<PAGE>
CRESTFUNDS-Registered Trademark-
Investors Class A and Investors Class B
PROSPECTUS
MARCH 30, 1999
CASH RESERVE FUND
TAX FREE MONEY FUND
INTERMEDIATE BOND FUND
GOVERNMENT BOND FUND
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
VIRGINIA MUNICIPAL BOND FUND
MARYLAND MUNICIPAL BOND FUND
VALUE FUND
CAPITAL APPRECIATION FUND
SPECIAL EQUITY FUND
INVESTMENT ADVISER: CRESTAR ASSET MANAGEMENT COMPANY
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY FUND SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
IT IS A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
<PAGE>
HOW TO READ THIS PROSPECTUS
CrestFunds is a mutual fund family that offers different classes of shares
in separate investment portfolios (Funds). The Funds have individual investment
goals and strategies. This prospectus gives you important information about the
Class A and Class B Shares of the Funds that you should know before investing.
Please read this prospectus and keep it for future reference.
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT THE FUNDS.
FOR MORE DETAILED INFORMATION ABOUT EACH FUND, PLEASE SEE:
- ---------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
CASH RESERVE FUND 5
TAX FREE MONEY FUND 9
INTERMEDIATE BOND FUND 12
GOVERNMENT BOND FUND 16
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND 20
VIRGINIA MUNICIPAL BOND FUND 23
MARYLAND MUNICIPAL BOND FUND 26
VALUE FUND 29
CAPITAL APPRECIATION FUND 32
SPECIAL EQUITY FUND 35
MORE INFORMATION ABOUT RISK 39
FUND INVESTMENTS 43
THE INVESTMENT ADVISER AND INVESTMENT TEAM 43
PURCHASING, SELLING AND EXCHANGING FUND SHARES 45
DIVIDENDS, DISTRIBUTIONS AND TAXES 56
DISTRIBUTION OF FUND SHARES
FINANCIAL HIGHLIGHTS 58
HOW TO OBTAIN MORE INFORMATION ABOUT
CRESTFUNDS INSIDE BACK COVER
</TABLE>
Page 2 of 63
<PAGE>
RISK RETURN SUMMARY
INTRODUCTION
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal and strategies for reaching that goal.
Crestar Asset Management Company (the Adviser) invests Fund assets in a way that
the Adviser believes will help the Fund achieve its goal. Still, investing in
each Fund involves risk and there is no guarantee that a Fund will achieve its
goal. The Adviser's judgments about the markets, the economy, or companies may
not anticipate actual market movements, economic conditions or company
performance, and these judgments may affect the return on your investment. In
fact, no matter how good a job the Adviser does, you could lose money on your
investment in the Fund, just as you could with other investments. A Fund share
is not a bank deposit and it is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any government agency.
The value of your investment in a Fund (other than a money market fund) is based
on the market value of the securities the Fund holds. These prices change daily
due to economic and other events that affect particular companies and other
issuers. These price movements, sometimes called volatility, may be greater or
lesser depending on the types of securities a Fund owns and the markets in which
they trade. The effect on a Fund of a change in the value of a single security
will depend on how widely the Fund diversifies its holdings.
CASH RESERVE FUND AND TAX FREE MONEY FUND TRY TO MAINTAIN A CONSTANT PRICE PER
SHARE OF $1.00, BUT THERE IS NO GUARANTEE THAT A FUND WILL ACHIEVE THIS GOAL.
Page 3 of 63
<PAGE>
CHOOSING CLASS A OR CLASS B SHARES
Class A and Class B Shares have different expenses and other characteristics,
allowing you to choose the class that best suits your needs. You should
consider the amount you want to invest, how long you plan to have it invested,
and whether you plan to make additional investments.
CLASS A SHARES
Front-end sales charge (except for money market funds)
Lower annual expenses
$1,000 ($500 for IRAs and "CrestFunds Account Builder" Accounts)
minimum initial investment
CLASS B SHARES
Contingent deferred sales charge
Higher annual expenses
$1,000 ($500 for IRAs and "CrestFunds Account Builder" Accounts)
minimum initial investment
Page 4 of 63
<PAGE>
CASH RESERVE FUND
FUND SUMMARY
Investment Goal High current income, while maintaining
a share price of $1.00
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in a broad range of short-
term, high quality U.S. dollar
denominated debt securities
Investor Profile Conservative, income-oriented investors
with short- to medium-term time
horizons who seek current income,
preservation of capital and liquidity
INVESTMENT STRATEGY OF THE CASH RESERVE FUND
The Fund invests primarily in U.S. dollar denominated money market instruments,
such as U.S. Government securities; short-term debt obligations of high quality
corporate issuers including commercial paper, notes and bonds; high quality debt
obligations of foreign issuers; repurchase agreements; and obligations of
institutions such as banks and insurance companies including certificates of
deposit, bankers' acceptances and time deposits. The Fund's portfolio is
comprised only of short-term, high quality debt securities. High quality
securities are securities rated in the top two ratings categories by a
nationally recognized statistical rating organization. The Fund will maintain
an average maturity of 90 days or less, and will acquire only securities that
have a remaining maturity of 397 days or less. The Fund's investment
approach, with its emphasis on high quality, short-term money market
instruments, is expected to produce current income with low risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE CASH RESERVE FUND
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in a money market fund.
The Fund can be expected to produce lower income levels than fixed-income funds
that invest in longer-term securities.
Page 5 of 63
<PAGE>
PERFORMANCE INFORMATION
Class B Shares of this Fund are available through exchange only.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
The performance of Class A and Class B Shares will differ due to differences in
expenses.
This bar chart shows changes in the performance of the Fund's Class A Shares
from year to year.*
<TABLE>
<S> <C>
1994 3.56%
1995 5.48%
1996 4.95%
1997 5.17%
1998 5.07%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
1.40% 0.62%
(6/30/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S RETURNS FOR THE PERIODS ENDING DECEMBER 31, 1998
TO THOSE OF THE IBC/FINANCIAL DATA FIRST TIER AVERAGE.
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Reserve Fund 5.07% 4.84% 4.57%*
IBC/Financial Data First Tier Average 4.96% 4.79% 4.56%**
</TABLE>
*Since May 4, 1993
**Since May 31, 1993
<TABLE>
<CAPTION>
CLASS A SHARES 7 DAY YIELD
- --------------------------------------------------------------------
<S> <C>
Cash Reserve Fund 4.54%
IBC/Financial Data First Tier Average 4.52%
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash Reserve Fund (0.92)% 3.48%*
IBC/Financial Data First Tier Average 4.96% 5.03%**
</TABLE>
*Since April 19, 1995
**Since April 30, 1995
<TABLE>
<CAPTION>
CLASS B SHARES 7 DAY YIELD
- --------------------------------------------------------------------
<S> <C>
Cash Reserve Fund 3.60%
IBC/Financial Data First Tier Average 4.52%
</TABLE>
Page 6 of 63
<PAGE>
WHAT IS AN AVERAGE?
An Average measures the share prices of a specific group of mutual funds with a
particular investment objective. You cannot invest directly in an average. The
IBC/Financial Data First Tier Average is a composite of mutual funds with
investment goals similar to the Fund's goals.
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A SHARES CLASS B SHARES
- -------------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases None None
(as a percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a None 5.00%
percentage of the lesser of net asset value or
the offering price)
Maximum Sales Charge (Load) Imposed on Reinvested None None
Dividends and other Distributions (as a
percentage of offering price)
Redemption Fee (as a percentage of amount None None
redeemed, if applicable)
Exchange Fee None None
Maximum Account Fee None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Management Fees 0.36% 0.36%
Distribution and Service (12b-1) Fees 0.40% 1.00%
Other Expenses 0.28% 0.28%
----- -----
Total Annual Fund Operating Expenses 1.04% 1.64%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.36%, 0.00% and 0.64% for
Class A Shares, respectively, and 0.36%, 0.95% and 1.59% for Class B Shares,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
Page 7 of 63
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $106 $331 $574 $1,271
Class B Shares $667 $817 $1,092 $1,705
</TABLE>
Page 8 of 63
<PAGE>
TAX FREE MONEY FUND
FUND SUMMARY
Investment Goal High current income exempt from federal
income tax, while maintaining a share
price of $1.00
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in high quality municipal
securities
Investor Profile Conservative, income-oriented investors
with short- to medium-term time
horizons who seek current tax exempt
income, preservation of capital and
liquidity
INVESTMENT STRATEGY OF THE TAX FREE MONEY FUND
The Fund invests primarily in high quality municipal securities that are free
from federal income tax. The Fund focuses on municipal securities that pay
interest that is not includable in federal alternative minimum tax calculations,
however, the Fund reserves the right to invest up to 20% of the value of its net
assets in securities, including private bonds, the interest on which is fully
taxable or subject to the alternative minimum tax. As a fundamental policy, at
least 80% of the Fund's income will, under normal circumstances, be exempt from
such taxes. Subject to such limitation, the Fund may invest in any taxable
investment, including repurchase agreements. The Fund's portfolio is
diversified among issuers and comprised only of short term, high quality debt
securities. High quality securities are securities rated in the top two ratings
categories by a nationally recognized statistical rating organization. The Fund
will maintain an average weighted maturity of 90 days or less, and will acquire
only securities that have a remaining maturity of 397 days or less. The Fund's
investment approach, with its emphasis on high-quality, short-term money market
instruments, is expected to produce current income with low risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE TAX FREE MONEY FUND
Although a money market fund seeks to keep a constant price per share of $1.00,
you may lose money by investing in a money market fund.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes to the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's municipal securities.
The Fund can be expected to produce lower income levels than fixed-income funds
that invest in longer-term securities.
Page 9 of 63
<PAGE>
PERFORMANCE INFORMATION
Class B Shares of this Fund are currently not available.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Class A Shares
from year to year.*
<TABLE>
<S> <C>
1994 2.11%
1995 3.27%
1996 3.10%
1997 3.07%
1998 2.92%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
0.91% 0.37%
(3/31/96) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE IBC/FINANCIAL DATA ALL TAX-FREE
AVERAGE.
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Free Money Fund 2.92% 2.89% 2.74%*
IBC/Financial Data All Tax-Free Average 2.93% 2.96% 2.86%**
</TABLE>
*Since May 5, 1993
**Since May 31, 1993
<TABLE>
<CAPTION>
CLASS A SHARES 7 DAY YIELD
- ----------------------------------------------------------------------
<S> <C>
Tax Free Money Fund 3.11%
IBC/Financial Data All Tax-Free Average 2.98%
</TABLE>
WHAT IS AN AVERAGE?
An average measures the share prices of a specific group of mutual funds with a
particular investment objective. You cannot invest directly in an average. The
IBC/Financial Data All Tax-Free Average is a composite of mutual funds with
investment goals similar to the Fund's goals.
Page 10 of 63
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A SHARES
- --------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a None
percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net None
asset value)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
and other Distributions (as a percentage of offering price)
Redemption Fee (as a percentage of amount redeemed, if None
applicable)
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS A SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.40%
Distribution and Service (12b-1) Fees 0.40%
Other Expenses 0.27%
-----
Total Annual Fund Operating Expenses 1.07%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.40%, 0.00% and 0.67%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $109 $340 $590 $1,306
</TABLE>
Page 11 of 63
<PAGE>
INTERMEDIATE BOND FUND
FUND SUMMARY
Investment Goal High current income
Investment Focus Bonds and other fixed income securities
Share Price Volatility Medium
Principal Investment Strategy Investing in investment grade fixed
income debt obligations of domestic
issuers
Investor Profile Conservative, income-oriented investors
who have a medium-term time horizon and
who seek a relatively high level of
current income and are willing to
tolerate a moderate degree of price
fluctuation
INVESTMENT STRATEGY OF THE INTERMEDIATE BOND FUND
The Fund invests primarily in bonds and other fixed income securities issued
by domestic issuers such as corporate obligations; obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
commercial paper which is rated Prime-1 by Moody's or A-1 by S&P; and
asset-backed and mortgage-backed securities. All such instruments must be
investment grade. Investment grade securities are securities rated in the
top four ratings categories by a nationally recognized statistical rating
organization. In selecting the Fund's investments, the Adviser will consider
preservation of capital, the potential for realizing capital appreciation,
sector rotation, maturity and yield to maturity. The Adviser will monitor
the Fund's investments in response to its appraisal of changing economic
conditions and trends. The Fund is managed to maintain a dollar-weighted
average maturity of between five and ten years. The Fund's investment
approach, with its emphasis on bonds and other fixed-income securities is
expected to produce current income with moderate risk to capital.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities.
PRINCIPAL RISKS OF INVESTING IN THE INTERMEDIATE BOND FUND
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa, and the volatility of lower rated securities is even
greater than that of higher rated securities. Also, longer-term securities are
generally more volatile, so the average maturity or duration of these securities
affects risk.
Page 12 of 63
<PAGE>
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies
are backed by the U.S. Treasury, while others are backed solely by the ability
of the agency to borrow from the U.S. Treasury or by the agency's own resources.
PERFORMANCE INFORMATION
Class B Shares of this Fund are currently not available.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Class A Shares
from year to year.*
The chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.
<TABLE>
<S> <C>
1994 (4.83)%
1995 18.08%
1996 1.67%
1997 8.51%
1998 6.66%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
6.41% (3.95)%
(6/30/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS AGGREGATE BOND INDEX.
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund 3.46% 5.11% 5.08%*
Lehman Brothers Aggregate Bond Index 8.67% 7.27% 7.34%**
</TABLE>
*Since May 11, 1993
**Since May 31, 1993
Page 13 of 63
<PAGE>
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A SHARES
- --------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a 3.00%
percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net None
asset value)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
and other Distributions (as a percentage of offering price)
Redemption Fee (as a percentage of amount redeemed, if None
applicable)
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS A SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.28%
-----
Total Annual Fund Operating Expenses 1.03%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.60%, 0.00% and 0.88%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
Page 14 of 63
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $402 $618 $852 $1,522
</TABLE>
Page 15 of 63
<PAGE>
GOVERNMENT BOND FUND
FUND SUMMARY
Investment Goal High current income with preservation
of capital
Investment Focus Bonds and other fixed income
securities
Share Price Volatility Medium
Principal Investment Strategy Investing in bonds issued or
guaranteed by the U.S. Government, its
agencies or instrumentalities
Investor Profile Conservative, income-oriented
investors who have a medium- to long-
term time horizon and who seek a
high level of current income and are
willing to tolerate a moderate degree
of price fluctuation
INVESTMENT STRATEGY OF THE GOVERNMENT BOND FUND
The Fund invests primarily in bonds and other fixed income securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities including
U.S. Treasury Bonds, Notes and Bills, Government National Mortgage Association
mortgage-backed pass-through certificates and mortgage-backed securities issued
by the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation. Under normal conditions, at least 65% of the Fund's total assets
will be invested in U.S. Government securities, including bonds and repurchase
agreements secured by U.S. Government securities. Any remaining assets may be
invested in fixed income securities that are not U.S. Government securities.
There are no limits on the dollar-weighted average portfolio maturity of the
Fund. The Fund's investment approach, with its emphasis on debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
is expected to produce current income with moderate risk to principal.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities.
PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa, and the volatility of lower rated securities is even
greater than that of higher rated securities. Also, longer-term securities are
generally more volatile, so the average maturity or duration of these securities
affects risk.
Page 16 of 63
<PAGE>
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies
are backed by the U.S. Treasury, while others are backed solely by the ability
of the agency to borrow from the U.S. Treasury or by the agency's own resources.
PERFORMANCE INFORMATION
Class A Shares of this Fund are currently available only through conversion of
Class B Shares after seven years.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Class B Shares
from year to year.*
The chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.
<TABLE>
<S> <C>
1996 (0.46)%
1997 7.33%
1998 6.86%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
3.55% (3.21)%
(9/30/98) (3/31/96)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GOVERNMENT BOND INDEX.
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Government Bond Fund 1.86% 6.30%*
Lehman Brothers Government Bond Index 9.85% 9.18%**
</TABLE>
*Since April 19, 1995
**Since April 30, 1995
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an
Page 17 of 63
<PAGE>
index does not have an investment adviser and does not pay any commissions or
expenses. If an index had expenses, its performance would be lower.
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a None
percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of 5.00%
the lesser of net asset value or the offering price)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
and other Distributions (as a percentage of offering price)
Redemption Fee (as a percentage of amount redeemed, if None
applicable)
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 1.00%
Other Expenses 0.26%
-----
Total Annual Fund Operating Expenses 1.86%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.95% and 1.62%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Page 18 of 63
<PAGE>
Class B Shares $689 $885 $1,206 $1,848
</TABLE>
Page 19 of 63
<PAGE>
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from
federal and Virginia income tax
Investment Focus Virginia municipal bonds
Share Price Volatility Low to medium
Principal Investment Strategy Investing in municipal bonds of
investment grade quality
Investor Profile Conservative, income-oriented
investors who are Virginia residents,
have short- to medium-term time
horizons, and seek current tax exempt
income with a relatively low to
moderate degree of price fluctuation
INVESTMENT STRATEGY OF THE VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds
which are free from federal and Virginia income tax. Such investments
include fixed, variable, or floating rate general obligation and revenue
bonds; zero coupon and asset-backed securities; tax; revenue, or bond
anticipation notes; and tax exempt commercial paper. All such instruments
must be investment grade. Investment grade securities are securities rated
in the top four ratings categories by a nationally recognized statistical
rating organization. In selecting the Fund's investments, stability and
growth of principal are considered. The Fund is managed to maintain a
dollar-weighted average maturity of between five and ten years. The Fund's
investment approach, with its emphasis on municipal bonds, is expected to
produce current income with moderate risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Virginia municipal
securities, may underperform other equity market segments or the equity market
as a whole.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Virginia subjects the Fund to economic and government policies of that state.
As a result the Fund will be more
Page 20 of 63
<PAGE>
susceptible to factors which adversely affect issuers of Virginia obligations
than a mutual fund that does not have as great a concentration in Virginia
municipal obligations.
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
Class B Shares of this Fund are currently not available.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Class A Shares
from year to year.*
The chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.
<TABLE>
<CAPTION>
<S> <C>
1994 (6.47)%
1995 14.37%
1996 2.94%
1997 7.24%
1998 5.32%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
6.10% (6.72)%
(3/31/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia Intermediate Municipal Bond Fund 1.59% 3.72% 4.27%*
Lehman Brothers General Obligation Bond Index 5.85% 5.36% 5.67%**
</TABLE>
*Since May 5, 1993
**Since May 31, 1993
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 21 of 63
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A SHARES
- --------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases 3.50%
(as a percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a percentage None
of net asset value)
Maximum Sales Charge (Load) Imposed on Reinvested None
Dividends and other Distributions (as a percentage of
offering price)
Redemption Fee (as a percentage of amount redeemed, None
if applicable)
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS A SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.29%
-----
Total Annual Fund Operating Expenses 0.94%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR PROFESSIONAL ADVISORY,
SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY SERVICES AND OTHER COSTS
OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST FEES AND EXPENSES THAT YOU
MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.79%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $443 $639 $852 $1,464
</TABLE>
Page 22 of 63
<PAGE>
VIRGINIA MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from federal
and Virginia income tax
Investment Focus Virginia municipal bonds
Share Price Volatility Medium
Principal Investment Strategy Investing in municipal bonds of
investment grade quality
Investor Profile Conservative, income-oriented investors
who are Virginia residents, have medium-
to long-term time horizons, seek current
tax exempt income and are willing to
tolerate a moderate degree of price
fluctuation
INVESTMENT STRATEGY OF THE VIRGINIA MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds which
are free from federal and Virginia income tax. Such investments include fixed,
variable, or floating rate general obligation and revenue bonds; zero coupon and
asset-backed securities; tax revenue, or bond anticipation notes; and tax exempt
commercial paper. All such instruments must be investment grade. Investment
grade securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. There are no limits on
the dollar weighted average portfolio maturity of the Fund. The Fund's
investment approach, with its emphasis on municipal bonds, is expected to
produce current income with moderate risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE VIRGINIA MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Virginia municipal
securities, may underperform other equity market segments or the equity market
as a whole.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Virginia subjects the Fund to economic and government policies of that state.
As a result, the Fund will be more susceptible to factors which adversely
affect issuers of Virginia obligations than a mutual fund that does not have
as great a concentration in Virginia municipal obligations.
Page 23 of 63
<PAGE>
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
Class A Shares of this Fund are currently available only through conversion of
Class B Shares after seven years.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Class B Shares
from year to year.*
This chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.
<TABLE>
<S> <C>
1996 0.81%
1997 7.91%
1998 4.83%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
3.18% (2.93)%
(6/30/97) (3/31/96)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Virginia Municipal Bond Fund (0.17)% 4.95%*
Lehman Brothers General Obligation Bond Index 6.68% 7.99%**
</TABLE>
*Since April 17, 1995
**Since April 30, 1995
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 24 of 63
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a None
percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a percentage
of the lesser of net asset value or the offering price) 5.00%
Maximum Sales Charge (Load) Imposed on Reinvested None
Dividends and other Distributions (as a percentage of
offering price)
Redemption Fee (as a percentage of amount redeemed, None
if applicable)
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 1.00%
Other Expenses 0.31%
-----
Total Annual Fund Operating Expenses 1.91%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.95% and 1.65%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B Shares $694 $900 $1,232 $1,902
</TABLE>
Page 25 of 63
<PAGE>
MARYLAND MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from federal
and Maryland income tax
Investment Focus Maryland municipal bonds
Share Price Volatility Medium
Principal Investment Strategy Investing in municipal bonds of
investment grade quality
Investor Profile Conservative, income-oriented investors
who are Maryland residents, have
medium-to long-term time horizons, seek
current tax exempt income and are willing
to tolerate a moderate degree of price
fluctuation
INVESTMENT STRATEGY OF THE MARYLAND MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds which
are free from federal and Maryland income tax. Such investments include fixed,
variable, or floating rate general obligation and revenue bonds; zero coupon and
asset-backed securities; tax revenue, or bond anticipation notes; and tax exempt
commercial paper. All such instruments must be investment grade. Investment
grade securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. There are no limits on
the dollar weighted average portfolio maturity of the Fund. The Fund's
investment approach, with its emphasis on municipal bonds, is expected to
produce current income with moderate risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE MARYLAND MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Maryland municipal
securities, may underperform other equity market segments or the equity market
as a whole.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Maryland subjects the Fund to economic and government policies of that state.
As a result, the Fund will be more susceptible to factors which adversely affect
issuers of Maryland obligations than a mutual fund that does not have as great a
concentration in Maryland municipal obligations.
Page 26 of 63
<PAGE>
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
Class A Shares of this Fund are currently available only through conversion of
Class B Shares after seven years.
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in performance of the Fund's Class B Shares from
year to year.*
The chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.
<TABLE>
<S> <C>
1997 7.90%
1998 4.91%
<CAPTION>
BEST QUARTER WORST QUARTER
3.35% (0.91)%
(6/30/97) (3/31/97)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Maryland Municipal Bond Fund (0.09)% 5.16%*
Lehman Brothers General Obligation Bond Index 6.68% 7.99%**
</TABLE>
*Since April 25, 1996
**Since April 30, 1996
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 27 of 63
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a None
percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of the 5.00%
lesser of net asset value or the offering price)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
and other Distributions (as a percentage of offering price)
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 1.00%
Other Expenses 0.39%
-----
Total Annual Fund Operating Expenses 1.99%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.25%, 0.95% and 1.59%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B Shares $702 $924 $1,273 $1,988
</TABLE>
Page 28 of 63
<PAGE>
VALUE FUND
FUND SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility Medium
Principal Investment Strategy Investing in a diversified portfolio of
equity securities of domestic companies
with market capitalizations of at least
$1 billion
Investor Profile Investors with medium- to long-term time
horizons who can tolerate a moderate
degree of price fluctuation and who wish
to establish core equity holdings of a
diversified investment portfolio
INVESTMENT STRATEGY OF THE VALUE FUND
The Fund invests primarily in common stock of domestic companies with market
capitalizations of at least $1 billion. Such investments include securities
convertible into common stock, such as convertible bonds and convertible
preferred stock rated investment grade or better. Investment grade
securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. The Adviser selects
these stocks from a list of companies traded in the U.S. securities markets.
In choosing its investments, the Adviser considers the fundamental
characteristics of growth and value in determining the price to earnings
ratio and the financial strength of the Fund's securities. The Fund's
investment approach, with its emphasis on common stocks of larger
capitalization companies, is expected to provide returns consistent with the
performance of the U.S. stock market.
PRINCIPAL RISKS OF INVESTING IN THE VALUE FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer
a decline in response. These factors contribute to price volatility, which is
the principal risk of investing in the Fund.
PERFORMANCE INFORMATION
Page 29 of 63
<PAGE>
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
The performance of Class A and Class B Shares will differ due to differences in
expenses.
