judgment, the income
to be earned from such loans would justify the risk.
It is the current view of the staff of the Securities and
Exchange Commission ("SEC") that a Fund may engage in loan
transactions only under the following conditions: (1) the Fund
must receive at least 100% collateral in the form of cash or
cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (2) the borrower must increase the collateral whenever
the market value of the securities loaned (determined on a daily
basis) rises above the value of the collateral; (3) after giving
notice, the Fund must be able to terminate the loan at any time;
(4) the Fund must receive reasonable interest on the loan or a
flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities
loaned and any increase in market value; (5) the Fund may pay
only reasonable custodian fees in connection with the loan; and
(6) the Board of Directors must be able to vote proxies on the
securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in
short-term high quality debt securities, U.S. government
securities or money market instruments. Investing this cash
subjects that investment, as well as the security loaned, to
market forces (i.e., capital appreciation or depreciation).
FOREIGN INVESTMENTS. Investing in securities issued by companies
or other issuers whose principal activities are outside the
United States may involve significant risks in addition to the
risks inherent in U.S. investments. The value of securities
denominated in foreign currencies and of dividends and interest
paid with respect to such securities will fluctuate based on
the relative strength of the U.S. dollar. In addition, there is
generally less publicly available information about foreign
issuers' financial condition and operations, particularly those
not subject to the disclosure and reporting requirements of the
U.S. securities laws. Foreign issuers are generally not bound by
uniform accounting, auditing and financial reporting
requirements and standards of practice comparable to those
applicable to U.S. issuers. Further, economies of particular
countries or areas of the world may differ favorably or
unfavorably from the economy of the United States.
Investing abroad also involves different political and economic
risks. Foreign investments may be affected by actions of
foreign governments adverse to the interests of U.S. investors,
including the possibility of expropriation or nationalization
of assets, confiscatory taxation, restrictions on U.S. investment
or on the ability to repatriate assets or convert currency into
U.S. dollars, or other government intervention. There may be a
greater possibility of default by foreign governments or
foreign government-sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic,
or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that Capitoline
will be able to anticipate these potential events or counter
their effects. The considerations noted above generally are
intensified for investments in developing countries. Developing
countries may have relatively unstable governments,
economies based on only a few industries, and securities markets
that trade a small number of securities.
Foreign markets may offer less protection to investors than U.S.
markets. It is anticipated that in most cases the best
available market for foreign securities will be on exchanges or
in over-the-counter markets located outside of the United
States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the
United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less
liquid and more volatile that securities of comparable U.S.
issuers. Foreign security trading practices, including those
involving securities settlement where fund assets may be released
prior to receipt of payment, may expose a Fund to increased risk
in the event of a failed trade or the insolvency of a foreign
broker-dealer, and may involve substantial delays. In addition,
the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher
8
<PAGE>
that for U.S. investors. In general, there is less overall
governmental supervision and regulation of securities exchanges,
brokers, and listed companies than in the United States. It may
also be difficult to enforce legal rights in foreign countries.
Cash Reserve Fund, the corporate bond funds and the equity funds
may invest in U.S. dollar denominated foreign securities that
impose restrictions on transfer within the U.S. or to U.S.
persons. Although securities subject to transfer restrictions
may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such
restrictions.
American Depositary Receipts and European Depositary Receipts
("ADRs" and "EDRs") are certificates evidencing ownership of
shares of a foreign-based issuer held in trust by a bank or
similar financial institution. Designed for use in U.S. and
European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in
their national markets and currencies.
INDEXED SECURITIES. A Fund may purchase securities whose prices
are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or
other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price
of gold, resulting in a security whose price tends to rise and
fall together with gold prices.
The performance of indexed securities depends to a great extent
on the performance of the security or other instrument to
which they are indexed, and may also be influenced by interest
rate changes. At the same time, indexed securities are
subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain
U.S. government agencies. Indexed securities may be more
volatile than the underlying instruments.
DELAYED DELIVERY TRANSACTIONS. These transactions involve a
commitment by a Fund to purchase or sell specific securities
at a predetermined price and/or yield, with payment and delivery
taking place after a period longer than the customary
settlement period for that type of security (and more than seven
days in the future). Typically, no interest accrues to the
purchaser until the security is delivered. Each money market and
bond fund may receive fees for entering into delayed delivery
transactions.
When purchasing securities on a delayed delivery basis, a Fund
assumes the rights and risks of ownership, including the risk
of price and yield fluctuations. Because a Fund is not required
to pay for securities until the delivery date, these risks are
in addition to the risks associated with the Fund's other
investments. If a Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed
delivery purchases may result in a form of leverage. When
delayed delivery purchases are outstanding, a Fund will set aside
cash or other appropriate liquid assets such as U.S. government
securities, or other high grade debt securities in a segregated
custodial account to cover its purchase obligations. When a Fund
has sold a security on a delayed delivery basis, the Fund does
not participate in further gains or losses with respect to the
security. If the other party to a delayed delivery transaction
fails to deliver or pay for the securities, the Fund could miss a
favorable price or yield opportunity, or could suffer a loss. A
Fund may renegotiate delayed delivery transactions after they are
entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
REFUNDING CONTRACTS. A Fund may purchase securities on a
when-issued basis in connection with the refinancing of an
issuer's outstanding indebtedness. Refunding contracts require
the issuer to sell and the Fund to buy refunded municipal
obligations at a stated price and yield on a settlement date that
may be several months or several years in the future. A Fund
generally will not be obligated to pay the full purchase price if
it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated
damages to the issuer (currently 15-20% of the purchase
price). A Fund may secure its obligations under a refunding
contract by depositing collateral or a letter of credit equal to
the liquidated damages provisions of the refunding contract.
When required by SEC guidelines, a Fund will place liquid
assets such as cash, U.S. government securities, or other high
grade debt securities in a segregated custodial account equal
in amount to its obligations under refunding contracts.
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VARIABLE OR FLOATING RATE DEMAND OBLIGATIONS ("VRDOS"/"FRDOS")
are tax-exempt obligations that bear variable or floating
interest rates and carry rights that permit holders to demand
payment of the unpaid principal balance plus accrued interest
from the issuers or certain financial intermediaries. Floating
rate securities have interest rates that change whenever there is
a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market
value for the VRDO or FRDO that approximates its par value.
With respect to each money market fund, a demand instrument with
a conditional demand feature must have received both a short-term
and a long-term high quality rating or, if unrated, have been
determined to be of comparable quality pursuant to procedures
adopted by the Board of Directors. A demand instrument with an
unconditional demand feature may be acquired solely in reliance
upon a short-term high quality rating or, if unrated, upon
finding of comparable short-term quality pursuant to procedures
adopted by the Board of Directors.
A Fund may invest in fixed-rate bonds that are subject to third
party puts and in participation interests in such bonds held
by a bank in trust or otherwise. These bonds and participation
interests have tender options or demand features that permit
the Funds to tender (or put) their bonds to an institution at
periodic intervals of up to one year and to receive the principal
amount thereof. Each Fund considers variable rate instruments
structured in this way ("participating VRDOs") to be essentially
equivalent to other VRDOs that it may purchase. The IRS has not
ruled whether the interest on participating VRDOs is tax-exempt,
and accordingly, the Funds intend to purchase these instruments
based on opinions of bond counsel.
With respect to the money market funds, a variable rate
instrument that matures in 397 days or less may be deemed to have
a maturity equal to the period remaining until the next
readjustment of the interest rate. A variable rate instrument
that matures in greater than 397 days but that is subject to a
demand feature that is 397 days or less may be deemed to have a
maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining
until the principal amount can be recovered through demand. A
floating rate instrument that is subject to a demand feature
may be deemed to have a maturity equal to the period remaining
until the principal amount may be recovered through demand. The
money market funds may purchase a demand instrument with a
remaining final maturity in excess of 397 days only if the demand
feature can be exercised on no more than 30 days' notice (a) at
any time or (b) at specific intervals not exceeding 397 days.
TENDER OPTION BONDS are created by coupling an intermediate or
long-term tax-exempt bond (generally held pursuant to a custodial
agreement) with a tender agreement that gives the holder the
option to tender the bond at its face value. As consideration
for providing the tender option, the sponsor (usually a bank,
broker-dealer, or other financial institution) receives periodic
fees equal to the difference between the bond's fixed coupon rate
and the rate (determined by a remarketing or similar agent) that
would cause the bond, coupled with the tender option, to trade at
par on the date of such determination. After payment of the
tender option fee, a Fund effectively holds a demand obligation
that bears interest at the prevailing short-term tax-exempt rate.
Subject to applicable regulatory requirements, the money market
funds may buy tender option bonds if the agreement gives the Fund
the right to tender the bond to its sponsor no less frequently
than once every 397 days. In selecting tender option bonds for
the Funds, Capitoline will, pursuant to procedures established by
the Board of Directors, consider the creditworthiness of the
issuer of the underlying bond, the custodian, and the third party
provider of the tender option. In certain instances, a sponsor
may terminate a tender option if, for example, the issuer of the
underlying bond defaults on interest payments.
STANDBY COMMITMENTS are puts that entitle holders to same day
settlement at an exercise price equal to the amortized cost
of the underlying security plus accrued interest, if any, at the
time of exercise. A Fund may acquire standby commitments
to enhance the liquidity of portfolio securities, but in the case
of the money market funds, only when the issuers of the
commitments present minimal risk of default.
Ordinarily a Fund will not transfer a standby commitment to a
third party, although it could sell the underlying municipal
security to a third party at any time. A Fund may purchase
standby commitments separate from or in conjunction with the
purchase of securities subject to such commitments. In the
latter case, a Fund would pay a higher price for the securities
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acquired, thus reducing their yield to maturity. Standby
commitments will not affect the dollar-weighted average maturity
of the money market funds, or the valuation of the securities
underlying the commitments.
Standby commitments are subject to certain risks, including the
ability of issuers of standby commitments to pay for securities
at the time the commitments are exercised; the fact that standby
commitments are not marketable by the Funds; and the possibility
that the maturities of the underlying securities may be different
from those of the commitments.
MUNICIPAL LEASE OBLIGATIONS. The municipal bond funds may invest
a portion of their assets in municipal leases and participation
interests therein. These obligations, which may take the form of
a lease, an installment purchase, or a conditional sale contract,
are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities, such
as fire and sanitation vehicles, telecommunications equipment,
and other capital assets. Generally, a Fund will not hold such
obligations directly as a lessor of the property, but will
purchase a participation interest in a municipal obligation from
a bank or other third party. A participation interest gives a
Fund a specified, undivided interest in the obligation in
proportion to its purchased interest in the total amount of the
obligation.
Municipal leases frequently have risks distinct from those
associated with general obligation or revenue bonds. State
constitutions and statutes set forth requirements that states or
municipalities must meet to incur debt. These may include
voter referenda, interest rate limits, or public sale
requirements. Leases, installment purchases, or conditional sale
contracts (which normally provide for title to the leased asset
to pass to the governmental issuer) have evolved as a means for
governmental issuers to acquire property and equipment without
meeting their constitutional and statutory requirements for
the issuance of debt. Many leases and contracts include
"non-appropriation" clauses providing that the governmental
issuer has no obligation to make future payments under the lease
or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance
limitations.
FEDERALLY TAXABLE OBLIGATIONS. The municipal bond funds do not
intend to invest in securities whose interest is taxable;
however, from time to time each such Fund may invest a portion of
its assets in fixed-income obligations whose interest is
subject to federal income tax. For example, each such Fund may
invest in obligations whose interest is taxable pending the
investment or reinvestment in municipal securities of proceeds
from the sale of its shares or sales of portfolio securities.
Should a municipal bond fund invest in taxable obligations, it
would purchase securities that in Capitoline's judgment are
of high quality. These include obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities;
obligations of domestic banks; and repurchase agreements. The
bond funds' standards for high quality taxable obligations
are essentially the same as those described by Moody's Investors
Service, Inc. in rating corporate obligations within its two
highest ratings of Prime-1 and Prime-2, and those described by
Standard and Poor's Corporation in rating corporate obligations
within its two highest ratings of A-1 and A-2. Additionally,
each Fund will purchase such obligations only in accordance with
the quality standards as set forth in the Prospectus.
Proposals to restrict or eliminate the federal income tax
exemption for interest on municipal obligations are introduced
before Congress from time to time. Proposals may also be
introduced before state legislatures that would affect the state
tax treatment of a Fund's distributions. If such proposals were
enacted, the availability of municipal obligations and the value
of each Funds' holdings would be affected and the Board of
Directors would reevaluate the Funds' objectives and policies.
Each municipal bond fund anticipates being as fully invested as
practicable in municipal securities; however, there may be
occasions when as a result of maturities of portfolio securities,
or sales of Fund shares, or in order to meet redemption
requests, a Fund may hold cash that is not earning income. In
addition, there may be occasions when, in order to raise cash
to meet redemptions or to preserve credit quality, a Fund may be
required to sell securities at a loss.
PORTFOLIO TRANSACTIONS
Capitoline may place portfolio transactions with broker-dealers
which furnish, without cost, certain research, statistical, and
quotation services of value to Capitoline and its affiliates in
advising the Funds and other clients, provided that it shall
always
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seek best price and execution with respect to the transactions.
Certain investments may be appropriate for the Funds and for
other clients advised by Capitoline. Investment decisions for
the Funds and other clients are made with a view to achieving
their respective investment objectives and after consideration of
such factors as their current holdings, availability of cash for
investment, and the size of their investments generally. A
particular security may be bought or sold for only one client or
in different amounts and at different times for more than one but
less that all clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are
selling the security. In addition, purchases or sales of the
same security may be made for two or more clients of Capitoline
on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by Capitoline to
be equitable to each. In some cases, this procedure could have
an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for a
Fund may be combined with those of other clients of Capitoline in
the interest of achieving the most favorable net results for a
Fund.
Transactions on U.S. stock exchanges and other agency
transactions involve the payment by a Fund of negotiated
brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size
of the transaction. Transactions in foreign securities often
involve the payment of fixed brokerage commissions, which are
generally higher than those in the United States. There is
generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by a Fund
usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by a Fund includes a
disclosed, fixed commission or discount retained by the
underwriter or dealer.
Capitoline places all orders for the purchase and sale of
portfolio securities for a Fund through a substantial number of
brokers and dealers. In so doing, it uses its best efforts to
obtain for a Fund the best price and execution available. In
seeking the best price and execution, Capitoline, having in mind
a Fund's best interest, considers all factors it deems
relevant, including, by way of illustration, price, the size of
the transaction, the nature of the market for the security, the
amount of the commission, the timing of the transaction taking
into account market process and trends, the reputation,
experience and financial stability of the broker-dealer involved,
and the quality of service rendered by the broker-dealer in
other transactions.
It has for many years been a common practice in the investment
advisory business for advisers of investment companies and
other institutional investors to receive research, statistical,
and quotation services from broker-dealers that execute portfolio
transactions for the clients of such advisers. Consistent with
this practice, Capitoline receives research, statistical, and
quotation services from many broker-dealers with which it places
a Fund's portfolio transactions. These services, which
in some cases may also be purchased for cash, include such
matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and
recommendations as to the purchase and sale of securities.
Some of these services are of value to Capitoline and its
affiliates in advising various of their clients (including the
Funds), although not all of these services are necessarily useful
and of value in managing the Funds. The fee paid by a Fund to
Capitoline is not reduced because Capitoline and its affiliates
receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of
1934 (the "1934 Act"), as amended, Capitoline may cause
a Fund to pay a broker-dealer that provides brokerage and
research services to Capitoline a commission in excess of the
commission charged by another broker-dealer for effecting a
particular transaction. To cause a Fund to pay any such greater
commissions Capitoline must determine in good faith that such
commissions are reasonable in relation to the value of the
brokerage or research service provided by such executing
broker-dealers viewed in terms of a particular transaction or
Capitoline's overall responsibilities to the Fund or its other
clients. In reaching this determination, Capitoline will not
attempt to place a specific dollar value on the brokerage or
research services provided or to determine what portion of the
compensation should be related to those services.
It is expected that a Fund may execute brokerage or other agency
transactions through the Distributor or an affiliate of the
Distributor or through an affiliate of the Advisor, which are
registered broker-dealers, for a commission consistent with the
1940 Act, the 1934 Act and rules promulgated by the SEC. Under
these provisions, the Distributor or an affiliate of the
Advisor is permitted to receive and retain compensation for
effecting portfolio transactions for a Fund on a securities
exchange. These rules further require that commissions paid to
the Distributor by a Fund for exchange transactions not
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<PAGE>
exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which
are "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in
connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange
during a comparable period of time." In addition, the Fund may
direct commission business to one or more designated
broker-dealers in connection with such broker-dealers' provision
of services to the Fund or payment of certain Fund expenses
(e.g., custody, pricing and professional fees). The Directors of
the Company, including those who are not "interested persons" of
the Company have adopted procedures for evaluating the
reasonableness of commissions paid to the Distributor and will
review these procedures periodically.
Brokerage commissions paid by the following Funds for the fiscal
years ended 1995, 1994 and 1993 were:
1995 1994 1993
Value $1,111,862 $467,961 $32,110
Capital Appreciation** $ 321,065 $ 77,685 ----
Special Equity* $ 217,673 $116,129 $ 9,220
* Inception date 9/28/92
** Inception date 1/11/93
During fiscal year ended 1995, the Fund paid brokerage
commissions in the amount of $151,676 to SEI Financial Services
Company, which represented 0.6% of the Fund's aggregate brokerage
commissions for such period. The dollar amount of transactions
effected through such broker represented 0.3% of the Fund's
aggregate dollar amount of transactions involving the payment of
commissions for such period.
Certain of the Funds that invest primarily in fixed income
securities pay SEI Financial Services Company a fee with respect
to repurchase transactions. For fiscal 1995 these fees were as
follows: U.S. Treasury Money Fund, $74,696; Cash Reserve Fund,
$62,813; Limited Term Bond Fund, $334; Intermediate Bond Fund,
$118; and Government Bond Fund, $54. These fees represent the
only commissions paid by these Funds.
VALUATION OF PORTFOLIO SECURITIES
MONEY MARKET FUNDS. Like most money market funds, the Funds
value their investments on the basis of amortized cost.
This technique involves valuing an instrument at its cost as
adjusted for amortization of premium or accretion of discount
rather than its value based on current market quotations or
appropriate substitutes which reflect current market conditions.
The amortized cost value of an instrument may be higher or lower
than the price a Fund would receive if it sold the instrument.
Valuing a Fund's instruments on the basis of amortized cost and
use of the term "money market fund" are permitted by Rule 2a-7
under the 1940 Act. The Funds must adhere to certain conditions
under Rule 2a-7; these conditions are summarized in the
Prospectus.
The Company's Board of Directors oversees Capitoline's adherence
to SEC rules concerning money market funds, and has established
procedures designed to stabilize each money market fund's NAV at
$1.00. At such intervals as they deem appropriate, the Directors
consider the extent to which NAV calculated by using market
valuations would deviate from $1.00 per share. If the Directors
believe that a deviation from a Fund's amortized cost per share
may result in material dilution or other unfair results to
shareholders, the Directors have agreed to take such corrective
action, if any, as they deem appropriate to eliminate or reduce,
to the extent reasonably practicable, the dilution or unfair
results. Such corrective action could include selling portfolio
instruments prior to maturity to realize capital gains or losses
or to shorten average portfolio maturity; withholding dividends;
redeeming shares in kind; establishing NAV by using available
market quotations; and such other measures as the Directors may
deem appropriate.
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During periods of declining interest rates, a Fund's yield based
on amortized cost may be higher than the yield based on market
valuations. Under these circumstances, a shareholder in a Fund
would be able to obtain a somewhat higher yield than would result
if the Fund utilized market valuations to determine its NAV. The
converse would apply in a period of rising interest rates.
BOND FUNDS. Valuations of portfolio securities furnished by the
pricing service employed by the Funds are based upon a
computerized matrix system and/or appraisals by the pricing
service, in each case in reliance upon information concerning
market transactions and quotations from recognized securities
dealers. The methods used by the pricing service and the
quality of valuations so established are reviewed by officers of
the Funds and the Funds' pricing agent under general supervision
of the Board of Directors. There are a number of pricing
services available, and the Board of Directors, on the basis of
on-going evaluation of these services, may obtain quotes directly
from broker-dealers or market makers, may use other pricing
services or discontinue the use of any pricing service in whole
or in part.
EQUITY FUNDS. Securities owned by the Funds are appraised by
various methods depending on the market or exchange on which they
trade. Securities traded on the New York Stock Exchange or the
American Stock Exchange are appraised at the last sale price, or
if no sale has occurred, at the closing bid price. Securities
traded on other exchanges are appraised as nearly as possible in
the same manner. Securities and other assets for which exchange
quotations are not readily available are valued on the basis of
closing over-the-counter bid prices, if available, or at their
fair value as determined in good faith under consistently applied
procedures under the general supervision of the Board of
Directors.
FUND PERFORMANCE
YIELD CALCULATIONS. In computing each Class of the money market
funds' YIELD for a period, the net change in value of a
hypothetical account containing one share reflects the value of
additional shares purchased with dividends from the one
original share and dividends declared on both the original share
and any additional shares. The net change is then divided
by the value of the account at the beginning of the period to
obtain a base period return. This base period return is
annualized to obtain a current ANNUALIZED YIELD. Each Class of
the money market funds may also calculate a compounded
EFFECTIVE YIELD by compounding the base period return over a one
year period. In addition to the current yield, each Class may
quote yields in advertising based on any historical seven day
period. Yields for the money market funds are calculated on the
same basis as other money market funds, as required by
regulation.
For the bond funds, yields used in advertising are computed by
dividing a Class' interest income for a given 30-day or one-
month period, net of a Class of shares' expenses, by the average
number of shares of the class entitled to receive dividends
during the period, dividing this figure by the Class' NAV (A
Shares includes the maximum sales charge) at the end of the
period and annualizing the result (assuming compounding of
income) in order to arrive at an annual percentage rate. Income
is calculated for purposes of each Class' yield quotations in
accordance with standardized methods applicable to all stock and
bond funds. In general, interest income is reduced with respect
to bonds trading at a premium over their par value by subtracting
a portion of the premium from income on a daily basis, and is
increased with respect to bonds trading at a discount by adding a
portion of the discount to daily income. Capital gains and
losses generally are excluded from the calculation.
Income calculated for the purposes of determining each Class of
the bond funds' yield differs from income as determined for other
accounting purposes. Because of the different accounting methods
used, and because of the compounding of income assumed in yield
calculations, each Class' yield may not equal its distribution
rate, the income paid to shareholder accounts, or income reported
in the Fund's financial statements.
For purposes of the municipal funds, a TAX-EQUIVALENT YIELD is
the rate an investor would have to earn from a fully taxable
investment after taxes to equal a Class' tax-free yield.
Tax-equivalent yields are calculated by dividing a Class' yield
by the result of one minus a stated federal or combined federal,
state, and city tax rate. (If only a portion of the Class' yield
was tax-exempt, only that portion is adjusted in the
calculation.) If any portion of a Class' income is derived from
obligations subject to state or federal income taxes, its
tax-equivalent yield will generally be lower.
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Yield information may be useful in reviewing a Class' performance
and in providing a basis for comparison with other investment
alternatives. However, each Class' yield fluctuates, unlike
investments that pay a fixed interest rate over a stated period
of time. When comparing investment alternatives, investors
should also note the quality and maturity of the portfolio
securities of the respective investment companies that they have
chosen to consider.
Investors should recognize that in periods of declining interest
rates a Class' yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates
a Class' yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to a
Class from the continuous sale of its shares will likely be
invested in instruments producing lower yields than the balance
of the Fund's holdings, thereby reducing the Class' current
yield. In periods of rising interest rates, the opposite can be
expected to occur.
The distribution rate, which expresses the historical amount of
income dividends paid as a percentage of the share price may
also be quoted. The distribution rate is calculated by dividing
the daily dividend per share by its offering price (including
the maximum sales charge, if applicable) for each day in the
30-day period, averaging the resulting percentages, then
expressing the average rate in annualized terms. The
distribution rate may also be calculated without giving effect to
applicable sales charges.
The following table shows the effect of a shareholder's tax
status on effective yield under the federal, Virginia State and
Maryland State income tax laws for 1995. It shows the
approximate yield a taxable security must provide at various
income brackets to produce after-tax yields equivalent to those
of hypothetical tax-exempt obligations yielding from 2% to 8%.
Of course, no assurance can be given that any of the Tax Free
Money Fund and municipal bond funds will achieve any specific
tax-exempt yield. While the Funds invest principally in
obligations whose interest is exempt from federal income tax,
other income received by the Funds may be taxable, and income
produced by the Tax Free Money Fund will generally be subject
to Virginia or Maryland State income taxation, as the case may
be.
1995 TAX RATES AND TAX-EQUIVALENT YIELDS
Taxable
Income*
Combined Combined
Federal Federal
Federal Virginia Maryland and and
Tax Tax Tax Virginia Maryland
Bracket Bracket Bracket Tax Tax
** *** **** Brackets Brackets
single joint
return return
$0 - $0 - 15.00% 5.75% 8.00% 19.89% 21.80%
$23,350 $39,000
$23,351 $39,001- 28.00% 5.75% 8.00% 32.14% 33.76%
- -$56,550 $94,250
$56,551 $94,251- 31.00% 5.75% 8.00% 34.97% 36.52%
- -$117,950 $143,600
$117,951 $143,601 36.00% 5.75% 8.00% 39.68% 41.12%
- -$256,500 -$256,500
$256,501 $256,501- 39.60% 5.75% 8.00% 43.07% 44.43%
- -above above
* Taxable income (gross income after all exemptions, adjustments,
and deductions) based on current tax rates.
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** Excludes the impact of the phaseout of personal exemptions,
limitation on itemized deductions, and other credits,
exclusions, and adjustments which may raise a taxpayer's marginal
tax rate. An increase in a shareholder's marginal tax
rate would increase that shareholder's tax-equivalent yield.
*** Virginia has a graduated income tax. The top rate is 5.75%
applicable to Virginia taxable income over $17,000.
**** Maryland has a graduated income tax. The top rate is 5.00%
applicable to Maryland taxable income over $3,000. In general,
Maryland local income taxes imposed by various counties range
from 50% to 60% of the State income tax liability, although
Worcester County currently imposes an income tax equal to 30% of
the state income tax liability. The rate stated assumes a local
income tax imposed at 60% of the amount of the state income tax
and the tax-equivalent yield table below applicable to effective
combined federal and Maryland state tax rates approximates the
effect of exemption of distributions of tax-exempt income from
the Maryland Municipal Bond Fund from local income tax imposed at
that rate.
If your Federal tax rate in 1995 is:
15.00% 28.00% 31.00% 36.00% 39.60%
Then your tax-equivalent yield is:
Yield
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
7.00% 8.24% 9.92% 10.14% 10.94% 11.59%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
If your effective combined federal and Virginia state tax rate
is:
19.89% 32.14% 34.97% 39.68% 43.07%
Then your tax-equivalent yield is:
Yield
2.00% 2.50% 2.95% 3.08% 3.32% 3.51%
3.00% 3.75% 4.42% 4.61% 4.97% 5.27%
4.00% 4.99% 5.89% 6.15% 6.63% 7.03%
5.00% 6.24% 7.37% 7.69% 8.29% 8.78%
6.00% 7.49% 8.34% 9.23% 9.95% 10.54%
7.00% 8.74% 10.32% 10.76% 11.60% 12.30%
8.00% 9.99% 11.79% 12.30% 13.26% 14.05%
If your effective combined federal and Maryland state tax rate
is:
21.80% 33.76% 36.52% 41.12% 44.43%
Then your tax-equivalent yield is:
Yield
2.00% 2.56% 3.02% 3.15% 3.40% 3.60%
3.00% 3.84% 4.53% 4.73% 5.10% 5.40%
4.00% 5.12% 6.04% 6.30% 6.79% 7.20%
5.00% 6.39% 7.55% 7.88% 8.49% 9.00%
6.00% 7.67% 9.06% 9.45% 10.19% 10.80%
16
<PAGE>
7.00% 8.95% 10.57% 11.03% 11.89% 12.60%
8.00% 10.23% 12.08% 12.60% 13.59% 14.40%
Each of the Funds may invest a portion of its assets in
obligations that are subject to state or federal income tax.
When a Fund invests in these obligations, its tax-equivalent
yield will be lower. In the tables immediately above,
tax-equivalent yields are calculated assuming investments made by
the Virginia Intermediate Municipal Bond and Virginia Municipal
Bond Funds are 100% federally and Virginia tax-free and assuming
investments made by the Maryland Municipal Bond Fund are
100% federally and Maryland tax-free.
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising
reflect all aspects of the Class of shares' return, including
the effect of reinvesting dividends and capital gain
distributions (if any), and any change in the Class' NAV over the
period. Average annual total returns are calculated by
determining the growth or decline in value of a hypothetical
historical investment in a Class over a stated period, and then
calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in
value had been constant over the period. For example, a
cumulative total return of 100% over ten years would produce an
average annual total return of 7.18%, which is the steady annual
rate of return that would equal 100% growth on a compounded basis
in ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors
should realize that a Class of shares' performance is not
constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as
opposed to the actual year-to-year performance of the Class.
In addition to average annual total returns, each Class 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. A Shares' total returns may be quoted with or without
taking the maximum sales charge into account. Excluding A
Shares' 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.
HISTORICAL FUND RESULTS. The following table shows the money
market funds' yields and effective yields for each Class
for the seven-day period ended November 30, 1995.
Yield+ Effective Tax-Equivalent
Yield+ Yield+*
A Shares Trust A Shares Trust A Shares Trust
Class Class Class
Cash Reserve
Fund 5.28% 5.29% 5.42% 5.43% N/A N/A
U.S. Treasury
Money Fund N/A 5.18% N/A 5.31% N/A N/A
Tax Free
Money Fund 3.14% 3.14% 3.18% 3.19% 4.55% 4.55%
* Based on an assumed federal income tax rate of 31%.
+ Each money market fund's A Shares, which became effective May
3, 1993, pay an additional distribution-related 12b-1 fee of
.25%, which, when taken into account, results in lower yields.
Effective March 31, 1994, U.S. Treasury Money Fund discontinued
offering A Shares, and the .25% Rule 12b-1 distribution fee for
all the money market funds was waived.
Cash Reserve Fund's B Shares, became effective on March 29, 1995,
at which time a .75% 12b-1 fee (plus a .25% shareholder service
fee) began to be imposed.
17
<PAGE>
The following table shows yields and effective yields for each
class of the bond funds for the 30-day period ended November
30, 1995 and the average annual total returns for each bond and
equity fund for the period ended November 30, 1995.
Yield
Trust Class A Shares
Limited Term Bond Fund 5.26% 5.13%
Intermediate Bond Fund 5.49% 5.31%
Virginia Intermediate
Municipal Bond Fund 4.03% 3.88%
Average Annual Total Returns+
1 year Life of Fund*
A Shares Trust A Shares Trust
Class Class
Limited Term Bond
(9/28/92) 9.51% 11.50% 4.67% 5.38%
Intermediate Bond Fund
(9/28/92) 13.61% 12.07% 5.90% 6.12%
VA Intermediate Muni.
Bond (1/11/93) 12.08% 16.09% 4.06% 5.40%
Value Fund (9/28/92) 22.90% 28.76% 11.59% 13.25%
Capital Appreciation
(1/11/93) 15.24% 20.74% 5.24% 7.50%
Special Equity Fund
(9/28/92) 14.64% 20.87% 11.01% 12.63%
*Life of Fund figures are for the period beginning on the date
indicated above through November 30, 1995.
+ Average annual total returns include the effect of the maximum
sales charge. Effective May 3, 1993, the Funds commenced sales
of A Shares. This performance information reflects the A Shares'
12b-1 fees and revised transfer agency fee arrangements for the
period May 3, 1993 to November 30, 1995, and therefore, may not
be representative of A Shares performance.
Note: Initial offering of B Shares was made on March 29, 1995,
at which time a .75% 12b-1 fee (plus a .25% shareholder service
fee) began to be imposed.
Each Class' performance may be compared in advertising to the
performance of other mutual funds in general or to the
performance of particular types of mutual funds, especially those
with similar objectives. This performance may be expressed as a
ranking prepared by Lipper Analytical Services, Inc. ("Lipper,"
sometimes referred to as "Lipper Analytical Services"), an
independent service, that monitors the performance of mutual
funds. The Lipper performance analysis ranks funds on the basis
of total return, assuming reinvestment of all distributions, but
does not take sales charges or redemption fees into consideration
and is prepared without regard to tax consequences. In addition,
each Class of the municipal funds' performance may be compared in
advertising to the performance of representative individual
municipal securities and unit investment trusts comprised of
municipal securities.
The Lipper General Equity Funds Average can be used to show how
the Funds' performance compares to a broad-based set of equity
mutual funds. The Lipper General Equity Funds Average is an
average of the total returns of all equity mutual funds
(excluding international funds and funds that specialize in
particular industries or types of investments) tracked by
Lipper.
Ibbotson Associates of Chicago, Illinois provides historical
returns of the capital markets in the United States. Each Class
may compare its performance to the long-term performance of the
U.S. capital markets in order to demonstrate general long-
term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical
investment in common stocks, long-term bonds, or U.S. Treasury
securities.
18
<PAGE>
Each Class of the money market funds also may compare its
performance or the performance of securities in which it may
invest to IBC/Donoghue's MONEY FUND AVERAGES(TM), which monitors
the performance of taxable and tax-free money market funds. This
index, which also assumes reinvestment of distributions, is
published by IBC/Donoghue's MONEY FUND REPORT(R) of Ashland,
Massachusetts 01721.
Each Class also may quote in advertising the performance of
various unmanaged indices as may be selected from time to
time, and may compare the price volatility of these indices to
the price volatility of the Standard & Poor's Composite Index
of 500 Stocks ("S&P 500(R) Index"). These indices may include,
but are not limited to, the examples shown in the Appendix.
ADDITIONAL INFORMATION REGARDING PRICING AND REDEMPTIONS
The Funds are open for business and their NAVs are calculated
each day the New York Stock Exchange ("NYSE") and the
Custodian, Crestar Bank, are open. The NAV of each money market
fund is determined as of 12:00 Noon Eastern time for Tax Free
Money Fund, and 1:00 p.m. Eastern time for Cash Reserve Fund and
U.S. Treasury Money Fund, and as of the close of regular trading
hours of the NYSE, normally 4:00 p.m. Eastern time. The NAV of
each equity and bond fund is determined as of the close of
regular trading hours of the NYSE. The NYSE and Crestar Bank
have designated the following holiday closings for 1995, and
Capitoline expects the schedule to be the same in the future:
New Year's Day (observed), Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Columbus Day (observed), Veterans'
Day, Thanksgiving Day and Christmas Day. The holiday closing
schedule may be changed by the NYSE and Crestar Bank. When the
NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under
emergency circumstances as determined by the SEC to merit
such action, the Funds will determine NAVs at the close of
business, the time of which will coincide with the closing of the
NYSE. To the extent that Fund securities are traded in other
markets on days the NYSE or Crestar Bank are closed (and
a Fund is not open for business), a Fund's NAV may be
significantly affected on days when investors do not have access
to the Fund to purchase or redeem shares.
If the Directors determine that existing conditions make cash
payment undesirable, redemption payments may be made in whole or
in part in securities or other property, valued for this purpose
as they are valued in computing the NAV of each Fund.
Shareholders receiving securities or other property on redemption
may realize a gain or loss for tax purposes and will incur any
costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, a Fund is required to
give shareholders at least 60 days' notice prior to terminating
or modifying a Fund's exchange privilege. Under the Rule, the 60
day notification requirement may be waived if (i) the only effect
of a modification would be to reduce or eliminate an
administrative fee, redemption fee or deferred sales charge
ordinarily payable at the time of exchange or (ii) a Fund
temporarily suspends the offering of shares as permitted
under the 1940 Act or by the SEC or because it is unable to
invest amounts effectively in accordance with its investment
objective and policies.
In the Prospectus, the Funds have notified shareholders that they
reserve the right at any time without prior notice to
shareholders to refuse exchange purchases by any person or group
if, in Capitoline's judgment, a Fund would be unable to invest
effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. If you request to have distributions mailed to
you and the U.S. Postal Service cannot deliver your checks,
or if your checks remain uncashed for six months, the Fund will
hold your distributions without interest or until you provide
the Fund with alternate instructions.
Each money market and bond fund declares dividends equal to its
entire net investment income (including, in the case of the Cash
Reserve Fund and U.S. Treasury Money Fund, net realized
short-term capital gains, if any) on each business day of that
Fund. Equity funds declare and pay dividends monthly. Net
capital gains (and, in the case of Tax Free Money Fund,
19
<PAGE>
net short-term capital gains), if any, are declared and
distributed annually by all Funds, normally in December. Each
money market fund and bond fund declares dividends for Saturdays,
Sundays and holidays on the previous business day, and pay
dividends after the close of business on the last business day of
each month. Unless the Fund's Transfer Agent is otherwise
instructed, all dividends and distributions of capital gains are
automatically re-invested into additional shares of common stock
of that Fund immediately upon payment thereof.
Cash Reserve Fund, U.S. Treasury Money Fund, Tax Free Money Fund,
Limited Term Bond Fund, Intermediate Bond Fund, Virginia
Intermediate Municipal Bond Fund, Value Fund, Capital
Appreciation Fund and Special Equity Fund each qualified for the
fiscal year ended November 30, 1995, and each Fund, including
Maryland Municipal Bond Fund, Government Bond Fund and Virginia
Municipal Bond Fund, intends to qualify for each subsequent
fiscal year, for tax treatment as a "regulated investment
company" under the Internal Revenue Code. By distributing all of
its net investment income and any net realized short-term and
long-term capital gains for a taxable year in accordance with the
timing requirements imposed by the Code, and by meeting certain
other requirements relating to the sources of income and
diversification of assets, a Fund should not be liable for
federal income or excise taxes.
TAX FREE MONEY FUND, MARYLAND MUNICIPAL BOND FUND, VIRGINIA
INTERMEDIATE MUNICIPAL BOND FUND AND VIRGINIA MUNICIPAL BOND FUND
(COLLECTIVELY THE "MUNICIPAL FUNDS"). Dividends paid to
shareholders by any of the Municipal Funds out of tax-exempt
interest income earned by such a Fund ("exempt-interest
dividends") generally will not be subject to federal income tax,
provided that (as intended) at least 50% of the value of the
Fund's total assets at the close of each quarter of its taxable
year is comprised of obligations, the interest on which is
excluded from gross income under section 103(a) of the Internal
Revenue Code. Substantially all of the dividends paid by Tax
Free Money Fund are anticipated to be exempt from regular federal
income taxes. Under normal circumstances, at least 80% of the
income from Maryland Municipal Bond Fund, Virginia Intermediate
Municipal Bond Fund and Virginia Municipal Bond Fund will be
exempt from regular federal income taxes. However, persons who
are "substantial users" (or "related persons" of substantial
users) of facilities financed by private activity bonds held by a
Fund may be subject to tax on their pro rata share of the
interest income from such bonds and should consult their tax
advisers before purchasing shares of that Fund. Dividends paid
by a Fund out of its taxable net investment income (including
realized net short-term capital gains, if any) are taxable to
shareholders as ordinary income notwithstanding that such
dividends are reinvested in additional shares of that Fund.
Distributions of net capital gains, if any, are taxable as
long-term capital gains to the shareholder receiving them
regardless of the length of time the shares on which such
distributions are paid may have been held. With respect to a
shareholder who receives exempt-interest dividends on shares of a
fund held for six months or less, any loss on the sale or
exchange of such shares will, to the extent of the amount of such
exempt-interest dividends, be disallowed. In addition, a
long-term capital gain distribution with respect to shares will
cause any loss on a subsequent sale or exchange of such shares
not so disallowed to be treated as long-term capital loss to the
extent of such long-term capital gain distribution, if such
shares are held for six months or less.
Under current federal tax law (1) interest on certain private
activity bonds is treated as an item of tax preference for
purposes of the federal alternative minimum tax imposed on
individuals and corporations, though for regular federal income
tax purposes such interest remains fully tax-exempt, and (2)
interest on all tax-exempt obligations is included in "adjusted
current earnings" of corporations for federal alternative minimum
tax purposes. Because Tax Free Money Fund expects to purchase
private activity bonds, a portion (not expected to exceed 20%) of
the Fund's exempt-interest dividends may constitute an item
of tax preference for those shareholders subject to the federal
alternative minimum tax. Maryland Municipal Bond Fund, Virginia
Intermediate Municipal Bond Fund and Virginia Municipal Bond Fund
each may invest in municipal obligations, the interest on which
is subject to the federal alternative minimum tax ("AMT
securities"). To the extent that these Funds invest in AMT
securities, shareholders who are subject to the AMT will be
required to report a portion of that Fund's dividends as a "tax
preference item" in determining their federal taxes.
Every shareholder required to file a federal individual income
tax return is required to include for informational purposes
the amount of exempt-interest dividends received from the
municipal bond funds during the taxable year. Exempt interest
dividends are included in determining what portion, if any, of a
person's social security benefits and railroad retirement
benefits are subject to federal income tax.
20
<PAGE>
Interest on indebtedness incurred by shareholders to purchase or
carry shares of each municipal bond fund generally is not
deductible for federal income tax purposes. Shares of each
municipal bond fund may be considered to have been purchased
or carried with borrowed funds even though those funds are not
directly linked to the shares.
The exemption for federal income tax purposes of dividends
derived from interest on municipal securities does not
necessarily result in an exemption under the income or other tax
laws of any state or local taxing authority. Shareholders of the
municipal bond funds may be exempt from state and local taxes on
distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in
which they reside but may be subject to tax on income derived
from the municipal securities of other jurisdictions.
Shareholders are advised to consult with their tax advisers
concerning the application of state and local taxes to
investments in a municipal bond fund which may differ from the
federal income tax consequences described above.
FEDERAL TAXES. Distributions from each Fund's taxable net
investment income and net short-term capital gains are taxed
as dividends, and capital gain distributions are taxed as
long-term capital gains. A portion of the equity funds'
dividends may qualify for the dividends received deduction for
corporations. The Funds' distributions are taxable when they are
paid, whether taken in cash or reinvested in additional shares,
except that distributions declared in October, November or
December to shareholders of record in such month and paid the
subsequent January will be taxed as though paid on December 31.
The Funds will send shareholders a tax statement by January 30
showing the status of the taxable distributions received in
the prior year, and will file a copy with the IRS. In addition,
within 60 days from the end of each Fund's fiscal year end,
the shareholders will be notified as to the portion of
distributions paid that qualify as exempt-interest dividends,
capital gain distributions, and qualified dividends for corporate
investors. It is suggested that shareholders keep all statements
received to assist in personal recordkeeping.
STATE AND LOCAL TAXES. In addition to federal taxes,
shareholders may be subject to state or local taxes on their
investment, depending on state law.
Commonwealth of Virginia. Under existing Virginia law,
distributions from Virginia Intermediate Municipal Bond Fund and
Virginia Municipal Bond Fund will not be subject to Virginia
individual, trust, estate, or corporate income taxation to the
extent that such distributions are either (i) excludable from
federal gross income and attributable to interest on obligations
of Virginia, its political subdivisions, or its
instrumentalities, or Puerto Rico, United States Virgin Islands,
or Guam or (ii) attributable to interest on direct obligations of
the United States. These Virginia income tax exemptions will be
available only if a Fund (i) qualifies as a separate "regulated
investment company" under the Internal Revenue Code and (ii)
complies with the requirement of the Internal Revenue Code that
at least 50% of the value of its assets at the close of each
quarter of its taxable year is invested in state, municipal, or
other obligations described in Section 103(a) of the Internal
Revenue Code. These Funds intend to comply with those
requirements.
Other distributions from these Funds, including capital gains,
generally will not be exempt from Virginia income taxation.
Interest on indebtedness incurred (directly or indirectly) by a
shareholder of Virginia Intermediate Municipal Bond Fund or
Virginia Municipal Bond Fund to purchase or carry shares of these
Funds generally will not be deductible for Virginia income tax
purposes. These Funds will not be subject to any Virginia
intangible personal property tax on any obligations in a Fund.
In addition, shares of a Fund held for investment purposes will
not be subject to any Virginia intangible personal property tax.
To be entitled to the exemption described above for distributions
attributable to certain interest on Virginia obligations,
obligations of certain United States possessions or direct United
States obligations, a shareholder must be able to substantiate
the exempt portions of each distribution with reasonable
certainty. The determination of exempt portions must be made on
a monthly (rather than annual or quarterly) basis if, as planned,
Virginia Intermediate Municipal Bond Fund and Virginia Municipal
Bond Fund each makes monthly distributions. Accordingly,
shareholders should retain their statements from these
21
<PAGE>
Funds, which are to be issued at least annually, showing the
percentages of each monthly distribution attributable to interest
on Virginia obligations, possessions obligations and United
States obligations.
State of Maryland. To the extent the Maryland Municipal Bond
Fund qualifies as a regulated investment company under the Code,
it will be subject to tax only on (1) that portion of its income
on which tax is imposed for federal income tax purposes under
Section 852(b)(1) of the Code and (2) that portion of its income
which consists of federally tax exempt interest on obligations
other than Maryland Exempt Obligations (hereinafter defined) to
the extent such interest is not paid to Maryland Municipal Bond
Fund shareholders in the form of exempt-interest dividends. To
the extent dividends paid by the Maryland Municipal Bond Fund
represent interest excludable from gross income for federal
income tax purposes, that portion of exempt-interest dividends
that represents interest received by the Maryland Municipal Bond
Fund on obligations issued by the State of Maryland, its
political subdivisions, Puerto Rico, the U.S. Virgin Islands, or
Guam and their respective authorities or municipalities
("Maryland Exempt Obligations"), will be exempt from Maryland
state and local income taxes when allocated or distributed to a
shareholder of the Maryland Municipal Bond Fund except in the
case of a shareholder that is a financial institution. Except as
noted below, all other dividend distributions will be subject to
Maryland state and local income taxes.