This bar chart shows changes in the performance of the Fund's Class A Shares
from year to year.*
The chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.
<TABLE>
<S> <C>
1994 (0.91)%
1995 29.45%
1996 19.12%
1997 27.58%
1998 18.25%
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
17.35% (10.35)%
(6/30/97) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE S&P 500 COMPOSITE INDEX.
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Value Fund 12.90% 17.10% 16.07%*
S&P 500 Composite Index 28.60% 24.05% 22.40%**
</TABLE>
*Since May 7, 1993
**Since May 31, 1993
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Value Fund 12.28% 20.98%*
S&P 500 Composite Index 28.60% 29.32%**
</TABLE>
*Since April 19, 1995
**Since April 30, 1995
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 30 of 63
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A SHARES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on 4.50% None
Purchases (as a percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a None 5.00%
percentage of the lesser of net asset value
or the offering price)
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends and other Distributions None None
(as a percentage of offering price)
Redemption Fee (as a percentage of amount None None
redeemed, if applicable)
Exchange Fee None None
Maximum Account Fee None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Management Fees 0.75% 0.75%
Distribution and Service (12b-1) Fees 0.15% 1.00%
Other Expenses 0.28% 0.28%
----- -----
Total Annual Fund Operating Expenses 1.18% 2.03%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.15% and 1.18% for
Class A Shares, respectively, and 0.75%, 0.90% and 1.93% for Class B Shares,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $565 $808 $1,070 $1,817
Class B Shares $706 $937 $1,293 $2,031
</TABLE>
Page 31 of 63
<PAGE>
CAPITAL APPRECIATION FUND
FUND SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of
domestic companies with above average
growth rates and medium to large market
capitalizations
Investor Profile Investors with long-term time horizons
who can tolerate a moderate to above
average degree of price fluctuation
INVESTMENT STRATEGY OF THE CAPITAL APPRECIATION FUND
The Fund invests primarily in common stock of domestic companies with medium to
large market capitalizations of at least $250 million. Such investments include
securities convertible into common stock, such as convertible bonds and
convertible preferred stock rated investment grade or better. Investment grade
securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. The Adviser selects
these stocks from a list of companies traded in the U.S. securities markets. In
choosing its investments, the Adviser considers the fundamental characteristics
of growth and value in determining the price to earnings ratio and the financial
strength of the Fund's securities. The Fund's investment approach, with its
emphasis on common stocks, is expected to provide returns consistent with the
performance of the U.S. stock market.
PRINCIPAL RISKS OF INVESTING IN THE CAPITAL APPRECIATION FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer
a decline in response. These factors contribute to price volatility, which is
the principal risk of investing in the Fund.
The medium capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these mid-size companies may have limited product lines, markets
and financial resources.
Page 32 of 63
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
The performance of Class A and Class B Shares will differ due to differences in
expenses.
This bar chart shows changes in the performance of the Fund's Class A Shares
from year to year.*
The chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.
<TABLE>
<S> <C>
1994 (2.31)%
1995 23.79%
1996 20.98%
1997 26.70%
1998 28.94%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
26.37% (13.61)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE RUSSELL 1000 GROWTH INDEX.
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Appreciation Fund 23.14% 17.95% 17.41%*
Russell 1000 Growth Index 38.71% 25.70% 23.69%**
</TABLE>
*Since May 7, 1993
**Since May 31, 1993
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Capital Appreciation Fund 22.85% 23.09%*
Russell 1000 Growth Index 38.71% 34.01%**
</TABLE>
*Since September 2, 1997
**Since August 31, 1997
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 33 of 63
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A SHARES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on 4.50% None
Purchases (as a percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a None 5.00%
percentage of the lesser of net asset value
or the offering price)
Maximum Sales Charge (Load) Imposed on None None
Reinvested Dividends and other Distributions
(as a percentage of offering price)
Redemption Fee (as a percentage of amount None None
redeemed, if applicable)
Exchange Fee None None
Maximum Account Fee None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Management Fees 0.75% 0.75%
Distribution and Service (12b-1) Fees 0.15% 1.00%
Other Expenses 0.28% 0.28%
----- -----
Total Annual Fund Operating Expenses 1.18% 2.03%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.00% and 1.03% for
Class A Shares, respectively, and 0.75%, 0.95% and 1.98% for Class B Shares,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $565 $808 $1,070 $1,817
Class B Shares $706 $937 $1,293 $2,031
</TABLE>
Page 34 of 63
<PAGE>
SPECIAL EQUITY FUND
FUND SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of
domestic companies with market
capitalizations between $250 million and
$2 billion
Investor Profile Investors with long-term time horizons
who can tolerate an above average degree
of price fluctuation
INVESTMENT STRATEGY OF THE SPECIAL EQUITY FUND
The Fund invests primarily in common stock of domestic companies with market
capitalizations between $250 million and $2 billion. Such investments include
securities convertible into common stock, such as convertible bonds and
convertible preferred stock. The Fund may also invest in securities having
common stock characteristics, such as rights and warrants. Representative
industries may include, but are not limited to, technology, health care and
biotechnology, environmental services, communications, energy and alternative
energy. In choosing its investments, the Adviser considers the fundamental
characteristics of growth and value in determining the price to earnings ratio
and the financial strength of the Fund's securities. The Fund's investment
approach, with its emphasis on common stocks of smaller capitalization
companies, is expected to offer potentially higher returns and a significant
level of volatility relative to equity funds that invest in stocks of larger
companies.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities.
PRINCIPAL RISKS OF INVESTING IN THE SPECIAL EQUITY FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer
a decline in response. These factors contribute to price volatility, which is
the principal risk of investing in the Fund.
Page 35 of 63
<PAGE>
The medium capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these mid-size companies may have limited product lines, markets
and financial resources.
The smaller capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these small companies may have limited product lines, markets and
financial resources, and may depend upon a relatively small management group.
Therefore, small cap stocks may be more volatile than those of larger companies.
These securities may be traded over-the-counter or listed on an exchange and may
or may not pay dividends.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
The performance of Class A and Class B Shares will differ due to differences in
expenses.
This bar chart shows changes in the performance of the Fund's Class A Shares
from year to year.*
The chart does not reflect sales charges. If sales charges had been reflected,
returns would be less than those shown below.
<TABLE>
<S> <C>
1994 (10.89)%
1995 24.32%
1996 15.69%
1997 23.07%
1998 (8.61)%
<CAPTION>
BEST QUARTER WORST QUARTER
21.49% (27.25)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE RUSSELL 2000 GROWTH INDEX.
<TABLE>
<CAPTION>
CLASS A SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Special Equity Fund (12.72)% 6.60% 8.24%*
Russell 2000 Growth Index 1.23% 10.22% 11.42%**
</TABLE>
*Since May 5, 1993
**Since May 31, 1993
<TABLE>
<CAPTION>
CLASS B SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Special Equity Fund (13.95)% 10.49%*
Russell 2000 Growth Index 1.23% 12.83%**
</TABLE>
*Since April 5, 1995
Page 36 of 63
<PAGE>
**Since April 30, 1995
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES CLASS A SHARES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on 4.50% None
Purchases (as a percentage of offering price)
Maximum Deferred Sales Charge (Load) (as a None 5.00%
percentage of the lesser of net asset
value or the offering price)
Maximum Sales Charge (Load) Imposed on None None
Reinvested Dividends and other Distributions
(as a percentage of offering price)
Redemption Fee (as a percentage of amount None None
redeemed, if applicable)
Exchange Fee None None
Maximum Account Fee None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES* +
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Management Fees 0.75% 0.75%
Distribution and Service (12b-1) Fees 0.15% 1.00%
Other Expenses 0.27% 0.27%
----- -----
Total Annual Fund Operating Expenses 1.17% 2.02%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.00% and 1.02% for
Class A Shares, respectively, and 0.75%, 0.95% and 1.97% for Class B Shares,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
Page 37 of 63
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares $564 $805 $1,065 $1,806
Class B Shares $705 $934 $1,288 $2,021
</TABLE>
Page 38 of 63
<PAGE>
MORE INFORMATION ABOUT RISK
EQUITY RISK - Investments in equity securities Intermediate Bond Fund
and equity derivatives in general are subject
to market risks that may cause their prices to Value Fund
fluctuate over time. The value of securities
convertible into equity securities, such as Capital Appreciation Fund
warrants or convertible debt, is also affected
by prevailing interest rates, the credit quality Special Equity Fund
of the issuer and any call provision.
Fluctuations in the value of equity securities
in which a mutual fund invests will cause a
fund's net asset value to fluctuate. An
investment in a portfolio of equity securities
may be more suitable for long-term investors
who can bear the risk of these share price
fluctuations.
CONVERTIBLE SECURITIES - Convertible Intermediate Bond Fund
securities have characteristics of both
fixed income and equity securities. The Value Fund
value of the convertible security tends to
move with the market value of the Capital Appreciation Fund
underlying stock, but may also be affected
by interest rates, credit quality of the Special Equity Fund
issuer and any call provisions.
FIXED INCOME RISK - The market value of fixed Intermediate Bond Fund
income investments change in response to
interest rate changes and other factors. Government Bond Fund
During periods of falling interest rates,
the values of outstanding fixed income
securities generally rise. Moreover, while
securities with longer maturities tend to
produce higher yields, the prices of longer
maturity securities are also subject to
greater market fluctuations as a result of
changes in interest rates. In addition to
these fundamental risks, different types of
fixed income securities may be subject to
the following additional risks:
CALL RISK - During periods of falling Intermediate Bond Fund
interest rates, certain debt obligations
with high interest rates may be prepaid Government Bond Fund
(or called) by the issuer prior to
maturity. This may cause a Fund's
average weighted maturity to fluctuate,
and may require a Fund to invest the
resulting proceeds, at lower interest
rates.
Page 39 of 63
<PAGE>
CREDIT RISK - The possibility that an Intermediate Bond Fund
issuer will be unable to make timely
payments of either principal or interest. Government Bond Fund
Since a Fund purchases securities backed
by credit enhancements from banks and
other financial institutions, changes in
the credit ratings of these institutions
could cause a Fund to lose money and may
affect a Fund's share price.
MUNICIPAL ISSUER RISK - There may be economic Virginia Intermediate
or political changes that impact the ability Municipal Bond Fund
of municipal issuers to repay principal and
to make interest payments on municipal Virginia Municipal Bond Fund
securities. Changes to the financial
condition or credit rating of municipal issuers Maryland Municipal Bond Fund
may also adversely affect the value of a Fund's
municipal securities. Constitutional or
legislative limits on borrowing by municipal
issuers may result in reduced supplies of
municipal securities. Moreover, certain
municipal securities are backed only by a
municipal issuer's ability to levy and collect
taxes. In addition, a Fund's concentration of
investments in issuers located in a single
state makes the Fund more susceptible to
adverse political or economic developments
affecting that state. A Fund also may be
riskier than mutual funds that buy securities
of issuers in numerous states.
MORTGAGE-BACKED SECURITIES - Mortgage-backed Intermediate Bond Fund
securities are fixed income securities
representing an interest in a pool of underlying Government Bond Fund
mortgage loans. They are sensitive to changes
in interest rates, but may respond to these
changes differently from other fixed income
securities due to the possibility of prepayment
of the underlying mortgage loans. As a result,
it may not be possible to determine in advance
the actual maturity date or average life of a
mortgage-backed security. Rising interest rates
tend to discourage refinancings, with the result
that the average life and volatility of the
security will increase, exacerbating its
decrease in market price. When interest rates
fall, however, mortgage-backed securities may
not gain as much in market value because of the
expectation of additional mortgage prepayments
must be reinvested at lower interest rates.
Prepayment risk may make it difficult to
calculate the average maturity of a fund
mortgage-backed securities and, therefore,
to assess the volatility risk of that fund.
Page 40 of 63
<PAGE>
FOREIGN SECURITY RISKS - Investments in
securities of foreign companies or
governments can be more volatile than Intermediate Bond Fund
investments in U.S. companies or governments.
Diplomatic, political, or economic developments, Value Fund
including nationalization or appropriation,
could affect investments in foreign countries. Capital Appreciation Fund
Foreign securities markets generally have less
trading volume and less liquidity than U.S. Special Equity Fund
markets. In addition, the value of securities
denominated in foreign currencies, and of
dividends from such securities, can change
significantly when foreign currencies strengthen
or weaken relative to the U.S. dollar. Foreign
companies or governments generally are not
subject to uniform accounting, auditing, and
financial reporting standards comparable to
those applicable to domestic U.S. companies or
governments. Transaction costs are generally
higher than those in the U.S. and expenses for
custodial arrangements of foreign securities
may be somewhat greater than typical expenses
for custodial arrangements of similar U.S.
securities. Some foreign governments levy
withholding taxes against dividend and
interest income. Although in some countries a
portion of these taxes are recoverable, the
non-recovered portion will reduce the income
received from the securities comprising the
portfolio.
EVENT RISK - Securities may suffer declines Intermediate Bond Fund
in credit quality and market value due
to corporate or governmental restructurings. Government Bond Fund
While this risk may be high for certain
securities held by a Fund, the overall risk
should be reduced because of the Fund's
multiple holdings.
Page 41 of 63
<PAGE>
YEAR 2000 RISK - The Funds depend on the smooth All Funds
functioning of computer systems in almost every
aspect of their business. Like other mutual
funds, businesses and individuals around the
world, the Funds could be adversely affected if
the computer systems used by its service
providers do not properly process dates on and
after January 1, 2000, and distinguish between
the year 2000 and the year 1900. The Funds
have asked their service providers whether they
expect to have their computer systems adjusted
for the year 2000 transition, and are seeking
assurances from each service provider that they
are devoting significant resources to prevent
material adverse consequences to the Funds.
While it is likely that such assurances will
be obtained, the Funds and their shareholders
may experience losses if these assurances prove
to be incorrect or as a result of year 2000
computer difficulties experienced by issuers of
portfolio securities or third parties, such as
custodians, banks, broker-dealers or others with
which the Funds do business.
Page 42 of 63
<PAGE>
FUND INVESTMENTS
In addition to the investments and strategies described in this prospectus, each
Fund also may invest in other securities, use other strategies and engage in
other investment practices, which are described in detail in our Statement of
Additional Information (SAI). Of course, we cannot guarantee that any Fund will
achieve its investment goal.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions,
or for temporary defensive or liquidity purposes, each municipal bond fund
may invest up to 100% of its assets in short-term municipal obligations,
money market instruments and shares of money market mutual funds; each equity
fund may invest up to 100% of its assets in high quality short-term debt
securities and money market instruments, including repurchase agreements, and
in the securities of other open-end management investment companies investing
primarily in money market instruments. When a Fund is investing for
temporary defensive purposes, it is not pursuing its investment goal.
THE INVESTMENT ADVISER AND INVESTMENT TEAM
INVESTMENT ADVISER
The Investment Adviser makes investment decisions for the Funds and continuously
reviews, supervises and administers each Fund's respective investment program.
The Board of Directors supervises the Adviser and establishes policies that the
Adviser must follow in its management activities.
Crestar Asset Management Company serves as the Adviser to the Funds. As of
December 31, 1998, Crestar Asset Management Company had approximately $17
billion in assets under management. For the fiscal year ended November 30,
1998, Crestar Asset Management Company received advisory fees of:
<TABLE>
<S> <C>
CASH RESERVE FUND 0.36%
TAX FREE MONEY FUND 0.40%
INTERMEDIATE BOND FUND 0.60%
GOVERNMENT BOND FUND 0.50%
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND 0.50%
VIRGINIA MUNICIPAL BOND FUND 0.50%
MARYLAND MUNICIPAL BOND FUND 0.25%
VALUE FUND 0.75%
CAPITAL APPRECIATION FUND 0.75%
SPECIAL EQUITY FUND 0.75%
</TABLE>
Page 43 of 63
<PAGE>
On December 31, 1998, Crestar Financial Corporation (Crestar), the parent of
Crestar Bank which is the parent of Crestar Asset Management Corporation, the
Funds' Adviser, was acquired by SunTrust Banks, Inc. (SunTrust). On February
19, 1999, the Board of Directors of the CrestFunds approved a plan of
reorganization with the STI Classic Funds (mutual funds that are served by
investment advisers that are subsidiaries of SunTrust). Under the plan of
reorganization, shareholders of each Fund of the CrestFunds will receive shares
of a comparable class of the corresponding STI Fund. This plan of
reorganization will be submitted for approval by shareholders of the CrestFunds
at a Special Meeting of Shareholders expected to be held on May 7, 1999. The
plan is also conditioned upon receiving the appropriate exemptive relief from
the Securities and Exchange Commission.
INVESTMENT TEAM
The Funds are managed by teams of investment professionals from the Crestar
Asset Management Company. No one person is primarily responsible for making
investment recommendations to the teams.
Page 44 of 63
<PAGE>
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to buy, sell (sometimes called "redeem") or exchange
Class A and Class B Shares of the Funds.
The classes have different expenses and other characteristics.
CLASS A SHARES
- Front-end sales charge (except for money market funds)
- Lower annual expenses
- $1,000 ($500 for IRAs and "CrestFunds Account Builder" Accounts)
minimum initial investment
CLASS B SHARES
- Contingent deferred sales charge
- Higher annual expenses
- $1,000 ($500 for IRAs and "CrestFunds Account Builder" Accounts)
minimum initial investment
For some investors the minimum initial investment for Class A and Class B Shares
may be lower.
Class A and Class B Shares are for individual and institutional investors.
HOW TO PURCHASE FUND SHARES
You may purchase shares directly:
- - Through a Crestar Securities Corporation Investment Representative
(Financial Consultant);
- - by mail;
- - by telephone; or
- - by wire.
For more information regarding the purchase of shares, please call
1-800-273-7827. You must complete and return a signed account application for
each account you open. Write your check, payable in U.S. dollars to the name of
the Fund. We cannot accept third-party checks, credit cards, or cash.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your institution may charge a fee for its services, in addition to the fees
charged by the Fund. You will also generally have to address your
correspondence or questions regarding a Fund to your institution.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange and the
Federal Reserve are open for business (a Business Day). Shares cannot be
purchased by Federal Reserve Wire on days when either the New York Stock
Exchange or the Federal Reserve is closed.
Page 45 of 63
<PAGE>
A Fund may reject any purchase order if it is determined that accepting the
order would not be in the best interests of the Fund or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase order plus, in the
case of Class A Shares, the applicable front-end sales charge.
The Adviser calculates each bond and equity fund's NAV once each Business
Day at the regularly-scheduled close of normal trading on the New York Stock
Exchange (NYSE) (normally 4:00 p.m., Eastern time). The NAV of the Tax Free
Money Fund is determined as of 12:00 noon, Eastern time and as of the
regularly-scheduled close of normal trading on the NYSE. The NAV of the Cash
Reserve Fund is determined as of 1:00 p.m., Eastern time and as of the
regularly-scheduled close of normal trading on the NYSE. So, to be eligible
to receive dividends declared on the day you submit your purchase order,
generally a Fund must receive your order before 4:00 p.m., Eastern time for
each non-money market fund, 12:00 noon, Eastern time for the Tax Free Money
Fund, and 1:00 p.m., Eastern time for the Cash Reserve Fund.
HOW WE CALCULATE NAV
NAV for one fund share is the value of that share's portion of all of the assets
in the Fund.
In calculating NAV, the Adviser generally values a Fund's investment portfolio
at market price (except the Cash Reserve Fund and Tax Free Money Fund). If
market prices are unavailable or the Adviser believes that they are unreliable,
fair value prices may be determined in good faith using methods approved by the
Board of Directors.
In calculating NAV for the Cash Reserve Fund and the Tax Free Money Fund, we
generally value a Fund's investment portfolio using the amortized cost valuation
method, which is described in detail in our SAI. If this method is determined
to be unreliable during certain market conditions or for other reasons, fair
value prices may be determined in good faith using methods approved by the Board
of Directors.
Some Funds hold securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the NAV of these Fund shares may change on days when you
cannot purchase or sell Fund shares.
MINIMUM PURCHASES
To purchase Class A Shares or Class B Shares for the first time, you must invest
at least $1,000 ($500 for IRAs) in any Fund. All subsequent purchases must be
at least $100 ($50 for IRAs).
A Fund may accept investments of smaller amounts for either class of shares at
our discretion. Please refer to the CrestFunds Account Builder section for
more information regarding minimum purchases.
Page 46 of 63
<PAGE>
ELECTRONIC FUNDS TRANSFER SERVICE
ELECTRONIC FUNDS TRANSFER SERVICE is a telephone activated service that allows
certain shareholders of the Funds to transfer money quickly and easily between
the CrestFunds and your bank account(s). To use ELECTRONIC FUNDS TRANSFER
SERVICE, you must first contact your Crestar Securities Corporation Investment
Representative and complete the ELECTRONIC FUNDS TRANSFER SERVICE application
and authorization agreements. Once you have signed up to use, simply call us at
1-800-273-7827 to complete all of your purchase and redemption transactions.
Allow two to three business days after the call for the transfer to take place.
CRESTFUNDS ACCOUNT BUILDER
If you have a checking or savings account with a Crestar affiliate bank, you may
purchase shares of either class automatically through regular deductions from
your account. With a $500 minimum initial investment, you may begin regularly
scheduled investments of $50 per monthly transaction per Fund.
WIRE
You may make additional investments in a Fund by wiring Federal funds from your
bank account. You must call the Customer Service Center before wiring funds.
Federal funds should be wired to:
The Chase Manhattan Bank, N.A.
ABA # 021000021
DDA #910-2-733368
All wires should include the name of the Fund, account number, your name(s) and
the control number assigned by the Financial Consultant.
Page 47 of 63
<PAGE>
SALES CHARGES
FRONT-END SALES CHARGES - CLASS A SHARES
The offering price of Class A Shares is the NAV next calculated after a Fund
receives your request, plus the front-end sales load.
The amount of any front-end sales charge included in your offering price varies,
depending on the amount of your investment. Class A Shares of the money market
funds are offered at NAV without a sales charge. Reduced sales charges are
applicable to purchases of $50,000 or more of Class A Shares of a Fund alone or
in combination with purchases of Class A Shares of other Funds.
Page 48 of 63
<PAGE>
VALUE FUND, CAPITAL APPRECIATION FUND AND SPECIAL EQUITY FUND
<TABLE>
<CAPTION>
CLASS A SALES
CHARGES AS A % OF
-----------------
DEALER
CONCESSION
NET (AS A % OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE IN SINGLE TRANSACTION PRICE INVESTED PRICE)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.05%
$50,000 to less than $100,000 4.00% 4.17% 3.60%
$100,000 to less than $250,000 3.50% 3.63% 3.15%
$250,000 to less than $500,000 3.00% 3.09% 2.70%
$500,000 to less than $1,000,000 2.50% 2.56% 2.25%
$1,000,000 or more 2.00% 2.04% 1.80%
<CAPTION>
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
CLASS A SALES
CHARGES AS A % OF
-----------------
DEALER
CONCESSION
NET (AS A % OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE IN SINGLE TRANSACTION PRICE INVESTED PRICE)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.50% 3.63% 3.15%
$50,000 to less than $100,000 3.09% 2.70% 3.00%
$100,000 to less than $250,000 2.50% 2.56% 2.25%
$250,000 to less than $500,000 2.00% 2.04% 1.80%
$500,000 to less than $1,000,000 1.25% 1.27% 1.13%
$1,000,000 or more 0.50% 0.50% 0.45%
<CAPTION>
INTERMEDIATE MUNICIPAL BOND FUND
CLASS A SALES
CHARGES AS A % OF
-----------------
DEALER
CONCESSION
NET (AS A % OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE IN SINGLE TRANSACTION PRICE INVESTED PRICE)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 3.00% 3.09% 2.70%
$50,000 to less than $100,000 2.50% 2.56% 2.25%
$100,000 to less than $250,000 2.00% 2.04% 1.80%
$250,000 to less than $500,000 1.50% 1.52% 1.35%
$500,000 to less than $1,000,000 1.00% 1.01% 0.90%
$1,000,000 or more 0.50% 0.50% 0.45%
</TABLE>
Page 49 of 63
<PAGE>
WAIVER OF FRONT-END SALES CHARGE - CLASS A SHARES
The front-end sales charge will be waived on Class A Shares purchased:
- - by reinvestment of dividends and distributions;
- - by employees and retirees of Crestar Financial Corporation or its direct or
indirect subsidiaries;
- - by Directors and officers of CrestFunds, Inc.;
- - by a spouse of a Crestar Director or employee;
- - by a Crestar Director or employee acting as custodian for a minor child;
- - by persons acting as trustee of a trust for the sole benefit of the minor
child of a Crestar Director or employee;
- - with redemption proceeds from other mutual fund or annuity complexes.