Capital gains distributed by the Maryland Municipal Bond Fund to
a shareholder or any gains realized by a shareholder from a
redemption or sale of shares must be recognized for Maryland
state and local income tax purposes to the extent recognized
for federal income tax purposes. However, capital gains
distributions included in the gross income of shareholders for
federal income tax purposes are subtracted from capital gains
income for Maryland income tax purposes to the extent such
distributions are derived from the disposition by the Maryland
Municipal Bond Fund of debt obligations issued by the State
of Maryland, its political subdivisions and authorities.
Except in the case of a shareholder that is a financial
institution, dividends received by a shareholder from the
Maryland Municipal Bond Fund that are derived from interest on
U.S. government obligations will be exempt from Maryland state
and local income taxes.
In the case of individuals, Maryland presently imposes an income
tax on items of tax preference with reference to such items
as defined in the Code for purposes of calculating the federal
alternative minimum tax. Interest paid on certain private
activity bonds is a preference item for purposes of calculating
the federal alternative minimum tax. Accordingly, if the
Maryland Municipal Bond Fund holds such bonds, the excess of 50%
of that portion of exempt interest dividends which is
attributable to interest on such bonds over a threshold amount
may be taxable by Maryland. Interest on indebtedness incurred
or continued (directly or indirectly) by a shareholder in order
to purchase or carry shares of the Maryland Municipal Bond
Fund will not be deductible for Maryland state and local income
tax purposes. Individuals will not be subject to personal
property tax on their shares of the Maryland Municipal Bond Fund.
Shares of the Maryland Municipal Bond Fund held by a Maryland
resident at death may be subject to Maryland inheritance and
estate taxes.
CAPITAL GAINS. Shareholders may realize a capital gain or loss
when they redeem (sell) or exchange shares of the Funds. For
most types of accounts, the Funds will report the proceeds of a
shareholder's redemptions to the shareholder and the IRS
annually. However, because the tax treatment also depends on the
purchase price and the shareholder's personal tax position,
shareholders should keep their regular account statements to use
in determining their tax.
"BUYING A DIVIDEND." On the ex-dividend date for an equity or
bond fund distribution, the Fund's share value is reduced
by the amount of the distribution. If a shareholder were to buy
shares just before the record date ("buying a dividend"), the
shareholder would pay the full price for the shares and then, in
effect, receive a portion of the price back as a taxable
distribution.
OTHER TAX INFORMATION. When an investor signs his account
application, he will be asked to provide his social security
or taxpayer identification number and certify that the number
provided is correct and that he is not subject to 31% backup
withholding for failing to report income to the IRS. If an
investor fails to provide the correct number or violates IRS
regulations, the IRS can require the Funds to withhold 31% of his
taxable distributions and redemptions.
22
<PAGE>
Each Class calculates dividend and capital gain distributions
separately. Each Fund is treated as a separate entity in all
respects for tax purposes. There is a risk that a Fund may be
unable to meet tax rules that require mutual funds to derive
less than 30% of their gross income from gains realized upon the
sale of securities held less than 3 months. If this were
to occur, the affected Fund may be required to pay federal as
well as Maryland state income taxes from its assets.
The information above is only a summary of some of the tax
consequences generally affecting the Funds and their
shareholders, and no attempt has been made to discuss individual
tax consequences. In addition to federal income taxes,
shareholders may be subject to state and local taxes on
distributions received from the Funds. Investors should consult
their tax advisers to determine whether a Fund is suitable to
their particular situations.
DIRECTORS AND OFFICERS AND AFFILIATED PERSONS
The Directors and officers of the Company and their principal
occupations during the past five years are set forth below.
The Director who is an "interested person" (as defined in the
1940 Act) by virtue of his affiliation with either a fund or
Capitoline is indicated by an asterisk (*).
* Jesse F. Williams III, Chairman, President, and Director.
Chairman of the Board, Harrison & Bates Incorporated (real
estate company), since 1971. Mr. Williams is also a member of
the advisory board of Crestar Bank. His address is 823
East Main Street, Suite 1800, Richmond, Virginia 23219.
F. David Fowler, Director. Dean of School of Business and Public
Management of George Washington University since 1992. Mr.
Fowler is also a member of the board of directors of FTP Software
Corporation (software sales). Previously, he was a Partner at
KPMG Peat Marwick LLP (public accountants).
John Bruce James, Jr., Director. Vice President of Virginia
Landmark Corporation (real estate company) since 1970. Mr.
James is also a member of the Commission of Architectural Review,
City of Richmond, since 1982; a member of the Board of Trustees
of the Instructive Visiting Nurses Association since 1976; and a
member of the Board of Directors of The Retreat Hospital,
Richmond, Virginia, since 1982. Previously, he was a member of
the Board of Trustees, Hampden-Sydney College. His address is
3910 Exeter Road, Richmond, Virginia 23221.
Jean L. Oakey, Director. Partner at Wells Coleman & Co. (public
accountants).
Glen Douglas Pond, Director. Retired. Formerly the Director of
the Virginia Retirement System. His address is 21 Waterfront
Court, Cedar Point, Urbanna, Virginia 23175.
David M. Carter, Secretary, Partner, Hunton and Williams, Fund
Counsel.
Kevin P. Robins, Vice President, Assistant Secretary. Senior
Vice President & General Counsel of SEI, the Administrator
and the Distributor since 1994. Vice President of SEI, the
Administrator and the Distributor 1992-1994. Associate, Morgan,
Lewis & Bockius (law firm) prior to 1992.
Robert B. Carroll, Vice President, Assistant Secretary. Vice
President, Assistant Secretary of SEI, the Administrator and
Distributor since 1994. United States Securities and Exchange
Commission, Division of Investment Management, 1990-1994.
Associate, McGuire, Woods, Battle & Boothe (law firm) before
1990.
Jeffrey A. Cohen, Controller, Assistant Secretary. CPA,
Director, International and Domestic Funds Accounting, SEI
Corporation since 1991. Audit Manager, Price Waterhouse prior to
1991.
As of September 30, 1995, the Directors and officers owned in the
aggregate less than 1% of the outstanding shares of any
Fund.
23
<PAGE>
As of November 30, 1995, the Directors and officers of the
Company received the following compensation:
Total
Pension Compensation
or from
Aggregate Retire- Registrant
Compensation ment Estimated and
From Benefits Annual Fund Complex
Registrant Accrued Benefits Paid to
Name of for as Part Upon Directors for
Person, Fiscal Year of Fund Retire- Fiscal Year
Position Ended 1995 Expenses ment Ended 1995
Jesse F.
Williams, III,
Chairman,
President and
Director $7,000 0 0 $7,000
F. David Fowler,
Director $7,000 0 0 $7,000
John Bruce
James, Jr.,
Director $7,000 0 0 $7,000
Jean L. Oakey,
Director $7,000 0 0 $7,000
Glen Douglas
Pond, Director $7,000 0 0 $7,000
The Company was incorporated in the state of Maryland as Bayshore
Funds, Inc. on March 17, 1986. At a special meeting of
shareholders held July 7, 1992, shareholders approved an
amendment to the Articles of Incorporation changing the name
to CrestFunds, Inc. The change was effective July 10, 1992.
THE ADVISER
Pursuant to Investment Advisory Agreements, as amended (the
"Advisory Agreements") Capitoline Investment Services,
Incorporated, a wholly-owned subsidiary of Crestar Bank, a
subsidiary of Crestar Financial Corp., furnishes at its own
expense all services, facilities and personnel necessary in
connection with managing each Fund's investments and effecting
portfolio transactions for each Fund. Each Advisory Agreement
will continue in effect only if such continuance is
specifically approved at least annually by the Board of Directors
or by vote of the shareholders, and in either case by a majority
of the Directors who are not parties to each Advisory Agreement
or interested persons of any such party, at a meeting called for
the purpose of voting on each Advisory Agreement.
Each Advisory Agreement is terminable without penalty by any Fund
on 60 days' written notice when authorized either by vote of its
shareholders or by a vote of a majority of the Board of
Directors, or by the Adviser on 60 days' written notice, and
will automatically terminate in the event of its assignment.
Each Advisory Agreement also provides that, with respect
to each Fund, neither the Adviser nor its personnel shall be
liable for any error of judgment or mistake of law or for any
act or omission in the performance of its duties to the Fund,
except for willful misfeasance, bad faith or gross negligence
in the performance of the Adviser's or their duties or by reason
of reckless disregard of its or their obligations and duties
under the Advisory Agreements. Each Advisory Agreement provides
that the Adviser may render services to others.
The fees paid pursuant to the Advisory Agreements are accrued
daily and paid monthly. For its services under the Advisory
Agreements, the Adviser receives fees with respect to each Fund
at the annual rates set forth below:
MONEY MARKET FUNDS
.40% of each Fund's average daily net assets on the first $500
million of net assets;
.35% of each Fund's average daily net assets on the next $500
million of net assets; and
.30% of each Fund's average daily net assets on all remaining net
assets.
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<PAGE>
CAPITAL APPRECIATION FUND, VALUE FUND AND SPECIAL EQUITY FUND
.75% of each Fund's average daily net assets.
LIMITED TERM BOND FUND AND VIRGINIA INTERMEDIATE MUNICIPAL BOND
FUND
.50% of each Fund's average daily net assets.
INTERMEDIATE BOND FUND
.60% of Bond Fund's average daily net assets.
MARYLAND MUNICIPAL BOND FUND, GOVERNMENT BOND FUND AND VIRGINIA
MUNICIPAL BOND FUND
.60% of each Fund's average daily net assets.
The Adviser may choose to waive or reimburse a Fund for a portion
of that Fund's investment advisory fee.
For the fiscal years ended November 30, 1995, 1994 and 1993, the
advisory fees paid to the Adviser with respect to each
money market Fund were as follows:
11/30/95 Waived 11/30/94 Waived 11/30/93 Waived
Cash Reserve
Fund $1,933,503 $0 $1,657,907 $0 $1,975,064 $0
U.S. Treasury
Money Fund $1,296,973 $0 $1,600,262 $0
Tax Free Money
Fund $ 766,014 $0 $ 605,671 $0 $ 704,097 $0
Fees paid to the Adviser with respect to the bond and equity
funds were as follows:
11/30/95 Waived 11/30/94 Waived 11/30/93 Waived
Limited Term
Bond Fund $ 417,675 $0 $ 429,077 $0 $ 381,139 $0
Intermediate
Bond Fund $ 469,601 $0 $ 429,478 $0 $ 255,722 $0
Virginia
Intermediate
Municipal
Bond Fund $ 249,142 $0 $ 254,392 $0 $ 107,415 $0
Value Fund $1,521,942 $0 $1,360,865 $0 $1,047,885 $0
Capital
Appreciation
Fund $ 141,723 $0 $ 87,096 $0 $ 40,173 $0
Special Equity
Fund $ 386,506 $0 $ 321,826 $0 $ 206,402 $0
Government
Bond Fund $ 35,722 $5,370 N/A N/A N/A N/A
Virginia
Municipal
Bond Fund $ 19,433 $3,239 N/A N/A N/A N/A
Maryland
Municipal
Bond Fund N/A N/A N/A N/A N/A N/A
None of the Maryland Municipal Bond, Government Bond or Virginia
Municipal Bond Funds conducted operations during the fiscal years
ended November 30, 1994 and 1993.
In addition to receiving its advisory fee from the Funds, the
Adviser may also act and be compensated as investment manager
for its clients with respect to assets which are invested in a
Fund. In some instances the Adviser may elect to credit against
any investment management fee received from a client who is also
a shareholder in the Fund an amount equal to all or a portion of
the fees received by the Adviser and its affiliates from a Fund
with respect to the client's assets invested in the Fund.
25
<PAGE>
The Adviser has agreed to reimburse a Fund for certain of the
operating expenses (exclusive of interest, taxes, and brokerage
fees and expenses paid pursuant to the Distribution Plan and
organization expenses, all to the extent permitted by applicable
state law or regulation) which in any year exceed the limits
prescribed by any state in which the Fund's shares are qualified
for sale. Currently, the most restrictive expense ratio
limitation imposed by any state is 2 1/2% of the first $30
million of a Fund's average net assets, 2% of the next $70
million of its average net assets and 1 1/2% of its average net
assets in excess of $100 million. Shares of the Funds are not
currently qualified for sale in any state which limits operating
expenses. For the purpose of this obligation to reimburse
expenses, each Fund's annual expenses are estimated and accrued
daily, and any appropriate estimated payments will be made by the
Adviser monthly. No such reimbursement was payable with respect
to the fiscal year ended November 30, 1995.
Subject to the obligations of the Adviser to reimburse a Fund for
its excess expenses as described above, the Company has,
under each Advisory Agreement, confirmed its obligation to pay
all other expenses, including interest charges, taxes, brokerage
fees and commissions; certain insurance premiums; fees, interest
charges and expenses of the custodian, transfer agent and
dividend disbursing agent; telecommunications expenses; auditing,
legal and compliance expenses; costs of forming the corporation
and maintaining corporate existence; costs of preparing and
printing the Company's prospectus, statement of additional
information, subscription order forms and shareholder reports and
delivering them to existing and prospective shareholders; costs
of maintaining books of original entry for portfolio and Fund
accounting and other required books and accounts and of
calculating the net asset value of shares of the Funds; costs of
reproduction, stationery and supplies; compensation of directors
and officers and employees of the Company and costs of other
personnel performing services for the Company who are not
officers of the Adviser, the Company's Distributor or their
respective affiliates; costs of corporate meetings; SEC
registration fees and related expenses; state securities laws
registration fees and related expenses; fees payable to the
Adviser under the Advisory Agreements and to the Company's
Distributor under the Administration and Distribution
Agreement and all other fees and expenses paid by a Fund or Class
pursuant to the Administration Plans or Distribution
Plans.
ADMINISTRATOR AND DISTRIBUTOR
THE ADMINISTRATOR
The Company and SEI Financial Services Corporation (the
"Administrator") have entered into an administration agreement
(the "Administration Agreement") effective March 1, 1995.
The Administration Agreement provides that the Administrator
shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Trust in connection with the
matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith or
negligence on the part of the Administrator in the performance
of its duties or from reckless disregard by it of its duties and
obligations thereunder.
The Administrator, a wholly-owned subsidiary of SEI Corporation
("SEI"), was organized as a Delaware corporation in 1969
and has its principal business offices at 680 East Swedesford
Road, Wayne, PA 19087. Alfred P. West, Jr., Henry H. Greer
and Carmen V. Romeo, constitute the Board of Directors of the
Administrator and the Distributor. Mr. West is the Chairman of
the Board and Chief Executive Officer of SEI, the Administrator
and the Distributor. Mr. Greer serves as the President and
Chief Operating Officer of SEI, the Administrator and the
Distributor. SEI and its subsidiaries are leading providers of
funds evaluation services, trust accounting systems, and
brokerage and information services to financial institutions,
institutional investors and money managers. The Administrator
also serves as administrator to the following other mutual funds:
SEI Daily Income Trust; SEI Liquid Asset Trust; SEI Tax Exempt
Trust; SEI Index Funds; SEI Institutional Managed Trust; SEI
International Trust; Stepstone Funds; The Compass Capital Group,
FFB Lexicon Funds; The Advisors' Inner Circle Fund, The Pillar
Funds; CUFund; STI Classic Funds; CoreFunds, Inc.; First American
Funds, Inc.; First American Investment Funds, Inc.; The Arbor
Fund; 1784 Funds; MarquisSM Funds, Morgan Grenfell Investment
Trust; The PBHG Funds, Inc; Inventor Funds, Inc.; The Achievement
Funds Trust; Insurance Investment Products Trust; Bishop Street
Funds; and Conestoga Family of Funds.
26
<PAGE>
The Administrator is entitled to a fee, calculated daily and paid
monthly, at an annual rate of .15% of average daily net assets
of each of the Funds.
For the fiscal year ended November 30, 1995, the Administrator
was compensted for its services under the Administration
Agreement as follows:
Cash Reserve Fund $724,959, of which $0 was waived
U.S. Treasury Money Fund $486,365, of which $0 was waived
Tax Free Money Fund $287,134, of which $0 was waived
Limited Term Bond Fund $125,310, of which $0 was waived
Intermediate Bond Fund $117,410, of which $0 was waived
Government Bond Fund $8,805, of which $8,805 was waived
VA Intermediate Municipal
Bond Fund $74,748, of which $34,384 was waived
VA Municipal Bond Fund $4,858, of which $4,858 was waived
Value Fund $304,389, of which $0 was waived
Capital Appreciation
Fund $28,470, of which $0 was waived
Special Equity Fund $77,120, of which $0 was waived.
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a
wholly-owned subsidiary of SEI, and the Company are parties to a
distribution agreement ("Distribution Agreement") effective as of
March 1, 1995. The Distribution Agreement shall be reviewed and
ratified at least annually (i) by the Company's Directors or by
the vote of a majority of the outstanding shares of the Company,
and (ii) by the vote of a majority of the Directors of the
Company who are not parties to the Distribution Agreement or
interested persons (as defined in the 1940 Act) of any party to
the Distribution Agreement, cast in person at a meeting called
for the purpose of voting on such approval. The Distribution
Agreement will terminate in the event of any assignment, as
defined in the 1940 Act, and is terminable with respect to a
particular Fund on not less than sixty days' notice by the
Directors, by vote of a majority of the outstanding shares
of such Fund or by the Distributor.
DISTRIBUTION PLAN
The Board of Directors of the Company has approved an Amended and
Restated Distribution and Service Plan (the "Distribution Plan")
pursuant to Rule 12b-1 of the 1940 Act (the "Rule"). Under the
Distribution Plan the Distributor is compensated at the annual
rate of .15% of the aggregate average daily net assets of the
Trust Class shares of the Funds. The Distributor will be
compensated for distribution services provided to the Trust Class
shares including the printing and distribution of Prospectuses,
Statements of Additional Information or reports prepared for the
use in connection with the offering of shares of the Fund (other
than to existing shareholders at the time of such mailing), the
expenses incurred for the preparation of any other literature
used by the Distributor in connection with any such offering.
The Distributor has agreed to waive any fees payable pursuant to
the Distribution Plan attributable to Trust Class shares, and
will bear the costs of other distribution-related activities.
The Distributor reserves the right to terminate its waiver at any
time at its sole discretion.
A SHARES AND B SHARES DISTRIBUTION PLANS
The Distribution Plan further provides that the A Shares will
pay the Distributor a fee of .15% of the average daily net
assets of the funds and an additional .25% of the average daily
net assets of the money market funds, which the Distributor can
use to compensate broker/dealers and service providers, including
the Adviser and its affiliates which provide administrative
and/or distribution services to the Class A Shareholders or their
customers who beneficially own Class A Shares. All of the fees
currently are being waived by the Distributor.
27
<PAGE>
The Company has adopted the Investors Class B Distribution and
Service Plan (the "B Shares Distribution Plan") in accordance
with the provisions of the Rule which regulates circumstances
under which an investment company may directly or indirectly bear
expenses relating to the distribution of its shares. The B
Shares Distribution Plan provides that B Shares will pay the
Distributor a fee of .75% of the average daily net assets of the
funds which offer B Shares. Continuance of the B Shares
Distribution Plan must be approved annually by a majority
of the Directors of the Company. The B Shares Distribution Plan
requires that quarterly written reports of amounts spent under
the B Shares Distribution Plan and the purposes of such
expenditures be furnished to and reviewed by the Directors. The
B Shares Distribution Plan may not be amended to increase
materially the amount which may be spent thereunder without
approval by a majority of the outstanding shares of the Company.
All material amendments of the Plan will require approval
by a majority of the Directors of the Company and of the
Qualified Directors.
For the fiscal year ended November 30, 1995, the Distributor was
compensated beginning March 1, 1995 for its services under the B
Shares Distribution Plan as follows:
Cash Reserve Fund $74, of which $10 was waived
Government Bond Fund $656, of which $87 was waived
VA Municipal Bond
Fund $1,835, of which $245 was waived
Value Fund $3,833, of which $511 was waived
Special Equity Fund $1,403, of which $87 was waived.
Also, pursuant to the B Shars Distribution Plan, the Distributor
is compensated at an annual rate of .25% of B Shares' average net
assets for providing ongoing shareholder support services to
investors in B Shares for its services under a Shareholder
Services Plan as follows:
Cash Reserve Fund $25, of which $5 was waived
Government Bond Fund $217, of which $43 was waived
VA Municipal Bond
Fund $612, of which $122 was waived
Value Fund $1,277, of which $255 was waived
Special Equity Fund $468, of which $94 was waived.
Prior to March 1, 1995, Fidelity Distributor Corporation ("FDC")
served as the Funds' administrator and distributor under
the Administrative and Distribution Plans.
For the fiscal years ended November 30, 1995 (through February
28, 1995), November 30, 1994 and 1993, FDC was compensated
for its services under each operative Distribution Plan as
follows:
Cash Reserve Fund $152,042, $631,053 and $744,853, of
which $0, $0 and $0 was waived
U.S. Treasury Money Fund $112,822, $499,978 and $600,093, of
which $0, $0 and $0 was waived
Tax Free Money Fund $65,682, $228,173 and $264,036, of
which $0, $0 and $0 was waived
Limited Term Bond Fund $30,482, $128,753 and $114,342, of
which $0, $0 and $0 was waived
Intermediate Bond Fund $28,685, $107,382 and $63,930, of which
$0, $0 and $0 was waived
VA Intermediate Municipal
Bond Fund $18,356, $76,321 and $32,224, of which
$15,576, $64,180 and $27,670 was waived
Value Fund $65,118, $272,207 and $209,577, of
which $0, $0 and $0 was waived
Capital Appreciation Fund $5,362, $17,420 and $8,035, of which
$0, $0 and $0 was waived
Special Equity Fund $17,171, $64,372 and $41,280, of which
$0, $0 and $0 was waived.
For the fiscal years ended November 30, 1995 (through February
28, 1995), November 30, 1994 and 1993, FDC was compensated
under the A Shares Distribution Plan which provides for an
additional .25% of average daily net assets of the money market
funds as follows: Cash Reserve Fund, $12,283, $9,057 and $24;
U.S. Treasury Money Fund, $0, $0 and $0; and Tax Free Money Fund,
$468, $939 and $141.
28
<PAGE>
The following represents expenses made pursuant to the Rule for
the fiscal year ended November 30, 1995.
12b-1 Expenses
Promotion
Third Party and Marketing Distri- Main-
Fund Payments Advertising Management bution tenance
Cash Reserve
Fund $ 64
U.S. Treasury
Money Fund -- -- -- -- --
Tax Free
Money Fund -- -- -- -- --
Limited Term
Bond Fund -- -- -- -- --
Intermediate
Bond Fund -- -- -- -- --
Government
Bond Fund 569 -- -- -- --
VA Intermed-
iate Municipal
Bond Fund -- -- -- -- --
VA Municipal
Bond Fund 1,590 -- -- -- --
Value Fund 3,322 -- -- -- --
Capital
Appreciation
Fund -- -- -- -- --
Special Equity
Fund 1,216 -- -- -- --
In addition, Capitoline may use all or a portion of the fee
received under its advisory contract, past profits or other
resources to pay financial institutions and other industry
professionals such as investment advisors, broker-dealers
(including Crestar Securities Corporation) accountants and estate
planning firms ("Qualified Recipients") for shareholder services.
These Qualified Recipients may be paid for such services from the
fees paid by the Funds to Capitoline. The Plans also provide
that Capitoline may engage banks as Qualified Recipients for
performing certain shareholder support services. Capitoline
will make such payments only to Qualified Recipients who provide
shareholder support services. These shareholder services
may include, among other things, answering client inquiries,
investing client account balances automatically in Fund shares,
arranging for bank wires, and such other client services of a
nature generally provided by a bank as may seem appropriate.
Capitoline will enter into written agreements with Qualified
Recipients who receive payments pursuant to a Plan. Payments
will be made on the basis of the average daily net asset value of
a Fund's shares owned by shareholders for whom the Qualified
Recipient is the holder of record or with whom the Qualified
Recipient has a servicing relationship.
As discussed in the Prospectus, the Company recognizes that the
Glass-Steagall Act and other applicable laws prohibit banks
from engaging in the business of underwriting, selling or
distributing securities. Accordingly, the Distributor will
engage banks as Qualified Recipients only to perform
administrative and shareholder servicing functions. While the
matter is not free from doubt, the Company's Board of Directors
believes on advice of counsel that such laws should not preclude
a bank from performing shareholder support services. However,
judicial or administrative decisions or interpretations of such
laws, as well as changes in federal or state statutes or
regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, could prevent a bank from
continuing to perform all or a part of its servicing activities.
If banks or bank affiliates were prohibited from so acting, the
Company would change its existing policies to permit bank
customers who are shareholders to remain shareholders of a Fund
and would implement alternative means for continuing the
servicing of such shareholders. In such event, changes in the
operation of a Fund might occur and a shareholder serviced by
such bank might no longer be able to make use of any automatic
investment or other services then being provided by the bank.
29
<PAGE>
TRANSFER AGENT
Pursuant to a Transfer Agent Agreement dated as of July 10, 1992
between the Company, on behalf of each of the Funds, and Crestar
Bank, the Transfer Agent for each of the Funds is Crestar Bank
("Transfer Agent"). The Transfer Agent maintains an account for
each shareholder and monitors tax reporting, performs other
transfer agency functions and acts as dividend disbursing agent
for each Fund. For these services, the Transfer Agent will be
paid an annual fee of .06% of the average daily net assets of the
A Shares and B Shares of each Fund and .05% of the average daily
net assets of the Trust Class of each Fund.
The Transfer Agent Agreement will continue in effect only if such
continuance is specifically approved at least annually by
the Board of Directors or by a vote of the shareholders and in
either case by a majority of the Directors who are not parties
to the Transfer Agent Agreement or interested persons of any such
party, at a meeting called for the purpose of voting on the
Transfer Agent Agreement.
CUSTODIAN
Pursuant to a Custodian Agreement dated as of July 10, 1992
between the Company, on behalf of each of the Funds, and
Crestar Bank, Crestar Bank (the "Custodian") acts as the
Custodian of each Fund's assets. The Custodian's
responsibilities include safeguarding and controlling the Funds'
cash and securities, handling the receipt and delivery of
securities and collecting income on Fund investments. For these
services, the Custodian will receive a fee, with respect to each
money market fund, computed and paid monthly, based on the total
net assets of each such Fund, the number of portfolio
transactions of the Fund and the number of securities in the
Fund's portfolio. The Custodian's fee for any fiscal year of the
Company will not exceed, with respect to each money market fund,
.04% of each such Fund's average daily net assets. The
Custodian's fee with respect to each bond and equity fund will be
.04% of each such Fund's average daily net assets.
AUDITOR
Deloitte & Touche LLP, Two World Financial Center, New York, New
York 10281, independent auditors, have been selected as auditors
for the Company. Deloitte & Touche LLP has acted as independent
auditors of the Company since its inception.
PRINCIPAL HOLDERS OF SECURITIES
A shareholder owning of record or beneficially more than 25% of a
particular Fund's shares may be considered to be a "controlling
person" of that Fund. Accordingly, its vote could have a more
significant effect on matters presented at shareholder meetings
than the votes of the fund's other shareholders. The following
persons owned of record 25% or more of the outstanding shares of
the Trust Class of the indicated Funds as of September 30, 1995:
Fund Name Shareholder %
Cash Reserve Fund Crestar Bank 97%
P.O. Box 26665
Richmond, VA 23261
U.S. Treasury Money Fund Crestar Bank 98%
P.O. Box 26665
Richmond, VA 23261
Tax Free Money Fund Crestar Bank 99%
P.O. Box 26665
Richmond, VA 23261
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<PAGE>
Limited Term Bond Fund Crestar Bank 91%
P.O. Box 26665
Richmond, VA 23261
Intermediate Bond Fund Crestar Bank 88%
P.O. Box 26665
Richmond, VA 23261
Virginia Intermediate Crestar Bank 90%
Municipal Bond Fund P.O. Box 26665
Richmond, VA 23261
Virginia Municipal Bond
Fund Crestar Bank 88%
P.O. Box 26665
Richmond, VA 23261
Value Fund Crestar Bank 93%
P.O. Box 26665
Richmond, VA 23261
Capital Appreciation Fund Crestar Bank 48%
P.O. Box 26665
Richmond, VA 23261
Special Equity Fund Crestar Bank 91%
P.O. Box 26665
Richmond, VA 23261
FINANCIAL STATEMENTS
The financial statements and financial highlights for the fiscal
year ended November 30, 1995 for Cash Reserve Fund, U.S.
Treasury Money Fund, Tax Free Money Fund, Limited Term Bond Fund
(formerly known as Short/Intermediate Bond Fund), Intermediate
Bond Fund (formerly known as Bond Fund), Government Bond Fund,
Virginia Intermediate Municipal Bond Fund (formerly known as
Virginia Municipal Bond Fund), Virginia Municipal Bond Fund,
Value Fund, Capital Appreciation Fund and Special Equity Fund are
included in the Annual Report which is a separate report supplied
with this Statement of Additional Information. The financial
statements and financial highlights are incorporated herein by
reference.
31
<PAGE>
APPENDIX
Description of selected indices:
Dow Jones Industrial Average is an unmanaged index of 30 common
stock prices representing stocks of major industrial companies
and includes reinvestment of dividends.
Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index of common stock prices and includes reinvestment of
dividends.
NASDAQ Composite Index is an unmanaged index of over-the-counter
stock prices and does not assume reinvestment of dividends.
Russell 2000 Index is an unmanaged index of small capitalization
stocks that includes reinvestment of dividends.
Russell 1000 Growth Index, an unmanaged index, is a broad measure
of the performance of growth companies and includes reinvestment
of dividends and capital gains.
Value Line Index, an unmanaged index, is a broad measure of both
large and small companies and includes reinvestment of dividends
and capital gains.
Lehman Brothers Aggregate Bond Index, an unmanaged index, is a
broad measure of bond performance and includes reinvestment of
dividends.
Lehman Brothers General Obligation Bond Index, an unmanaged
index, is a broad measure of the performance of tax-exempt
bonds and includes reinvestment of dividends.
Lehman Brothers Government Bond Index is an index comprised of
all public obligations of the U.S. Treasury, U.S. Government
agencies, quasi-federal corporations, and of corporate debt
guaranteed by the U.S. Government. The index excludes flower
bonds, foreign targeted issues, and mortgage-backed securities.
Lehman Brothers Corporate Bond Index is an index comprised of all
public, fixed-rate, non-convertible investment-grade domestic
corporate debt. Issues included in this index are rated
at least Baa by Moody's Investors Service or BBB by Standard and
Poor's Corporation or, in the case of unrated bonds, BBB by Fitch
Investors Service. Collateralized mortgage obligations are not
included in the Corporate Bond Index.
The Government Bond Index and the Corporate Bond Index combine to
form the Corporate Bond Index.
Lehman Brothers Intermediate Corporate Bond Index is an index
comprised of all public, fixed-rate, non-convertible
investment-grade domestic corporate debt. Issues included in
this index have remaining maturities of one to ten years and
are rated at least Baa by Moody's Investors Service or BBB by
Standard and Poor's Corporation or, in the case of unrated
bonds, BBB by Fitch Investors Service.
Lehman Brothers Long-Term Corporate Bond Index is an index
comprised of all public, fixed-rate, non-convertible
investment-grade domestic corporate debt. Issues included in
this index have remaining maturities greater than ten years
and are rated at least Baa by Moody's Investors Service or BBB by
Standard and Poor's Corporation, or, in the case of unrated
bonds, BBB by Fitch Investors Service.
Salomon Brothers High Grade Corporate Bond Index is an index of
high quality corporate bonds with a minimum maturity of at least
ten years and with total debt outstanding of at least $50
million. Issues included in the index are rated AA or better by
Moody's Investors Service or AA or better by Standard & Poor's
Corporation.
32
<PAGE>
Merrill Lynch High and Medium Quality Intermediate-Term Corporate
Index is an index comprised of all public, fixed-rate,
non-convertible corporate debt. Issues included in this index
have remaining maturities of between one year and 9.99 years.
Issues included in the index are rated at least BBB by Standard &
Poor's Corporation.
Dollar-weighted average maturity is derived by multiplying the
value of each investment by the number of days remaining
to its maturity, adding these calculations, and then dividing the
total by the value of a Fund's portfolio. An obligation's
maturity is typically determined on a stated financial maturity
basis, although there are some exceptions to this rule. For
example, if it is probable that the issuer of an instrument will
take advantage of a maturity-shortening device, such as a call,
refunding, or redemption provision, the date in which the
instrument will probably be called, refunded or redeemed may
be considered to be its maturity date. Also, the maturities of
mortgage-backed securities and some asset-backed securities,
such as collateralized mortgage obligations, are determined on a
weighted average life basis, which is the average time for
principal to be repaid. For a mortgage security, this average
time is calculated by estimating the expected principal payments
during the life of the mortgage. The weighted average life of
these securities is likely to be substantially shorter than their
stated final maturity.
Description of Moody's Investors Service, Inc.'s ratings of state
and municipal notes:
Moody's ratings for state and municipal and other short-term
obligations are designated Moody's Investment Grade ("MIG,"
or "VMIG" for variable rate obligations). This distinction is in
recognition of the difference between short-term credit risk
and long-term credit risk. Factors affecting the liquidity of
the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less
important over the short run. Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to
the market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
Description of Standard & Poor's Corporation's ratings of state
and municipal notes:
SP-1 - Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
Description of Moody's Investors Service, Inc.'s municipal bond
ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt edge." 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 which are rated Aa 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 Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
may be present which suggest a susceptibility to impairment
sometime in the future.
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<PAGE>
Baa - Bonds which are rated Baa are considered as 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.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic
rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Description of Standard & Poor's Corporation's municipal bond
ratings:
AAA - Debt rated 'AAA' has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest
and repay principal and differs from the highest rated debt
issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and
repay principal, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits 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 categories.
The ratings from AA to CCC may be modified by the addition of a
plus or minus to show relative standing within the major
rating categories.
Description of Moody's Investors Service, Inc.'s commercial paper
ratings:
Issuers rated Prime-1 (or related supporting institutions) 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 capitalizations structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and with high internal cash generation.
- Well established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
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Description of Standard & Poor's Corporation's commercial paper
ratings:
A - Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are delineated with the numbers 1, 2, and 3 to indicate
the relative degree of safety.
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not
as high as for issues designated A-1.
35
<PAGE>
CRESTFUNDS(R), INC.
INVESTORS CLASS SHARES
STATEMENT OF ADDITIONAL INFORMATION
February 7, 1996
This Statement is not a prospectus but should be read in
conjunction with (a) the current Investors Class A Shares ("A
Shares") and Investors Class B Shares ("B Shares") Prospectus
(dated March 29, 1995) for CrestFunds(R), Inc. (the "Company")
and (b) the current Prospectus (dated February 7, 1996) for
the A Shares and B Shares of the Company's Maryland Municipal
Bond Fund. Please retain this document for future reference.
The financial statements and financial highlights, included in
the Annual Report for the fiscal year ended November 30, 1995 for
Cash Reserve Fund, U.S. Treasury Money Fund, Tax Free Money Fund,
Limited Term Bond Fund (formerly known as Short/Intermediate Bond
Fund), Intermediate Bond Fund (formerly known as Bond Fund),
Government Bond Fund, Virginia Intermediate Municipal Bond Fund
(formerly known as Virginia Municipal Bond Fund), Virginia
Municipal Bond Fund, Value Fund, Capital Appreciation Fund and
Special Equity Fund are incorporated herein by reference. To
obtain without charge additional copies of the A Shares and B
Shares Prospectus, the Annual Report, or the Trust Class
Prospectus or Statement of Additional Information, please
call 1-800-273-7827.
TABLE OF CONTENTS PAGE
INVESTMENT POLICIES AND LIMITATIONS . . . . . . . . . . . . . 3
INVESTMENT PRACTICES. . . . . . . . . . . . . . . . . . . . . 7
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 12
VALUATION OF PORTFOLIO SECURITIES . . . . . . . . . . . . . . 13
FUND PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . 14
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION. . . . . . . . 19
ADDITIONAL INFORMATION REGARDING PRICING AND REDEMPTIONS. . . 20
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . . 21
DIRECTORS AND OFFICERS AND AFFILIATED PERSONS . . . . . . . . 24
THE ADVISER . . . . . . . . . . . . . . . . . . . . . . . . . 26
ADMINISTRATOR AND DISTRIBUTOR . . . . . . . . . . . . . . . . 28
TRANSFER AGENT. . . . . . . . . . . . . . . . . . . . . . . . 32
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . 32
AUDITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . . . . . . 32
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 33
APPENDIX. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
<PAGE>
Adviser:
Capitoline Investment Services, Incorporated ("Capitoline" or the
"Adviser")
Transfer Agent:
Crestar Bank (the "Transfer Agent")
Custodian:
Crestar Bank (the "Custodian")
Administrator:
SEI Financial Management Corporation ("SFM")
Distributor:
SEI Financial Services Company ("SFS")
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INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth
in the Prospectus. Unless otherwise noted, whenever an
investment policy or limitation states a maximum percentage of a
Fund's assets that may be invested in any security or other
asset, or sets forth a policy regarding quality standards, such
standard or percentage limitation shall be determined immediately
after and as a result of the Fund's acquisition of such security
or other asset. Accordingly, any subsequent changes in values,
net assets, or other circumstances will not be considered when
determining whether the investment complies with a Fund's
investment policies and limitations.
Each Fund's fundamental investment policies and limitations
cannot be changed without approval by a "majority of the
outstanding voting securities," of the Fund (67% or more of the
voting securities present or 50% of the outstanding voting
securities, whichever is less) as defined in the Investment
Company Act of 1940 (the "1940 Act"). However, except for the
fundamental investment limitations set forth below, the
investment policies and limitations described in this Statement
of Additional Information are not fundamental and may be changed
without shareholder approval.
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT LIMITATIONS OF CASH
RESERVE FUND, U.S. TREASURY MONEY FUND, AND TAX FREE MONEY FUND
SET FORTH IN THEIR ENTIRETY. EACH MONEY MARKET FUND MAY NOT:
1. with respect to 75% of the Fund's assets (50% in the case of
Tax Free Money Fund), invest more than 5% of the total market
value of its assets (determined at the time of investment) in
the securities of any one issuer other than the United States
Government, its agencies or instrumentalities;
2. issue senior securities;
3. make short sales of securities;
4. purchase securities on margin or write put and call options;
5. borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which
might require the untimely disposition of securities.
Borrowing in the aggregate may not exceed 10%, and borrowing
for purposes other than meeting redemptions may not exceed
5%, of the value of the Fund's total assets (including the
amount borrowed) at the time the borrowing is made.
Outstanding borrowings in excess of 5% of the value of the
Fund's total assets will be repaid before any subsequent
investments are made by the Fund;
6. act as an underwriter of securities;
7. invest in the aggregate more than 10% of the value of its net
assets in securities, including municipal lease agreements,
for which there is no readily available market and in
repurchase agreements maturing in more than 7 days;
8. invest more than 25% of the total market value of its assets
(determined at the time of investment) in the securities of
foreign banks and foreign branches of domestic banks, in the
securities of foreign governments or in the securities of
issuers conducting their principal business activities in any
one industry; provided, (i) there is no limitation on the
aggregate of the Fund's investment in obligations (excluding
commercial paper) of domestic commercial banks and in
obligations of the United States Government, its agencies or
its instrumentalities; and (ii) consumer finance companies,
industrial finance companies and gas, electric, water and
telephone utility companies are each considered to be
separate industries;
9. invest in real estate (other than debt obligations secured by
real estate or interests therein or debt obligations issued
by companies which invest in real estate or interests
therein);
10. make loans, except that a Fund may (i) purchase publicly
issued debt securities for its portfolio, (ii) enter into
repurchase agreements, (iii) with respect to Tax Free Money
Fund, lend its portfolio securities in an amount up to 10%
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of the value of its total assets, and (iv) with respect to
Cash Reserve Fund and U.S. Treasury Money Fund, lend its
portfolio securities in an amount up to 33 1/3% of the value
of its total assets;
11. purchase securities having voting rights except, in the case
of Tax Free Money Fund, securities of other investment
companies (to the extent permitted by the 1940 Act). Subject
to certain exceptions, including a merger, acquisition,
consolidation or reorganization involving an investment
company, the 1940 Act contains a prohibition against a Fund
(i) investing more than 5% of its total assets in the
securities of another single investment company, (ii)
investing more than 10% of its total assets in securities of
investment companies, and (iii) purchasing more than 3% of
the total outstanding voting stock of another investment
company;
12. invest in securities issued, or guaranteed as to principal
and interest, by companies that have conducted operations for
less than three years, including the operations of
predecessors;
13. invest in interest in oil or gas or interests in other
mineral exploration or development programs;
14. invest in or hold securities of any issuer if officers and
directors of the Company or Capitoline, individually owning
beneficially more than 1/2 of 1% of the securities of the
issuer, in the aggregate own more than 5% of the issuer's
securities;
15. purchase Restricted Securities (as defined in Rule 144 under
the Securities Act of 1933 (the "Securities Act"));
16. make investments for the purpose of exercising control over
any issuer or other person; and
17. pledge, mortgage, assign or encumber any of its assets except
to the extent necessary to secure a borrowing permitted by
clause (5).
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT LIMITATIONS OF
LIMITED TERM BOND FUND, INTERMEDIATE BOND FUND, GOVERNMENT BOND
FUND, MARYLAND MUNICIPAL BOND FUND, VIRGINIA INTERMEDIATE
MUNICIPAL BOND FUND, AND VIRGINIA MUNICIPAL BOND FUND SET FORTH
IN THEIR ENTIRETY. EACH BOND FUND MAY NOT:
1. with respect to 75% of its total assets (50% in the case of
Maryland Municipal Bond Fund, Virginia Intermediate Municipal
Bond Fund and Virginia Municipal Bond Fund), purchase the
securities of any issuer (other than securities issued or
guaranteed by the U.S. Government, or any of its agencies or
instrumentalities) if, as a result thereof, (a) more than 5%
of the Fund's total assets would be invested in the
securities of that issuer, or (b) the Fund would hold more
than 10% of the outstanding voting securities of that issuer;
2. issue senior securities, except as permitted under the 1940
Act;
3. borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of its total
assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed
this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
4. underwrite securities issued by others, except to the extent
that the Fund may be considered an underwriter within the
meaning of the Securities Act in the disposition of
restricted securities;
5. purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments, but this shall
not prevent the Fund from investing in securities or other
instruments backed by real estate or securities of companies
engaged in the real estate business;
6. purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments;
4
<PAGE>
7. lend any security or make any other loan if, as a result,
more than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of
debt securities or to repurchase agreements;
8. Maryland Municipal Bond Fund, Virginia Intermediate Municipal
Bond Fund and Virginia Municipal Bond Fund may not purchase
the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or tax-exempt obligations issued or
guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision of any of the
foregoing) if, as a result, more than 25% of each Fund's
total assets would be invested in securities of companies
whose principal business activities are in the same industry;
and
9. Limited Term Bond Fund, Intermediate Bond Fund and Government
Bond Fund may not purchase the securities of any issuer
(other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities) if,
as a result, more than 25% of each Fund's total assets would
be invested in the securities of companies whose principal
business activities are in the same industry.
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT LIMITATIONS OF VALUE
FUND, CAPITAL APPRECIATION FUND AND SPECIAL EQUITY FUND SET FORTH
IN THEIR ENTIRETY. EACH EQUITY FUND MAY NOT:
1. with respect to 75% of its total assets, purchase the
securities of any issuer (other than securities issued or
guaranteed by the U.S. Government, or any of its agencies or
instrumentalities) if, as a result thereof, (a) more than 5%
of the Fund's total assets would be invested in the
securities of that issuer, or (b) the Fund would hold more
than 10% of the outstanding voting securities of that issuer;
2. issue senior securities, except as permitted under the 1940
Act;
3. borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 33 1/3% of its total
assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed
this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with
the 33 1/3% limitation;
4. underwrite securities issued by others, except to the extent
that the Fund may be considered an underwriter within the
meaning of the Securities Act in the disposition of
restricted securities;
5. purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities) if, as a result, more than 25%
of the Fund's total assets would be invested in the
securities of companies whose principal business activities
are in the same industry;
6. purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall
not prevent the Fund from investing in securities or other
instruments backed by real estate or securities of companies
engaged in the real estate business);
7. purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments; and
8. lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of
debt securities or to repurchase agreements.