REPURCHASE OF CLASS A SHARES
You may repurchase any amount of Class A Shares of any Fund at NAV (without the
normal front-end sales charge), up to the limit of the value of any amount of
Class A Shares (other than those which were purchased with reinvested dividends
and distributions) that you redeemed within the past 30 days. In effect, this
allows you to reacquire shares that you may have had to redeem, without
re-paying the front-end sales charge. To exercise this privilege, the Fund must
receive your purchase order within 30 days of your redemption. IN ADDITION, YOU
MUST NOTIFY THE FUND WHEN YOU SEND IN YOUR PURCHASE ORDER THAT YOU ARE
REPURCHASING SHARES.
REDUCED SALES CHARGES - CLASS A SHARES
RIGHTS OF ACCUMULATION. In calculating the appropriate sales charge rate, this
right allows you to add the value of the Class A Shares you already own to the
amount that you are currently purchasing. The Fund will combine the value of
your current purchases with the current value of any Class A Shares you
purchased previously for (i) your account, (ii) your spouse's account, (iii) a
joint account with your spouse, or (iv) your minor children's trust or custodial
accounts. The Fund will only consider the value of Class A Shares purchased
previously that were subject to a sales charge when purchased. TO BE ENTITLED
TO A REDUCED SALES CHARGE BASED ON SHARES ALREADY OWNED, YOU MUST ASK US FOR THE
REDUCTION AT THE TIME OF PURCHASE. You must provide the Fund with your account
number(s) and, if applicable, the account numbers for your spouse and/or
children (and provide the children's ages). The Fund may amend or terminate
this right of accumulation at any time.
LETTER OF INTENT. You may purchase Class A Shares at the sales charge rate
applicable to the total amount of the purchases you intend to make over a
13-month period. In other words, a Letter of Intent allows you to purchase
Class A Shares of a Fund over a 13-month period and receive the same sales
charge as if you had purchased all the shares at the same time. The Fund will
only consider the value of Class A Shares subject to a sales charge when
purchased. As a result, shares of the Class A Shares purchased with dividends
or distributions will not be included in the calculation. To be entitled to a
reduced sales charge based on shares you intend to purchase over the 13-month
period, you must send the Fund a Letter of Intent. In calculating the total
amount of purchases, you may include in your letter purchases made up to 90
days before the date of the Letter. The 13-month period begins on the date
of the first purchase, including those
Page 50 of 63
<PAGE>
purchases made in the 90-day period before the date of the Letter. Please note
that the purchase price of these prior purchases will not be adjusted.
You are not legally bound by the terms of your Letter of Intent to purchase the
amount of your shares stated in the Letter. The Letter does, however, authorize
the Fund to hold in escrow 5% of the total amount you intend to purchase. If
you do not complete the total intended purchase at the end of the 13-month
period, the Fund's transfer agent will redeem the necessary portion of the
escrowed shares to make up the difference between the reduced rate sales charge
(based on the amount you intended to purchase) and the sales charge that would
normally apply (based on the actual amount you purchased).
COMBINED PURCHASE/QUANTITY DISCOUNT PRIVILEGE. When calculating the appropriate
sales charge rate, the Fund will combine same day purchases of Class A Shares
(that are subject to a sales charge) made by you, your spouse and your minor
children (under age 21). This combination also applies to Class A Shares you
purchase with a Letter of Intent.
Page 51 of 63
<PAGE>
CONTINGENT DEFERRED SALES CHARGES - CLASS B SHARES
You do not pay a sales charge when you purchase Class B Shares. The offering
price of Class B Shares is simply the next calculated NAV. But if you sell
your shares within seven years after your purchase, you will pay a contingent
deferred sales charge equal to a percentage of either (1) the NAV of the
shares at the time of purchase, or (2) the NAV of the shares next calculated
after the Fund receives your sale request, whichever is less. The sales
charge does not apply to shares you purchase through reinvestment of
dividends or distributions. So, you never pay a deferred sales charge on any
increase in your investment above the initial offering price. This sales
charge does not apply to exchanges of Class B Shares of one Fund for Class B
Shares of another Fund.
Class B Shares may, upon redemption, be assessed a charge based on the following
schedule:
<TABLE>
<CAPTION>
FROM DATE OF PURCHASE CONTINGENT DEFERRED SALES CHARGES
--------------------- ---------------------------------
<S> <C>
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%
Year 8 Conversion to A Shares
</TABLE>
The contingent deferred sales charge will be waived if you sell your Class B
Shares for the following reasons:
- - to make certain withdrawals from a retirement plan (not including IRAs);
- - because of death or disability; or
- - for certain payments under the Systematic Withdrawal Plan (which is
discussed later).
SELLING FUND SHARES
You may sell shares:
- - Through a Financial Consultant;
- - by Mail;
- - by Telephone; or
- - by Wire
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
Page 52 of 63
<PAGE>
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, those
proceeds will be sent to the record address. If you choose the Electronic Fund
Transfer service on your account application, you may redeem shares of a Fund by
calling the Customer Service Center.
If you selected the wire feature, you may receive redemption proceeds by wire by
calling the Customer Service Center. Your money normally will be wired to your
bank on the next business day. With respect to the money market funds, if your
redemption order is received by 1:00 p.m., Eastern time (or 12:00 p.m., Eastern
time for the Tax Free Money Fund), proceeds will be wired to your bank the same
day. You may be charged a nominal fee for wire redemption proceeds.
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell (sometimes called "redeem") your
shares on any Business Day by contacting a Fund directly by mail or telephone.
At the time you complete your 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. If you would like to
sell your shares, please notify us in writing and include a signature guarantee
by a bank or other financial institution (a notarized signature is not
sufficient).
The sale price of each share will be the next NAV determined after the Fund
receives your request less, in the case of Class B Shares, any applicable
deferred sales charge.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan is only available for Class A Shares. Under the
Systematic Withdrawal Plan you may arrange monthly, quarterly, semi-annual or
annual automatic withdrawals of at least $250 from any Fund. The proceeds of
each withdrawal will be mailed to you by check or, if you have a checking or
savings account with a bank, electronically transferred to your account.
RECEIVING YOUR MONEY
Normally, we will send your sale proceeds within seven days after we receive
your request. Your proceeds can be wired to your bank account (subject to a
nominal fee) or sent to you by check. IF YOU RECENTLY PURCHASED YOUR SHARES BY
CHECK, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED
(WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise (and for the protection of a
Fund's remaining shareholders) we might pay all or part of your redemption
proceeds in liquid securities with a market value equal to the redemption price
(redemption in kind). It is highly unlikely that your shares would ever be
redeemed in kind, but if they were, you would probably have to pay brokerage
costs to
Page 53 of 63
<PAGE>
sell the securities distributed to you, as well as taxes on any capital gains
from the sale as with any redemption.
INVOLUNTARY SALES OF YOUR SHARES
If your account balance drops below the required minimum because of redemptions
you may be required to sell your shares. The account balance minimums are:
<TABLE>
<CAPTION>
CLASS DOLLAR AMOUNT
<S> <C>
Class A Shares $500
Class B Shares $1,000 ($500 for IRAs)
</TABLE>
But, we will always give you at least 30 days' written notice to give you time
to add to your account and avoid the sale of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in our SAI.
HOW TO EXCHANGE YOUR SHARES
You may exchange your shares on any Business Day by contacting us directly by
mail or telephone.
You may exchange shares through your financial institution by mail or telephone.
You will be notified before any fee is charged. IF YOU RECENTLY PURCHASED
SHARES BY CHECK, YOU MAY NOT BE ABLE TO EXCHANGE YOUR SHARES UNTIL YOUR CHECK
HAS CLEARED (WHICH MAY TAKE UP TO 15 BUSINESS DAYS). This exchange privilege
may be changed or canceled at any time upon 60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after the Fund receives your exchange request.
CLASS A SHARES
You may exchange Class A Shares of any Fund for Class A Shares of any other
Fund. If you exchange shares that you purchased without a sales charge or with
a lower sales charge into a Fund with a sales charge or with a higher sale
charge, the exchange is subject to an incremental sales charge (e.g., the
difference between the lower and higher applicable sales charges). If you
exchange shares into a Fund with the same, lower or no sales charge there is no
incremental sales charge for the exchange.
Page 54 of 63
<PAGE>
CLASS B SHARES
You may exchange Class B Shares of any Fund for Class B Shares of any other
Fund. No contingent deferred sales charge is imposed on redemptions you acquire
in an exchange. After the seventh year of investment, Class B Shares
automatically convert to Class A Shares for all Class B shares, including
Government Bond Fund, Maryland Municipal Bond Fund and Virginia Municipal Bond
Fund.
TELEPHONE TRANSACTIONS
Purchasing, Selling and Exchanging Fund shares over the telephone is extremely
convenient, but not without risk. Although the Fund has certain safeguards and
procedures to confirm the identity of callers and the authenticity of
instructions, the Fund is not responsible for any losses or costs incurred by
following telephone instructions we reasonably believe to be genuine. If you or
your financial institution transact with the Fund over the telephone, you
generally will bear the risk of any loss.
Page 55 of 63
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes its income as follows:
Declared Daily and Distributed Monthly Declared and Paid Monthly
- -------------------------------------- -------------------------
Cash Reserve Fund Value Fund
Tax Free Money Fund Capital Appreciation Fund
Intermediate Bond Fund Special Equity Fund
Government Bond Fund
Virginia Intermediate Municipal Bond Fund
Virginia Municipal Bond Fund
Maryland Municipal Bond Fund
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.
You will receive dividends and distributions in the form of additional Fund
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Fund in writing prior to the date of the distribution. Your
election will be effective for dividends and distributions paid after the Fund
receives your written notice. To cancel your election, simply send the Fund
written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax
issues that affect the Funds and their shareholders. This summary is based on
current tax laws, which may change.
Each Fund will distribute substantially all of its income and capital gains, if
any. The dividends you receive are taxed as ordinary income. Any capital gains
distributions may be taxable to you as capital gains. For individuals,
long-term capital gains are currently taxed at a maximum rate of 20% and
short-term capital gains are currently taxed at ordinary income tax rates.
If you redeem a Fund's shares, you will be subject to tax on any gain. The
character of such gain will generally be based on your holding period for the
shares. An exchange of shares of a Fund for shares of another Fund is a sale
of Fund shares for tax purposes.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, you should consult your tax adviser about your
investment.
Tax Free Money Fund, Maryland Municipal Bond Fund, Virginia Intermediate
Municipal Bond Fund and Virginia Municipal Bond Fund intend to distribute
federally tax-exempt income. Each Fund may invest a portion of its assets in
securities that generate taxable income for federal or state income taxes.
Income exempt from federal tax may be subject to state and local taxes. Any
capital gains distributed by any Fund may be taxable.
MORE INFORMATION ABOUT TAXES IS IN OUR SAI.
Page 56 of 63
<PAGE>
DISTRIBUTION OF FUND SHARES
Each Fund has adopted a distribution plan that allows the Fund to pay
distribution and service fees for the sale and distribution of its shares, and
for services provided to shareholders. Because these fees are paid out of a
Fund's assets continuously, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Distribution fees, as a percentage of average daily net assets are as follows:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------- --------------
<S> <C> <C>
Cash Reserve Fund 0.40% 1.00%
Tax Free Money Fund 0.40% N/A
Intermediate Bond Fund 0.15% N/A
Government Bond Fund N/A 1.00%
Virginia Intermediate Municipal Bond Fund 0.15% N/A
Virginia Municipal Bond Fund N/A 1.00%
Maryland Municipal Bond Fund N/A 1.00%
Value Fund 0.15% 1.00%
Capital Appreciation Fund 0.15% 1.00%
Special Equity Fund 0.15% 1.00%
</TABLE>
The Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs for dealers, which will be paid for by the
Distributor from any sales charge it receives or from any other source available
to it. Under any such program, the Distributor may provide incentives, in the
form of cash or other compensation, including merchandise, airline vouchers,
trips and vacation packages, to dealers selling shares of a Fund.
Page 57 of 63
<PAGE>
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about Class A Shares and
Class B Shares of each Fund. This information is intended to help you
understand each Fund's financial performance for the past five years, or, if
shorter, the period of the Fund's operations. Some of this information reflects
financial information for a single Fund share. The total returns in the table
represent the rate that you would have earned (or lost) on an investment in a
Fund, assuming you reinvested all of your dividends and distributions. This
information has been audited by Deloitte & Touche LLP, independent public
accountants. Their report, along with each Fund's financial statements, appears
in the annual report that accompanies our SAI. You can obtain the annual
report, which contains more performance information, at no charge by calling
1-800-273-7827.
Page 58 of 63
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS CRESTFUNDS, INC.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
Investment Activities Distributions
----------------------- -------------------- Ratio
Net Net Net of Expenses
Asset Net Realized Asset Assets Ratio to Average
Value, Net and Unrealized Net Value, End of Expenses Net Assets
Beginning Investment Gain (Loss) Investment Capital End Total of Period to Average Excluding
of Period Income on Investments Income Gains of Period Return (000) Net Assets Fee Waivers
- ------------------------------------------------------------------------------------------------------------------------------
Cash Reserve Fund
- ------------------------------------------------------------------------------------------------------------------------------
Investors Class A
For the years ended November 30,:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $1.00 0.050 -- (0.050) -- $1.00 5.12% $189,942 0.64% 1.04%
1997 1.00 0.050 -- (0.050) -- 1.00 5.15% 135,507 0.65% 1.05%
1996 1.00 0.049 -- (0.049) -- 1.00 4.97% 65,411 0.67% 1.07%
1995 1.00 0.053 -- (0.053) -- 1.00 5.44% 40,240 0.67% 1.07%
1994 1.00 0.033 -- (0.033) -- 1.00 3.36% 11,832 0.68% 0.97%
Investors Class B (**)
For the years ended November 30,:
1998 $1.00 0.041 -- (0.041) -- $1.00 4.13% $133 1.59% 1.65%
1997 1.00 0.042 -- (0.042) -- 1.00 4.22% 38 1.56% 1.71%
1996 1.00 0.040 -- (0.040) -- 1.00 4.08% 15 1.52% 1.67%
1995 (1) 1.00 0.028 -- (0.028) -- 1.00 2.82%* 21 1.52%* 1.67%*
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Money Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Investors Class A
For the years ended November 30,:
1998 $1.00 0.030 -- (0.030) -- $1.00 2.96% $8,851 0.67% 1.07%
1997 1.00 0.030 -- (0.030) -- 1.00 3.05% 7,634 0.68% 1.08%
1996 1.00 0.029 0.002 (0.029) (0.002) 1.00 3.13% 2,994 0.67% 1.07%
1995 1.00 0.031 -- (0.031) -- 1.00 3.25% 1,627 0.67% 1.07%
1994 1.00 0.020 -- (0.020) -- 1.00 1.98% 757 0.76% 1.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 $9.96 0.562 0.168 (0.560) -- $10.13 7.51% $3,290 0.88% 1.03%
1997 9.94 0.592 0.022 (0.594) -- 9.96 6.45% 2,257 0.88% 1.03%
1996 10.12 0.543 (0.169) (0.554) -- 9.94 3.91% 2,238 0.89% 1.04%
1995 9.16 0.572 0.951 (0.563) -- 10.12 17.08% 1,729 0.89% 1.04%
1994 10.19 0.520 (0.990) (0.520) (0.040) 9.16 (4.72%) 1,030 0.89% 1.05%
- ------------------------------------------------------------------------------------------------------------------------------------
Government Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Investors Class B (**)
For the years ended November 30:
1998 $10.39 0.594 0.278 (0.592) -- $10.67 7.58% $2,397 1.62% 1.89%
1997 10.39 0.516 -- (0.516) -- 10.39 5.17% 1,213 1.57% 1.97%
1996 10.68 0.503 (0.291) (0.502) -- 10.39 2.12% 698 1.55% 1.95%
1995(1) 10.03 0.338 0.738 (0.333) (0.093) 10.68 10.86%* 325 1.55%* 1.95%*
- ------------------------------------------------------------------------------------------------------------------------------------
Virginia Intermediate Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 $10.31 0.454 0.171 (0.450) (0.035) $10.45 6.19% $7,899 0.79% 0.94%
1997 10.21 0.468 0.093 (0.461) -- 10.31 5.65% 7,826 0.79% 0.94%
1996 10.23 0.415 (0.018) (0.417) -- 10.21 4.01% 8,185 0.79% 0.94%
1995 9.20 0.428 1.029 (0.427) -- 10.23 16.10% 8,649 0.73% 0.95%
1994 10.32 0.440 (1.100) (0.440) (0.020) 9.20 (6.56%) 7,481 0.66% 0.80%
<CAPTION>
Ratio of
Net Investment
Ratio of Income to
Net Investments Average
Income Net Assets Portfolio
to Average Excluding Turnover
Net Assets Fee Waivers Rate
- --------------------------------------------------------
Cash Reserve Fund
- --------------------------------------------------------
Investors Class A
For the years ended November 30,:
<S> <C> <C> <C>
1998 5.00% 4.60% --
1997 5.04% 4.64% --
1996 4.85% 4.45% --
1995 5.31% 4.91% --
1994 3.35% 3.06% --
Investors Class B (**)
For the years ended November 30,:
1998 4.00% 3.94% --
1997 4.17% 4.02% --
1996 4.02% 3.87% --
1995 (1) 4.45%* 4.30%* --
- ---------------------------------------------------------
Tax Free Money Fund
- ---------------------------------------------------------
Investors Class A
For the years ended November 30,:
1998 2.92% 2.52% --
1997 3.42% 3.02% --
1996 2.86% 2.46% --
1995 3.16% 2.76% --
1994 1.97% 1.29% --
- --------------------------------------------------------
Intermediate Bond Fund
- --------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 5.59% 5.44% 178%
1997 6.06% 5.91% 66%
1996 5.54% 5.39% 35%
1995 5.87% 5.72% 37%
1994 5.51% 5.35% 39%
- --------------------------------------------------------
Government Bond Fund
- --------------------------------------------------------
Investors Class B (**)
For the years ended November 30:
1998 4.65% 4.38% 220%
1997 5.07% 4.67% 144%
1996 4.89% 4.49% 16%
1995(1) 5.05%* 4.65%* 28%
- ---------------------------------------------------------
Virginia Intermediate Municipal Bond Fund
- ---------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 4.33% 4.18% 24%
1997 4.56% 4.41% 30%
1996 4.12% 3.97% 25%
1995 4.33% 4.11% 28%
1994 4.47% 4.33% 24%
</TABLE>
Page 59 of 63
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS CRESTFUNDS, INC.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
Investment Activities Distributions
----------------------- -------------------- Ratio
Net Net Net of Expenses
Asset Net Realized Asset Assets Ratio to Average
Value, Net and Unrealized Net Value, End of Expenses Net Assets
Beginning Investment Gain (Loss) Investment Capital End Total of Period to Average Excluding
of Period Income on Investments Income Gains of Period Return (000) Net Assets Fee Waivers
- ------------------------------------------------------------------------------------------------------------------------------
Virginia Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investors Class B (**)
For the years ended November 30:
1998 $10.48 0.367 0.276 (0.367) (0.026) $10.73 6.24% $3,697 1.64% 1.92%
1997 10.31 0.387 0.176 (0.385) (0.008) 10.48 5.58% 1,476 1.60% 2.00%
1996 10.43 0.378 (0.121) (0.377) -- 10.31 2.58% 787 1.57% 1.97%
1995 (2) 10.06 0.237 0.409 (0.232) (0.044) 10.43 6.51%* 628 1.57%* 1.97%*
- ------------------------------------------------------------------------------------------------------------------------------
Maryland Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------
Investors Class B (**)
For the years ended November 30:
1998 $9.96 0.325 0.281 (0.326) -- $10.24 6.17% $3,246 1.57% 1.96%
1997 9.76 0.338 0.199 (0.337) -- 9.96 5.64% 561 1.54% 2.00%
1996 (3) 9.53 0.200 0.226 (0.196) -- 9.76 7.67%* 113 1.55%* 2.20%*
- ------------------------------------------------------------------------------------------------------------------------------
Value Fund
- ------------------------------------------------------------------------------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 $16.64 0.096 1.655 (0.096) (3.085) $15.21 13.69% $34,434 1.03% 1.18%
1997 13.47 0.136 3.248 (0.143) (0.070) 16.64 25.42% 28,112 1.03% 1.18%
1996 11.66 0.169 2.396 (0.164) (0.591) 13.47 22.63% 17,997 1.03% 1.18%
1995 10.78 0.250 2.623 (0.261) (1.732) 11.66 28.71% 12,633 1.03% 1.18%
1994 11.42 0.180 (0.220) (0.180) (0.420) 10.78 (0.45%) 8,115 1.02% 1.04%
Investors Class B (**)
For the years ended November 30:
1998 $16.59 (0.007) 1.642 -- (3.085) $15.14 12.78% $25,656 1.78% 2.03%
1997 13.44 0.037 3.234 (0.051) (0.070) 16.59 24.63% 13,269 1.73% 2.09%
1996 11.64 0.091 2.384 (0.084) (0.591) 13.44 21.81% 5,131 1.68% 2.03%
1995 (1) 11.11 0.120 1.618 (0.136) (1.072) 11.64 15.78%* 2,086 1.68%* 2.03%*
- ------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund
- ------------------------------------------------------------------------------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 $15.80 (0.016) 2.747 (0.006) (0.935) $17.59 18.58% $11,136 1.03% 1.18%
1997 13.44 0.038 2.983 (0.040) (0.621) 15.80 23.80% 7,900 1.03% 1.18%
1996 10.76 0.043 2.677 (0.040) -- 13.44 25.34% 4,870 1.11% 1.26%
1995 10.08 0.044 2.013 (0.045) (1.332) 10.76 20.72% 3,261 1.11% 1.26%
1994 9.74 0.010 0.340 (0.010) -- 10.08 3.70% 1,509 1.06% 1.18%
Investors Class B (**)
For the years ended November 30:
1998 $15.77 (0.077) 2.642 -- (0.935) $17.40 17.49% $4,841 1.97% 2.02%
1997 (4) 15.21 (0.016) 0.580 (0.004) -- 15.77 27.07% 432 1.93%* 2.07%*
- ------------------------------------------------------------------------------------------------------------------------------
Special Equity Fund
- ------------------------------------------------------------------------------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 $16.45 (0.027) (2.027) -- (2.176) $12.22 (13.84%) $4,973 1.04% 1.19%
1997 13.72 (0.011) 3.126 (0.005) (0.380) 16.45 23.38% 5,892 1.02% 1.17%
1996 12.12 0.052 1.911 (0.050) (0.313) 13.72 16.34% 4,660 1.05% 1.20%
1995 10.56 0.100 1.927 (0.107) (0.360) 12.12 20.06% 4,693 1.05% 1.20%
1994 12.76 0.030 (0.460) (0.020) (1.750) 10.56 (4.76%) 3,436 1.04% 1.10%
Investors Class B (**)
For the years ended November 30:
1998 $16.18 (0.084) (2.050) -- (2.176) $11.87 (14.67%) $2,701 1.98% 2.03%
1997 13.62 (0.063) 3.002 -- (0.380) 16.18 22.22% 2,133 1.93% 2.08%
1996 12.08 (0.043) 1.899 (0.003) (0.313) 13.62 15.47% 955 1.90% 2.05%
1995 (5) 10.61 0.007 1.501 (0.038) -- 12.08 14.22%* 554 1.90%* 2.05%*
<CAPTION>
Ratio of
Net Investment
Ratio of Income to
Net Investments Average
Income Net Assets Portfolio
to Average Excluding Turnover
Net Assets Fee Waivers Rate
- --------------------------------------------------------
Virginia Municipal Bond Fund
- --------------------------------------------------------
Investors Class B (**)
For the years ended November 30:
<S> <C> <C> <C>
1998 3.46% 3.18% 28%
1997 3.73% 3.33% 39%
1996 3.73% 3.33% 24%
1995 (2) 3.76%* 3.36%* 35%
- --------------------------------------------------------
Maryland Municipal Bond Fund
- --------------------------------------------------------
Investors Class B (**)
For the years ended November 30:
1998 3.16% 2.77% 12%
1997 3.43% 2.97% 5%
1996 (3) 3.42%* 2.77%* 9%
- ---------------------------------------------------------
Value Fund
- ---------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 0.63% 0.48% 71%
1997 0.89% 0.74% 100%
1996 1.35% 1.20% 82%
1995 2.14% 1.99% 175%
1994 1.81% 1.79% 116%
Investors Class B (**)
For the years ended November 30:
1998 (0.13%) (0.38%) 71%
1997 0.15% (0.20%) 100%
1996 0.71% 0.36% 82%
1995 (1) 1.13%* 0.78%* 175%
- ---------------------------------------------------------
Capital Appreciation Fund
- ---------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 (0.11%) (0.26%) 39%
1997 0.27% 0.12% 123%
1996 0.36% 0.21% 86%
1995 0.39% 0.24% 470%
1994 0.16% 0.04% 271%
Investors Class B (**)
For the years ended November 30:
1998 (1.08%) (1.13%) 39%
1997 (4) (0.87%)* (1.01%)* 123%
- ---------------------------------------------------------
Special Equity Fund
- ---------------------------------------------------------
Investors Class A (**)
For the years ended November 30:
1998 (0.21%) (0.36%) 231%
1997 (0.08%) (0.23%) 148%
1996 0.40% 0.25% 98%
1995 0.89% 0.74% 81%
1994 0.31% 0.25% 117%
Investors Class B (**)
For the years ended November 30:
1998 (1.15%) (1.20%) 231%
1997 (1.00%) (1.15%) 148%
1996 (0.47%) (0.62%) 98%
1995 (5) (0.04%)* (0.19%)* 81%
</TABLE>
Page 60 of 63
<PAGE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) Commencement of operations for this class April 19, 1995.
(2) Commencement of operations for this class April 17, 1995.
(3) Commencement of operations for this class April 25, 1996.
(4) Commencement of operations for this class September 2, 1997.
(5) Commencement of operations for this class April 5, 1995.
* Annualized.
** Total return does not reflect the sales charge or redemption charge, where
applicable.
Page 61 of 63
<PAGE>
CRESTFUNDS
INVESTMENT ADVISER
Crestar Asset Management Company
919 East Main Street
Richmond, Virginia 23219
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
More information about the Funds are available without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated March 30, 1999, includes detailed information about the
CrestFunds. The SAI is on file with the SEC and is incorporated by reference
into this prospectus. This means that the SAI, for legal purposes, is a part of
this prospectus.
Annual and Semi-Annual Reports
These reports list each Fund's holdings and contain information from the Fund's
managers about strategies, and recent market conditions and trends and their
impact on the Funds' performance. The reports also contain detailed financial
information about the Funds.
TO OBTAIN MORE INFORMATION:
BY TELEPHONE: Call 1-800-273-7827
BY MAIL: Write to us
Crestar Direct
RSV 9193
7818 Parham Road
Richmond, Virginia 23219
BY INTERNET: www.crestar.com
Page 62 of 63
<PAGE>
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual
reports, as well as other information about the CrestFunds, from the SEC's
website ("http://www.sec.gov"). You may review and copy documents at the SEC
Public Reference Room in Washington, DC (for information call 1-800-SEC-0330).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-6009. The CrestFunds Investment Company Act
registration number is 811-4620.
Page 63 of 63
<PAGE>
CRESTFUNDS-REGISTERED TRADEMARK-, INC.
INVESTORS CLASS SHARES
STATEMENT OF ADDITIONAL INFORMATION
MARCH 30, 1999
This Statement is not a prospectus but should be read in conjunction with
the current Investors Class A Shares (A Shares) and Investors Class B Shares (B
Shares) Prospectus (dated March 30, 1999) for CrestFunds, Inc. (the Company).
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, 1998 for Cash Reserve Fund, Tax Free Money Fund, Intermediate Bond
Fund, Government Bond Fund, Maryland Municipal Bond Fund, Virginia Intermediate
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 Class A Shares and Class 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
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Investment Objectives and Policies........................................................................ 2
Investment Policies and Limitations....................................................................... 10
Investment Practices...................................................................................... 14
Portfolio Transactions.................................................................................... 22
Valuation of Portfolio Securities......................................................................... 24
Fund Performance.......................................................................................... 25
Additional Purchase and Redemption Information............................................................ 30
Additional Information Regarding Pricing and Redemptions.................................................. 31
Distributions and Taxes................................................................................... 32
Directors and Officers and Affiliated Persons............................................................. 36
The Adviser............................................................................................... 37
Administrator and Distributor............................................................................. 39
Transfer Agent............................................................................................ 42
Custodian................................................................................................. 43
Auditor................................................................................................... 43
Legal Counsel............................................................................................. 43
Principal Holders of Securities........................................................................... 43
Financial Statements...................................................................................... 44
Appendix.................................................................................................. 45
</TABLE>
<PAGE>
CRESTFUNDS, INC.
CrestFunds, Inc. (the Company) is a registered open-end management
investment company that currently consists of fifteen separate investment
portfolios (portfolios or series). The Company was established as a Maryland
corporation on March 17, 1986. The Company's Articles of Incorporation permit it
to offer separate series of common stock (shares) and separate classes of each
series. Except for the differences among the Trust Class shares, Investors Class
A shares and Investors Class B shares, each share of each series represents an
equal proportionate interest in that series with each other share of that
series.
This Statement of Additional Information relates to the following investment
portfolios: Cash Reserve Fund, Tax Free Money Fund, Intermediate Bond Fund,
Government Bond Fund, Maryland Municipal Bond Fund, Virginia Intermediate
Municipal Bond Fund, Virginia Municipal Bond Fund, Value Fund, Capital
Appreciation Fund and Special Equity Fund (each a Fund and, collectively, the
Funds). Shareholders may purchase shares in the CrestFunds Family of Funds
through three separate classes, the Trust Class, Investors Class A and Investors
Class B, which provide for variations in distribution and servicing costs,
transfer agent fees, voting rights and dividends.
ADVISER:
Crestar Asset Management Company (the Adviser)
TRANSFER AGENT:
Crestar Bank (the Transfer Agent)
CUSTODIAN:
Crestar Bank (the Custodian)
ADMINISTRATOR:
SEI Investments Mutual Funds Services (the Administrator)
DISTRIBUTOR:
SEI Investments Distribution Co. (the Distributor)
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's objective, together with those policies identified as being
fundamental, may not be changed except by approval of the majority of the
outstanding shares of that Fund. All other investment policies of a Fund may be
changed by the Company's Board of Directors without shareholder approval. The
Adviser will manage each Fund consistently with that Fund's investment objective
and policies. There is no assurance that a Fund will achieve its investment
objective.
MONEY MARKET FUNDS:
The investment objective of each money market fund is to provide high
current income to the extent consistent with the preservation of capital and the
maintenance of liquidity. A further objective of Tax Free Money Fund is to
provide high current income exempt from federal income taxes.
Each money market fund invests in accordance with the requirements of Rule
2a-7 (Rule 2a-7) under the Investment Company Act of 1940, as amended (the 1940
Act). These requirements provide that money market funds must limit their
investments to securities with remaining maturities of 397 days or less and
maintain a dollar-weighted average maturity of 90 days or less. If the SEC
adopts new or amended
2
<PAGE>
requirements under Rule 2a-7, the money market funds will comply with all such
additional or amended requirements.
There may be occasions when, in order to raise cash to meet redemptions or
to maintain the quality standards of the portfolio, the Funds might be required
to sell securities at a loss.
CASH RESERVE FUND
Cash Reserve Fund invests only in high quality, U.S. dollar-denominated,
money market instruments of U.S. and foreign issuers including floating and
variable rate instruments. Investments include:
- obligations of institutions, such as banks and insurance companies,
including certificates of deposit, bankers' acceptances and time deposits;
- obligations of the U.S. and certain foreign governments and their agencies
or instrumentalities;
- short-term corporate obligations, including commercial paper, notes and
bonds; and
- other eligible debt obligations, including repurchase agreements.
The Fund's investments in domestic bank obligations (including their foreign
branches) are limited to those of banks having total assets in excess of one
billion dollars and subject to regulation by the U.S. Government. The Fund may
also invest in certificates of deposit issued by banks insured by the Federal
Deposit Insurance Corporation (FDIC) having total assets of less than one
billion dollars, provided that the Fund will at no time own more than an
aggregate of $100,000 in principal and interest obligations (or any higher
principal amount or principal and interest amount, which in the future may be
fully covered by FDIC insurance) of any one such issuer.
The Fund may invest in obligations of U.S. banks, foreign branches of U.S.
banks (Eurodollars), U.S. branches and agencies of foreign banks (Yankee
dollars), and foreign branches of foreign banks. Eurodollar, Yankee dollar, and
foreign bank obligation investments involve risks in addition to those inherent
in investing in domestic bank obligations. These risks may include future
unfavorable political and economic developments, withholding taxes, seizures of
foreign deposits, currency controls, interest limitations, or other governmental
restrictions that might affect payment of principal or interest. Additionally,
there may be less public information available about foreign banks and their
branches. Foreign branches of foreign banks are not regulated by U.S. banking
authorities and generally are not subject to accounting, auditing, or financial
reporting standards comparable to those applicable to U.S. banks. Although the
Adviser carefully considers these factors when making investments, the Fund does
not limit the amount of its assets that can be invested in any one type of
instrument or in any foreign country.
The Fund's investments in obligations of domestic or foreign branches of
foreign banks are limited to U.S. dollar-denominated obligations of foreign
banks which, at the time of investment: (i) have more than $5 billion, or the
equivalent in other currencies, in total assets; and (ii) have branches or
agencies in the United States. Investments in the foregoing foreign bank
obligations are further limited to banks headquartered in and to those branches
located in the United Kingdom, France, Germany, Belgium, the Netherlands, Italy,
Switzerland, Denmark, Norway, Sweden, Australia, Japan and Canada.
Cash Reserve Fund limits its investments in U.S. dollar-denominated foreign
government obligations to those obligations issued or guaranteed by the
governments of the countries listed above. Such obligations may be subject to
the risks described above in connection with the purchase of obligations of
foreign branches of domestic and foreign banks.
QUALITY. Pursuant to Rule 2a-7 and policies and procedures adopted by the
Company's Board of Directors, Cash Reserve Fund may purchase only high-quality
securities determined by the Adviser to present minimal credit risks. To be
considered high-quality, a security must be a U.S. Government security or rated
in accordance with applicable rules in one of the two highest categories for
short-term securities
3
<PAGE>
by at least two nationally recognized statistical rating organizations (NRSRO)
(or by one, if only one NRSRO has rated the security); or, if unrated, judged to
be of equivalent quality by the Adviser pursuant to procedures adopted by the
Company's Board of Directors. Purchases of unrated securities and securities
rated by only one NRSRO will be ratified by the Company's Board of Directors.
Foreign obligations are considered to be unrated.
High-quality securities are divided into "first tier" and "second tier"
securities. FIRST TIER securities have received the highest rating (e.g.,
Standard & Poor's Ratings Group (S&P) A-1 rating) from at least two NRSROs (or
one, if only one has rated the security). SECOND TIER securities have received
ratings within the two highest categories (e.g., S&P A-1 or A-2) from at least
two NRSROs (or one, if only one has rated the security), but do not qualify as
first tier securities. If a security has been assigned different ratings by
different NRSROs, at least two NRSROs must have assigned the higher rating in
order for the Adviser to determine eligibility on the basis of that higher
rating. The Fund does not currently intend to invest in commercial paper rated
below first tier and will not invest more than 10% of its net assets in illiquid
securities. Cash Reserve Fund may not invest more than 5% of its total assets in
second tier securities.
DIVERSIFICATION. The Fund may not invest more than 5% of its total assets
in the securities of any one issuer, except that it may invest up to 25% of its
assets in the first tier securities of a single issuer for up to three business
days. The Fund may not invest more than 25% of its total assets in any one
industry.
Cash Reserve Fund may not invest more than 5% of its total assets in second
tier securities. In addition, the Fund may not invest more than 1% of its total
securities or $1 million (whichever is greater) in the second tier securities of
a single issuer.
Cash Reserve Fund is offered for initial and subsequent investments only
through A Shares. B Shares of Cash Reserve Fund are only available for purchase
by exchange.
TAX FREE MONEY FUND
Tax Free Money Fund invests only in high-quality municipal securities.
Although the Fund will attempt to invest 100% of its assets in tax-exempt
municipal securities, the interest on which is exempt from federal income tax,
including the federal alternative minimum tax, the Fund reserves the right to
invest up to 20% of the value of its net assets in securities, including private
activity bonds, the interest on which is fully taxable or subject to the
alternative minimum tax. As a fundamental policy, at least 80% of the Fund's
income will, under normal circumstances, be exempt from federal income tax
including the federal alternative minimum tax. Subject to such limitation, the
Fund may invest in any taxable investment, including repurchase agreements,
appropriate for investment by Cash Reserve Fund.
Municipal obligations, which are issued by states, cities, municipalities or
municipal agencies, will include variable rate demand obligations (VRDOs), tax
anticipation notes (TANs), revenue anticipation notes (RANs), bond anticipation
notes (BANs), construction loan notes, and tax-exempt commercial paper. The Fund
may also invest in municipal bonds within the maturity limitations discussed
above and may enter into commitments to purchase these securities on a delayed
delivery basis.
QUALITY. Pursuant to Rule 2a-7 and policies and procedures adopted by the
Company's Board of Directors, the Fund may purchase securities determined by the
Adviser to present minimal credit risks. Securities must be rated in accordance
with applicable rules in the highest rating category for short-term securities
by at least one NRSRO and, if rated by more than one NRSRO, rated in one of the
two highest categories for short-term securities by another NRSRO, or, if
unrated, judged to be equivalent to the highest short-term rating category by
the Adviser pursuant to procedures adopted by the Company's Board of Directors.
The Fund will not invest more than 10% of its net assets in illiquid
securities. For purposes of this limitation, "illiquid securities" shall be
deemed to include municipal securities not rated at the time of purchase by the
requisite NRSROs, or not guaranteed or supported by a letter of credit issued
by, or
4
<PAGE>
subject to a remarketing agreement with, a responsible party, and not otherwise
determined by the Adviser to be readily marketable.
The Fund may from time to time have more than 25% of its assets invested in
municipal securities of issuers located in one or more of the following states:
Arizona, California, Maryland, New Jersey, New York and Pennsylvania, and will
invest more than 25% of its assets in municipal securities of issuers located in
Virginia.
The Fund may also purchase shares of other money market funds. Should the
Fund elect to do so, it will incur additional expenses charged by that money
market fund, such as management fees.
Yields on municipal obligations depend on a variety of factors, including
the general conditions of the money markets and of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Municipal obligations with longer
maturities tend to produce higher yields and generally are subject to
potentially greater price fluctuations than obligations with shorter maturities.
Tax Free Money Fund currently offers A Shares only; B Shares are not
available.
BOND FUNDS:
CORPORATE BOND FUNDS:
INTERMEDIATE BOND FUND
Intermediate Bond Fund seeks to provide a high level of current income by
investing in investment-grade fixed-income debt obligations. The Fund is managed
to maintain a dollar-weighted average portfolio maturity of between five and ten
years.
Intermediate Bond Fund currently offers A Shares only; B Shares are not
available.
INVESTMENT POLICIES--INTERMEDIATE BOND FUND
The Intermediate Bond Fund will seek to obtain a high level of current
income by investing exclusively in investment-grade debt obligations of domestic
and foreign issuers as follows:
- corporate obligations which are rated at least Baa or its equivalent by an
NRSRO;
- obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and
- commercial paper which is rated Prime-1 or its equivalent by an NRSRO.
The Intermediate Bond Fund also may purchase unrated securities that are
deemed by the Adviser to be of equivalent quality to investment-grade debt
obligations pursuant to procedures established by the Company's Board of
Directors. Credit ratings are considered at the time of purchase; the sale of
securities is not required in the event of a subsequent rating downgrade. In the
event that a security owned by the Fund is downgraded below the stated ratings
categories, the Adviser will review the security and take appropriate action.
Fixed-income securities held by The Intermediate Bond Fund may include (but
are not limited to), in any proportion, bonds, notes, mortgage-related and
asset-backed securities, U.S. Government and government agency obligations, zero
coupon securities, indexed securities, convertible notes and bonds, convertible
preferred securities, foreign securities (see "Foreign Investments" in
"Investment Practices" in this Statement of Additional Information) and
short-term obligations such as certificates of deposit, repurchase agreements,
bankers' acceptances, and commercial paper. The Fund may also enter into reverse
repurchase agreements. These funds also may purchase 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.
5
<PAGE>
The Intermediate Bond Fund may hold individual securities with remaining
maturities of more than ten years, as long as its dollar-weighted average
portfolio maturity is no more than ten years. For the purpose of determining the
dollar-weighted average portfolio maturity of the Intermediate Bond Fund, the
maturities of mortgage-backed securities, collateralized mortgage obligations
and asset-backed securities are determined on a "weighted average life" basis.
(The weighted average life is the average time in which principal is repaid; for
a mortgage security, this average time is calculated by estimating the expected
principal payments for the life of the mortgage.) The weighted average life of
such securities is likely to be substantially shorter than their stated final
maturity as a result of scheduled and unscheduled principal prepayments. The
maturities of most of the other securities held by the Intermediate Bond Fund
will be determined on a "stated final maturity" basis. One exception would be
"extendible" debt instruments, which can be retired at the option of the
Intermediate Bond Fund at various dates prior to maturity, and which may be
treated as maturing on the next optional retirement date when calculating
average portfolio maturity.
The Intermediate Bond Fund also may purchase obligations of U.S. banks
(including certificates of deposit and bankers' acceptances) which have capital,
surplus, and undivided profits (as of the date of their most recently published
annual financial statements) of $100 million or more.
In making investment decisions for The Intermediate Bond Fund, the Adviser
will consider many factors other than current yield, including preservation of
capital, the potential for realizing capital appreciation, maturity and yield to
maturity. The Adviser will monitor the Intermediate Bond Fund's investments in
particular securities or in types of debt securities in response to its
appraisal of changing economic conditions and trends. The Adviser may sell
securities in anticipation of a market decline or purchase securities in
anticipation of a market rise. The Intermediate Bond Fund may invest a portion
of its assets in securities issued by foreign companies and foreign governments,
which may be less liquid or more volatile than domestic investments. The
Intermediate Bond Fund will only invest in U.S. dollar-denominated securities.
GOVERNMENT BOND FUNDS:
GOVERNMENT BOND FUND
Government Bond Fund seeks to provide a high level of current income in a
manner consistent with preserving principal by investing primarily in
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (U.S. Government Securities). In seeking current income, the
Fund also may consider the potential for capital gain.
Under normal conditions, at least 65% of the Fund's total assets will be
invested in U.S. Government bonds or other debt instruments, including
repurchase agreements secured by U.S. Government Securities. Any remaining
assets may be invested in fixed-income securities that are eligible for purchase
by the Intermediate Bond Fund. The Fund may purchase securities on a delayed
delivery basis. There are no limits on the dollar-weighted average portfolio
maturity of the Fund, and, consistent with its investment objective of obtaining
current income while preserving capital, the Fund may acquire individual
securities without regard to their remaining maturities.
The Fund invests in various debt obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, including U.S. Treasury
Bonds, Notes and Bills, Government National Mortgage Association mortgage-backed
pass-through certificates (Ginnie Maes) and mortgage-backed securities issued by
the Federal National Mortgage Association (Fannie Maes) or the Federal Home Loan
Mortgage Corporation (Freddie Macs). The Fund is not restricted as to the
percentage of its assets that may be invested in any one type of U.S. Government
Security. The U.S. Government Securities in which the Fund invests may or may
not be fully backed by the U.S. Government. The Fund may enter into repurchase
agreements involving the U.S. Government Securities and any other securities in
which it may invest, and also may enter into reverse repurchase agreements. The
Fund considers government securities
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to include U.S. Government Securities subject to repurchase agreements. The Fund
may, for temporary defensive purposes, invest without limit in U.S. Government
Securities having a maturing of 365 days or less.
Government Bond Fund currently offers B Shares only; A Shares are available
through conversion only.
MUNICIPAL BOND FUNDS:
MARYLAND MUNICIPAL BOND FUND
Maryland Municipal Bond 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. 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.
Maryland Municipal Bond Fund currently offers B Shares only; A Shares are
available through conversion only.
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
Virginia Intermediate Municipal Bond Fund seeks to provide high current
income exempt from federal and Virginia income tax in a manner consistent with
the preservation of capital by investing in municipal bonds of investment-grade
quality. The Fund is managed to maintain a dollar-weighted average portfolio
maturity of between five and ten years. The Fund may hold individual securities
with remaining maturities of more than ten years, as long as the Fund's
dollar-weighted average maturity is no more than ten years. Stability and growth
of principal also will be considered when choosing securities.
Virginia Intermediate Municipal Bond Fund currently offers A Shares only; B
Shares are not available.
VIRGINIA MUNICIPAL BOND FUND
Virginia Municipal Bond Fund seeks to provide high current income exempt
from federal and Virginia income tax in a manner consistent with the
preservation of capital by investing in municipal bonds of investment-grade
quality. 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.
Virginia Municipal Bond Fund currently offers B Shares only; A Shares are
available through conversion only.
INVESTMENT POLICIES--MUNICIPAL BOND FUNDS
Each municipal bond 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 its equivalent or
higher by an NRSRO, an unrated securities that are deemed by the Adviser to be
of comparable quality to each municipal bond fund's ratings requirements.
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 the 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.
The Adviser monitors the financial condition of parties (including insurance
companies, banks, and corporations) upon whose creditworthiness is relied in
determining the credit quality of securities eligible for purchase by each
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municipal bond fund. Each municipal bond fund may invest more than 25% of its
assets in industrial development bonds.
Generally, the municipal bond funds' 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 municipal bond funds may buy or sell securities
on a when-issued or delayed-delivery basis (including refunding contracts) and
may acquire standby commitments. See "Investment Practices" in this Statement of
Additional Information for a complete description of these types of securities.
Each municipal bond fund may deviate from its investment objective for
temporary defensive purposes. During periods when, in the Adviser's opinion, a
temporary defensive posture in the market is appropriate, each municipal bond
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 municipal bond
funds' defensive investments may include short-term municipal obligations, money
market instruments and shares of money market mutual funds. Should a 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 municipal bond funds may each temporarily invest so that less
that 80% of their income distributions are federally and/or state tax-free.
Federally taxable obligations in which a Fund may invest 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 or deposit, and
repurchase agreements.
Each municipal bond 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,
each of the municipal bond funds may present greater risks than a diversified
fund.
As a fundamental policy, at least 80% of each municipal bond 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. Each
municipal bond fund reserves the right to invest up to 100% of its assets in AMT
bonds, although none of the municipal bond funds have a current intention of
investing in such securities.
As a non-fundamental policy, at least 65% of each municipal bond fund's
assets will be invested in bonds that will, under normal circumstances, produce
income that is exempt from Virginia or Maryland income taxes, as the case may
be.
Investors should be aware of certain factors that might affect the financial
condition of issuers of Maryland and Virginia municipal securities.
EQUITY FUNDS:
VALUE FUND
Value fund seeks to provide long-term capital appreciation and, as a
secondary objective, current income, by investing primarily in income producing
equity securities of companies with large market capitalizations.
The Fund's investments will be broadly diversified among major economic
sectors and among those securities with above-average total return potential. A
number of valuation criteria are considered in the equity selection process, the
principal one being the issue's price to earnings (P/E) ratio in relation to
other stocks in the same industry. Stocks with the lowest P/E ratios, along with
strong financial quality and above-average earnings momentum, are selected to
secure the best relative values in each economic sector.
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The Adviser believes that this approach will produce a portfolio with less
volatility and greater dividend yield than the market as a whole. The Fund will
invest primarily in the income producing equity securities of companies with
market capitalizations of at least $1 billion.
Value Fund offers both A Shares and B Shares.
CAPITAL APPRECIATION FUND
Capital Appreciation Fund seeks to provide long-term capital appreciation by
investing primarily in the equity securities of companies with medium to large
market capitalizations.
The Fund may invest a portion of its assets in foreign securities,
securities of small capitalization companies, and in securities having common
stock characteristics, such as rights and warrants. The Adviser considers many
factors when evaluating the overall quality of a security for the Fund,
including, but not limited to, a company's current financial strength, earnings
momentum, and relative value. The Fund will invest primarily in the equity
securities of companies with market capitalization of at least $250 million.
Capital Appreciation Fund offers both A Shares and B Shares.
INVESTMENT POLICIES--VALUE FUND AND CAPITAL APPRECIATION FUND
Value Fund and Capital Appreciation Fund each will invest primarily in
domestic and foreign common stock and in securities convertible into common
stock, such as convertible bonds and convertible preferred stock rated
investment-grade or better. The Adviser will select stocks for these Funds from
a list of companies traded in the U.S. securities markets, including sponsored
American Depositary Receipts (ADRs) of qualifying foreign companies. (See
"Foreign Investments" in "Investment Practices" in this Statement of Additional
Information.) A qualitative screening process is employed to exclude companies
with poor earnings results or highly leveraged balance sheets in an effort to
construct a portfolio with low risk characteristics relative to the major stock
market indices, although it is not the intention of either Fund to match the
risk or performance characteristics of any index. Each Fund may to the extent
consistent with its investment objective, invest in any debt security in which
the Intermediate Bond Fund may invest. (See "Investment Policies and
Limitations--Intermediate Bond Fund.") Each of the Value Fund and Capital
Appreciation Fund may also invest up to 10% and 5%, respectively, of its assets
in U.S. Treasury obligations.
Although the Value Fund and Capital Appreciation Fund intend to be fully
invested at all times in the securities mentioned above, under normal
circumstances, each Fund may make substantial temporary investments in
high-quality, short-term debt securities and money market instruments, including
repurchase agreements, and in shares of other open-end management investment
companies which invest primarily in money market instruments, when the Adviser
believes market conditions warrant a defensive position. Should a Fund elect to
purchase shares of money market funds, it will incur additional expenses charged
by that money market fund, such as management fees.