5
<PAGE>
THE FOLLOWING LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
MONEY MARKET FUNDS:
i. Tax Free Money Fund does not currently intend to purchase a
security (other than a security issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities)
if, as a result, more than 5% of its total assets would be
invested in the securities of a single issuer, provided that
the Fund may invest up to 50% of its total assets in the
first tier securities of a single issuer for up to three
business days.
ii. Cash Reserve Fund does not currently intend to purchase a
security (other than a security issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities)
if, as a result, more than 5% of its total assets would be
invested in the securities of a single issuer, provided that
the Fund may invest up to 25% of its total assets in the
first tier securities of a single issuer for up to three
business days.
iii. Each Fund does not currently intend to lend any security or
make any other loan if, as a result, more than 10% of the
value of its total assets would be lent to other parties,
but this limitation does not apply to the purchase of debt
securities or to repurchase agreements.
iv. Tax Free Money Fund does not currently intend to lend any
security or make any other loan.
v. To meet federal requirements for qualification as a
"regulated investment company" the Tax Free Money Fund
limits its investments so that at the close of each quarter
of its taxable year: (a) with regard to at least 50% of
total assets, no more than 5% of total assets are invested
in the securities of a single issuer, and (b) no more than
25% of total assets are invested in the securities of a
single issuer. These limitations do not apply to
"government securities" as defined for federal tax purposes.
ALL BOND AND EQUITY FUNDS
vi. Each Fund does not currently intend to purchase securities
on margin, except that a Fund may obtain such short-term
credits as are necessary for the clearance of transactions.
vii. Each Fund may borrow money only from a bank or by engaging
in reverse repurchase agreements with any party (reverse
repurchase agreements are treated as borrowings for purposes
of fundamental limitation 3). Each Fund will not purchase
any security while borrowings representing more than 5% of
its total assets are outstanding.
viii. Each Fund does not currently intend to purchase any
security if, as a result, more than 10% of its net assets
would be invested in securities that are deemed to be
illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at
approximately the prices at which they are valued.
ix. Each Fund does not currently intend to purchase securities
of other investment companies except pursuant to the
provisions of the 1940 Act.
x. Each Fund does not currently intend to purchase the
securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its
total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of
less than three years of continuous operation.
xi. Each Fund does not currently intend to invest in oil, gas,
or other mineral exploration or development programs or
leases.
6
<PAGE>
xii. Each Fund does not currently intend to purchase or hold the
securities of any issuer if those officers and Directors of
a Fund who individually own more than 1/2 of 1% of the
securities of such issuer together own more than 5% of such
issuer's securities.
xiii. Each Fund does not currently intend to sell securities
short.
CORPORATE BOND FUNDS, GOVERNMENT BOND FUND, AND EQUITY FUNDS ONLY
xiv. With respect to 100% of its total assets, each Fund does not
currently intend to purchase the securities of any issuer
(other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities) if,
as a result thereof, a Fund would own more than 10% of the
outstanding voting securities of such issuer.
xv. Each of the corporate bond and government bond funds does
not currently intend to purchase warrants. Warrants
acquired by a Fund in units or attached to securities are
not subject to this restriction.
xvi. Each Fund does not currently intend to purchase or sell
futures contracts or put or call options. This limitation
does not apply to options attached to, or acquired or traded
together with, their underlying securities, and does not
apply to securities that incorporate features similar to
options or futures contracts.
MARYLAND MUNICIPAL BOND FUND, VIRGINIA INTERMEDIATE MUNICIPAL
BOND FUND AND VIRGINIA MUNICIPAL BOND FUND ONLY
xvii. To meet federal tax requirements for qualification as a
"regulated investment company," Maryland Municipal Bond
Fund, Virginia Intermediate Municipal Bond Fund and
Virginia Municipal Bond Fund each limits its investments so
that at the close of each quarter of its taxable year: (a)
with regard to at least 50% of total assets, no more than
5% of total assets are invested in the securities of a
single issuer, and (b) no more than 25% of total assets are
invested in the securities of a single issuer. Limitations
(a) and (b) do not apply to "government securities" as
defined for federal tax purposes.
xviii. Each Fund does not currently intend to engage in
repurchase agreements or make loans, but this limitation
does not apply to purchases of debt securities.
xix. Each Fund does not currently intend to purchase or sell
futures contracts or call options. This limitation does not
apply to options attached to, or acquired or traded together
with, their underlying securities, and does not apply to
securities that incorporate features similar to options or
futures contracts.
INVESTMENT PRACTICES
Each Fund's investments must be consistent with its investment
objective and policies. Accordingly, not all of the security
types and investment techniques discussed below are eligible
investments for each of the Funds.
REPURCHASE AGREEMENTS. In a repurchase agreement, a Fund
purchases a security and simultaneously commits to resell that
security to the seller at an agreed upon price. The resale price
reflects the purchase price plus an agreed upon incremental
amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value (at least equal to
the amount of the agreed upon resale price and marked to market
daily) of the underlying security. Each fund may engage in a
repurchase agreement with respect to any security in which it is
authorized to invest (except that, with respect to the money
market funds, the security may have a maturity in excess of 397
days). While it does not presently appear possible to eliminate
all risks from these transactions (particularly the possibility
of a decline in the market value of the underlying securities, as
well as delays and costs to the Funds in connection with
bankruptcy proceedings), it is the Funds'
7
<PAGE>
current policy to limit repurchase agreements to those parties
whose creditworthiness has been reviewed and found satisfactory
by Capitoline pursuant to procedures established by the Board of
Directors.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement
a Fund sells a portfolio instrument to another party, such as a
bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time. While
a reverse repurchase agreement is outstanding, a Fund will
maintain appropriate liquid assets in a segregated custodial
account to cover its obligation under the agreement. A Fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by Capitoline. Such
transactions may increase fluctuations in the market value of a
Fund's assets and may be viewed as a form of leverage.
SECURITIES LENDING. The Funds (except Tax Free Money Fund,
Maryland Municipal Bond Fund, Virginia Intermediate Municipal
Bond Fund and Virginia Municipal Bond Fund) may lend securities
to parties such as broker-dealers or institutional investors.
Securities lending allows a Fund to retain ownership of the
securities loaned and, at the same time, to earn additional
income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied
should the borrower fail financially, loans will be made only to
parties deemed by Capitoline to be creditworthy pursuant to
procedures established by the Board of Directors. Furthermore,
they will only be made if, in Capitoline's judgment, the income
to be earned from such loans would justify the risk.
It is the current view of the staff of the Securities and
Exchange Commission ("SEC") that a Fund may engage in loan
transactions only under the following conditions: (1) the Fund
must receive at least 100% collateral in the form of cash or cash
equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (2) the borrower must increase the collateral whenever
the market value of the securities loaned (determined on a daily
basis) rises above the value of the collateral; (3) after giving
notice, the Fund must be able to terminate the loan at any time;
(4) the Fund must receive reasonable interest on the loan or a
flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities
loaned and any increase in market value; (5) the Fund may pay
only reasonable custodian fees in connection with the loan; and
(6) the Board of Directors must be able to vote proxies on the
securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in short-
term, high quality debt securities, U.S. government securities or
money market instruments. Investing this cash subjects that
investment, as well as the security loaned, to market forces
(i.e., capital appreciation or depreciation).
FOREIGN INVESTMENTS. Investing in securities issued by companies
or other issuers whose principal activities are outside the
United States may involve significant risks in addition to the
risks inherent in U.S. investments. The value of securities
denominated in foreign currencies and of dividends and interest
paid with respect to such securities will fluctuate based on the
relative strength of the U.S. dollar. In addition, there is
generally less publicly available information about foreign
issuers' financial condition and operations, particularly those
not subject to the disclosure and reporting requirements of the
U.S. securities laws. Foreign issuers are generally not bound by
uniform accounting, auditing and financial reporting requirements
and standards of practice comparable to those applicable to U.S.
issuers. Further, economies of particular countries or areas of
the world may differ favorably or unfavorably from the economy of
the United States.
Investing abroad also involves different political and economic
risks. Foreign investments may be affected by actions of foreign
governments adverse to the interests of U.S. investors, including
the possibility of expropriation or nationalization of assets,
confiscatory taxation, restrictions on U.S. investment or on the
ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a
greater possibility of default by foreign governments or foreign
government-sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic, or
social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that Capitoline
will be able to anticipate these potential events or counter
their effects. The considerations noted above generally are
intensified for investments in developing countries. Developing
countries may have relatively unstable governments, economies
based on only a few industries, and securities markets that trade
a small number of securities.
8
<PAGE>
Foreign markets may offer less protection to investors than U.S.
markets. It is anticipated that in most cases the best available
market for foreign securities will be on exchanges or in over-
the-counter markets located outside of the United States.
Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the
United States, and securities of some foreign issuers
(particularly those located in developing countries) may be less
liquid and more volatile that securities of comparable U.S.
issuers. Foreign security trading practices, including those
involving securities settlement where fund assets may be released
prior to receipt of payment, may expose a Fund to increased risk
in the event of a failed trade or the insolvency of a foreign
broker-dealer, and may involve substantial delays. In addition,
the costs of foreign investing, including withholding taxes,
brokerage commissions and custodial costs, are generally higher
that for U.S. investors. In general, there is less overall
governmental supervision and regulation of securities exchanges,
brokers, and listed companies than in the United States. It may
also be difficult to enforce legal rights in foreign countries.
Cash Reserve Fund, the corporate bond funds and the equity funds
may invest in U.S. dollar denominated foreign securities that
impose restrictions on transfer within the U.S. or to U.S.
persons. Although securities subject to transfer restrictions
may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such
restrictions.
American Depositary Receipts and European Depositary Receipts
("ADRs" and "EDRs") are certificates evidencing ownership of
shares of a foreign-based issuer held in trust by a bank or
similar financial institution. Designed for use in U.S. and
European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in
their national markets and currencies.
INDEXED SECURITIES. A Fund may purchase securities whose prices
are indexed to the prices of other securities, securities
indices, currencies, precious metals or other commodities, or
other financial indicators. Indexed securities typically, but
not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example,
typically provide for a maturity value that depends on the price
of gold, resulting in a security whose price tends to rise and
fall together with gold prices.
The performance of indexed securities depends to a great extent
on the performance of the security or other instrument to which
they are indexed, and may also be influenced by interest rate
changes. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and
their values may decline substantially if the issuer's
creditworthiness deteriorates. Recent issuers of indexed
securities have included banks, corporations, and certain U.S.
government agencies. Indexed securities may be more volatile
than the underlying instruments.
DELAYED DELIVERY TRANSACTIONS. These transactions involve a
commitment by a Fund to purchase or sell specific securities at a
predetermined price and/or yield, with payment and delivery
taking place after a period longer than the customary settlement
period for that type of security (and more than seven days in the
future). Typically, no interest accrues to the purchaser until
the security is delivered. Each money market and bond fund may
receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed delivery basis, a Fund
assumes the rights and risks of ownership, including the risk of
price and yield fluctuations. Because a Fund is not required to
pay for securities until the delivery date, these risks are in
addition to the risks associated with the Fund's other
investments. If a Fund remains substantially fully invested at a
time when delayed delivery purchases are outstanding, the delayed
delivery purchases may result in a form of leverage. When
delayed delivery purchases are outstanding, a Fund will set aside
cash or other appropriate liquid assets such as U.S. government
securities, or other high grade debt securities in a segregated
custodial account to cover its purchase obligations. When a Fund
has sold a security on a delayed delivery basis, the Fund does
not participate in further gains or losses with respect to the
security. If the other party to a delayed delivery transaction
fails to deliver or pay for the securities, the Fund could miss a
favorable price or yield opportunity, or could suffer a loss. A
Fund may renegotiate delayed delivery transactions after they are
entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
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<PAGE>
REFUNDING CONTRACTS. A Fund may purchase securities on a when-
issued basis in connection with the refinancing of an issuer's
outstanding indebtedness. Refunding contracts require the issuer
to sell and the Fund to buy refunded municipal obligations at a
stated price and yield on a settlement date that may be several
months or several years in the future. A Fund generally will not
be obligated to pay the full purchase price if it fails to
perform under a refunding contract. Instead, refunding contracts
generally provide for payment of liquidated damages to the issuer
(currently 15-20% of the purchase price). A Fund may secure its
obligations under a refunding contract by depositing collateral
or a letter of credit equal to the liquidated damages provisions
of the refunding contract. When required by SEC guidelines, a
Fund will place liquid assets such as cash, U.S. government
securities, or other high grade debt securities in a segregated
custodial account equal in amount to its obligations under
refunding contracts.
VARIABLE OR FLOATING RATE DEMAND OBLIGATIONS ("VRDOS"/"FRDOS")
are tax-exempt obligations that bear variable or floating
interest rates and carry rights that permit holders to demand
payment of the unpaid principal balance plus accrued interest
from the issuers or certain financial intermediaries. Floating
rate securities have interest rates that change whenever there is
a change in a designated base rate while variable rate
instruments provide for a specified periodic adjustment in the
interest rate. These formulas are designed to result in a market
value for the VRDO or FRDO that approximates its par value.
With respect to each money market fund, a demand instrument with
a conditional demand feature must have received both a short-term
and a long-term high quality rating or, if unrated, have been
determined to be of comparable quality pursuant to procedures
adopted by the Board of Directors. A demand instrument with an
unconditional demand feature may be acquired solely in reliance
upon a short-term high quality rating or, if unrated, upon
finding of comparable short-term quality pursuant to procedures
adopted by the Board of Directors.
A Fund may invest in fixed-rate bonds that are subject to third
party puts and in participation interests in such bonds held by a
bank in trust or otherwise. These bonds and participation
interests have tender options or demand features that permit the
Funds to tender (or put) their bonds to an institution at
periodic intervals of up to one year and to receive the principal
amount thereof. Each Fund considers variable rate instruments
structured in this way ("participating VRDOs") to be essentially
equivalent to other VRDOs that it may purchase. The IRS has not
ruled whether the interest on participating VRDOs is tax-exempt,
and accordingly, the Funds intend to purchase these instruments
based on opinions of bond counsel.
With respect to the money market funds, a variable rate
instrument that matures in 397 days or less may be deemed to have
a maturity equal to the period remaining until the next
readjustment of the interest rate. A variable rate instrument
that matures in greater than 397 days but that is subject to a
demand feature that is 397 days or less may be deemed to have a
maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining
until the principal amount can be recovered through demand. A
floating rate instrument that is subject to a demand feature may
be deemed to have a maturity equal to the period remaining until
the principal amount may be recovered through demand. The money
market funds may purchase a demand instrument with a remaining
final maturity in excess of 397 days only if the demand feature
can be exercised on no more than 30 days' notice (a) at any time
or (b) at specific intervals not exceeding 397 days.
TENDER OPTION BONDS are created by coupling an intermediate or
long-term tax-exempt bond (generally held pursuant to a custodial
agreement) with a tender agreement that gives the holder the
option to tender the bond at its face value. As consideration
for providing the tender option, the sponsor (usually a bank,
broker-dealer, or other financial institution) receives periodic
fees equal to the difference between the bond's fixed coupon rate
and the rate (determined by a remarketing or similar agent) that
would cause the bond, coupled with the tender option, to trade at
par on the date of such determination. After payment of the
tender option fee, a Fund effectively holds a demand obligation
that bears interest at the prevailing short-term tax-exempt rate.
Subject to applicable regulatory requirements, the money market
funds may buy tender option bonds if the agreement gives the Fund
the right to tender the bond to its sponsor no less frequently
than once every 397 days. In selecting tender option bonds for
the Funds, Capitoline will, pursuant to procedures established by
the Board of Directors, consider the creditworthiness of the
issuer of the underlying bond, the custodian, and the third party
provider of the tender
10
<PAGE>
option. In certain instances, a sponsor may terminate a tender
option if, for example, the issuer of the underlying bond
defaults on interest payments.
STANDBY COMMITMENTS are puts that entitle holders to same day
settlement at an exercise price equal to the amortized cost of
the underlying security plus accrued interest, if any, at the
time of exercise. A Fund may acquire standby commitments to
enhance the liquidity of portfolio securities, but in the case of
the money market funds, only when the issuers of the commitments
present minimal risk of default.
Ordinarily a Fund will not transfer a standby commitment to a
third party, although it could sell the underlying municipal
security to a third party at any time. A Fund may purchase
standby commitments separate from or in conjunction with the
purchase of securities subject to such commitments. In the
latter case, a Fund would pay a higher price for the securities
acquired, thus reducing their yield to maturity. Standby
commitments will not affect the dollar-weighted average maturity
of the money market funds, or the valuation of the securities
underlying the commitments.
Standby commitments are subject to certain risks, including the
ability of issuers of standby commitments to pay for securities
at the time the commitments are exercised; the fact that standby
commitments are not marketable by the Funds; and the possibility
that the maturities of the underlying securities may be different
from those of the commitments.
MUNICIPAL LEASE OBLIGATIONS. The municipal bond funds may invest
a portion of their assets in municipal leases and participation
interests therein. These obligations, which may take the form of
a lease, an installment purchase, or a conditional sale contract,
are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities, such
as fire and sanitation vehicles, telecommunications equipment,
and other capital assets. Generally, a Fund will not hold such
obligations directly as a lessor of the property, but will
purchase a participation interest in a municipal obligation from
a bank or other third party. A participation interest gives a
Fund a specified, undivided interest in the obligation in
proportion to its purchased interest in the total amount of the
obligation.
Municipal leases frequently have risks distinct from those
associated with general obligation or revenue bonds. State
constitutions and statutes set forth requirements that states or
municipalities must meet to incur debt. These may include voter
referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts
(which normally provide for title to the leased asset to pass to
the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting their
constitutional and statutory requirements for the issuance of
debt. Many leases and contracts include "non-appropriation"
clauses providing that the governmental issuer has no obligation
to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. Non-appropriation
clauses free the issuer from debt issuance limitations.
FEDERALLY TAXABLE OBLIGATIONS. The municipal bond funds do not
intend to invest in securities whose interest is taxable;
however, from time to time each such Fund may invest a portion of
its assets in fixed-income obligations whose interest is subject
to federal income tax. For example, each such Fund may invest in
obligations whose interest is taxable pending the investment or
reinvestment in municipal securities of proceeds from the sale of
its shares or sales of portfolio securities.
Should a municipal bond fund invest in taxable obligations, it
would purchase securities that in Capitoline's judgment are of
high quality. These include obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities;
obligations of domestic banks; and repurchase agreements. The
bond funds' standards for high quality taxable obligations are
essentially the same as those described by Moody's Investors
Service, Inc. in rating corporate obligations within its two
highest ratings of Prime-1 and Prime-2, and those described by
Standard and Poor's Corporation in rating corporate obligations
within its two highest ratings of A-1 and A-2. Additionally,
each Fund will purchase such obligations only in accordance with
the quality standards as set forth in the Prospectus.
Proposals to restrict or eliminate the federal income tax
exemption for interest on municipal obligations are introduced
before Congress from time to time. Proposals may also be
introduced before state legislatures that would affect the state
tax
11
<PAGE>
treatment of a Fund's distributions. If such proposals were
enacted, the availability of municipal obligations and the value
of each Funds' holdings would be affected and the Board of
Directors would reevaluate the Funds' objectives and policies.
Each municipal bond fund anticipates being as fully invested as
practicable in municipal securities; however, there may be
occasions when as a result of maturities of portfolio securities,
or sales of Fund shares, or in order to meet redemption requests,
a Fund may hold cash that is not earning income. In addition,
there may be occasions when, in order to raise cash to meet
redemptions or to preserve credit quality, a Fund may be required
to sell securities at a loss.
PORTFOLIO TRANSACTIONS
Capitoline may place portfolio transactions with broker-dealers
which furnish, without cost, certain research, statistical, and
quotation services of value to Capitoline and its affiliates in
advising the Funds and other clients, provided that it shall
always seek best price and execution with respect to the
transactions. Certain investments may be appropriate for the
Funds and for other clients advised by Capitoline. Investment
decisions for the Funds and other clients are made with a view to
achieving their respective investment objectives and after
consideration of such factors as their current holdings,
availability of cash for investment, and the size of their
investments generally. A particular security may be bought or
sold for only one client or in different amounts and at different
times for more than one but less that all clients. Likewise, a
particular security may be bought for one or more clients when
one or more other clients are selling the security. In addition,
purchases or sales of the same security may be made for two or
more clients of Capitoline on the same day. In such event, such
transactions will be allocated among the clients in a manner
believed by Capitoline to be equitable to each. In some cases,
this procedure could have an adverse effect on the price or
amount of the securities purchased or sold by the Fund. Purchase
and sale orders for a Fund may be combined with those of other
clients of Capitoline in the interest of achieving the most
favorable net results for a Fund.
Transactions on U.S. stock exchanges and other agency
transactions involve the payment by a Fund of negotiated
brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size
of the transaction. Transactions in foreign securities often
involve the payment of fixed brokerage commissions, which are
generally higher than those in the United States. There is
generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by a Fund
usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by a Fund includes a
disclosed, fixed commission or discount retained by the
underwriter or dealer.
Capitoline places all orders for the purchase and sale of
portfolio securities for a Fund through a substantial number of
brokers and dealers. In so doing, it uses its best efforts to
obtain for a Fund the best price and execution available. In
seeking the best price and execution, Capitoline, having in mind
a Fund's best interest, considers all factors it deems relevant,
including, by way of illustration, price, the size of the
transaction, the nature of the market for the security, the
amount of the commission, the timing of the transaction taking
into account market process and trends, the reputation,
experience and financial stability of the broker-dealer involved,
and the quality of service rendered by the broker-dealer in other
transactions.
It has for many years been a common practice in the investment
advisory business for advisers of investment companies and other
institutional investors to receive research, statistical, and
quotation services from broker-dealers that execute portfolio
transactions for the clients of such advisers. Consistent with
this practice, Capitoline receives research, statistical, and
quotation services from many broker-dealers with which it places
a Fund's portfolio transactions. These services, which in some
cases may also be purchased for cash, include such matters as
general economic and security market reviews, industry and
company reviews, evaluations of securities, and recommendations
as to the purchase and sale of securities. Some of these
services are of value to Capitoline and its affiliates in
advising various of their clients (including the Funds), although
not all of these services are necessarily useful and of value in
managing the Funds. The fee paid by a Fund to Capitoline is not
reduced because Capitoline and its affiliates receive such
services.
As permitted by Section 28(e) of the Securities Exchange Act of
1934, as amended (the "1934 Act"), Capitoline may cause a Fund to
pay a broker-dealer that provides brokerage and research services
to Capitoline a commission in excess of the
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<PAGE>
commission charged by another broker-dealer for effecting a
particular transaction. To cause a Fund to pay any such greater
commissions Capitoline must determine in good faith that such
commissions are reasonable in relation to the value of the
brokerage or research service provided by such executing
broker-dealers viewed in terms of a particular transaction or
Capitoline's overall responsibilities to the Fund or its other
clients. In reaching this determination, Capitoline will not
attempt to place a specific dollar value on the brokerage or
research services provided or to determine what portion of the
compensation should be related to those services.
It is expected that a Fund may execute brokerage or other agency
transactions through the Distributor or an affiliate of the
Distributor or through an affiliate of the Advisor, which are
registered broker-dealers, for a commission consistent with
the 1940 Act, the 1934 Act and rules promulgated by the SEC.
Under these provisions, the Distributor or an affiliate of the
Advisor is permitted to receive and retain compensation for
effecting portfolio transactions for a Fund on a securities
exchange. These rules further require that commissions paid to
the Distributor by a Fund for exchange transactions not exceed
"usual and customary" brokerage commissions. The rules define
"usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in
connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange
during a comparable period of time." In addition, the Fund may
direct commission business to one or more designated
broker-dealers in connection with such broker-dealers' provision
of services to the Fund or payment of certain Fund expenses
(e.g., custody, pricing and professional fees). The
Directors of the Company, including those who are not "interested
persons" of the Company have adopted procedures for evaluating
the reasonableness of commissions paid to the Distributor and
will review these procedures periodically.
Brokerage commissions paid by the following Funds for the fiscal
years ended 1995, 1994 and 1993 were:
1995 1994 1993
Value $1,111,862 $467,961 $32,110
Capital Appreciation** $ 321,065 $ 77,685 ----
Special Equity* $ 217,673 $116,129 $ 9,220
* Inception date 9/28/92
** Inception date 1/11/93
During fiscal year ended 1995, the Fund paid brokerage
commissions in the amount of $151,676 to SEI Financial Services
Company, which represented 0.6% of the Fund's aggregate brokerage
commissions for such period. The dollar amount of transactions
effected through such broker represented 0.3% of the Fund's
aggregate dollar amount of transactions involving the payment of
commissions for such period.
Certain of the Funds that invest primarily in fixed income
securities pay SEI Financial Services Company a fee with respect
to repurchase transactions. For fiscal 1995 these fees were as
follows: U.S. Treasury Money Fund, $74,696; Cash Reserve Fund,
$62,813; Limited Term Bond Fund, $334; Intermediate Bond Fund,
$118; and Government Bond Fund, $54. These fees represent the
only commissions paid by these Funds.
VALUATION OF PORTFOLIO SECURITIES
MONEY MARKET FUNDS. Like most money market funds, the Funds
value their investments on the basis of amortized cost. This
technique involves valuing an instrument at its cost as adjusted
for amortization of premium or accretion of discount rather than
its value based on current market quotations or appropriate
substitutes which reflect current market conditions. The
amortized cost value of an instrument may be higher or lower than
the price a Fund would receive if it sold the instrument.
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<PAGE>
Valuing a Fund's instruments on the basis of amortized cost and
use of the term "money market fund" are permitted by Rule 2a-7
under the 1940 Act. The Funds must adhere to certain conditions
under Rule 2a-7; these conditions are summarized in the
Prospectus.
The Company's Board of Directors oversees Capitoline's adherence
to SEC rules concerning money market funds, and has established
procedures designed to stabilize each money market fund's NAV at
$1.00. At such intervals as they deem appropriate, the Directors
consider the extent to which NAV calculated by using market
valuations would deviate from $1.00 per share. If the Directors
believe that a deviation from a Fund's amortized cost per share
may result in material dilution or other unfair results to
shareholders, the Directors have agreed to take such corrective
action, if any, as they deem appropriate to eliminate or reduce,
to the extent reasonably practicable, the dilution or unfair
results. Such corrective action could include selling portfolio
instruments prior to maturity to realize capital gains or losses
or to shorten average portfolio maturity; withholding dividends;
redeeming shares in kind; establishing NAV by using available
market quotations; and such other measures as the Directors may
deem appropriate.
During periods of declining interest rates, a Fund's yield based
on amortized cost may be higher than the yield based on market
valuations. Under these circumstances, a shareholder in a Fund
would be able to obtain a somewhat higher yield than would result
if the Fund utilized market valuations to determine its NAV. The
converse would apply in a period of rising interest rates.
BOND FUNDS. Valuations of portfolio securities furnished by the
pricing service employed by the Funds are based upon a
computerized matrix system and/or appraisals by the pricing
service, in each case in reliance upon information concerning
market transactions and quotations from recognized securities
dealers. The methods used by the pricing service and the quality
of valuations so established are reviewed by officers of the
Funds and the Funds' pricing agent under general supervision of
the Board of Directors. There are a number of pricing services
available, and the Board of Directors, on the basis of on-going
evaluation of these services, may obtain quotes directly from
broker-dealers or market-makers, may use other pricing services
or discontinue the use of any pricing service in whole or in
part.
EQUITY FUNDS. Securities owned by the Funds are appraised by
various methods depending on the market or exchange on which they
trade. Securities traded on the New York Stock Exchange or the
American Stock Exchange are appraised at the last sale price, or
if no sale has occurred, at the closing bid price. Securities
traded on other exchanges are appraised as nearly as possible in
the same manner. Securities and other assets for which exchange
quotations are not readily available are valued on the basis of
closing over-the-counter bid prices, if available, or at their
fair value as determined in good faith under consistently applied
procedures under the general supervision of the Board of
Directors.
FUND PERFORMANCE
YIELD CALCULATIONS. In computing each Class of the money market
funds' YIELD for a period, the net change in value of a
hypothetical account containing one share reflects the value of
additional shares purchased with dividends from the one original
share and dividends declared on both the original share and any
additional shares. The net change is then divided by the value
of the account at the beginning of the period to obtain a base
period return. This base period return is annualized to obtain a
current ANNUALIZED YIELD. Each Class of the money market funds
may also calculate a compounded EFFECTIVE YIELD by compounding
the base period return over a one year period. In addition to
the current yield, each Class may quote yields in advertising
based on any historical seven day period. Yields for the money
market funds are calculated on the same basis as other money
market funds, as required by regulation.
For the bond funds, yields used in advertising are computed by
dividing a Class' interest income for a given 30-day or one-month
period, net of a Class of shares' expenses, by the average number
of shares of the class entitled to receive dividends during the
period, dividing this figure by the Class' NAV (A Shares includes
the maximum sales charge) at the end of the period and
annualizing the result (assuming compounding of income) in order
to arrive at an annual percentage rate. Income is calculated for
purposes of each Class' yield quotations in accordance with
standardized methods applicable to all stock and bond funds. In
general, interest income is reduced with respect to bonds trading
at a premium over their par value by
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<PAGE>
subtracting a portion of the premium from income on a daily
basis, and is increased with respect to bonds trading at a
discount by adding a portion of the discount to daily income.
Capital gains and losses generally are excluded from the
calculation.
Income calculated for the purposes of determining each Class of
the bond funds' yield differs from income as determined for other
accounting purposes. Because of the different accounting methods
used, and because of the compounding of income assumed in yield
calculations, each Class' yield may not equal its distribution
rate, the income paid to shareholder accounts, or income reported
in the Fund's financial statements.
For purposes of the municipal funds, a TAX-EQUIVALENT YIELD is
the rate an investor would have to earn from a fully taxable
investment after taxes to equal a Class' tax-free yield. Tax-
equivalent yields are calculated by dividing a Class' yield by
the result of one minus a stated federal or combined federal,
state, and city tax rate. (If only a portion of the Class' yield
was tax-exempt, only that portion is adjusted in the
calculation.) If any portion of a Class' income is derived from
obligations subject to state or federal income taxes, its tax-
equivalent yield will generally be lower.
Yield information may be useful in reviewing a Class' performance
and in providing a basis for comparison with other investment
alternatives. However, each Class' yield fluctuates, unlike
investments that pay a fixed interest rate over a stated period
of time. When comparing investment alternatives, investors
should also note the quality and maturity of the portfolio
securities of the respective investment companies that they have
chosen to consider.
Investors should recognize that in periods of declining interest
rates a Class' yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates
a Class' yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to a
Class from the continuous sale of its shares will likely be
invested in instruments producing lower yields than the balance
of the Fund's holdings, thereby reducing the Class' current
yield. In periods of rising interest rates, the opposite can be
expected to occur.
The distribution rate, which expresses the historical amount of
income dividends paid as a percentage of the share price may also
be quoted. The distribution rate is calculated by dividing the
daily dividend per share by its offering price (including the
maximum sales charge, if applicable) for each day in the 30-day
period, averaging the resulting percentages, then expressing the
average rate in annualized terms. The distribution rate may also
be calculated without giving effect to applicable sales charges.
The following table shows the effect of a shareholder's tax
status on effective yield under the federal, Virginia State and
Maryland State income tax laws for 1995. It shows the
approximate yield a taxable security must provide at various
income brackets to produce after-tax yields equivalent to those
of hypothetical tax-exempt obligations yielding from 2% to 8%.
Of course, no assurance can be given that any of the Tax Free
Money Fund and municipal bond funds will achieve any specific
tax-exempt yield. While the Funds invest principally in
obligations whose interest is exempt from federal income tax,
other income received by the Funds may be taxable, and income
produced by the Tax Free Money Fund and municipal bond funds will
generally be subject to Virginia or Maryland State income
taxation, as the case may be.
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<PAGE>
1995 TAX RATES AND TAX-EQUIVALENT YIELDS
Taxable
Income*
Combined Combined
Federal Federal
Federal Virginia Maryland and and
Tax Tax Tax Virginia Maryland
Bracket Bracket Bracket Tax Tax
** *** **** Brackets Brackets
single joint
return return
$0 - $0 - 15.00% 5.75% 8.00% 19.89% 21.80%
$23,350 $39,000
$23,351 $39,001- 28.00% 5.75% 8.00% 32.14% 33.76%
- -$56,550 $94,250
$56,551 $94,251- 31.00% 5.75% 8.00% 34.97% 36.52%
- -$117,950 $143,600
$117,951 $143,601 36.00% 5.75% 8.00% 39.68% 41.12%
- -$256,500 -$256,500
$256,501 $256,501- 39.60% 5.75% 8.00% 43.07% 44.43%
- -above above
* Taxable income (gross income after all exemptions, adjustments,
and deductions) based on current tax rates.
** Excludes the impact of the phaseout of personal exemptions,
limitation on itemized deductions, and other credits,
exclusions, and adjustments which may raise a taxpayer's marginal
tax rate. An increase in a shareholder's marginal tax
rate would increase that shareholder's tax-equivalent yield.
*** Virginia has a graduated income tax. The top rate is 5.75%
applicable to Virginia taxable income over $17,000.
**** Maryland has a graduated income tax. The top rate is 5.00%
applicable to Maryland taxable income over $3,000. In general,
Maryland local income taxes imposed by various counties range
from 50% to 60% of the State income tax liability, although
Worcester County currently imposes an income tax equal to 30% of
the state income tax liability. The rate stated assumes a local
income tax imposed at 60% of the amount of the state income tax
and the tax-equivalent yield table below applicable to effective
combined federal and Maryland state tax rates approximates the
effect of exemption of distributions of tax-exempt income from
the Maryland Municipal Bond Fund from local income tax imposed at
that rate.
If your Federal tax rate in 1995 is:
15.00% 28.00% 31.00% 36.00% 39.60%
Then your tax-equivalent yield is:
Yield
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
7.00% 8.24% 9.92% 10.14% 10.94% 11.59%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
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If your effective combined federal and Virginia state tax rate
is:
19.89% 32.14% 34.97% 39.68% 43.07%
Then your tax-equivalent yield is:
Yield
2.00% 2.50% 2.95% 3.08% 3.32% 3.51%
3.00% 3.75% 4.42% 4.61% 4.97% 5.27%
4.00% 4.99% 5.89% 6.15% 6.63% 7.03%
5.00% 6.24% 7.37% 7.69% 8.29% 8.78%
6.00% 7.49% 8.34% 9.23% 9.95% 10.54%
7.00% 8.74% 10.32% 10.76% 11.60% 12.30%
8.00% 9.99% 11.79% 12.30% 13.26% 14.05%
If your effective combined federal and Maryland state tax rate
is:
21.80% 33.76% 36.52% 41.12% 44.43%
Then your tax-equivalent yield is:
Yield
2.00% 2.56% 3.02% 3.15% 3.40% 3.60%
3.00% 3.84% 4.53% 4.73% 5.10% 5.40%
4.00% 5.12% 6.04% 6.30% 6.79% 7.20%
5.00% 6.39% 7.55% 7.88% 8.49% 9.00%
6.00% 7.67% 9.06% 9.45% 10.19% 10.80%
7.00% 8.95% 10.57% 11.03% 11.89% 12.60%
8.00% 10.23% 12.08% 12.60% 13.59% 14.40%
Each of the Funds may invest a portion of its assets in
obligations that are subject to state or federal income tax.
When a Fund invests in these obligations, its tax-equivalent
yield will be lower. In the table immediately above, tax-
equivalent yields are calculated assuming investments made by the
Virginia Intermediate Municipal Bond and Virginia Municipal Bond
Funds are 100% federally and Virginia tax-free and assuming
investments made by the Maryland Municipal Bond Fund are 100%
federally and Maryland tax-free.
TOTAL RETURN CALCULATIONS. TOTAL RETURNS quoted in advertising
reflect all aspects of the Class of shares' return, including the
effect of reinvesting dividends and capital gain distributions
(if any), and any change in the Class' NAV over the period.
AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the
growth or decline in value of a hypothetical historical
investment in a Class over a stated period, and then calculating
the annually compounded percentage rate that would have produced
the same result if the rate of growth or decline in value had
been constant over the period. For example, a cumulative total
return of 100% over ten years would produce an average annual
total return of 7.18%, which is the steady annual rate of return
that would equal 100% growth on a compounded basis in ten years.
While average annual total returns are a convenient means of
comparing investment alternatives, investors should realize that
a Class of shares' performance is not constant over time, but
changes from year to year, and that average annual total returns
represent averaged figures as opposed to the actual year-to-year
performance of the Class.
In addition to average annual total returns, each Class 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. A Shares' total returns may be quoted with or without
taking the maximum sales charge into
17
<PAGE>
account. Excluding A Shares' 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.
HISTORICAL FUND RESULTS. The following table shows the money
market funds' yields and effective yields for each Class for the
seven-day period ended November 30, 1995.
Yield+ Effective Tax-Equivalent
Yield+ Yield+*
A Shares Trust A Shares Trust A Shares Trust
Class Class Class
Cash Reserve
Fund 5.28% 5.29% 5.42% 5.43% N/A N/A
U.S. Treasury
Money Fund N/A 5.18% N/A 5.31% N/A N/A
Tax Free
Money Fund 3.14% 3.14% 3.18% 3.19% 4.55% 4.55%
* Based on an assumed federal income tax rate of 31%.
+ Each money market fund's A Shares, which became effective May
3, 1993, pay an additional distribution-related 12b-1 fee of
.25%, which, when taken into account, results in lower yields.
Effective March 31, 1994, U.S. Treasury Money Fund discontinued
offering A Shares, and the .25% Rule 12b-1 distribution fee for
all the money market funds was waived.
Cash Reserve Fund's B Shares, became effective on March 29, 1995,
at which time a .75% 12b-1 fee plus a .25% shareholder service
fee began to be imposed.
The following table shows yields and effective yields for each
class of the bond funds for the 30-day period ended November 30,
1995 and the average annual total returns for each bond and
equity fund for the period ended November 30, 1995.
Yield
Trust Class A Shares
Limited Term Bond Fund 5.26% 5.13%
Intermediate Bond Fund 5.49% 5.31%
Virginia Intermediate
Municipal Bond Fund 4.03% 3.88%
Average Annual Total Returns+
1 year Life of Fund*
A Shares Trust A Shares Trust
Class Class
Limited Term Bond
(9/28/92) 9.51% 11.50% 4.67% 5.38%
Intermediate Bond Fund
(9/28/92) 13.61% 12.07% 5.90% 6.12%
VA Intermediate Muni.
Bond (1/11/93) 12.08% 16.09% 4.06% 5.40%
Value Fund (9/28/92) 22.90% 28.76% 11.59% 13.25%
Capital Appreciation
(1/11/93) 15.24% 20.74% 5.24% 7.50%
Special Equity Fund
(9/28/92) 14.64% 20.87% 11.01% 12.63%
* Life of Fund figures are for the period beginning on the date
indicated above through November 30, 1995.
+ Average annual total returns include the effect of the maximum
sales charge. Effective May 3, 1993, the Funds commenced sales
of A Shares. This performance information reflects the A Shares'
12b-1 fees and revised transfer agency
18
<PAGE>
arrangements for the period May 3, 1993 to November 30, 1995, and
therefore, may not be representative of A Shares performance.
Note: Initial offering of B Shares was made on March 29, 1995,
at which time a .75% 12b-1 fee (plus a .25% shareholder service
fee) began to be imposed.
Each Class' performance may be compared in advertising to the
performance of other mutual funds in general or to the
performance of particular types of mutual funds, especially those
with similar objectives. This performance may be expressed as a
ranking prepared by Lipper Analytical Services, Inc. ("Lipper,"
sometimes referred to as "Lipper Analytical Services"), an
independent service, that monitors the performance of mutual
funds. The Lipper performance analysis ranks funds on the basis
of total return, assuming reinvestment of all distributions, but
does not take sales charges or redemption fees into consideration
and is prepared without regard to tax consequences. In addition,
each Class of the municipal funds' performance may be compared in
advertising to the performance of representative individual
municipal securities and unit investment trusts comprised of
municipal securities.
The Lipper General Equity Funds Average can be used to show how
the Funds' performance compares to a broad-based set of equity
mutual funds. The Lipper General Equity Funds Average is an
average of the total returns of all equity mutual funds
(excluding international funds and funds that specialize in
particular industries or types of investments) tracked by Lipper.
Ibbotson Associates of Chicago, Illinois provides historical
returns of the capital markets in the United States. Each Class
may compare its performance to the long-term performance of the
U.S. capital markets in order to demonstrate general long-term
risk versus reward investment scenarios. Performance comparisons
could also include the value of a hypothetical investment in
common stocks, long-term bonds, or U.S. Treasury securities.
Each Class of the money market funds also may compare its
performance or the performance of securities in which it may
invest to IBC/Donoghue's MONEY FUND AVERAGES(TM), which monitors
the performance of taxable and tax-free money market funds. This
index, which also assumes reinvestment of distributions, is
published by IBC/Donoghue's MONEY FUND REPORT(R) of Ashland,
Massachusetts 01721.
Each Class also may quote in advertising the performance of
various unmanaged indices as may be selected from time to time,
and may compare the price volatility of these indices to the
price volatility of the Standard & Poor's Composite Index of 500
Stocks ("S&P 500(R) Index"). These indices may include, but are
not limited to, the examples shown in the Appendix.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
You may qualify for a reduction in A Shares sales charge under
the following programs:
COMBINED PURCHASES. When you invest in A Shares for several
accounts at the same time, you may combine these investments into
a single transaction if the total is at least $50,000. The
following may qualify for this privilege: an individual, or
"company" as defined in Section 2(a)(8) of the 1940 Act; an
individual, spouse, and their children under age 21 purchasing
for his, her, or their own account; a trustee, administrator or
other fiduciary purchasing for a single trust estate or single
fiduciary account or for a single or a parent-subsidiary group of
"employee benefit plans" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974); and tax-exempt
organizations under Section 501(c)(3) of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit
reduced sales charges on any future purchases after you have
reached a new breakpoint in A Shares' sales charge schedule (see
A Shares' Prospectus for the sales charge schedule). You can add
the value of existing A Shares and B Shares of the Fund held by
you, your spouse, and your children under age 21 determined at
the previous day's NAV at the close of business, to the amount of
your new purchase valued at the current offering price to
determine your reduced sales charge.
19
<PAGE>
LETTER OF INTENT. If you anticipate purchasing $50,000 or more
of shares of A Shares in one Fund or in combination with shares
of other Funds within a 13-month period, you may obtain shares
of the Funds at the same reduced sales charge as though the total
quantity were invested in one lump sum, by filing a nonbinding
Letter of Intent (the Letter) within 90 days of the start of the
purchases. Each investment you make after signing the Letter
will be entitled to the sales charge applicable to the total
investment indicated in the Letter. For example, a $2,500
purchase toward a $50,000 Letter would receive the same reduced
sales charge as if the $50,000 had been invested at one time.
Neither income dividends nor capital gain distributions taken in
additional shares will apply toward the completion of the Letter.
[For these purposes, however, a purchase of B Shares will be
credited toward the total amount of the committed investment.]
Your initial investment must be at least 5% of the total amount
you plan to invest. Out of the initial purchase, 5% of the
dollar amount specified in the Letter will be registered in your
name and held in escrow. The shares held in escrow cannot be
redeemed or exchanged until the Letter is satisfied or the
additional sales charges have been paid. You will earn income
dividends and capital gain distributions on escrowed shares. The
escrow will be released when your purchase of the total amount
has been completed. You are not obligated to complete the
Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge
will be adjusted to reflect your total purchase at the end of 13
months. Surplus funds will be applied to the purchase of
additional shares at the then current offering price applicable
to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward,
corresponding to the amount actually purchased, and if after
written notice, you do not pay the increased sales charge,
sufficient escrowed shares will be redeemed to pay such charge.
CRESTFUNDS ACCOUNT BUILDER. You can make regular investments in
A Shares or B Shares of a Fund with the CrestFunds Account
Builder by completing the appropriate section of the account
application and attaching a voided personal check with your
bank's magnetic ink coding number across the front. If your bank
account is jointly owned, be sure that all owners sign.
Investments may be made monthly by automatically deducting $50 or
more from your bank checking account. You may change the amount
of your monthly purchase by notifying the Funds at the address on
your account statement at least 5 days prior to your next
purchase. There is a $500 minimum initial investment requirement
for automatic investment plans.
Your account will be drafted on or about the days indicated on
your application. Shares will be purchased at the offering price
next determined following receipt of the order by the Transfer
Agent. You may cancel the Account Builder option at any time
without payment of a cancellation fee. You will receive a
confirmation from the Transfer Agent for every transaction, and a
debit entry will appear on your bank statement.
As provided for in Rule 22d-1 under the 1940 Act, the Distributor
will waive A Shares' sales charge in connection with a Fund's
merger with or acquisition of any investment company or trust.
ADDITIONAL INFORMATION REGARDING PRICING AND REDEMPTIONS
The Funds are open for business and their NAVs are calculated
each day the New York Stock Exchange ("NYSE") and the custodian,
Crestar Bank, are open. The NAV of each money market fund is
determined as of 12:00 Noon Eastern time for Tax Free Money Fund,
and 1:00 p.m. Eastern time for Cash Reserve Fund and U.S.
Treasury Money Fund, and as of the close of regular trading hours
of the NYSE, normally 4:00 p.m. Eastern time. The NAV of each
equity and bond fund is determined as of the close of regular
trading hours of the NYSE. The NYSE and Crestar Bank have
designated the following holiday closings for 1995, and
Capitoline expects the schedule to be the same in the future:
New Year's Day (observed), Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Columbus Day (observed), Veterans'
Day, Thanksgiving Day and Christmas Day. The holiday closing
schedule may be changed by the NYSE and Crestar Bank. When the
NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under
emergency circumstances as determined by the SEC to merit such
20
<PAGE>
action, the Funds will determine NAVs at the close of business,
the time of which will coincide with the closing of the NYSE. To
the extent that Fund securities are traded in other markets on
days the NYSE or Crestar Bank are closed (and a Fund is not open
for business), a Fund's NAV may be significantly affected on days
when investors do not have access to the Fund to purchase or
redeem shares.