SPECIAL EQUITY FUND
Special Equity Fund seeks to provide long-term capital appreciation by
investing primarily in the equity securities of companies with small to medium
market capitalizations.
Small to medium capitalization companies with rapid growth rates may have
higher P/E ratios than other companies. The market prices of securities with
higher P/E ratios than other companies. The market prices of securities with
higher P/E ratios tend to drop more suddenly in response to negative news than
securities with low P/E's. That is especially true for smaller, less well-known
companies that have a narrow product line or whose securities are thinly traded.
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These companies typically tend to offer the potential for accelerated
earnings or revenue growth because of new products or technologies, new channels
of distribution, revitalized management or industry conditions, or similar new
opportunities. Smaller companies often pay no dividends, and current income is
not a goal of the Fund. Representative industries may include, but are not
limited to, technology, health care and biotechnology, environmental services,
communications, and energy and alternative energy.
Special Equity Fund offers both A Shares and B Shares.
The Fund will invest primarily in domestic and foreign common stock and
in securities convertible into common stock, such as convertible bonds and
convertible preferred stock. The Fund generally will invest primarily in the
securities of companies with market capitalizations of between $250 million and
$2 billion. It also may invest a portion of its assets in sponsored ADRs of
qualifying foreign companies (see "Foreign Investments" in "Investment
Practices" in this Statement of Additional Information), and in securities
having common stock characteristics, such as rights and warrants. As a
non-fundamental investment policy, each Fund may to the extent consistent
with its investment objective, invest in any debt security in which the
Intermediate Bond Fund may invest. The Fund may also invest up to 5% of its
assets in obligations of the U.S. Treasury.
Although the Special Equity Fund intends, under normal circumstances, to be
fully invested in equity securities, the Fund may make substantial temporary
investments in high-quality, short-term debt securities and money market
instruments, including repurchase agreements, and in the securities of other
open-end management investment companies investing primarily in money market
instruments, when the Adviser believes market conditions warrant a defensive
position. Should the Fund elect to purchase shares of a money market fund, it
will incur additional expenses charged by that money market fund, such as
management fees.
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 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. write put and call options;
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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% of the value of its total assets, and (iv) with respect to
Cash Reserve Fund, lends 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. purchase Restricted Securities (as defined in Rule 144 under the Securities
Act of 1933 (the Securities Act));
14. make investments for the purpose of exercising control over any issuer or
other person; and
15. 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 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
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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;
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. 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
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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 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 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.
vii. Each Fund does not currently intend to purchase any security if, as a
result, more than 15% 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.
viii. Each Fund does not currently intend to purchase securities of other
investment companies except pursuant to the provisions of the 1940 Act.
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ix. Each Fund does not currently intend to sell securities short.
CORPORATE BOND FUNDS, GOVERNMENT BOND FUND, AND EQUITY FUNDS ONLY
x. 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.
xi. The Intermediate Bond Fund 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.
xii. 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
xiii. 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.
xiv. 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.
xv. 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
The following briefly describes the securities in which the Funds may invest
and the transactions they may make. The Funds are not limited by this
discussion, however, and may purchase other types of securities and enter into
other types of transactions if they meet each Fund's respective quality,
maturity, and liquidity requirements.
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.
AMERICAN DEPOSITARY RECEIPTS (ADRS). Value Fund and Capital Appreciation
Fund may invest in sponsored ADRs which are certificates evidencing ownership of
shares of a foreign-based corporation held in trust by a bank or similar
financial institution. Designed for use in U.S. securities markets, ADRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies. A sponsored ADR is an ADR established jointly by the
issuer of the security underlying the receipt and the bank or other financial
institution holding the receipt.
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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.
BANKERS' ACCEPTANCES. The money market funds may purchase bankers'
acceptances, which are time drafts drawn on and accepted by a bank, the
customary means of effecting payment for merchandise sold in import-export
transactions and a source of financing used extensively in international trade.
BANK OBLIGATIONS. The performance of the money market funds may be affected
by conditions affecting the banking industry. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans and
other financial commitments they can make and the interest rates and fees they
can charge. Bank profitability is largely dependent on the availability and cost
of capital funds, and has shown significant fluctuation recently as a result of
volatile interest rate levels. In addition, general economic conditions are
important to bank operations, with exposure to credit losses potentially having
an adverse effect.
CERTIFICATES OF DEPOSIT. Cash Reserve Fund and Tax Free Money Fund may
purchase certificates of deposit, which are debt instruments issued by a bank
that usually pays interest. Maturities range from a few weeks to several years.
Interest rates are set by competitive forces in the marketplace.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Intermediate Bond Fund may
purchase collateralized mortgage obligations (CMOs), which are pay-through
securities collateralized by mortgages or mortgage-backed securities. CMOs are
issued in classes and have different maturities and often are retired in
sequence. CMOs may be issued by governmental or non-governmental entities such
as banks and other mortgage lenders. CMOs may be volatile investments. During
periods of declining interest rates, prepayment of mortgages underlying CMOs 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 prepayment risks, the realized yield or total return of a particular issue
may be reduced.
COMMERCIAL PAPER. The money market funds may purchase commercial paper,
which is comprised of short-term obligations issued by banks, broker-dealers,
corporations, or other entities for purposes such as financing their current
obligations. Currently only the Cash Reserve Fund intends to purchase commercial
paper and will limit its purchase of these instruments to those rated Prime-1 by
Moody's or A-1 by S&P.
COMMON STOCK. The equity funds may purchase common stock which is evidence
of ownership of a corporation. Owners typically are entitled to vote on the
selection of directors and other important matters as well as to receive
dividends on their holdings. In the event that a corporation is liquidated, the
claims of secured and unsecured creditors and owners of bonds and preferred
stock take precedence over the claims of those who own common stock. For the
most part, however, common stock has more potential for appreciation. PREFERRED
STOCK is a class of capital stock that pays dividends at a specified rate and
that has preference over common stock in the payment of dividends and the
liquidation of assets. Preferred stock does not ordinarily carry voting rights.
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CONVERTIBLE PREFERRED STOCK. The Intermediate Bond Fund and the equity
funds may purchase convertible preferred stock, which is preferred stock that
may be converted or exchanged by the holder into shares of the underlying common
stock at a stated exchange ratio. A convertible security may also be subject to
redemption by the issuer after a particular date and under certain circumstances
(including a specified price) established upon issue. If a convertible security
held by a Fund is called for redemption, the Fund could be required to tender it
for redemption, convert it to the underlying common stock, or sell it to a third
party.
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.
DEMAND FEATURE. A put that entitles the security holder to repayment of the
principal amount of the underlying security on no more than 30 days' notice at
any time or at specified intervals is a demand feature. With respect to the
money market funds, such intervals may not exceed 397 days. A STANDBY COMMITMENT
is a put that entitles the security holder to same-day settlement at amortized
cost plus accrued interest.
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 the Adviser'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
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enacted, the availability of municipal obligations and the value of each Fund's
holdings would be affected and the Board of Directors would reevaluate the
Fund's 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.
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 the Adviser 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 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 Intermediate Bond Fund 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.
European Depositary Receipts (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 European securities markets, EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies.
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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.
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.
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 a 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 seven days in
length. The Adviser will determine and monitor the liquidity of portfolio
securities subject to the supervision of the Fund's Board of Directors.
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.
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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.
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.
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 not 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 the Adviser
pursuant to procedures established by the Board of Directors.
RESOURCE RECOVERY BONDS. The Tax Free Money Fund and the municipal bond
funds 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 municipal bond funds may invest in refunding
contracts which require the issuer to sell and a 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 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 the Adviser. Such transactions may increase fluctuations in the market value
of a Fund's assets and may be viewed as a form of leverage.
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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 the Adviser to be creditworthy pursuant to
procedures established by the Board of Directors. Furthermore, they will only be
made if, in the Adviser'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).
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.
STRIPPED GOVERNMENT SECURITIES. Stripped securities are created by
separating the income and principal components of a debt instrument and selling
them separately. Each 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 each money market and bond fund.
Each Fund except the U.S. Treasury 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
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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, a
Fund must treat them as it would non-government securities pursuant to
regulatory guidelines applicable to all money market funds. Accordingly, a 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 the Adviser.
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 or 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.
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.
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, the Adviser 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.
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 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
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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.
ZERO COUPON BONDS. The Intermediate Bond Fund may purchase zero coupon
bonds. Zero coupon bonds do not make regular interest payments; instead, they
are sold at a deep discount from their face value and are redeemed at face value
when they mature. Because zero coupon bonds do not pay current income, their
prices can be very volatile when interest rates change. In calculating its daily
dividend, each Fund takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value.
PORTFOLIO TRANSACTIONS
The Adviser may place portfolio transactions with broker-dealers which
furnish, without cost, certain research, statistical, and quotation services of
value to the Adviser 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 the Adviser. 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 than 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 the Adviser on the
same day. In such event, such transactions will be allocated among the clients
in a manner believed by the Adviser 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
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and sale orders for a Fund may be combined with those of other clients of the
Adviser 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.
The Adviser 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, the Adviser,
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 or execution services from broker-dealers that execute
portfolio transactions for clients of such advisers. Consistent with this
practice, the Adviser receives research or execution services from many
broker-dealers with which it places a Fund's portfolio transactions which
assists the Adviser in making investment decisions. Such services may include,
but are not limited to: on-line access to financial information (such as prices
and earnings estimates); technical as well as fundamental analyses of securities
and financial markets; portfolio strategy information; software and hardware
that assists in the investment decision-making process; portfolio performance
measurement; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). Some of these services
are of value to the Adviser 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
the Adviser is not reduced because the Adviser and its affiliates receive such
services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended (the 1934 Act), the Adviser may cause a Fund to pay a broker-dealer that
provides brokerage and research services to the Adviser 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 the Adviser
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 the Adviser's
overall responsibilities to the Fund or its other clients. In reaching this
determination, the Adviser 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
23
<PAGE>
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
1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Value.................................................................... $1,031,949 $1,248,896 $813,371
Capital Appreciation..................................................... 123,250 257,052 89,544
Special Equity........................................................... 604,919 358,778 231,715
</TABLE>
During fiscal year ended 1998, the Funds paid brokerage commissions in the
amount of $0 to SEI Investments Distrubtion Co., which represented 0% of the
Fund's aggregate brokerage commissions for such period. The dollar amount of
transactions effected through such broker represented 0% 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 Investments Distribution Co. a fee with respect to repurchase
transactions. For fiscal year ended 1998 these fees were as follows: Cash
Reserve Fund, $148,995 Intermediate Bond Fund, $8,025; Government Bond Fund,
$2,621; Value Fund, $5,815 Special Equity Fund, $764; and Capital
Appreciation Fund, $454. 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 the Adviser'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
24
<PAGE>
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 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.
25
<PAGE>
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 1998. 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.
1998 TAX RATES AND TAX EQUIVALENT YIELDS
<TABLE>
<CAPTION>
COMBINED COMBINED
TAXABLE INCOME* FEDERAL AND FEDERAL AND
- ------------------------------------------------ FEDERAL TAX VIRGINIA TAX MARYLAND TAX VIRGINIA TAX MARYLAND TAX
SINGLE RETURN JOINT RETURN BRACKET** BRACKET*** BRACKET**** BRACKETS BRACKETS
- ----------------------- ----------------------- ----------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$0 - $25,350 $0 - $42,350 15.00% 5.75% 7.92% 19.89% 21.73%
$25,350 - $61,400 $42,350 - $102,300 28.00% 5.75% 7.92% 32.14% 33.70%
$61,400 - $128,100 $102,300 - $155,950 31.00% 5.75% 7.92% 34.97% 36.46%
$128,100 - $278,450 $155,950 - $278,450 36.00% 5.75% 7.92% 39.68% 41.07%
$278,450 - above $278,450 - above 39.60% 5.75% 7.92% 43.07% 44.38%
</TABLE>
- ------------------------
* 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.
26
<PAGE>
*** 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 4.95% 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 Talbot and Worcester Counties currently impose
income taxes equal to 40% and 20%, respectively, 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 1998 is:
<TABLE>
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
</TABLE>
Then your tax-equivalent yield is:
<TABLE>
<CAPTION>
YIELD
- -----------
<S> <C> <C> <C> <C> <C>
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% 9.72% 10.14% 10.94% 11.59%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
If your effective combined federal and Virginia state tax rate is:
<TABLE>
<S> <C> <C> <C> <C> <C>
19.89% 32.14% 34.97% 39.68% 43.07%
</TABLE>
Then your tax-equivalent yield is:
<TABLE>
<CAPTION>
YIELD
- -----------
<S> <C> <C> <C> <C> <C>
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% 8.84% 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%
</TABLE>
If your effective combined federal and Maryland state tax rate is:
<TABLE>
<S> <C> <C> <C> <C> <C>
21.73% 33.70% 36.46% 41.07% 44.38%
</TABLE>
Then your tax-equivalent yield is:
<TABLE>
<CAPTION>
YIELD
- -----------
<S> <C> <C> <C> <C> <C>
2.00% 2.56% 3.02% 3.15% 3.39% 3.60%
3.00% 3.83% 4.53% 4.72% 5.09% 5.39%
4.00% 5.11% 6.03% 6.30% 6.79% 7.19%
5.00% 6.39% 7.54% 7.87% 8.98% 8.99%
6.00% 7.67% 9.05% 9.44% 10.18% 10.79%
7.00% 8.94% 10.56% 11.02% 11.88% 12.59%
8.00% 10.22% 12.07% 12.59% 13.58% 14.38%
</TABLE>
27
<PAGE>
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 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, 1998.
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD+
YIELD+ EFFECTIVE YIELD+
------------------------ ------------------------ ------------------------
Fund A SHARES B SHARES A SHARES B SHARES A SHARES B SHARES
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Reserve Fund............. 4.65% 3.71% 4.76% 3.78% N/A N/A
Tax Free Money Fund........... 2.68% N/A 2.72% N/A 4.50% N/A
</TABLE>
- ------------------------
* Based on an assumed federal income tax rate of 39.6%.
+ Each money market fund's A Shares, which became effective May 3, 1993, pay an
additional distribution-related 12b-1 fee of 0.25%, which, when taken into
account, results in lower yields. Effective March 31, 1994, the 0.25% 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 0.75% 12b-1 fee plus a 0.25% shareholder service fee began to be imposed.
28
<PAGE>
The following table shows yields and effective yields for each class of the
bond funds for the 30-day period ended November 30, 1998 and the average annual
total returns for each bond and equity fund for the period ended November 30,
1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YIELD EFFECTIVE YIELD
- ----------------------------------------------------------------------------------------------------------
FUND A SHARES B SHARES A SHARES B SHARES
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Intermediate Bond Fund 5.02% N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------
Government Bond Fund N/A 4.62% N/A N/A
- ----------------------------------------------------------------------------------------------------------
Virginia Intermediate Municipal Bond Fund 4.19% N/A 6.94% N/A
- ----------------------------------------------------------------------------------------------------------
Virginia Municipal Bond Fund N/A 3.42% N/A 5.66%
- ----------------------------------------------------------------------------------------------------------
Maryland Bond Fund N/A 3.15% N/A 5.22%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS+
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------------------------------------------------
A B A B A B A B
FUND SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund 4.27% N/A 4.89% N/A 5.16% N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Government Bond Fund N/A 2.58% N/A 4.02% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Virginia Intermediate Municipal Bond Fund 2.52% N/A 4.04% N/A 4.09% N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
VA Municipal Bond Fund N/A 1.24% N/A 3.87% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Maryland Municipal Bond Fund N/A 1.17% N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Value Fund 8.60% 8.22% 18.64% 18.93% 16.43% N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 13.27% 12.49% 20.66% N/A 17.08% N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Special Equity Fund 17.74% 18.34% 5.71% 5.51% 6.20% N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------
LIFE OF FUND*
- ------------------------------------------
A B
FUND SHARES SHARES
<S> <C> <C>
- ------------------------------------------
Intermediate Bond Fund 5.12% N/A
- ------------------------------------------
Government Bond Fund N/A 6.38%
- ------------------------------------------
Virginia Intermediate Municipal Bond Fund 4.27% N/A
- ------------------------------------------
VA Municipal Bond Fund N/A 5.04%
- ------------------------------------------
Maryland Municipal Bond Fund N/A 5.25%
- ------------------------------------------
Value Fund 15.43% 20.09%
- ------------------------------------------
Capital Appreciation Fund 15.89% 16.32%
- ------------------------------------------
Special Equity Fund 6.97% 8.54%
- ------------------------------------------
</TABLE>
- ----------------------------------
* Life of Fund figures are from commencement of operations per class to the
period ended November 30, 1998.
+ 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 arrangements for the period May 3, 1993 to November 30,
1998, and therefore, may not be representative of A Shares performance.
Initial offering of B Shares was made on March 29, 1995, at which time a
0.65% 12b-1 fee (plus a .20% shareholder service fee) began to be imposed
which fees are also reflected.
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
29
<PAGE>
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-Registered Trademark- 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-Registered Trademark- Index).
These indices may include, but are not limited to, the examples shown in the in
"Investment Practices."
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.
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
30
<PAGE>
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 as of
the regularly-scheduled close of normal trading on the NYSE, normally 4:00 p.m.
Eastern time. The NAV of each equity and bond fund is determined as of the
regularly-scheduled close of normal trading on the NYSE, normally 4:00 p.m.
Eastern time. The NYSE and Crestar Bank have designated the following holiday
closings for 1998, and the Adviser 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.
In addition to the minimum investment requirements set forth in the
prospectus, the Company's Articles of Incorporation provide that the Company's
Board of Directors may establish a "Minimum Amount," not to exceed One Hundred
Thousand Dollars ($100,000), for each of the Funds. If the NAV of the shares
held by a shareholder is less than the Minimum Amount, the Company may redeem
those
31
<PAGE>
shares upon providing thirty days written notice to the shareholder. The
Company's Board of Directors have set the Minimum Amount for each of the Funds
at $100,000. Therefore, if the NAV of the Shares held by a shareholder in any of
the Funds is less than One Hundred Thousand Dollars ($100,000), the Fund may
redeem those Shares upon providing thirty days written notice to the
shareholder.
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 the Adviser'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, 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, Tax Free Money Fund, Intermediate Bond Fund, Government
Bond Fund, Maryland Municipal Bond Fund, Virginia Intermediate Municipal Bond
Fund, Virginia Municipal Bond Fund, Value Fund, Capital Appreciation Fund and
Special Equity Fund each qualified for the fiscal year ended November 30, 1998,
and each 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 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
32
<PAGE>
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. The sale or
exchange of a Share is a taxable event for the shareholder. Generally, gain or
loss on the sale or exchange of a Share will be capital gain or loss that will
be long-term if the Share has been held for more than twelve months, and
otherwise will be short-term capital gain or loss. For individuals, long-term
capital gains are currently taxed at a maximum rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates. However, if a
shareholder realizes a loss on the sale, exchange or redemption of a Share held
for six months or less and has previously received a capital gains distribution,
with respect to the Share (or any undistributed net capital gains of the Fund
with respect to such Share are included in determining the shareholder's
long-term capital gains), the shareholder must treat the loss as a long-term
capital loss to the extent of the amount of the prior capital gains distribution
(or any undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
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 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 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 alternative minimum tax (AMT securities). To
the extent that these Funds invest in AMT securities, shareholders who are
subject to the alternative minimum tax will be required to report a portion of
that Fund's dividends as a "tax preference item" in determining their federal
taxes.
Every shareholder that is 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 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
33
<PAGE>
state and local taxes to investments in a municipal bond fund that 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. In the case of corporate
shareholders, a portion of the equity funds' distributions may qualify for the
dividends-received deduction. 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.
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 Maryland
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
certain 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 (AMT Bonds) is a preference item for
purposes of calculating the federal alternative minimum tax. Accordingly, if the
Maryland Municipal Bond Fund holds AMT Bonds of an issuer other than the State
of Maryland or one of its political subdivisions, agencies or authorities
(Non-Maryland AMT Bonds), the excess of 50% of that portion of
34
<PAGE>
exempt interest dividends which is attributable to interest on Non-Maryland AMT
Bonds over a threshold amount is subject to Maryland income tax. 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.
COMMONWEALTH OF VIRGINIA. Under existing Virginia law, distributions from
Virginia Intermediate Municipal Bond Fund and Virginia Municipal Bond Fund will
not be subject to income taxation to the extent that such distributions are
attributable to interest from or gain on the sale or exchange of (i) obligations
of Virginia, its political subdivisions, or its instrumentalities, or (ii)
obligations of the United States and its territories that are exempt from state
taxation under federal law. 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.
Interest on indebtedness incurred (or continued) by a shareholder of
Virginia Intermediate Municipal Bond Fund or Virginia Municipal Bond Fund to
purchase or carry shares of these Funds will not be deductible for Virginia
income tax purposes to the extent such interest expense relates to the portions
of distributions exempt from Virginia income taxation. 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.
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.
35
<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 certain tax rules required for
treatment as a regulated investment company. 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. 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 the Adviser is indicated by an asterisk (*).
TODD CIPPERMAN, Vice President and Assistant Secretary. Vice President and
Assistant Secretary of SEI Investments, the Administrator and the Distributor
since 1995. Associate, Dewey Ballantine (law firm), 1994-1995. Associate,
Winston & Strawn (law firm) 1991-1994.
* 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
830 East Main Street, 5th Floor, Richmond, Virginia 23219.
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). Her business address is 3800 Patterson Avenue, Richmond, Virginia
23221.
GLEN DOUGLAS POND, Director. Retired. Formerly the Director of the Virginia
Retirement System. His address is 1545 Winona Park Drive, West Point, Virginia
23181.
DAVID M. CARTER, Secretary, Partner, Hunton and Williams, Fund Counsel.
KEVIN P. ROBINS, Vice President and Assistant Secretary. Senior Vice
President and General Counsel of SEI Investments, the Administrator and the
Distributor since 1994. Assistant Secretary of SEI Investments since 1992.
Secretary of the Administrator since 1994. Vice President, General Counsel and
Assistant Secretary of the Administrator and the Distributor, 1992-1994.
Associate, Morgan, Lewis & Bockius LLP (law firm), 1988-1992.
ROBERT DELLACROCE, Controller and Chief Financial Officer. Director, Funds
Administration and Accounting of SEI Investments since 1994. Senior Audit
Manager, Arthur Andersen LLP, 1986-1994.
The Directors and officers of the Trust own less than 1% of the outstanding
shares of any Fund.
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<PAGE>
As of November 30, 1998, the Directors and officers of the Company received
the following compensation:
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE PENSION OR REGISTRANT AND FUND
COMPENSATION FROM RETIREMENT ESTIMATED COMPLEX PAID TO
REGISTRANT FOR BENEFITS ACCRUED ANNUAL BENEFITS DIRECTORS
FISCAL YEAR ENDED AS PART OF FUND UPON FOR FISCAL YEAR ENDED
NAME OF PERSON, POSITION 1998 EXPENSES RETIREMENT 1998
- ------------------------------ ------------------ ------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
Jesse F. Williams, III,
Chairman, President and
Director.................... $ 9,000 0 0 $ 9,000
John Bruce James, Jr.,
Director.................... $ 9,000 0 0 $ 9,000
Jean L. Oakey, Director....... $ 9,000 0 0 $ 9,000
Glen Douglas Pond, Director... $ 9,000 0 0 $ 9,000
</TABLE>
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) Crestar Asset Management Company (the Adviser) (formerly 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.
CAPITAL APPRECIATION FUND, VALUE FUND AND SPECIAL EQUITY FUND
.75% of each Fund's average daily net assets.
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<PAGE>
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
.50% of the 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, 1998, 1997 and 1996, the advisory
fees paid to the Adviser with respect to each money market fund were as follows:
<TABLE>
<CAPTION>
11/30/98 WAIVED 11/30/97 WAIVED 11/30/96 WAIVED
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Reserve Fund..................................... $4,309,642 $ 0 $3,195,116 $ 0 $2,315,239 $ 0
Tax Free Money Fund................................... $ 963,089 $ 0 $ 861,325 $ 0 $ 732,401 $ 0
</TABLE>
Fees paid to the Adviser with respect to the bond and equity funds were as
follows:
<TABLE>
<CAPTION>
11/30/98 WAIVED 11/30/97 WAIVED 11/30/96 WAIVED
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Limited Term Bond Fund......................... N/A N/A $ 383,856 $0 $ 442,489 $0
Intermediate Bond Fund......................... $1,884,648 $0 $1,720,984 $0 $ 834,629 $0
Government Bond Fund........................... $ 282,663 $47,111 $ 210,388 $29,208 $ 96,203 $16,038
MD Municipal Bond Fund......................... $ 104,506 $60,961 $ 50,300 $31,143 $ 18,497 $15,422
VA Intermediate Municipal Bond Fund............ $1,248,320 $0 $1,232,770 $0 $ 460,612 $0
VA Municipal Bond Fund......................... $ 166,644 $27,777 $ 107,969 $17,385 $ 72,398 $12,074
Value Fund..................................... $4,748,698 $0 $4,336,987 $0 $2,617,223 $0
Capital Appreciation Fund...................... $ 948,330 $0 $ 613,737 $0 $ 211,351 $0
Special Equity Fund............................ $ 889,637 $0 $ 763,167 $0 $ 506,324 $0
</TABLE>
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.