If the Directors determine that existing conditions make cash
payment undesirable, redemption payments may be made in whole or
in part in securities or other property, valued for this purpose
as they are valued in computing the NAV of each Fund.
Shareholders receiving securities or other property on redemption
may realize a gain or loss for tax purposes and will incur any
costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, a Fund is required to
give shareholders at least 60 days' notice prior to terminating
or modifying a Fund's exchange privilege. Under the Rule, the 60
day notification requirement may be waived if (i) the only effect
of a modification would be to reduce or eliminate an
administrative fee, redemption fee or deferred sales charge
ordinarily payable at the time of exchange or (ii) a Fund
temporarily suspends the offering of shares as permitted under
the 1940 Act or by the SEC or because it is unable to invest
amounts effectively in accordance with its investment objective
and policies.
In the Prospectus, the Funds have notified shareholders that they
reserve the right at any time without prior notice to
shareholders to refuse exchange purchases by any person or group,
if, in Capitoline's judgment, a Fund would be unable to invest
effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. If you request to have distributions mailed to
you and the U.S. Postal Service cannot deliver your checks, or if
your checks remain uncashed for six months, the Fund will hold
your distributions without interest until you provide the Fund
with alternate instructions.
Each money market and bond fund declares dividends equal to its
entire net investment income (including, in the case of the Cash
Reserve Fund and U.S. Treasury Money Fund, net realized short-
term capital gains, if any) on each business day of that Fund.
Equity funds declare and pay dividends monthly. Net capital
gains (and, in the case of Tax Free Money Fund, net short-term
capital gains), if any, are declared and distributed annually by
all Funds, normally in December. Each money market fund and bond
fund declares dividends for Saturdays, Sundays and holidays on
the previous business day, and pay dividends after the close of
business on the last business day of each month. Unless the
Fund's Transfer Agent is otherwise instructed, all dividends and
distributions of capital gains are automatically re-invested into
additional shares of common stock of that Fund immediately upon
payment thereof.
Cash Reserve Fund, U.S. Treasury Money Fund, Tax Free Money Fund,
Limited Term Bond Fund, Intermediate Bond Fund, Virginia
Intermediate Municipal Bond Fund, Value Fund, Capital
Appreciation Fund and Special Equity Fund each qualified for the
fiscal year ended November 30, 1995, and each Fund, including
Maryland Municipal Bond Fund, Government Bond Fund, Municipal
Bond Fund and Virginia Municipal Bond Fund, intends to qualify
for each subsequent fiscal year, for tax treatment as a
"regulated investment company" under Subchapter M the Internal
Revenue Code. By distributing all of its net investment income
and any net realized short-term and long-term capital gains for a
taxable year in accordance with the timing requirements imposed
by the Code, and by meeting certain other requirements relating
to the sources of income and diversification of assets, a Fund
should not be liable for federal income or excise taxes.
TAX FREE MONEY FUND, MARYLAND MUNICIPAL BOND FUND, VIRGINIA
INTERMEDIATE MUNICIPAL BOND FUND AND VIRGINIA MUNICIPAL BOND FUND
(COLLECTIVELY THE "MUNICIPAL FUNDS"). Dividends paid to
shareholders by any of the Municipal Funds out of net tax-exempt
interest income earned by such a Fund ("exempt-interest
dividends") generally will not be subject to federal income tax,
provided that (as intended) at least 50% of the value of the
Fund's total assets at the close of each quarter of its taxable
year is comprised of obligations, the interest on which is
excluded from gross income under
21
<PAGE>
section 103(a) of the Internal Revenue Code. Substantially all
of the dividends paid by Tax Free Money Fund are anticipated to
be exempt from regular federal income taxes. Under normal
circumstances, at least 80% of the income from Maryland Municipal
Bond Fund, Virginia Intermediate Municipal Bond Fund and Virginia
Municipal Bond Fund will be exempt from regular federal income
taxes. However, persons who are "substantial users" (or "related
persons" of substantial users) of facilities financed by private
activity bonds held by a Fund may be subject to tax on their pro
rata share of the interest income from such bonds and should
consult their tax advisers before purchasing shares of that Fund.
Dividends paid by a Fund out of its taxable net investment income
(including realized net short-term capital gains, if any) are
taxable to shareholders as ordinary income notwithstanding that
such dividends are reinvested in additional shares of that Fund.
Distributions of net capital gains, if any, are taxable as long-
term capital gains to the shareholder receiving them regardless
of the length of time the shares on which such distributions are
paid may have been held. With respect to a shareholder who
receives exempt-interest dividends on shares of a fund held for
six months or less, any loss on the sale or exchange of such
shares will, to the extent of the amount of such exempt-interest
dividends, be disallowed. In addition, a long-term capital gain
distribution with respect to shares will cause any loss on a
subsequent sale or exchange of such shares not so disallowed to
be treated as long-term capital loss to the extent of such long-
term capital gain distribution, if such shares are held for six
months or less.
Under current federal tax law (1) interest on certain private
activity bonds is treated as an item of tax preference for
purposes of the federal alternative minimum tax imposed on
individuals and corporations, though for regular federal income
tax purposes such interest remains fully tax-exempt, and (2)
interest on all tax-exempt obligations is included in "adjusted
current earnings" of corporations for federal alternative minimum
tax purposes. Because Tax Free Money Fund expects to purchase
private activity bonds, a portion (not expected to exceed 20%) of
the Fund's exempt-interest dividends may constitute an item of
tax preference for those shareholders subject to the federal
alternative minimum tax. Maryland Municipal Bond Fund, Virginia
Intermediate Municipal Bond Fund and Virginia Municipal Bond Fund
each may invest in municipal obligations, the interest on which
is subject to the federal alternative minimum tax ("AMT
securities"). To the extent that these Funds invest in AMT
securities, shareholders who are subject to the AMT will be
required to report a portion of that Fund's dividends as a "tax
preference item" in determining their federal taxes.
Every shareholder required to file a federal individual income
tax return is required to include for informational purposes the
amount of exempt-interest dividends received from the municipal
bond funds during the taxable year. Exempt interest dividends
are included in determining what portion, if any, of a person's
social security benefits and railroad retirement benefits are
subject to federal income tax.
Interest on indebtedness incurred by shareholders to purchase or
carry shares of each municipal bond fund generally is not
deductible for federal income tax purposes. Shares of each
municipal bond fund may be considered to have been purchased or
carried with borrowed funds even though those funds are not
directly linked to the shares.
The exemption for federal income tax purposes of dividends
derived from interest on municipal securities does not
necessarily result in an exemption under the income or other tax
laws of any state or local taxing authority. Shareholders of the
municipal bond funds may be exempt from state and local taxes on
distributions of tax-exempt interest income derived from
obligations of the state and/or municipalities of the state in
which they reside but may be subject to tax on income derived
from the municipal securities of other jurisdictions.
Shareholders are advised to consult with their tax advisers
concerning the application of state and local taxes to
investments in a municipal bond fund which may differ from the
federal income tax consequences described above.
FEDERAL TAXES. Distributions from each Fund's taxable net
investment income and net short-term capital gains are taxed as
dividends, and capital gain distributions are taxed as long-term
capital gains. A portion of the equity funds' dividends may
qualify for the dividends received deduction for corporations.
The Funds' distributions are taxable when they are paid, whether
taken in cash or reinvested in additional shares, except that
distributions declared in October, November or December to
shareholders of record in such month and paid the subsequent
January will be taxed as though paid on December 31.
22
<PAGE>
The Funds will send shareholders a tax statement by January 30
showing the status of the taxable distributions received in the
prior year, and will file a copy with the IRS. In addition,
within 60 days from the end of each Fund's fiscal year end, the
shareholders will be notified as to the portion of distributions
paid that qualify as exempt-interest dividends, capital gain
distributions, and qualified dividends for corporate investors.
It is suggested that shareholders keep all statements received to
assist in personal recordkeeping.
STATE AND LOCAL TAXES. In addition to federal taxes,
shareholders may be subject to state or local taxes on their
investment, depending on state law.
Commonwealth of Virginia. Under existing Virginia law,
distributions from Virginia Intermediate Municipal Bond Fund and
Virginia Municipal Bond Fund will not be subject to Virginia
individual, trust, estate, or corporate income taxation to the
extent that such distributions are either (i) excludable from
federal gross income and attributable to interest on obligations
of Virginia, its political subdivisions, or its
instrumentalities, or Puerto Rico, United States Virgin Islands,
or Guam or (ii) attributable to interest on direct obligations of
the United States. These Virginia income tax exemptions will be
available only if a Fund (i) qualifies as a separate "regulated
investment company" under the Internal Revenue Code and (ii)
complies with the requirement of the Internal Revenue Code that
at least 50% of the value of its assets at the close of each
quarter of its taxable year is invested in state, municipal, or
other obligations described in Section 103(a) of the Internal
Revenue Code. These Funds intend to comply with those
requirements.
Other distributions from these Funds, including capital gains,
generally will not be exempt from Virginia income taxation.
Interest on indebtedness incurred (directly or indirectly) by a
shareholder of Virginia Intermediate Municipal Bond Fund or
Virginia Municipal Bond Fund to purchase or carry shares of these
Funds generally will not be deductible for Virginia income tax
purposes. These Funds will not be subject to any Virginia
intangible personal property tax on any obligations in a Fund.
In addition, shares of a Fund held for investment purposes will
not be subject to any Virginia intangible personal property tax.
To be entitled to the exemption described above for distributions
attributable to certain interest on Virginia obligations,
obligations of certain United States possessions or direct United
States obligations, a shareholder must be able to substantiate
the exempt portions of each distribution with reasonable
certainty. The determination of exempt portions must be made on
a monthly (rather than annual or quarterly) basis if, as planned,
Virginia Intermediate Municipal Bond Fund and Virginia Municipal
Bond Fund each makes monthly distributions. Accordingly,
shareholders should retain their statements from these Funds,
which are to be issued at least annually, showing the percentages
of each monthly distribution attributable to interest on Virginia
obligations, possessions obligations and United States
obligations.
State of Maryland. To the extent the Maryland Municipal Bond
Fund qualifies as a regulated investment company under the Code,
it will be subject to tax only on (1) that portion of its income
on which tax is imposed for federal income tax purposes under
Section 852(b)(1) of the Code and (2) that portion of its income
which consists of federally tax exempt interest on obligations
other than Maryland Exempt Obligations (hereinafter defined) to
the extent such interest is not paid to Maryland Municipal Bond
Fund shareholders in the form of exempt-interest dividends. To
the extent dividends paid by the Maryland Municipal Bond Fund
represent interest excludable from gross income for federal
income tax purposes, that portion of exempt-interest dividends
that represents interest received by the Maryland Municipal Bond
Fund on obligations issued by the State of Maryland, its
political subdivisions, Puerto Rico, the U.S. Virgin Islands, or
Guam and their respective authorities or municipalities
("Maryland Exempt Obligations"), will be exempt from Maryland
state and local income taxes when allocated or distributed to a
shareholder of the Maryland Municipal Bond Fund except in the
case of a shareholder that is a financial institution. Except as
noted below, all other dividend distributions will be subject to
Maryland state and local income taxes.
Capital gains distributed by the Maryland Municipal Bond Fund to
a shareholder or any gains realized by a shareholder from a
redemption or sale of shares must be recognized for Maryland
state and local income tax purposes to the extent recognized for
federal income tax purposes. However, capital gains
distributions included in the gross income of shareholders for
23
<PAGE>
federal income tax purposes are subtracted from capital gains
income for Maryland income tax purposes to the extent such
distributions are derived from the disposition by the Maryland
Municipal Bond Fund of debt obligations issued by the State of
Maryland, its political subdivisions and authorities.
Except in the case of a shareholder that is a financial
institution, dividends received by a shareholder from the
Maryland Municipal Bond Fund that are derived from interest on
U.S. government obligations will be exempt from Maryland state
and local income taxes.
In the case of individuals, Maryland presently imposes an income
tax on items of tax preference with reference to such items as
defined in the Code for purposes of calculating the federal
alternative minimum tax. Interest paid on certain private
activity bonds is a preference item for purposes of calculating
the federal alternative minimum tax. Accordingly, if the
Maryland Municipal Bond Fund holds such bonds, the excess of 50%
of that portion of exempt interest dividends which is
attributable to interest on such bonds over a threshold amount
may be taxable by Maryland. Interest on indebtedness incurred or
continued (directly or indirectly) by a shareholder in order to
purchase or carry shares of the Maryland Municipal Bond Fund will
not be deductible for Maryland state and local income tax
purposes. Individuals will not be subject to personal property
tax on their shares of the Maryland Municipal Bond Fund. Shares
of the Maryland Municipal Bond Fund held by a Maryland resident
at death may be subject to Maryland inheritance and estate taxes.
CAPITAL GAINS. Shareholders may realize a capital gain or loss
when they redeem (sell) or exchange shares of the Funds. For
most types of accounts, the Funds will report the proceeds of a
shareholder's redemptions to the shareholder and the IRS
annually. However, because the tax treatment also depends on the
purchase price and the shareholder's personal tax position,
shareholders should keep their regular account statements to use
in determining their tax.
"BUYING A DIVIDEND." On the ex-dividend date for an equity or
bond fund distribution, the Fund's share value is reduced by the
amount of the distribution. If a shareholder were to buy shares
just before the record date ("buying a dividend"), the
shareholder would pay the full price for the shares and then, in
effect, receive a portion of the price back as a taxable
distribution.
OTHER TAX INFORMATION. When an investor signs his account
application, he will be asked to provide his social security or
taxpayer identification number and certify that the number
provided is correct and that he is not subject to 31% backup
withholding for failing to report income to the IRS. If an
investor fails to provide the correct number or violates IRS
regulations, the IRS can require the Funds to withhold 31% of his
taxable distributions and redemptions.
Each Class calculates dividend and capital gain distributions
separately. Each Fund is treated as a separate entity in all
respects for tax purposes. There is a risk that a Fund may be
unable to meet tax rules that require mutual funds to derive less
than 30% of their gross income from gains realized upon the sale
of securities held less than 3 months. If this were to occur,
the affected Fund may be required to pay federal as well as
Maryland state income taxes from its assets.
The information above is only a summary of some of the tax
consequences generally affecting the Funds and their
shareholders, and no attempt has been made to discuss individual
tax consequences. In addition to federal income taxes,
shareholders may be subject to state and local taxes on
distributions received from the Funds. Investors should consult
their tax advisers to determine whether a Fund is suitable to
their particular situations.
DIRECTORS AND OFFICERS AND AFFILIATED PERSONS
The Directors and officers of the Company and their principal
occupations during the past five years are set forth below. The
Director who is an "interested person" (as defined in the 1940
Act) by virtue of his affiliation with either a fund or
Capitoline is indicated by an asterisk (*).
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<PAGE>
* Jesse F. Williams III, Chairman, President, and Director.
Chairman of the Board, Harrison & Bates Incorporated (real estate
company), since 1971. Mr. Williams is also a member of the
advisory board of Crestar Bank. His address is 823 East Main
Street, Suite 1800, Richmond, Virginia 23219.
F. David Fowler, Director. Dean of School of Business and Public
Management of George Washington University since 1992. Mr.
Fowler is also a member of the board of directors of FTP Software
Corporation (software sales). Previously, he was a Partner at
KPMG Peat Marwick LLP (public accountants).
John Bruce James, Jr., Director. Vice President of Virginia
Landmark Corporation (real estate company) since 1970. Mr. James
is also a member of the Commission of Architectural Review, City
of Richmond, since 1982; a member of the Board of Trustees of the
Instructive Visiting Nurses Association since 1976; and a member
of the Board of Directors of The Retreat Hospital, Richmond,
Virginia, since 1982. Previously, he was a member of the Board
of Trustees, Hampden-Sydney College. His address is 3910 Exeter
Road, Richmond, Virginia 23221.
Jean L. Oakey, Director. Partner at Wells Coleman & Co. (public
accountants).
Glen Douglas Pond, Director. Retired. Formerly the Director of
the Virginia Retirement System. His address is 21 Waterfront
Court, Cedar Point, Urbanna, Virginia 23175.
David M. Carter, Secretary, Partner, Hunton and Williams, Fund
Counsel.
Kevin P. Robins, Vice President, Assistant Secretary. Senior
Vice President & General Counsel of SEI, the Administrator and
the Distributor since 1994. Vice President of SEI, the
Administrator and the Distributor 1992-1994. Associate, Morgan,
Lewis & Bockius (law firm) prior to 1992.
Robert B. Carroll, Vice President, Assistant Secretary. Vice
President, Assistant Secretary of SEI, the Administrator and
Distributor since 1994. United States Securities and Exchange
Commission, Division of Investment Management, 1990-1994.
Associate, McGuire, Woods, Battle & Booth (law firm) before 1990.
Jeffrey A. Cohen, Controller, Assistant Secretary. CPA,
Director, International and Domestic Funds Accounting, SEI
Corporation since 1991. Audit Manager, Price Waterhouse prior to
1991.
As of September 30, 1995, the Directors and officers owned in the
aggregate less than 1% of the outstanding shares of any Fund.
25
<PAGE>
As of November 30, 1995, the Directors and officers of the
Company received the following compensation:
Total
Pension Compensation
or from
Aggregate Retire- Registrant
Compensation ment Estimated and
From Benefits Annual Fund Complex
Registrant Accrued Benefits Paid to
Name of for as Part Upon Directors for
Person, Fiscal Year of Fund Retire- Fiscal Year
Position Ended 1995 Expenses ment Ended 1995
Jesse F.
Williams, III,
Chairman,
President and
Director $7,000 0 0 $7,000
F. David Fowler,
Director $7,000 0 0 $7,000
John Bruce
James, Jr.,
Director $7,000 0 0 $7,000
Jean L. Oakey,
Director $7,000 0 0 $7,000
Glen Douglas
Pond, Director $7,000 0 0 $7,000
The Company was incorporated in the state of Maryland as Bayshore
Funds, Inc. on March 17, 1986. At a special meeting of
shareholders held July 7, 1992, shareholders approved an
amendment to the Articles of Incorporation changing the name to
CrestFunds, Inc. The change was effective July 10, 1992.
THE ADVISER
Pursuant to Investment Advisory Agreements, as amended (the
"Advisory Agreements") Capitoline Investment Services,
Incorporated, a wholly-owned subsidiary of Crestar Bank, a
subsidiary of Crestar Financial Corp., furnishes at its own
expense all services, facilities and personnel necessary in
connection with managing each Fund's investments and effecting
portfolio transactions for each Fund. Each Advisory Agreement
will continue in effect only if such continuance is specifically
approved at least annually by the Board of Directors or by vote
of the shareholders, and in either case by a majority of the
Directors who are not parties to each Advisory Agreement or
interested persons of any such party, at a meeting called for the
purpose of voting on each Advisory Agreement.
Each Advisory Agreement is terminable without penalty by any Fund
on 60 days' written notice when authorized either by vote of its
shareholders or by a vote of a majority of the Board of
Directors, or by the Adviser on 60 days' written notice, and will
automatically terminate in the event of its assignment. Each
Advisory Agreement also provides that, with respect to each Fund,
neither the Adviser nor its personnel shall be liable for any
error of judgment or mistake of law or for any act or omission in
the performance of its duties to the Fund, except for willful
misfeasance, bad faith or gross negligence in the performance of
the Adviser's or their duties or by reason of reckless disregard
of its or their obligations and duties under the Advisory
Agreements. Each Advisory Agreement provides that the Adviser
may render services to others.
The fees paid pursuant to the Advisory Agreements are accrued
daily and paid monthly. For its services under the Advisory
Agreements, the Adviser receives fees with respect to each Fund
at the annual rates set forth below:
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<PAGE>
MONEY MARKET FUNDS
.40% of each Fund's average daily net assets on the first $500
million of net assets; .35% of each Fund's average daily net
assets on the next $500 million of net assets; and .30% of each
Fund's average daily net assets on all remaining net assets.
CAPITAL APPRECIATION FUND, VALUE FUND AND SPECIAL EQUITY FUND
.75% of each Fund's average daily net assets.
LIMITED TERM BOND FUND AND VIRGINIA INTERMEDIATE MUNICIPAL BOND
FUND
.50% of each Fund's average daily net assets.
INTERMEDIATE BOND FUND
.60% of Bond Fund's average daily net assets.
MARYLAND MUNICIPAL BOND FUND, GOVERNMENT BOND FUND AND VIRGINIA
MUNICIPAL BOND FUND
.60% of each Fund's average daily net assets.
The Adviser may choose to waive or reimburse a Fund for a portion
of that Fund's investment advisory fee.
For the fiscal years ended November 30, 1995, 1994 and 1993, the
advisory fees paid to the Adviser with respect to each money
market fund were as follows:
11/30/95 Waived 11/30/94 Waived 11/30/93 Waived
Cash Reserve
Fund $1,933,503 $0 $1,657,907 $0 $1,975,064 $0
U.S. Treasury
Money Fund $1,296,973 $0 $1,600,262 $0
Tax Free Money
Fund $ 766,014 $0 $ 605,671 $0 $ 704,097 $0
Fees paid to the Adviser with respect to the bond and equity
funds were as follows:
11/30/95 Waived 11/30/94 Waived 11/30/93 Waived
Limited Term
Bond Fund $ 417,675 $0 $ 429,077 $0 $ 381,139 $0
Intermediate
Bond Fund $ 469,601 $0 $ 429,478 $0 $ 255,722 $0
Virginia
Intermediate
Municipal
Bond Fund $ 249,142 $0 $ 254,392 $0 $ 107,415 $0
Value Fund $1,521,942 $0 $1,360,865 $0 $1,047,885 $0
Capital
Appreciation
Fund $ 141,723 $0 $ 87,096 $0 $ 40,173 $0
Special Equity
Fund $ 386,506 $0 $ 321,826 $0 $ 206,402 $0
Government
Bond Fund $ 35,722 $5,370 N/A N/A N/A N/A
Virginia
Municipal
Bond Fund $ 19,433 $3,239 N/A N/A N/A N/A
Maryland
Municipal
Bond Fund N/A N/A N/A N/A N/A N/A
None of the Maryland Municipal Bond, Government Bond or Virginia
Municipal Bond Funds conducted operations during the fiscal years
ended November 30, 1994 and 1993.
In addition to receiving its advisory fee from the Funds, the
Adviser may also act and be compensated as investment manager for
its clients with respect to assets which are invested in a Fund.
In some instances the Adviser may elect to credit against
27
<PAGE>
any investment management fee received from a client who is also
a shareholder in the Fund an amount equal to all or a portion of
the fees received by the Adviser and its affiliates from a Fund
with respect to the client's assets invested in the Fund.
The Adviser has agreed to reimburse a Fund for certain of the
operating expenses (exclusive of interest, taxes, and brokerage
fees and expenses paid pursuant to the Distribution Plan and
organization expenses, all to the extent permitted by applicable
state law or regulation) which in any year exceed the limits
prescribed by any state in which the Fund's shares are qualified
for sale. Currently, the most restrictive expense ratio
limitation imposed by any state is 2 1/2% of the first $30
million of a Fund's average net assets, 2% of the next $70
million of its average net assets and 1 1/2% of its average net
assets in excess of $100 million. Shares of the Funds are not
currently qualified for sale in any state which limits operating
expenses. For the purpose of this obligation to reimburse
expenses, each Fund's annual expenses are estimated and accrued
daily, and any appropriate estimated payments will be made by the
Adviser monthly. No such reimbursement was payable with respect
to the fiscal year ended November 30, 1995.
Subject to the obligations of the Adviser to reimburse a Fund for
its excess expenses as described above, the Company has, under
each Advisory Agreement, confirmed its obligation to pay all
other expenses, including interest charges, taxes, brokerage fees
and commissions; certain insurance premiums; fees, interest
charges and expenses of the custodian, transfer agent and
dividend disbursing agent; telecommunications expenses; auditing,
legal and compliance expenses; costs of forming the corporation
and maintaining corporate existence; costs of preparing and
printing the Company's prospectus, statement of additional
information, subscription order forms and shareholder reports and
delivering them to existing and prospective shareholders; costs
of maintaining books of original entry for portfolio and Fund
accounting and other required books and accounts and of
calculating the net asset value of shares of the Funds; costs of
reproduction, stationery and supplies; compensation of directors
and officers and employees of the Company and costs of other
personnel performing services for the Company who are not
officers of the Adviser, the Company's Distributor or their
respective affiliates; costs of corporate meetings; SEC
registration fees and related expenses; state securities laws
registration fees and related expenses; fees payable to the
Adviser under the Advisory Agreements and to the Company's
Distributor under the Administration and Distribution Agreement
and all other fees and expenses paid by a Fund or Class pursuant
to the Administration Plans or Distribution Plans.
ADMINISTRATOR AND DISTRIBUTOR
THE ADMINISTRATOR
The Company and SEI Financial Services Corporation (the
"Administrator") have entered into an administration agreement
(the "Administration Agreement") effective March 1, 1995.
The Administration Agreement provides that the Administrator
shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Trust in connection with the
matters to which the Administration Agreement relates, except a
loss resulting from willful misfeasance, bad faith or negligence
on the part of the Administrator in the performance of its duties
or from reckless disregard by it of its duties and obligations
thereunder.
The Administrator, a wholly-owned subsidiary of SEI Corporation
("SEI"), was organized as a Delaware corporation in 1969 and has
its principal business offices at 680 East Swedesford Road,
Wayne, PA 19087. Alfred P. West, Jr., Henry H. Greer and Carmen
V. Romeo, constitute the Board of Directors of the Administrator
and the Distributor. Mr. West is the Chairman of the Board and
Chief Executive Officer of SEI, the Administrator and the
Distributor. Mr. Greer serves as the President and Chief
Operating Officer of SEI, the Administrator and the Distributor.
SEI and its subsidiaries are leading providers of funds
evaluation services, trust accounting systems, and brokerage and
information services to financial institutions, institutional
investors and money managers. The Administrator also serves as
administrator to the following other mutual funds: SEI Daily
Income Trust; SEI Liquid Asset Trust; SEI Tax Exempt Trust; SEI
Index Funds; SEI Institutional Managed Trust; SEI International
Trust; Stepstone Funds; The Compass Capital Group, FFB Lexicon
Funds; The Advisors' Inner Circle Fund, The Pillar Funds; CUFund;
STI Classic Funds; CoreFunds, Inc.; First American Funds, Inc.;
First American Investment Funds, Inc.; The Arbor Fund; 1784
Funds; MarquisSM Funds, Morgan Grenfell Investment
28
<PAGE>
Trust; The PBHG Funds, Inc; Inventor Funds, Inc.; The Achievement
Funds Trust; Insurance Investment Products Trust; Bishop Street
Funds; and Conestoga Family of Funds.
The Administrator is entitled to a fee, calculated daily and paid
monthly, at an annual rate of .15% of average daily net assets of
each of the Funds.
For the fiscal year ended November 30, 1995, the Administrator
was compensted for its services under the Administration
Agreement as follows:
Cash Reserve Fund $724,959, of which $0 was waived
U.S. Treasury Money Fund $486,365, of which $0 was waived
Tax Free Money Fund $287,134, of which $0 was waived
Limited Term Bond Fund $125,310, of which $0 was waived
Intermediate Bond Fund $117,410, of which $0 was waived
Government Bond Fund $8,805, of which $8,805 was waived
VA Intermediate Municipal
Bond Fund $74,748, of which $34,384 was waived
VA Municipal Bond Fund $4,858, of which $4,858 was waived
Value Fund $304,389, of which $0 was waived
Capital Appreciation
Fund $28,470, of which $0 was waived
Special Equity Fund $77,120, of which $0 was waived.
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a
wholly-owned subsidiary of SEI, and the Company are parties to a
distribution agreement ("Distribution Agreement") effective as of
March 1, 1995. The Distribution Agreement shall be reviewed and
ratified at least annually (i) by the Company's Directors or by
the vote of a majority of the outstanding shares of the Company,
and (ii) by the vote of a majority of the Directors of the
Company who are not parties to the Distribution Agreement or
interested persons (as defined in the 1940 Act) of any party to
the Distribution Agreement, cast in person at a meeting called
for the purpose of voting on such approval. The Distribution
Agreement will terminate in the event of any assignment, as
defined in the 1940 Act, and is terminable with respect to a
particular Fund on not less than sixty days' notice by the
Directors, by vote of a majority of the outstanding shares
of such Fund or by the Distributor.
DISTRIBUTION PLAN
The Board of Directors of the Company has approved an Amended and
Restated Distribution and Service Plan (the "Distribution Plan")
pursuant to Rule 12b-1 of the 1940 Act (the "Rule"). Under the
Distribution Plan the Distributor is compensated at the annual
rate of .15% of the aggregate average daily net assets of the
Trust Class shares of the Funds. The Distributor will be
compensated for distribution services provided to the Trust Class
shares including the printing and distribution of Prospectuses,
Statements of Additional Information or reports prepared for the
use in connection with the offering of shares of the Fund (other
than to existing shareholders at the time of such mailing), the
expenses incurred for the preparation of any other literature
used by the Distributor in connection with any such offering.
The Distributor has agreed to waive any fees payable pursuant to
the Distribution Plan, and will bear the costs of other
distribution-related activities. The Distributor reserves the
right to terminate its waiver at any time at its sole discretion.
A SHARES AND B SHARES DISTRIBUTION PLANS
The Distribution Plan further provides that the A Shares will
pay the Distributor a fee of .15% of the average daily net
assets of the funds and an additional .25% of the average daily
net assets of the money market funds, which the Distributor can
use to compensate broker/dealers and service providers, including
the Adviser and its affiliates which provide administrative
29
<PAGE>
and/or distribution services to the Class A Shareholders or their
customers who beneficially own Class A Shares. All of the fees
currently are being waived by the Distributor.
The Company has adopted the Investors Class B Distribution and
Service Plan (the "B Shares Distribution Plan") in accordance
with the provisions of the Rule which regulates circumstances
under which an investment company may directly or indirectly bear
expenses relating to the distribution of its shares. The B
Shares Distribution Plan provides that B Shares will pay the
Distributor a fee of .75% of the average daily net assets of the
funds which offer B Shares. Continuance of the B Shares
Distribution Plan must be approved annually by a majority
of the Directors of the Company. The B Shares Distribution Plan
requires that quarterly written reports of amounts spent under
the B Shares Distribution Plan and the purposes of such
expenditures be furnished to and reviewed by the Directors. The
B Shares Distribution Plan may not be amended to increase
materially the amount which may be spent thereunder without
approval by a majority of the outstanding shares of the Company.
All material amendments of the Plan will require approval
by a majority of the Directors of the Company and of the
Qualified Directors.
For the fiscal year ended November 30, 1995, the Distributor was
compensated beginning March 1, 1995 for its services under the B
Shares Distribution Plan as follows:
Cash Reserve Fund $74, of which $10 was waived
Government Bond Fund $656, of which $87 was waived
VA Municipal Bond
Fund $1,835, of which $245 was waived
Value Fund $3,833, of which $511 was waived
Special Equity Fund $1,403, of which $87 was waived.
Also, pursuant to the B Shars Distribution Plan, the Distributor
is compensated at an annual rate of .25% of B Shares' average net
assets for providing ongoing shareholder support services to
investors in B Shares for its services under a Shareholder
Services Plan as follows:
Cash Reserve Fund $25, of which $5 was waived
Government Bond Fund $217, of which $43 was waived
VA Municipal Bond
Fund $612, of which $122 was waived
Value Fund $1,277, of which $255 was waived
Special Equity Fund $468, of which $94 was waived.
Prior to March 1, 1995, Fidelity Distributor Corporation ("FDC")
served as the Funds' administrator and distributor under
the Administrative and Distribution Plans.
For the fiscal years ended November 30, 1995 (through February
28, 1995), November 30, 1994 and 1993, FDC was compensated
for its services under each operative Distribution Plan as
follows:
Cash Reserve Fund $152,042, $631,053 and $744,853, of
which $0, $0 and $0 was waived
U.S. Treasury Money Fund $112,822, $499,978 and $600,093, of
which $0, $0 and $0 was waived
Tax Free Money Fund $65,682, $228,173 and $264,036, of
which $0, $0 and $0 was waived
Limited Term Bond Fund $30,482, $128,753 and $114,342, of
which $0, $0 and $0 was waived
Intermediate Bond Fund $28,685, $107,382 and $63,930, of which
$0, $0 and $0 was waived
VA Intermediate Municipal
Bond Fund $18,356, $76,321 and $32,224, of which
$15,576, $64,180 and $27,670 was waived
Value Fund $65,118, $272,207 and $209,577, of
which $0, $0 and $0 was waived
Capital Appreciation Fund $5,362, $17,420 and $8,035, of which
$0, $0 and $0 was waived
Special Equity Fund $17,171, $64,372 and $41,280, of which
$0, $0 and $0 was waived.
For the fiscal years ended November 30, 1995 (through February
28, 1995), November 30, 1994 and 1993, FDC was compensated
under the A Shares Distribution Plan which provides for an
additional .25% of average daily net assets of the
30
<PAGE>
money market funds as follows: Cash Reserve Fund, $12,283, $9,057
and $24; U.S. Treasury Money Fund, $0, $0 and $0; and Tax Free
Money Fund, $468, $939 and $141.
The following represents expenses made pursuant to the Rule for
the fiscal year ended November 30, 1995.
12b-1 Expenses
Promotion
Third Party and Marketing Distri- Main-
Fund Payments Advertising Management bution tenance
Cash Reserve
Fund $ 64 -- -- -- --
U.S. Treasury
Money Fund -- -- -- -- --
Tax Free
Money Fund -- -- -- -- --
Limited Term
Bond Fund -- -- -- -- --
Intermediate
Bond Fund -- -- -- -- --
Government
Bond Fund 569 -- -- -- --
VA Intermed-
iate Municipal
Bond Fund -- -- -- -- --
VA Municipal
Bond Fund 1,590 -- -- -- --
Value Fund 3,322 -- -- -- --
Capital
Appreciation
Fund -- -- -- -- --
Special Equity
Fund 1,216 -- -- -- --
In addition, Capitoline may use all or a portion of the fee
received under its advisory contract, past profits or other
resources to pay financial institutions and other industry
professionals such as investment advisors, broker-dealers
(including Crestar Securities Corporation) accountants and estate
planning firms ("Qualified Recipients") for shareholder services.
These Qualified Recipients may be paid for such services from the
fees paid by the Funds to Capitoline. The Plans also provide
that Capitoline may engage banks as Qualified Recipients for
performing certain shareholder support services. Capitoline
will make such payments only to Qualified Recipients who provide
shareholder support services. These shareholder services
may include, among other things, answering client inquiries,
investing client account balances automatically in Fund shares,
arranging for bank wires, and such other client services of a
nature generally provided by a bank as may seem appropriate.
Capitoline will enter into written agreements with Qualified
Recipients who receive payments pursuant to a Plan. Payments
will be made on the basis of the average daily net asset value of
a Fund's shares owned by shareholders for whom the Qualified
Recipient is the holder of record or with whom the Qualified
Recipient has a servicing relationship.
As discussed in the Prospectus, the Company recognizes that the
Glass-Steagall Act and other applicable laws prohibit banks
from engaging in the business of underwriting, selling or
distributing securities. Accordingly, the Distributor will
engage banks as Qualified Recipients only to perform
administrative and shareholder servicing functions. While the
matter is not free from doubt, the Company's Board of Directors
believes on advice of counsel that such laws should not preclude
a bank from performing shareholder support services. However,
judicial or administrative decisions or interpretations of such
laws, as well as changes in federal or state statutes or
regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, could prevent a bank from
continuing to perform all or a part of its servicing activities.
If banks or bank affiliates were prohibited from so acting, the
Company would change its existing policies to permit bank
customers who are shareholders to remain shareholders of a Fund
and would implement alternative means for continuing the
servicing
31
<PAGE>
of such shareholders. In such event, changes in the operation of
a Fund might occur and a shareholder serviced by such bank might
no longer be able to make use of any automatic investment or
other services then being provided by the bank.
TRANSFER AGENT
Pursuant to a Transfer Agent Agreement dated as of July 10, 1992
between the Company, on behalf of each of the Funds, and Crestar
Bank, the Transfer Agent for each of the Funds is Crestar Bank
("Transfer Agent"). The Transfer Agent maintains an account for
each shareholder and monitors tax reporting, performs other
transfer agency functions and acts as dividend disbursing agent
for each Fund. For these services, the Transfer Agent will be
paid an annual fee of .06% of the average daily net assets of the
A Shares and B Shares of each Fund.
The Transfer Agent Agreement will continue in effect only if such
continuance is specifically approved at least annually by the
Board of Directors or by a vote of the shareholders and in either
case by a majority of the Directors who are not parties to the
Transfer Agent Agreement or interested persons of any such party,
at a meeting called for the purpose of voting on the Transfer
Agent Agreement.
CUSTODIAN
Pursuant to a Custodian Agreement dated as of July 10, 1992
between the Company, on behalf of each of the Funds, and Crestar
Bank, Crestar Bank (the "Custodian") acts as the Custodian of
each Fund's assets. The Custodian's responsibilities include
safeguarding and controlling the Funds' cash and securities,
handling the receipt and delivery of securities and collecting
income on Fund investments. For these services, the Custodian
will receive a fee, with respect to each money market fund,
computed and paid monthly, based on the total net assets of each
such Fund, the number of portfolio transactions of the Fund and
the number of securities in the Fund's portfolio. The
Custodian's fee for any fiscal year of the Company will not
exceed, with respect to each money market fund, .04% of each such
Fund's average daily net assets. The Custodian's fee with
respect to each bond and equity fund will be .04% of each such
Fund's average daily net assets.
AUDITOR
Deloitte & Touche LLP, Two World Financial Center, New York, New
York 10281, independent auditors, have been selected as auditors
for the Company. Deloitte & Touche LLP has acted as independent
auditors of the Company since its inception.
PRINCIPAL HOLDERS OF SECURITIES
A shareholder owning of record or beneficially more than 25% of a
particular Fund's shares may be considered to be a "controlling
person" of that Fund. Accordingly, its vote could have a more
significant effect on matters presented at shareholder meetings
than the votes of the fund's other shareholders. The following
persons owned of record 5% or more of the outstanding Trust Class
shares of the indicated Funds as of September 30, 1995:
FUND NAME SHAREHOLDER %
Cash Reserve Fund Crestar Bank 97%
P.O. Box 26665
Richmond, VA 23261
U.S. Treasury Fund Crestar Bank 98%
P.O. Box 26665
Richmond, VA 23261
32
<PAGE>
Tax Free Money Fund Crestar Bank 99%
P.O. Box 26665
Richmond, VA 23261
Limited Term Bond Fund Crestar Bank 91%
P.O. Box 26665
Richmond, VA 23261
Intermediate Bond Fund Crestar Bank 88%
P.O. Box 26665
Richmond, VA 23261
Virginia Intermediate Crestar Bank 90%
Municipal Bond Fund P.O. Box 26665
Richmond, VA 23261
Virginia Municipal Bond Crestar Bank 88%
Fund P.O. Box 26665
Richmond, VA 23261
Value Fund Crestar Bank 93%
P.O. Box 26665
Richmond, VA 23261
Capital Appreciation Crestar Bank 48%
Fund P.O. Box 26665
Richmond, VA 23261
Special Equity Fund Crestar Bank 91%
P.O. Box 26665
Richmond, VA 23261
FINANCIAL STATEMENTS
The financial statements and financial highlights for the fiscal
year ended November 30, 1995 for Cash Reserve Fund, U.S. Treasury
Money Fund, Tax Free Money Fund, Limited Term Bond Fund (formerly
known as Short/Intermediate Bond Fund), Intermediate Bond Fund
(formerly known as Bond Fund), Government Bond Fund, Virginia
Intermediate Municipal Bond Fund (formerly known as Virginia
Municipal Bond Fund), Virginia Municipal Bond Fund, Value Fund,
Capital Appreciation Fund and Special Equity Fund are included in
the Annual Report which is a separate report supplied with this
Statement of Additional Information. The financial statements
and financial highlights are incorporated herein by reference.
33
<PAGE>
APPENDIX
Description of selected indices:
Dow Jones Industrial Average is an unmanaged index of 30 common
stock prices representing stocks of major industrial companies
and includes reinvestment of dividends.
Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index of common stock prices and includes reinvestment of
dividends.
NASDAQ Composite Index is an unmanaged index of over-the-counter
stock prices and does not assume reinvestment of dividends.
Russell 2000 Index is an unmanaged index of small capitalization
stocks that includes reinvestment of dividends.
Russell 1000 Growth Index, an unmanaged index, is a broad measure
of the performance of growth companies and includes reinvestment
of dividends and capital gains.
Value Line Index, an unmanaged index, is a broad measure of both
large and small companies and includes reinvestment of dividends
and capital gains.
Lehman Brothers Aggregate Bond Index, an unmanaged index, is a
broad measure of bond performance and includes reinvestment of
dividends.
Lehman Brothers General Obligation Bond Index, an unmanaged
index, is a broad measure of the performance of tax-exempt bonds
and includes reinvestment of dividends.
Lehman Brothers Government Bond Index is an index comprised of
all public obligations of the U.S. Treasury, U.S. Government
agencies, quasi-federal corporations, and of corporate debt
guaranteed by the U.S. Government. The index excludes flower
bonds, foreign targeted issues, and mortgage-backed securities.
Lehman Brothers Corporate Bond Index is an index comprised of all
public, fixed-rate, non-convertible investment-grade domestic
corporate debt. Issues included in this index are rated at least
Baa by Moody's Investors Service or BBB by Standard and Poor's
Corporation or, in the case of unrated bonds, BBB by Fitch
Investors Service. Collateralized mortgage obligations are not
included in the Corporate Bond Index.
The Government Bond Index and the Corporate Bond Index combine to
form the Corporate Bond Index.
Lehman Brothers Intermediate Corporate Bond Index is an index
comprised of all public, fixed-rate, non-convertible investment-
grade domestic corporate debt. Issues included in this index
have remaining maturities of one to ten years and are rated at
least Baa by Moody's Investors Service or BBB by Standard and
Poor's Corporation or, in the case of unrated bonds, BBB by Fitch
Investors Service.
Lehman Brothers Long-Term Corporate Bond Index is an index
comprised of all public, fixed-rate, non-convertible investment-
grade domestic corporate debt. Issues included in this index
have remaining maturities greater than ten years and are rated at
least Baa by Moody's Investors Service or BBB by Standard and
Poor's Corporation, or, in the case of unrated bonds, BBB by
Fitch Investors Service.
Salomon Brothers High Grade Corporate Bond Index is an index of
high quality corporate bonds with a minimum maturity of at least
ten years and with total debt outstanding of at least $50
million. Issues included in the index are rated AA or better by
Moody's Investors Service or AA or better by Standard & Poor's
Corporation.
34
<PAGE>
Merrill Lynch High and Medium Quality Intermediate-Term Corporate
Index is an index comprised of all public, fixed-rate, non-
convertible corporate debt. Issues included in this index have
remaining maturities of between one year and 9.99 years. Issues
included in the index are rated at least BBB by Standard & Poor's
Corporation.
Dollar-weighted average maturity is derived by multiplying the
value of each investment by the number of days remaining to its
maturity, adding these calculations, and then dividing the total
by the value of a Fund's portfolio. An obligation's maturity is
typically determined on a stated financial maturity basis,
although there are some exceptions to this rule. For example, if
it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call,
refunding, or redemption provision, the date in which the
instrument will probably be called, refunded or redeemed may be
considered to be its maturity date. Also, the maturities of
mortgage-backed securities and some asset-backed securities, such
as collateralized mortgage obligations, are determined on a
weighted average life basis, which is the average time for
principal to be repaid. For a mortgage security, this average
time is calculated by estimating the expected principal payments
during the life of the mortgage. The weighted average life of
these securities is likely to be substantially shorter than their
stated final maturity.
Description of Moody's Investors Service, Inc.'s ratings of state
and municipal notes:
Moody's ratings for state and municipal and other short-term
obligations are designated Moody's Investment Grade ("MIG," or
"VMIG" for variable rate obligations). This distinction is in
recognition of the difference between short-term credit risk and
long-term credit risk. Factors affecting the liquidity of the
borrower and short-term cyclical elements are critical in short-
term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important
over the short run. Symbols used will be as follows:
MIG-1/VMIG-1 - This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG-2/VMIG-2 - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
Description of Standard & Poor's Corporation's ratings of state
and municipal notes:
SP-1 - Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 - Satisfactory capacity to pay principal and interest.
Description of Moody's Investors Service, Inc.'s municipal bond
ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." 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 which are rated Aa 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 Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
may be present which suggest a susceptibility to impairment
sometime in the future.
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Baa - Bonds which are rated Baa are considered as 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.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic
rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Description of Standard & Poor's Corporation's municipal bond
ratings:
AAA - Debt rated 'AAA' has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest
and repay principal and differs from the highest rated debt
issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and
repay principal, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits 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 categories.
The ratings from AA to CCC may be modified by the addition of a
plus or minus to show relative standing within the major rating
categories.
Description of Moody's Investors Service, Inc.'s commercial paper
ratings: Issuers rated Prime-1 (or related supporting
institutions) 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 capitalizations structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and with high internal cash generation.
- Well established access to a range of financial markets
and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Description of Standard & Poor's Corporation's commercial paper
ratings:
A - Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are delineated with the numbers 1, 2, and 3 to indicate
the relative degree of safety.
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
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A-2 - Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
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