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
38
<PAGE>
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 Investments Mutual Funds Services (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 Delaware business trust, has its principal business
offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation
(SIMC), a wholly-owned subsidiary of SEI Investments Company (SEI Investments),
is the owner of all beneficial interest in the Administrator. SEI Investments
and its subsidiaries and affiliates, including the Administrator, 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 and its affiliates also serve as administrator
or sub-administrator to the following other mutual funds: The Achievement Funds
Trust, The Advisors' Inner Circle Fund, Alpha Select Funds, The Arbor Fund, ARK
Funds, Armada Funds, Bishop Street Funds, Boston 1784
Funds-Registered Trademark-, CUFUND, The Expedition Funds, First American Funds,
Inc., First American Investment Funds, Inc., First American Strategy Funds,
Inc., HighMark Funds, Huntington Funds, The Nevis Fund, Inc., Oak Associates'
Funds, The PBHG Funds, Inc., PBHG Advisor Funds, Inc., PBHG Insurance Series
Fund, Inc., The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income
Trust, SEI Index Funds, SEI Institutional International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, STI Classic Funds, STI Classic Variable Trust and TIP 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 years ended November 30, 1996, 1997 and 1998, the
Administrator was compensated for its services under the Administration
Agreement as follows:
<TABLE>
<CAPTION>
FEES PAID FEES WAIVED
------------------------------------------------------------------------
FUND 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash Reserve Fund................ $1,779,809 $1,322,853 $828,715 $0 $0 $0
Tax Free Money Fund.............. $ 361,160 $ 323,063 $275,026 $0 $65 $0
Intermediate Bond Fund........... $ 471,162 $ 430,246 $208,658 $0 $0 $0
Government Bond Fund............. $ 70,666 $ 54,362 $ 24,058 $56,497 $54,362 $24,058
MD Municipal Bond Fund........... $ 26,127 $ 10,561 $ 4,627 $0 $0 $ 4,627
VA Intermediate Municipal Bond
Fund........................... $ 374,498 $ 370,217 $138,184 $0 $ 384 $0
VA Municipal Bond Fund........... $ 41,661 $ 32,181 $ 18,111 $36,010 $27,381 $18,111
Value Fund....................... $ 949,744 $ 867,402 $523,446 $0 $0 $0
Capital Appreciation Fund........ $ 189,667 $ 122,748 $ 42,270 $0 $0 $0
Special Equity Fund.............. $ 177,928 $ 152,634 $101,178 $0 $0 $0
</TABLE>
39
<PAGE>
THE DISTRIBUTOR
SEI Investments Distribution Co. (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.
For the fiscal years ended November 30, 1998, 1997 and 1996, the aggregate
dollar amounts of commissions paid under the Distribution Agreement and the
amounts retained by the distributor during such years were as follows:
<TABLE>
<CAPTION>
DOLLAR AMOUNTS OF COMMISSIONS COMMISSIONS RETAINED BY UNDERWRITER
- ---------------------------------------------------------------------------------------------------------------------------------
FUND NAME CLASS 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Intermediate Bond Fund................. A $10,884.47 $ 15,304.40 $17,402.17 $1,163.07 $ 631.24 $1,825.43
Virginia Intermediate Bond Fund........ A 26,260.88 25,357.93 33,050.62 3,006.81 2,315.57 3,291.12
Value Fund............................. A 199,046.93 323,214.57 188,031.26 22,097.71 28,268.32 19,044.13
Capital Appreciation Fund.............. A 89,699.92 100,736.11 55,652.57 9,980.89 9,940.12 5,495.80
Special Equity Fund.................... A 17,175.33 41,106.33 22,831.22 1,911.66 3,902.98 2,287.46
Value Fund............................. B 0 0 0 57,744.89 22,970.48 9,197.61
Special Equity Fund.................... B 0 0 0 8,937.55 5,195.30 3,153.64
Government Bond Fund................... B 0 0 0 8,312.29 401.20 771.47
Virginia Municipal Bond Fund........... B 0 0 0 16,061.27 4,362.23 8,286.99
Maryland Municipal Bond Fund........... B 0 0 0 5,718.86 1,644.33 0
Capital Appreciation Fund.............. B 0 0 0 13,772.72 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL............................. $343,067.53 $505,719.34 $316,967.84 $148,707.92 $79,631.77 $53,353.65
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Trust Class 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 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 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
40
<PAGE>
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 Shares 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 years ended November 30, 1998, 1997 and 1996, the Distributor
was compensated for its services under the B Shares Distribution Plan as
follows:
<TABLE>
<CAPTION>
FEES PAID FEES WAIVED
------------------------------ -------------------------------
FUND 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------ -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Reserve Fund................................................. $ 422 $ 274 $ 127 $ 26 $ 55 $ 17
Government Bond Fund.............................................. $ 12,896 $ 7,020 $ 3,885 $ 647 $ 784 $ 518
MD Municipal Bond Fund............................................ $ 13,430 $ 2,494 $ 356 $ 554 $ 354 $ 48
VA Municipal Bond Fund............................................ $ 19,314 $ 4,948 $ 5,079 $ 966 $ 1,213 $ 677
Value Fund........................................................ $152,051 $ 29,668 $25,184 $ 37,981 $ 21,461 $ 3,353
Capital Appreciation Fund......................................... $ 18,312 $ 0 $ 0 $ 914 $ 0 $ 0
Special Equity Fund............................................... $ 20,913 $ 8,206 $ 5,955 $ 1,045 $ 1,439 $ 794
</TABLE>
Also, for the fiscal years November 30, 1998, 1997 and 1996, pursuant to the
B Shares Distribution Plan, the Distributor is compensated at an annual rate of
.25% of B Shares' average net assets for providing ongoing shareholder services
to investors in B Shares as follows:
<TABLE>
<CAPTION>
FEES PAID FEES WAIVED
------------------------------- -------------------------------
FUND 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash Reserve Fund............................................ $ 141 $ 91 $ 42 $ 8 $ 41 $ 8
Government Bond Fund......................................... $ 4,299 $2,340 $1,295 $ 215 $ 262 $ 259
MD Municipal Bond Fund....................................... $ 4,476 $ 832 $119 $ 184 $ 118 $ 24
VA Municipal Bond Fund....................................... $ 6,438 $1,650 $1,693 $ 322 $ 404 $ 339
Value Fund................................................... $50,684 $9,889 $8,394 $12,660 $7,154 $8,394
Special Equity Fund.......................................... $ 6,971 $2,736 $1,985 $ 348 $ 480 $ 397
Capital Appreciation Fund.................................... $ 6,104 $0 $0 $ 304 $0 $0
</TABLE>
Prior to March 1, 1995, Fidelity Distributor Corporation (FDC) served as the
Funds' administrator and distributor under Administrative and Distribution
Plans.
41
<PAGE>
The following represents expenses made pursuant to the Rule for the fiscal
year ended November 30, 1998.
<TABLE>
<CAPTION>
12b-1 EXPENSES
-------------------------------------------------------------------------
THIRD PARTY PROMOTION AND MARKETING
FUND PAYMENTS ADVERTISING MANAGEMENT DISTRIBUTION MAINTENANCE
- ------------------------------------------- ------------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash Reserve Fund.......................... $ 384 -- -- -- --
Tax Free Money Fund........................ $ 0 -- -- -- --
Intermediate Bond Fund..................... $ 0 -- -- -- --
Government Bond Fund....................... $ 14,677 -- -- -- --
MD Municipal Bond Fund..................... $ 12,742 -- -- -- --
VA Intermediate Municipal Bond Fund........ $ 0 -- -- -- --
VA Municipal Bond Fund..................... $ 19,824 -- -- -- --
Value Fund................................. $184,217 -- -- -- --
Capital Appreciation Fund.................. $ 23,907 -- -- -- --
Special Equity Fund........................ $ 27,494 -- -- -- --
</TABLE>
In addition, the Adviser 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 the Adviser. The Plans also provide that the Adviser may engage banks
as Qualified Recipients for performing certain shareholder support services. The
Adviser 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. The
Adviser 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.
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
42
<PAGE>
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 .04% of each Fund's
average daily net assets.
AUDITOR
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
independent auditors, has been selected as auditors for the Company. Deloitte &
Touche LLP has acted as independent auditors of the Company since its inception.
LEGAL COUNSEL
Hunton & Williams, Riverfront Plaza, 951 E. Byrd Street, East Tower,
Richmond, VA 23219-4074 serves as legal counsel for the Company.
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. As of
March 1, 1999, the following persons were the only persons who were record
owners (or to the knowledge of the Company, beneficial owners) of 5% and 25%
or more of the Funds' Class A and Class B Shares:
43
<PAGE>
<TABLE>
<CAPTION>
Fund Name Shareholder %
--------- ----------- -
<S> <C> <C>
Cash Reserve Fund Class A Shares
National Finance Services 99.99%
Corp.
For the Exclusive Benefit
of Our Customers
Church Street Station
New York, NY 10008-3752
Tax Free Money Fund Class A Shares
National Finance Services 90.58%
Corp.
For the Exclusive Benefit
of Our Customers
Church Street Station
New York, NY 10008-3752
Intermediate Bond Fund Class A Shares
NFSC FEBO BNG-640344 5.76%
The National Education of
Chain Drugstores Education
Foundation
Attn: R James Huber
P.O Box 1417 D-49
Alexandria, VA 22313
NFSC FEBO A1F-975494 10.04%
NFSC/FMTC
12105 Devilwood Dr.
Potomac, MD 20854
NFSC FEBO BNG-002623 10.18%
Old Dominion Trust Co.
109 East Main St.
Suite 410
Norfolk, VA 23510
Cash Reserve Fund Class B Shares
NFSC FEBO DFL-721409 8.83%
Ellen Gilliam
7922 Coriander Drive Apt.
103
Gaithersburg, MD 20879
NFSC FEBO A1F-416550 10.04%
Gail B. Rehmert
3 Seagle Court
Hampton, VA 23669
NFSC FEBO A1F-279170 10.11%
Leibet O. Tuttle
3270 Forest Lane
Saluda, VA 23149
SEI Corporation 11.92%
680 E. Swedesford Road
Wayne, PA 19087-1658
NFSC FEBO A1F-815373 13.55%
NFSC FMTC IRA
FBO Eung Sung Kim
1120 Challedon Rd.
Great Falls, VA 22066
NFSC FEBO A1F-830550 16.00%
NFSC FMTC IRA Rollover
227 High Falcon Road
Reisterstown, MD 21136
NFSC FEBO A1F-948195 24.13%
NFSC FMTC IRA Rollover
132 River Ridge Road
Madison Heights, VA 24572
MD Municipal Bond Fund Class B Shares
NFSC FEBO 01W-415111 5.25%
Barbara C. Tew
3318 Dunnington Rd.
Beltsville, MD 20705
NFSC FEBO A1F-045799 5.43%
Son Ho Yi
10028 Fox Den Court
Ellicott, MD 21042
Virginia Intermediate Class B Shares
Municipal Bond Fund
NFSC FEBO A1F-393789 5.03%
Jeffrey S. Hall
2413 Loreines Landing Lane
Richmond, VA 23233
NFSC FEBO A1F-029106 5.23%
Mary Jo McNeer
7321 Riverside Drive
Richmond, VA 23225
NFSC FEBO A1F-628107 7.27%
Nancy Holdmann
23 Winster Fax
Williamsburg, VA 23185
</TABLE>
FINANCIAL STATEMENTS
The financial statements and financial highlights for the fiscal year ended
November 30, 1998 for Cash Reserve Fund, Tax Free Money Fund, Intermediate Bond
Fund (formerly known as Bond Fund), Government Bond Fund, Maryland Municipal
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.
44
<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.
45
<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.
46
<PAGE>
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.
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, wmay be more
affected by external conditions. Ample alternate liquidity is maintained.
47
<PAGE>
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.
48
<PAGE>
CRESTFUNDS-Registered Trademark-
Trust Class
PROSPECTUS
MARCH 30, 1999
CASH RESERVE FUND
U.S. TREASURY MONEY FUND
TAX FREE MONEY FUND
LIMITED TERM BOND FUND
INTERMEDIATE BOND FUND
GOVERNMENT BOND FUND
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
VIRGINIA MUNICIPAL BOND FUND
MARYLAND MUNICIPAL BOND FUND
VALUE FUND
CAPITAL APPRECIATION FUND
SPECIAL EQUITY FUND
INVESTMENT ADVISER: CRESTAR ASSET MANAGEMENT COMPANY
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY FUND SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
IT IS A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
Page 1 of 55
<PAGE>
HOW TO READ THIS PROSPECTUS
CrestFunds is a mutual fund family that offers shares in separate investment
portfolios (Funds). The Funds have individual investment goals and
strategies. This prospectus gives you important information about the Trust
Class of the Funds that you should know before investing. Please read this
prospectus and keep it for future reference.
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN
EASILY REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME
GENERAL INFORMATION YOU SHOULD KNOW ABOUT THE FUNDS.
FOR MORE DETAILED INFORMATION ABOUT EACH FUND, PLEASE SEE:
<TABLE>
PAGE
<S> <C>
CASH RESERVE FUND 4
U.S. TREASURY MONEY FUND 7
TAX FREE MONEY FUND 10
LIMITED TERM BOND FUND 13
INTERMEDIATE BOND FUND 16
GOVERNMENT BOND FUND 19
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND 22
VIRGINIA MUNICIPAL BOND FUND 26
MARYLAND MUNICIPAL BOND FUND 29
VALUE FUND 32
CAPITAL APPRECIATION FUND 35
SPECIAL EQUITY FUND 38
MORE INFORMATION ABOUT RISK 41
FUND INVESTMENTS 45
THE INVESTMENT ADVISER AND INVESTMENT TEAM 45
PURCHASING, SELLING AND EXCHANGING FUND SHARES 46
DIVIDENDS, DISTRIBUTIONS AND TAXES 50
DISTRIBUTION OF FUND SHARES 51
FINANCIAL HIGHLIGHTS 52
HOW TO OBTAIN MORE INFORMATION ABOUT
CRESTFUNDS Inside Back Cover
</TABLE>
Page 2 of 55
<PAGE>
RISK RETURN SUMMARY
INTRODUCTION
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal and strategies for reaching that goal.
Crestar Asset Management Company (the Adviser) invests Fund assets in a way
that the Adviser believes will help the Fund achieve its goal. Still,
investing in each Fund involves risk and there is no guarantee that a Fund
will achieve its goal. The Adviser's judgments about the markets, the
economy, or companies may not anticipate actual market movements, economic
conditions or company performance, and these judgments may affect the return
on your investment. In fact, no matter how good a job the Adviser does, you
could lose money on your investment in a Fund, just as you could with other
investments. A Fund share is not a bank deposit and it is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any government
agency.
The value of your investment in a Fund (other than a money market fund) is
based on the market value of the securities the Fund holds. These prices
change daily due to economic and other events that affect particular
companies and other issuers. These price movements, sometimes called
volatility, may be greater or lesser depending on the types of securities a
Fund owns and the markets in which they trade. The effect on a Fund of a
change in the value of a single security will depend on how widely the Fund
diversifies its holdings.
THE CASH RESERVE FUND, U.S. TREASURY MONEY FUND AND TAX FREE MONEY FUND TRY
TO MAINTAIN A CONSTANT PRICE PER SHARE OF $1.00, BUT THERE IS NO GUARANTEE
THAT A FUND WILL ACHIEVE THIS GOAL.
Page 3 of 55
<PAGE>
CASH RESERVE FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income, while maintaining
a share price of $1.00
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in a broad range of short-term,
high quality U.S. dollar denominated debt
securities
Investor Profile Conservative, income-oriented investors with
short-to medium-term time horizons who seek
current income, preservation of capital and
liquidity
</TABLE>
INVESTMENT STRATEGY OF THE CASH RESERVE FUND
The Fund invests primarily in U.S. dollar denominated money market
instruments, such as U.S. Government securities; short-term debt obligations
of high quality corporate issuers including commercial paper, notes and
bonds; high quality debt obligations of foreign issuers; repurchase
agreements; and obligations of institutions such as banks and insurance
companies including certificates of deposit, bankers' acceptances and time
deposits. The Fund's portfolio is comprised only of short-term, high quality
debt securities. High quality securities are securities rated in the top two
ratings categories by a nationally recognized statistical rating
organization. The Fund will maintain an average maturity of 90 days or less,
and will acquire only securities that have a remaining maturity of 397 days
or less. The Fund's investment approach, with its emphasis on high quality,
short-term money market instruments, is expected to produce current income
with low risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE CASH RESERVE FUND
Although a money market fund seeks to keep a constant price per share of
$1.00, you may lose money by investing in a money market fund.
The Fund can be expected to produce lower income levels than fixed income funds
that invest in longer-term securities.
Page 4 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1989 9.22%
1990 8.08%
1991 5.91%
1992 3.34%
1993 2.75%
1994 3.64%
1995 5.49%
1996 4.96%
1997 5.18%
1998 5.08%
BEST QUARTER WORST QUARTER
2.35% 0.67%
(6/30/89) (6/30/93)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S RETURNS FOR THE PERIODS ENDING DECEMBER 31,
1998 TO THOSE OF THE IBC/FINANCIAL DATA FIRST TIER AVERAGE.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Reserve Fund 5.08% 4.87% 5.35% 5.64%*
IBC/Financial Data First Tier Average 4.96% 4.79% N/A N/A**
</TABLE>
*Since December 8, 1986
**Since June 1, 1991
<TABLE>
<CAPTION>
TRUST CLASS SHARES 7 DAY YIELD
- ------------------------------------------------------
<S> <C>
Cash Reserve Fund 4.55%
IBC/Financial Data First Tier Average 4.52%
</TABLE>
WHAT IS AN AVERAGE?
An average measures the share prices of a specific group of mutual funds with
a particular investment objective. You cannot invest directly in an average.
The IBC/Financial Data First Tier Average is a composite of mutual funds
with investment goals similar to the Fund's goals.
Page 5 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN
THE FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------
<S> <C>
Management Fees 0.36%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.27%
-----
Total Annual Fund Operating Expenses 0.78%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.36%, 0.00% and 0.63%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and that
you sell your shares at the end of the period. The Example also assumes that
each year your investment has a 5% return and Fund expenses remain the same.
Although your actual costs and returns might be different, your approximate
costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $80 $249 $433 $966
</TABLE>
Page 6 of 55
<PAGE>
U.S. TREASURY MONEY FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income while maintaining a share
price of $1.00
Investment Focus Money market instruments issued and
guaranteed by the U.S. Treasury
Share Price Volatility Very low
Principal Investment Strategy Investing in U.S. Treasury obligations and
repurchase agreements
Investor Profile Conservative, income-oriented investors with
short-to medium-term time horizons who seek
current income, preservation of capital and
liquidity
</TABLE>
INVESTMENT STRATEGY OF THE U.S. TREASURY MONEY FUND
The Fund invests solely in U.S. Treasury obligations and repurchase
agreements that are collateralized by obligations issued or guaranteed by the
U.S. Treasury. The Fund limits its investments so as to obtain the highest
investment quality rating by a nationally recognized statistical rating
organization. The Fund will maintain an average maturity of 90 days or less,
and will acquire only securities that have a remaining maturity of 397 days
or less. The Fund's investment approach, with its emphasis on U.S. Treasury
obligations, is expected to produce current income with low risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE U.S. TREASURY MONEY FUND
Although the Fund's U.S. Treasury securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates.
Although a money market fund seeks to keep a constant price per share of
$1.00, you may lose money by investing in a money market fund.
The Fund can be expected to produce lower income levels than fixed income
funds that invest in longer-term or riskier securities.
Page 7 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1989 8.84%
1990 7.86%
1991 5.75%
1992 3.40%
1993 2.51%
1994 3.50%
1995 5.33%
1996 4.77%
1997 4.93%
1998 4.82%
BEST QUARTER WORST QUARTER
2.25% 0.61%
(6/30/89) (12/31/93)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S RETURNS FOR THE PERIODS ENDING DECEMBER 31,
1998 TO THOSE OF THE IBC/FINANCIAL DATA U.S. TREASURY & REPO AVERAGE.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Fund 4.82% 4.67% 5.15% 5.38%*
IBC/Financial Data U.S. Treasury & Repo Average 4.81% 4.66% N/A N/A**
</TABLE>
*Since February 18, 1987
**Since June 1, 1991
<TABLE>
<CAPTION>
TRUST CLASS SHARES 7 DAY YIELD
- ----------------------------------------------------------
<S> <C>
U.S. Treasury Money Fund 4.21%
IBC/Financial Data U.S. Treasury & Repo Average 4.20%
</TABLE>
WHAT IS AN AVERAGE?
An average measures the share prices of a specific group of mutual funds with
a particular investment objective. You cannot invest directly in an average.
The IBC/Financial Data U.S. Treasury & Repo Average is a composite of mutual
funds with investment goals similar to the Fund's goals.
Page 8 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------
<S> <C>
Management Fees 0.38%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.28%
-----
Total Annual Fund Operating Expenses 0.81%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.38%, 0.00% and 0.66%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and that
you sell your shares at the end of the period. The Example also assumes that
each year your investment has a 5% return and Fund expenses remain the same.
Although your actual costs and returns might be different, your approximate
costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $83 $259 $450 $1,002
</TABLE>
Page 9 of 55
<PAGE>
TAX FREE MONEY FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income exempt from federal
income tax, while maintaining a share price
of $1.00
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in high quality municipal
securities
Investor Profile Conservative, income-oriented investors with
short-to medium-term time horizons who seek
current tax exempt income, preservation of
capital and liquidity
</TABLE>
INVESTMENT STRATEGY OF THE TAX FREE MONEY FUND
The Fund invests primarily in high quality municipal securities that are free
from federal income tax. The Fund focuses on municipal securities that pay
interest that is not includable in federal alternative minimum tax
calculations, however, the Fund reserves the right to invest up to 20% of the
value of its net assets in securities, including private bonds, the interest
on which is fully taxable or subject to the alternative minimum tax. As a
fundamental policy, at least 80% of the Fund's income will, under normal
circumstances, be exempt from such taxes. Subject to such limitation, the
Fund may invest in any taxable investment, including repurchase agreements.
The Fund's portfolio is diversified among issuers and comprised only of
short-term, high quality debt securities. High quality securities are
securities rated in the top two ratings categories by a nationally recognized
statistical rating organization. The Fund will maintain an average weighted
maturity of 90 days or less, and will only acquire securities that have a
remaining maturity of 397 days or less. The Fund's investment approach, with
its emphasis on high-quality, short-term money market instruments, is
expected to produce current income with low risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE TAX FREE MONEY FUND
Although a money market fund seeks to keep a constant price per share of
$1.00, you may lose money by investing in a money market fund.
There may be economic or political changes that impact the ability of
municipal issuers to repay principal and to make interest payments on
municipal securities. Changes to the financial condition or credit rating of
municipal issuers also may adversely affect the value of the Fund's municipal
securities.
The Fund can be expected to produce lower income levels than fixed income
funds that invest in longer-term securities.
Page 10 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1990 5.86%
1991 4.55%
1992 2.86%
1993 1.84%
1994 2.18%
1995 3.28%
1996 3.11%
1997 3.08%
1998 2.93%
BEST QUARTER WORST QUARTER
1.47% 0.43%
(6/30/90) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S RETURNS FOR THE PERIODS ENDING DECEMBER 31, 1998
TO THOSE OF THE IBC/FINANCIAL DATA ALL TAX-FREE AVERAGE.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Free Money Fund 2.93% 2.92% 3.45%*
IBC/Financial Data All Tax-Free Average 2.93% 2.96% 3.34%**
</TABLE>
* Since June 15, 1989
** Since June 30, 1989
<TABLE>
<CAPTION>
TRUST CLASS SHARES 7 DAY YIELD
- ----------------------------------------------------------
<S> <C>
Tax Free Money Fund 3.12%
IBC/Financial Data All Tax-Free Average 2.98%
</TABLE>
WHAT IS AN AVERAGE?
An average measures the share prices of a specific group of mutual funds with a
particular investment objective. You cannot invest directly in an average. The
IBC/Financial Data All Tax-Free Average is a composite of mutual funds with
investment goals similar to the Fund's goals.
Page 11 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN
THE FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------
<S> <C>
Management Fees 0.40%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.26%
-----
Total Annual Fund Operating Expenses 0.81%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.40%, 0.00% and 0.66%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $83 $259 $450 $1,002
</TABLE>
Page 12 of 55
<PAGE>
LIMITED TERM BOND FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income
Investment Focus Bonds and other fixed income securities
Share Price Volatility Low
Principal Investment Strategy Investing in investment grade fixed
income debt obligations of domestic
issuers
Investor Profile Conservative, income-oriented investors
who have short- to medium-term time
horizons and who seek current income and
a relatively low degree of price
fluctuation
</TABLE>
INVESTMENT STRATEGY OF THE LIMITED TERM BOND FUND
The Fund invests primarily in bonds and other fixed income securities issued
by domestic issuers, such as corporate obligations; obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
commercial paper rated Prime-1 by Moody's or A-1 by S&P; and mortgage-backed
securities. All such instruments must be investment grade. Investment grade
securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. In selecting the
Fund's investments, the Adviser will consider preservation of capital, the
potential for realizing capital appreciation, sector rotation, maturity and
yield to maturity. The Adviser will monitor the Fund's investments in
response to its appraisal of changing economic conditions and trends. The
Fund is managed to maintain a dollar-weighted average maturity of between one
and five years. The Fund's investment approach, with its emphasis on bonds
and other fixed income securities with a relatively short average weighted
maturity, is expected to produce current income with low risk to principal.
Due to its investment strategy, the Fund may buy and sell securities
frequently. This may result in higher transaction costs and additional
capital gains tax liabilities.
PRINCIPAL RISKS OF INVESTING IN THE LIMITED TERM BOND FUND
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if
interest rates rise and vice versa, and the volatility of lower rated
securities is even greater than that of higher rated securities. Also,
longer-term securities are generally more volatile, so the average maturity
or duration of these securities affects risk.
Page 13 of 55
<PAGE>
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies
are backed by the U.S. Treasury, while others are backed solely by the ability
of the agency to borrow from the U.S. Treasury or by the agency's own resources.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1993 8.40%
1994 (1.83)%
1995 12.30%
1996 3.18%
1997 6.73%
1998 6.22%
BEST QUARTER WORST QUARTER
4.08% (1.88)%
(6/30/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE MERRILL LYNCH 1-5 YEAR
CORPORATE/GOVERNMENT BOND INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Limited Term Bond Fund 6.22% 5.22% 5.47%*
Merrill Lynch 1-5 Year Corporate/Government Bond Index 7.64% 6.27% 6.12%**
</TABLE>
* Since September 28, 1992
**Since September 30, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 14 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.52%
-----
Total Annual Fund Operating Expenses 1.17%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.82%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $119 $372 $644 $1,420
</TABLE>
Page 15 of 55
<PAGE>
INTERMEDIATE BOND FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income
Investment Focus Bonds and other fixed income securities
Share Price Volatility Medium
Principal Investment Strategy Investing in investment grade fixed
income debt obligations of domestic
issuers
Investor Profile Conservative, income-oriented investors
who have a medium-term time horizon and
who seek a relatively high level of
current income and are willing to
tolerate a moderate degree of price
fluctuation
</TABLE>
INVESTMENT STRATEGY OF THE INTERMEDIATE BOND FUND
The Fund invests primarily in bonds and other fixed income securities issued
by domestic issuers such as corporate obligations; obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
commercial paper rated Prime-1 by Moody's or A-1 by S&P; and asset-backed and
mortgage-backed securities. All such instruments must be investment grade.
Investment grade securities are securities rated in the top four ratings
categories by a nationally recognized statistical rating organization. In
selecting the Fund's investments, the Adviser will consider preservation of
capital, the potential for realizing capital appreciation, sector rotation,
maturity and yield to maturity. The Adviser will monitor the Fund's
investments in response to its appraisal of changing economic conditions and
trends. The Fund is managed to maintain a dollar-weighted average maturity
of between five and ten years. The Fund's investment approach, with its
emphasis on bonds and other fixed income securities is expected to produce
current income with moderate risk to capital.
Due to its investment strategy, the Fund may buy and sell securities
frequently. This may result in higher transaction costs and additional
capital gains tax liabilities.
PRINCIPAL RISKS OF INVESTING IN THE INTERMEDIATE BOND FUND
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if
interest rates rise and vice versa, and the volatility of lower rated
securities is even greater than that of higher rated securities. Also,
longer-term securities are generally more volatile, so the average maturity
or duration of these securities affects risk.
Page 16 of 55
<PAGE>
The mortgages underlying mortgage-backed securities may be paid off early,
which makes it difficult to determine their actual maturity and therefore
calculate how they will respond to changes in interest rates. The Fund may
have to reinvest prepaid amounts at lower interest rates. This risk of
prepayment is an additional risk of mortgage-backed securities.
Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies
are backed by the U.S. Treasury, while others are backed solely by the
ability of the agency to borrow from the U.S. Treasury or by the agency's own
resources.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<S> <C>
1993 9.61%
1994 (4.87)%
1995 18.09%
1996 1.58%
1997 8.63%
1998 6.66%
BEST QUARTER WORST QUARTER
6.42% (3.99)%
(6/30/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS AGGREGATE BOND INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund 6.66% 5.75% 5.99%*
Lehman Brothers Aggregate Bond Index 8.67% 7.27% 7.41%**
</TABLE>
*Since September 28, 1992
**Since September 30, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 17 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- ------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.52%
-----
Total Annual Fund Operating Expenses 1.27%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.60%, 0.00% and 0.92%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $129 $403 $697 $1,534
</TABLE>
Page 18 of 55
<PAGE>
<TABLE>
<S> <C>
GOVERNMENT BOND FUND
FUND SUMMARY
Investment Goal High current income with preservation of
capital
Investment Focus Bonds and other fixed income securities
Share Price Volatility Medium
Principal Investment Strategy Investing in bonds issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities
Investor Profile Conservative, income-oriented investors who
have medium- to long-term time horizon and
who seek a high level of current income and
are willing to tolerate a moderate degree of
price fluctuation
</TABLE>
INVESTMENT STRATEGY OF THE GOVERNMENT BOND FUND
The Fund invests primarily in bonds and other fixed income securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities including
U.S. Treasury bonds, notes and bills, Government National Mortgage Association
mortgage-backed pass-through certificates and mortgage-backed securities issued
by the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation. Under normal conditions, at least 65% of the Fund's total assets
will be invested in U.S. Government securities, including bonds and repurchase
agreements secured by U.S. Government securities. Any remaining assets may be
invested in fixed income securities that are not U.S. Government securities.
There are no limits on the dollar-weighted average portfolio maturity of the
Fund. The Fund's investment approach, with its emphasis on debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
is expected to produce current income with moderate risk to principal.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities.
PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa, and the volatility of lower rated securities is even
greater than that of higher rated securities. Also, longer-term securities are
generally more volatile, so the average maturity or duration of these securities
affects risk.
Page 19 of 55
<PAGE>
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies
are backed by the U.S. Treasury, while others are backed solely by the ability
of the agency to borrow from the U.S. Treasury or by the agency's own resources.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<S> <C>
1996 0.40%
1997 8.22%
1998 7.80%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
3.82% (3.00)%
(9/30/98) (3/31/96)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GOVERNMENT BOND INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------
<S> <C> <C>
Government Bond Fund 7.80% 7.92%*
Lehman Brothers Government Bond Index 9.85% 9.18%**
</TABLE>
*Since April 5, 1995
**Since April 30, 1995
Page 20 of 55
<PAGE>
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.50%
-----
Total Annual Fund Operating Expenses 1.25%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.71%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example
Page 21 of 55
<PAGE>
also assumes that each year your investment has a 5% return and Fund expenses
remain the same. Although your actual costs and returns might be different,
your approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $127 $397 $686 $1,511
</TABLE>
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from federal and
Virginia income tax
Investment Focus Virginia municipal bonds
Share Price Volatility Low to medium
Principal Investment Strategy Investing in municipal bonds of investment
grade quality
Investor Profile Conservative, income-oriented investors who
are Virginia residents, have short- to
medium-term time horizons, and seek current
tax exempt income with a relatively low to
moderate degree of price fluctuation
INVESTMENT STRATEGY OF THE VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds which
are free from federal and Virginia income tax. Such investments include fixed,
variable, or floating rate general obligation and revenue bonds; zero coupon and
asset-backed securities; tax, revenue, or bond anticipation notes; and tax
exempt commercial paper. All such instruments must be investment grade.
Investment grade securities are securities rated in the top four ratings
categories by a nationally recognized statistical rating organization. In
selecting the Fund's investments, stability and growth of principal are
considered. The Fund is managed to maintain a dollar-weighted average maturity
of between five and ten years. The Fund's investment approach, with its
emphasis on municipal bonds, is expected to produce current income with moderate
risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Virginia municipal
securities, may underperform other equity market segments or the equity market
as a whole.
Page 22 of 55
<PAGE>
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Virginia subjects the Fund to economic and government policies of that state.
As a result the Fund will be more susceptible to factors which adversely affect
issuers of Virginia obligations than a mutual fund that does not have as great a
concentration in Virginia municipal obligations.
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<S> <C>
1994 (6.45)%
1995 14.25%
1996 2.95%
1997 7.25%
1998 5.22%
BEST QUARTER WORST QUARTER
5.99% (6.80)%
(3/31/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia Intermediate Municipal Bond Fund 5.22% 4.43% 5.29%*
Lehman Brothers General Obligation Bond Index 6.68% 6.13% 6.92%**
</TABLE>
*Since January 11, 1993
**Since January 31, 1993
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an
Page 23 of 55
<PAGE>
index does not have an investment adviser and does not pay any commissions or
expenses. If an index had expenses, its performance would be lower.
Page 24 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES*+
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.53%
-----
Total Annual Fund Operating Expenses 1.18%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.83%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $120 $375 $649 $1,432
</TABLE>
Page 25 of 55
<PAGE>
VIRGINIA MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from federal and
Virginia income tax
Investment Focus Virginia municipal bonds
Share Price Volatility Medium
Principal Investment Strategy Investing in municipal bonds of investment
grade quality
Investor Profile Conservative, income-oriented investors who
are Virginia residents, have medium- to long-
term time horizons, seek current tax exempt
income and are willing to tolerate a moderate
degree of price fluctuation
INVESTMENT STRATEGY OF THE VIRGINIA MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds
which are free from federal and Virginia income tax. Such investments
include fixed, variable, or floating rate general obligation and revenue
bonds; zero coupon and asset-backed securities; tax revenue, or bond
anticipation notes; and tax exempt commercial paper. All such instruments
must be investment grade. Investment grade securities are securities rated
in the top four ratings categories by a nationally recognized statistical
rating organization. There are no limits on the dollar weighted average
portfolio maturity of the Fund. The Fund's investment approach, with its
emphasis on municipal bonds, is expected to produce current income with
moderate risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE VIRGINIA MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Virginia municipal
securities, may underperform other equity market segments or the equity market
as a whole.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Virginia subjects the Fund to economic and government policies of that state.
As a result, the Fund will be more
Page 26 of 55
<PAGE>
susceptible to factors which adversely affect issuers of Virginia obligations
than a mutual fund that does not have as great a concentration in Virginia
municipal obligations.
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<S> <C>
1996 1.68%
1997 8.82%
1998 5.86%
BEST QUARTER WORST QUARTER
3.41% (2.73)%
(6/30/97) (3/31/96)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C>
Virginia Municipal Bond Fund 5.86% 6.69%*
Lehman Brothers General Obligation Bond Index 6.68% 7.99%**
</TABLE>
*Since April 5, 1995
**Since April 30, 1995
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 27 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.55%
-----
Total Annual Fund Operating Expenses 1.30%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.74%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $132 $412 $713 $1,568
</TABLE>
Page 28 of 55
<PAGE>
MARYLAND MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from federal and
Maryland income tax
Investment Focus Maryland municipal bonds
Share Price Volatility Medium
Principal Investment Strategy Investing in municipal bonds of investment
grade quality
Investor Profile Conservative, income-oriented investors who
are Maryland residents, have medium- to long-
term horizons, seek current tax exempt income
and are willing to tolerate a moderate degree
of price fluctuation
INVESTMENT STRATEGY OF THE MARYLAND MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds
which are free from federal and Maryland income tax. Such investments
include fixed, variable, or floating rate general obligation and revenue
bonds; zero coupon and asset-backed securities; tax revenue, or bond
anticipation notes; and tax exempt commercial paper. All such instruments
must be investment grade. Investment grade securities are securities rated
in the top four ratings categories by a nationally recognized statistical
rating organization. There are no limits on the dollar weighted average
portfolio maturity of the Fund. The Fund's investment approach, with its
emphasis on municipal bonds, is expected to produce current income with
moderate risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE MARYLAND MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Maryland municipal
securities, may underperform other equity market segments or the equity market
as a whole.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Maryland subjects the Fund to economic and government policies of that state.
As a result, the Fund will be more
Page 29 of 55
<PAGE>
susceptible to factors which adversely affect issuers of Maryland obligations
than a mutual fund that does not have as great a concentration in Maryland
municipal obligations.
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
1997 8.78%
1998 5.87%
BEST QUARTER WORST QUARTER
3.58% (0.70)%
(6/30/97) (3/31/97)
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- ----------------------------------------------------------------------------
<S> <S> <C>
Maryland Municipal Bond Fund 5.87% 5.12%*
Lehman Brothers General Obligation Bond Index 6.68% 7.60%**
</TABLE>
*Since March 1, 1996
**Since March 31, 1996
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 30 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.63%
-----
Total Annual Fund Operating Expenses 1.38%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.25%, 0.00% and 0.68%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $140 $437 $755 $1,657
</TABLE>
Page 31 of 55
<PAGE>
VALUE FUND
FUND SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility Medium
Principal Investment Strategy Investing in a diversified portfolio of
equity securities of domestic companies with
market capitalizations of at least $1 billion
Investor Profile Investors with medium- to long-term time
horizons who can tolerate a moderate degree
of price fluctuation and who wish to
establish core equity holdings of a
diversified investment portfolio
INVESTMENT STRATEGY OF THE VALUE FUND
The Fund invests primarily in common stock of domestic companies with market
capitalizations of at least $1 billion. Such investments include securities
convertible into common stock, such as convertible bonds and convertible
preferred stock rated investment grade or better. Investment grade
securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. The Adviser selects
these stocks from a list of companies traded in the U.S. securities markets.
In choosing its investments, the Adviser considers the fundamental
characteristics of growth and value in determining the price to earnings
ratio and the financial strength of the Fund's securities. The Fund's
investment approach, with its emphasis on common stocks of larger
capitalization companies, is expected to provide returns consistent with the
performance of the U.S. stock market.
PRINCIPAL RISKS OF INVESTING IN THE VALUE FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer
a decline in response. These factors contribute to price volatility, which is
the principal risk of investing in the Fund.
Page 32 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<CAPTION>
<S> <C>
1993 10.20%
1994 (0.81)%
1995 29.38%
1996 19.06%
1997 27.69%
1998 18.20%
BEST QUARTER WORST QUARTER
17.38% (10.36)%
(6/30/97) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE S&P 500 COMPOSITE INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Value Fund 18.20% 18.19% 17.27%*
S&P 500 Composite Index 28.60% 24.05% 21.60%**
</TABLE>
*Since September 28, 1992
**Since September 30, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 33 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.52%
-----
Total Annual Fund Operating Expenses 1.42%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.00% and 1.12%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $145 $449 $776 $1,702
</TABLE>
Page 34 of 55
<PAGE>
CAPITAL APPRECIATION FUND
FUND SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of domestic
companies with above average growth rates and
medium to large market capitalizations
Investor Profile Investors with long-term time horizons who
can tolerate a moderate to above average
degree of price fluctuation
INVESTMENT STRATEGY OF THE CAPITAL APPRECIATION FUND
The Fund invests primarily in common stock of domestic companies with medium to
large market capitalizations of at least $250 million. Such investments include
securities convertible into common stock, such as convertible bonds and
convertible preferred stock rated investment grade or better. Investment grade
securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. The Adviser selects
these stocks from a list of companies traded in the U.S. securities markets. In
choosing its investments, the Adviser considers the fundamental characteristics
of growth and value in determining the price to earnings ratio and the financial
strength of the Fund's securities. The Fund's investment approach, with its
emphasis on common stocks, is expected to provide returns consistent with the
performance of the U.S. stock market.
PRINCIPAL RISKS OF INVESTING IN THE CAPITAL APPRECIATION FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer
a decline in response. These factors contribute to price volatility, which is
the principal risk of investing in the Fund.
The medium capitalization companies the Fund invests in may be more
vulnerable to adverse business or economic events than larger, more
established companies. In particular, these mid-size companies may have
limited product lines, markets and financial resources.
Page 35 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1994 (1.91)%
1995 23.78%
1996 20.96%
1997 26.75%
1998 28.88%
BEST QUARTER WORST QUARTER
26.34% (13.63)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE RUSSELL 1000 GROWTH INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Appreciation Fund 28.88% 19.13% 16.35%*
Russell 1000 Growth Index 38.71% 25.70% 22.15%**
</TABLE>
*Since January 11, 1993
**Since January 31, 1993
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest
directly in an index. Unlike a mutual fund, an index does not have an
investment adviser and does not pay any commissions or expenses. If an index
had expenses, its performance would be lower.
FUND FEES AND EXPENSES
This table describes the shareholder fees that you may pay if you purchase or
sell Fund shares. You would pay these fees directly from your investment in
the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
Page 36 of 55
<PAGE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.52%
-----
Total Annual Fund Operating Expenses 1.42%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.00% and 1.12%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and that
you sell your shares at the end of the period. The Example also assumes that
each year your investment has a 5% return and Fund expenses remain the same.
Although your actual costs and returns might be different, your approximate
costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $145 $449 $776 $1,702
</TABLE>
Page 37 of 55
<PAGE>
SPECIAL EQUITY FUND
Fund Summary
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of
domestic companies with market
capitalizations between $250 million and
$2 billion
Investor Profile Investors with long-term time horizons
who can tolerate an above average degree
of price fluctuation
INVESTMENT STRATEGY OF THE SPECIAL EQUITY FUND
The Fund invests primarily in common stock of domestic companies with market
capitalizations between $250 million and $2 billion. Such investments
include securities convertible into common stock, such as convertible bonds
and convertible preferred stock. The Fund may also invest in securities
having common stock characteristics, such as rights and warrants.
Representative industries may include, but are not limited to, technology,
health care and biotechnology, environmental services, communications, energy
and alternative energy. In choosing its investments, the Adviser considers
the fundamental characteristics of growth and value in determining the price
to earnings ratio and the financial strength of the Fund's securities. The
Fund's investment approach, with its emphasis on common stocks of smaller
capitalization companies, is expected to offer potentially higher returns and
a significant level of volatility relative to equity funds that invest in
stocks of larger companies.
Due to its investment strategy, the Fund may buy and sell securities
frequently. This may result in higher transaction costs and additional
capital gains tax liabilities.
PRINCIPAL RISKS OF INVESTING IN THE SPECIAL EQUITY FUND
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies
may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies
may suffer a decline in response. These factors contribute to price
volatility, which is the principal risk of investing in the Fund.
Page 38 of 55
<PAGE>
The medium capitalization companies the Fund invests in may be more
vulnerable to adverse business or economic events than larger, more
established companies. In particular, these mid-size companies may have
limited product lines, markets and financial resources.
The smaller capitalization companies the Fund invests in may be more
vulnerable to adverse business or economic events than larger, more
established companies. In particular, these small companies may have limited
product lines, markets and financial resources, and may depend upon a
relatively small management group. Therefore, small cap stocks may be more
volatile than those of larger companies. These securities may be traded
over-the-counter or listed on an exchange and may or may not pay dividends.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1993 14.18%
1994 (10.89)%
1995 24.32%
1996 15.70%
1997 23.07%
1998 (8.47)%
BEST QUARTER WORST QUARTER
21.57% (27.23)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE RUSSELL 2000 GROWTH INDEX.
<TABLE>
<CAPTION>
TRUST SHARES CLASS 1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Special Equity Fund (8.47)% 7.63% 11.24%*
Russell 2000 Growth Index 1.23% 10.22% 13.08%**
</TABLE>
*Since September 28, 1992
**Since September 30, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest
directly in an index. Unlike a mutual fund, an index does not have an
investment adviser and does not pay any commissions or expenses. If an index
had expenses, its performance would be lower.
Page 39 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN
THE FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.51%
-----
Total Annual Fund Operating Expenses 1.41%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.00% and 1.11%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and that
you sell your shares at the end of the period. The Example also assumes that
each year your investment has a 5% return and Fund expenses remain the same.
Although your actual costs and returns might be different, your approximate
costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $144 $446 $771 $1,691
</TABLE>
Page 40 of 55
<PAGE>
MORE INFORMATION ABOUT RISK
<TABLE>
<S> <C>
EQUITY RISK - Investments in equity securities Limited Term Bond Fund
and equity derivatives in general are subject
to market risks that may cause their prices to Intermediate Bond Fund
fluctuate over time. The value of securities
convertible into equity securities, such as Value Fund
warrants or convertible debt, is also affected
by prevailing interest rates, the credit Capital Appreciation Fund
quality of the issuer and any call provision.
Fluctuations in the value of equity securities Special Equity Fund
in which a mutual fund invests will cause a
fund's net asset value to fluctuate. An
investment in a portfolio of equity securities
may be more suitable for long-term investors
who can bear the risk of these share price
fluctuations.
CONVERTIBLE SECURITIES - Convertible securities Limited Term Bond Fund
have characteristics of both fixed income and
equity securities. The value of the Intermediate Bond Fund
convertible security tends to move with the
market value of the underlying stock, but may Value Fund
also be affected by interest rates, credit
quality of the issuer and any call provisions. Capital Appreciation Fund
Special Equity Fund
FIXED INCOME RISK - The market value of fixed Limited Term Bond Fund
income investments change in response to
interest rate changes and other factors. Intermediate Bond Fund
During periods of falling interest rates, the
values of outstanding fixed income securities Government Bond Fund
generally rise. Moreover, while securities
with longer maturities tend to produce higher
yields, the prices of longer maturity
securities are also subject to greater market
fluctuations as a result of changes in interest
rates. In addition to these fundamental risks,
different types of fixed income securities may
be subject to the following additional risks:
CALL RISK - During periods of falling interest Limited Term Bond Fund
rates, certain debt obligations with high
interest rates may be prepaid (or called) by Intermediate Bond Fund
the issuer prior to maturity. This may cause a
Fund's average weighted maturity to fluctuate, Government Bond Fund
and may require a Fund to invest the resulting
proceeds at lower interest rates.
Page 41 of 55
<PAGE>
CREDIT RISK - The possibility that an issuer Limited Term Bond Fund
will be unable to make timely payments of
either principal or interest. Since a Fund Intermediate Bond Fund
purchases securities backed by credit
enhancements from banks and other financial Government Bond Fund
institutions, changes in the credit ratings of
these institutions could cause the Fund to lose
money and may affect the Fund's share price.
MUNICIPAL ISSUER RISK - There may be economic Virginia Intermediate
or political changes that impact the ability of Municipal Bond Fund
municipal issuers to repay principal and to
make interest payments on municipal securities. Virginia Municipal Bond
Changes to the financial condition or credit Fund
rating of municipal issuers may also adversely
affect the value of a Fund's municipal Maryland Municipal Bond
securities. Constitutional or legislative Fund
limits on borrowing by municipal issuers may
result in reduced supplies of municipal
securities. Moreover, certain municipal
securities are backed only by a municipal
issuer's ability to levy and collect taxes. In
addition, a Fund's concentration of investments
in issuers located in a single state makes the
Fund more susceptible to adverse political or
economic developments affecting that state. A
Fund also may be riskier than mutual funds that
buy securities of issuers in numerous states.
MORTGAGE-BACKED SECURITIES - Mortgage-backed Limited Term Bond Fund
securities are fixed income securities
representing an interest in a pool of Intermediate Bond Fund
underlying mortgage loans. They are sensitive
to changes in interest rates, but may respond Government Bond Fund
to these changes differently from other fixed
income securities due to the possibility of
prepayment of the underlying mortgage loans.
As a result, it may not be possible to
determine in advance the actual maturity date
or average life of a mortgage-backed security.
Rising interest rates tend to discourage
refinancings, with the result that the average
life and volatility of the security will
increase, exacerbating its decrease in market
price. When interest rates fall, however,
mortgage-backed securities may not gain as much
in market value because of the expectation of
additional mortgage prepayments that must be
reinvested at lower interest rates. Prepayment
risk may make it difficult to calculate the
average maturity of a fund of mortgage-backed
securities and, therefore, to assess the
volatility risk of that fund.
Page 42 of 55
<PAGE>
FOREIGN SECURITY RISKS - Investments in Limited Term Bond Fund
securities of foreign companies or governments
can be more volatile than investments in U.S. Intermediate Bond Fund
companies or governments. Diplomatic,
political, or economic developments, including Value Fund
nationalization or appropriation, could affect
investments in foreign countries. Foreign Capital Appreciation Fund
securities markets generally have less trading
volume and less liquidity than U.S. markets. Special Equity Fund
In addition, the value of securities
denominated in foreign currencies, and of
dividends from such securities, can change
significantly when foreign currencies
strengthen or weaken relative to the U.S.
dollar. Foreign companies or governments
generally are not subject to uniform
accounting, auditing, and financial reporting
standards comparable to those applicable to
domestic U.S. companies or governments.
Transaction costs are generally higher than
those in the U.S. and expenses for custodial
arrangements of foreign securities may be
somewhat greater than typical expenses for
custodial arrangements of similar U.S.
securities. Some foreign governments levy
withholding taxes against dividend and interest
income. Although in some countries a portion
of these taxes are recoverable, the
non-recovered portion will reduce the income
received from the securities comprising the
portfolio.
EVENT RISK - Securities may suffer declines in Limited Term Bond Fund
credit quality and market value due to
corporate or governmental restructurings. Intermediate Bond Fund
While this risk may be high for certain
securities held by a Fund, the overall risk Government Bond Fund
should be reduced because of the Fund's
multiple holdings.
YEAR 2000 RISK - The Funds depend on the smooth All Funds
functioning of computer systems in almost every
aspect of their business. Like other mutual
funds, businesses and individuals around the
world, the Funds could be adversely affected if
the computer systems used by its service
providers do not properly process dates on and
after January 1, 2000, and distinguish between
the year 2000 and the year 1900. The Funds
have asked their service providers whether they
expect to have their computer systems adjusted
for the year 2000 transition, and are seeking
assurances from each service provider that they
are devoting significant resources to prevent
material adverse consequences to the Funds.
While it is likely that
Page 43 of 55
<PAGE>
such assurances will be obtained, the Funds and
their shareholders may experience losses if these
assurances prove to be incorrect or as a result of
year 2000 computer difficulties experienced by
issuers of portfolio securities or third parties,
such as custodians, banks, broker-dealers or others
with which the Funds do business.
</TABLE>
Page 44 of 55
<PAGE>
FUND INVESTMENTS
In addition to the investments and strategies described in this prospectus,
each Fund also may invest in other securities, use other strategies and
engage in other investment practices, which are described in detail in our
Statement of Additional Information (SAI). Of course, we cannot guarantee
that any Fund will achieve its investment goal.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions,
or for temporary defensive or liquidity purposes, each municipal bond fund
may invest up to 100% of its assets in short-term municipal obligations,
money market instruments and shares of money market mutual funds; each equity
fund may invest up to 100% of its assets in high-quality, short-term debt
securities and money market instruments, including repurchase agreements, and
in the securities of other open-end management companies investing primarily
in money market instruments that would not ordinarily be consistent with the
Fund's objectives. A Fund will do so only if the Adviser believes that the
risk of loss outweighs the opportunity for capital gains or higher income.
THE INVESTMENT ADVISER AND INVESTMENT TEAM
INVESTMENT ADVISER
The Investment Adviser makes investment decisions for the Funds and
continuously reviews, supervises and administers each Fund's respective
investment program. The Board of Directors supervises the Adviser and
establishes policies that the Adviser must follow in its management
activities.
Crestar Asset Management Company serves as the Adviser to the Funds. As of
December 31, 1998, Crestar Asset Management Company had approximately $17
billion in assets under management. For the fiscal year ended November 30,
1998, Crestar Asset Management Company received advisory fees of:
<TABLE>
<S> <C>
CASH RESERVE FUND 0.36%
U.S. TREASURY MONEY FUND 0.38%
TAX FREE MONEY FUND 0.40%
LIMITED TERM BOND FUND 0.50%
INTERMEDIATE BOND FUND 0.60%
GOVERNMENT BOND FUND 0.50%
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND 0.50%
VIRGINIA MUNICIPAL BOND FUND 0.50%
MARYLAND MUNICIPAL BOND FUND 0.25%
VALUE FUND 0.75%
CAPITAL APPRECIATION FUND 0.75%
SPECIAL EQUITY FUND 0.75%
</TABLE>
Page 45 of 55
<PAGE>
On December 31, 1998, Crestar Financial Corporation (Crestar), the parent of
Crestar Bank which is the parent of Crestar Asset Management Corporation, the
Funds' Adviser, was acquired by SunTrust Banks, Inc. (SunTrust). On February
19, 1999, the Board of Directors of the CrestFunds approved a plan of
reorganization with the STI Classic Funds (mutual funds that are served by
investment advisers that are subsidiaries of SunTrust). Under the plan of
reorganization, shareholders of each Fund of the CrestFunds will receive shares
of a comparable class of the corresponding STI Fund. This plan of
reorganization will be submitted for approval by shareholders of the CrestFunds
at a Special Meeting of Shareholders expected to be held on May 7, 1999. The
plan is also conditioned upon receiving the appropriate exemptive relief from
the Securities and Exchange Commission.
INVESTMENT TEAM
The Funds are managed by teams of investment professionals from the Crestar
Asset Management Company. No one person is primarily responsible for making
investment recommendations to the teams.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to buy, sell (sometimes called "redeem") or exchange
Trust Class Shares of the Funds.
HOW TO PURCHASE FUND SHARES
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange and the
Federal Reserve are open for business (a Business Day). Shares cannot be
purchased by Federal Reserve Wire on days when either the New York Stock
Exchange or the Federal Reserve is closed.
You may purchase shares through a representative of certain correspondent banks
of Crestar Asset Management Company, or other financial institutions that have
executed dealer agreements. Shares of the Funds may be purchased through
procedures established by the banks in connection with the requirements of
customer accounts.
A Fund may reject any purchase order if it is determined that accepting the
order would not be in the best interests of the Fund or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase order.
The Adviser calculates each bond and equity fund's NAV once each Business Day
at the regularly scheduled close of normal trading on the New York Stock
Exchange (NYSE) (normally 4:00 p.m., Eastern time). The NAV of the Tax Free
Money Fund is determined as of 12:00 noon, Eastern time, and as of the
regularly-scheduled close of normal trading on the NYSE. The NAV of the Cash
Reserve Fund and the U.S. Treasury Money Fund is determined as of 1:00 p.m.,
Page 46 of 55
<PAGE>
Eastern time and as of the regularly-scheduled close of normal trading on the
NYSE. So, to be eligible to receive dividends declared on the day you submit
your purchase order, generally a Fund must receive your order before 4:00
p.m., Eastern time for each non-money market fund, 12:00 noon, Eastern time
for the Tax Free Money Fund, and 1:00 p.m., Eastern time for the Cash
Reserve Fund and the U.S. Treasury Money Fund.
HOW WE CALCULATE NAV
NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.
In calculating NAV, the Adviser generally values a Fund's investment
portfolio at market price (except the Cash Reserve Fund, U.S. Treasury Money
Fund and Tax Free Money Fund). If market prices are unavailable or the
Adviser believes that they are unreliable, fair value prices may be
determined in good faith using methods approved by the Board of Directors.
In calculating NAV for the Cash Reserve Fund, U.S. Treasury Money Fund and Tax
Free Money Fund, the Adviser generally values a Fund's investment portfolio
using the amortized cost valuation method, which is described in detail in the
SAI. If the Adviser believes that this method is unreliable during certain
market conditions or for other reasons, fair value prices may be determined in
good faith using methods approved by the Board of Directors.
Some Funds hold securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the NAV of these Fund shares may change on days when you
cannot purchase or sell Fund shares.
MINIMUM PURCHASES
To purchase Trust Class Shares for the first time, you must invest at least $1
million, except for agency accounts for which the minimum is $10,000, and
qualified cash management accounts for which the minimum is waived, in any Fund.
There is no minimum for subsequent investments.
We may accept investments of smaller amounts at our discretion.
HOW TO SELL YOUR FUND SHARES
You may sell (sometimes called "redeem") your shares on any Business Day by
contacting your bank or financial institution directly. 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.
No charge for wire redemption payments is imposed by the Funds, although banks
may charge their customer accounts for services provided in connection with the
redemption of shares of the Funds.
If you would like to sell your shares, please notify us in writing and include a
signature guarantee by a bank or other financial institution (a notarized
signature is not sufficient).
Page 47 of 55
<PAGE>
RECEIVING YOUR MONEY
Normally, we will send your sale proceeds within seven days after we receive
your request. Your proceeds can be wired to your bank account (subject to a
nominal fee) or sent to you by check. IF YOU RECENTLY PURCHASED YOUR SHARES BY
CHECK, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED
(WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
The Funds generally pay sale (redemption) proceeds in cash. However, under
unusual conditions that make the payment of cash unwise (and for the protection
of a Fund's remaining shareholders) a Fund might pay all or part of your
redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). Although it is highly unlikely that your
shares would ever be redeemed in kind, you would probably have to pay brokerage
costs to sell the securities distributed to you, as well as taxes on any capital
gains from the sale as with any redemption.
INVOLUNTARY SALES OF YOUR SHARES
If your account balance drops below $1 million because of redemptions you may be
required to sell your shares. But, we will always give you at least 30 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in the SAI.
Page 48 of 55
<PAGE>
HOW TO EXCHANGE YOUR SHARES
You may exchange shares on any Business Day by contacting your financial
institution by mail or telephone. This exchange privilege may be changed or
canceled at any time upon 60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after a Fund receives your exchange request.
You may exchange Trust Class Shares of any Fund for Trust Class Shares of any
other Fund. Trust Class Shares may be exchanged for Class A Shares or Class B
Shares of the same Fund should the holder of the Trust Class Shares cease to be
eligible to invest in the Trust Class. Additionally, Class A Shares or Class B
Shares may be exchanged for Trust Class Shares if the investor is eligible to
invest in the Trust Class.
Page 49 of 55
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes its income as follows:
<TABLE>
<CAPTION>
Declared Daily and Distributed Monthly Declared and Paid Monthly
-------------------------------------- -------------------------
<S> <C>
Cash Reserve Fund Value Fund
U.S. Treasury Money Fund Capital Appreciation Fund
Tax Free Money Fund Special Equity Fund
Limited Term Bond Fund
Intermediate Bond Fund
Government Bond Fund
Virginia Intermediate Municipal Bond Fund
Virginia Municipal Bond Fund
Maryland Municipal Bond Fund
</TABLE>
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.
You will receive dividends and distributions in the form of additional Fund
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Fund in writing prior to the date of the distribution. Your
election will be effective for dividends and distributions paid after the Fund
receives your written notice. To cancel your election, simply send the Fund
written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax
issues that affect the Funds and their shareholders. This summary is based on
current tax laws, which may change.
Each Fund will distribute substantially all of its income and capital gains, if
any. The dividends you receive are taxed as ordinary income. Any capital gains
distributions may be taxable to you as capital gains. For individuals, long-
term capital gains are currently taxed at a maximum rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates.
If you redeem a Fund's shares, you will be subject to tax on any gain. The
character of such gain will generally be based on your holding period for the
shares. An exchange of shares of a Fund for shares of another Fund is a sale of
Fund shares for tax purposes.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, you should consult your tax adviser about your
investment.
More information about taxes is in the SAI.
Page 50 of 55
<PAGE>
DISTRIBUTION OF FUND SHARES
Each Fund has adopted a distribution plan that allows the Fund to pay
distribution and service fees for the sale and distribution of its shares, and
for services provided to shareholders. Because these fees are paid out of a
Fund's assets continuously, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Under this Plan, the Distributor is compensated at the annual rate of 0.15% of
the aggregate average daily net assets of the Trust Class Shares of each Fund.
The Distributor has agreed to waive any fees payable pursuant to the Plan. The
Distributor reserves the right to terminate its waiver at any time at is sole
discretion.
The Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs for dealers, which will be paid for by the
Distributor from any sales charge it receives or from any other source available
to it. Under any such program, the Distributor may provide incentives, in the
form of cash or other compensation, including merchandise, airline vouchers,
trips and vacation packages, to dealers selling shares of a Fund.
Page 51 of 55
<PAGE>
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about each Fund. This
information is intended to help you understand each Fund's financial performance
for the past five years, or, if shorter, the period of the Fund's operations.
Some of this information reflects financial information for a single Fund share.
The total returns in the table represent the rate that you would have earned (or
lost) on an investment in a Fund, assuming you reinvested all of your dividends
and distributions. This information has been audited by Deloitte & Touche LLP,
independent public accountants. Their report, along with each Fund's financial
statements, appears in the annual report that accompanies the SAI. You can
obtain the annual report, which contains more performance information, at no
charge by calling 1-800-273-7827.
Page 52 of 55
<PAGE>
Financial Highlights CrestFunds, Inc.
For a Share Outstanding Throughout the Year
<TABLE>
<CAPTION>
Investment Activities Distributions
------------------------ ------------------
Net
Realized Ratio Ratio
Net and Net Net of Expenses of Net
Asset Unrealized Asset Assets, Ratio of to Average Investment
Value, Net Gain (Loss) Net Value, End of Expenses Net Assets Income
Beginning Investment on Investment Capital End of Total Period to Average Excluding to Average
of Period Income Investments Income Gains Period Return (000) Net Assets Fee Waivers Net Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Reserve Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $1.00 0.050 - (0.050) - $1.00 5.13% $1,135,571 0.63% 0.78% 5.01%
1997 1.00 0.050 - (0.050) - 1.00 5.16% 848,140 0.65% 0.80% 5.04%
1996 1.00 0.049 - (0.049) - 1.00 4.98% 621,139 0.66% 0.81% 4.87%
1995 1.00 0.053 - (0.053) - 1.00 5.45% 520,185 0.66% 0.81% 5.31%
1994 1.00 0.034 - (0.034) - 1.00 3.46% 377,493 0.66% 0.66% 3.37%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Money Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $1.00 0.048 - (0.048) - $1.00 4.89% $ 699,923 0.66% 0.81% 4.77%
1997 1.00 0.048 - (0.048) - 1.00 4.91% 632,381 0.65% 0.80% 4.82%
1996 1.00 0.047 - (0.047) - 1.00 4.80% 389,051 0.66% 0.81% 4.69%
1995 1.00 0.052 - (0.052) - 1.00 5.29% 370,454 0.66% 0.81% 5.16%
1994 1.00 0.033 - (0.033) - 1.00 3.30% 319,477 0.66% 0.66% 3.23%
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Money Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $1.00 0.029 - (0.029) - $1.00 2.97% $ 270,899 0.66% 0.81% 2.92%
1997 1.00 0.030 - (0.030) - 1.00 3.06% 226,837 0.66% 0.81% 3.02%
1996 1.00 0.029 0.002 (0.029) (0.002) 1.00 3.14% 182,320 0.66% 0.81% 2.88%
1995 1.00 0.032 - (0.032) - 1.00 3.26% 202,333 0.66% 0.81% 3.19%
1994 1.00 0.021 - (0.021) - 1.00 2.07% 157,602 0.67% 0.67% 2.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Limited Term Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $ 9.92 0.557 0.061 (0.558) - $ 9.98 6.39% $ 83,980 0.76% 0.95% 5.57%
1997 9.93 0.570 (0.010) (0.570) - 9.92 5.84% 77,696 0.75% 0.90% 5.79%
1996 10.03 0.534 (0.097) (0.537) - 9.93 4.52% 84,973 0.78% 0.93% 5.41%
1995 9.49 0.532 0.534 (0.526) - 10.03 11.50% 88,789 0.78% 0.93% 5.44%
1994 10.16 0.480 (0.640) (0.480) (0.030) 9.49 (1.56%) 83,369 0.76% 0.76% 4.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $ 9.96 0.564 0.167 (0.561) - $10.13 7.52% $ 310,885 0.88% 1.06% 5.60%
1997 9.94 0.594 0.021 (0.595) - 9.96 6.46% 299,820 0.87% 1.02% 6.07%
1996 10.12 0.550 (0.175) (0.555) - 9.94 3.92% 281,187 0.88% 1.03% 5.70%
1995 9.16 0.569 0.954 (0.563) - 10.12 17.07% 81,870 0.88% 1.03% 5.89%
1994 10.20 0.530 (1.000) (0.530) (0.040) 9.16 (4.72%) 77,143 0.88% 0.88% 5.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Government Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $10.36 0.591 0.281 (0.592) - $10.64 8.63% $ 50,051 0.67% 1.07% 5.60%
1997 10.37 0.605 (0.010) (0.605) - 10.36 6.04% 34,013 0.66% 1.06% 5.99%
1996 10.66 0.591 (0.290) (0.591) - 10.37 3.02% 20,171 0.69% 1.09% 5.75%
1995(1) 10.00 0.412 0.753 (0.412) (0.093) 10.66 11.85%* 10,211 0.71%* 1.11%* 6.00%*
Ratio of
Net Investment
Income to
Average
Net Assets Portfolio
Excluding Turnover
Fee Waivers Rate
<C> <C>
- -----------------------------
- -----------------------------
4.86% -
4.89% -
4.72% -
5.16% -
3.37% -
- -----------------------------
- -----------------------------
4.62% -
4.67% -
4.54% -
5.01% -
3.23% -
- -----------------------------
- -----------------------------
2.77% -
2.87% -
2.73% -
3.04% -
2.06% -
- -----------------------------
- -----------------------------
5.38% 142%
5.64% 64%
5.26% 51%
5.29% 36%
4.92% 47%
- -----------------------------
- -----------------------------
5.42% 178%
5.92% 66%
5.55% 35%
5.74% 37%
5.53% 39%
- -----------------------------
- -----------------------------
5.20% 220%
5.59% 144%
5.35% 16%
5.60%* 28%
</TABLE>
Page 53 of 55
<PAGE>
Financial Highlights CrestFunds, Inc.
For a Share Outstanding Throughout the Year
<TABLE>
<CAPTION>
Investment Activities Distributions
------------------------ ------------------
Net
Realized Ratio Ratio
Net and Net Net of Expenses of Net
Asset Unrealized Asset Assets, Ratio of to Average Investment
Value, Net Gain (Loss) Net Value, End of Expenses Net Assets Income
Beginning Investment on Investment Capital End of Total Period to Average Excluding to Average
of Period Income Investments Income Gains Period Return (000) Net Assets Fee Waivers Net Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Virginia Intermediate Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $10.31 0.449 0.166 (0.450) (0.035) $10.44 6.10% $ 243,606 0.79% 0.97% 4.33%
1997 10.22 0.463 0.089 (0.462) - 10.31 5.55% 237,096 0.78% 0.93% 4.57%
1996 10.24 0.419 (0.021) (0.418) - 10.22 4.01% 243,137 0.78% 0.93% 4.35%
1995 9.21 0.428 1.030 (0.428) - 10.24 16.09% 43,373 0.72% 0.94% 4.34%
1994 10.33 0.440 (1.100) (0.440) (0.020) 9.21 (6.53%) 41,365 0.65% 0.77% 4.48%
- ------------------------------------------------------------------------------------------------------------------------------------
Virginia Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $10.44 0.468 0.267 (0.468) (0.026) $10.68 7.19% $ 29,252 0.69% 1.10% 4.41%
1997 10.28 0.475 0.168 (0.475) (0.008) 10.44 6.46% 20,044 0.69% 1.09% 4.65%
1996 10.40 0.465 (0.120) (0.465) - 10.28 3.48% 15,911 0.71% 1.11% 4.61%
1995(1) 10.00 0.309 0.445 (0.310) (0.044) 10.40 7.67%* 6,247 0.71%* 1.11%* 4.61%*
- ------------------------------------------------------------------------------------------------------------------------------------
Maryland Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $ 9.95 0.416 0.270 (0.416) - $10.22 7.03% $ 19,115 0.62% 1.15% 4.11%
1997 9.76 0.426 0.190 (0.426) - 9.95 6.50% 11,461 0.63% 1.16% 4.38%
1996(2) 10.00 0.309 (0.240) (0.309) - 9.76 1.07%* 5,808 0.71%* 1.36%* 4.30%*
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $16.55 0.093 1.638 (0.095) (3.085) $15.10 13.64% $ 577,042 1.03% 1.21% 0.63%
1997 13.39 0.137 3.237 (0.145) (0.070) 16.55 25.41% 590,824 1.02% 1.17% 0.92%
1996 11.60 0.166 2.380 (0.165) (0.591) 13.39 22.68% 553,648 1.02% 1.17% 1.38%
1995 10.73 0.245 2.619 (0.262) (1.732) 11.60 28.76% 220,386 1.02% 1.17% 2.16%
1994 11.38 0.200 (0.240) (0.190) (0.420) 10.73 (0.49%) 166,713 1.01% 1.01% 1.82%
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $15.96 (0.018) 2.780 (0.007) (0.935) $17.78 18.59% $ 124,182 1.03% 1.21% (0.11%)
1997 13.58 0.037 3.005 (0.041) (0.621) 15.96 23.71% 99,364 1.02% 1.17% 0.27%
1996 10.87 0.043 2.709 (0.042) - 13.58 25.38% 32,983 1.10% 1.25% 0.37%
1995 10.17 0.043 2.035 (0.046) (1.332) 10.87 20.74% 19,592 1.10% 1.25% 0.40%
1994 9.79 0.010 0.380 (0.010) - 10.17 4.13% 12,869 1.05% 1.05% 0.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Special Equity Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $16.45 (0.031) (2.013) - (2.176) $12.23 (13.77%) $ 90,311 1.04% 1.22% (0.21%)
1997 13.73 (0.009) 3.114 (0.005) (0.380) 16.45 23.28% 112,403 1.01% 1.16% (0.07%)
1996 12.12 0.050 1.926 (0.053) (0.313) 13.73 16.44% 77,931 1.04% 1.19% 0.39%
1995 10.56 0.100 1.928 (0.108) (0.360) 12.12 20.07% 54,221 1.04% 1.19% 0.90%
1994 12.76 0.030 (0.460) (0.020) (1.750) 10.56 (4.74%) 43,640 1.03% 1.03% 0.32%
Ratio of
Net Investment
Income to
Average
Net Assets Portfolio
Excluding Turnover
Fee Waivers Rate
<C> <C>
- -----------------------------
- -----------------------------
4.15% 24%
4.42% 30%
4.20% 25%
4.12% 28%
4.36% 24%
- -----------------------------
- -----------------------------
4.00% 28%
4.25% 39%
4.21% 24%
4.21%* 35%
- -----------------------------
- -----------------------------
3.58% 12%
3.85% 5%
3.65%* 9%
- -----------------------------
- -----------------------------
0.45% 71%
0.77% 100%
1.23% 82%
2.01% 175%
1.82% 116%
- -----------------------------
- -----------------------------
(0.29%) 39%
0.12% 123%
0.22% 86%
0.25% 470%
0.17% 271%
- -----------------------------
- -----------------------------
(0.39%) 231%
(0.22%) 148%
0.24% 98%
0.75% 81%
0.32% 117%
</TABLE>
Amounts designated as "-" are either $0 or have been rounded to $0.
(1) Commencement of operations for this class April 5, 1995.
(2) Commencement of operations for this class March 1, 1996.
* Annualized.
Page 54 of 55
<PAGE>
CRESTFUNDS
INVESTMENT ADVISER
Crestar Asset Management Company
919 E. Main Street
Richmond, Virginia 23219
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
More information about the Funds is available without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated March 30, 1999, includes detailed information about CrestFunds.
The SAI is on file with the SEC and is incorporated by reference into this
prospectus. This means that the SAI, for legal purposes, is a part of this
prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list each Fund's holdings and contain information from the Fund's
managers about strategies and recent market conditions and trends and their
impact on the Fund's performance. These reports also contain detailed financial
information about the Funds.
TO OBTAIN MORE INFORMATION CONTACT YOUR BANK OR FINANCIAL INSTITUTION.
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual
reports, as well as other information about CrestFunds, from the SEC's website
("HTTP://WWW.SEC.GOV"). You may review and copy documents at the SEC Public
Reference Room in Washington, DC (for information call 1-800-SEC-0330). You may
request documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section,
Washington, DC 20549-6009. The CrestFunds' Investment Company Act registration
number is 811-4620.
Page 55 of 55
<PAGE>
CRESTFUNDS-REGISTERED TRADEMARK-, INC.
TRUST CLASS SHARES
STATEMENT OF ADDITIONAL INFORMATION
MARCH 30, 1999
This Statement is not a prospectus but should be read in conjunction with
the current Trust Class Prospectus (dated March 30, 1999) for CrestFunds, Inc.
(the Company). 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, 1998 for Cash Reserve Fund, U.S. Treasury Money
Fund, Tax Free Money Fund, Limited Term Bond Fund, Intermediate Bond Fund,
Government Bond Fund, Maryland Municipal Bond Fund, Virginia Intermediate
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 Class A Shares and Class B Shares Prospectus or Statement
of Additional Information, please call 1-800-273-7827.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Investment Objectives and Policies........................................................................ 2
Investment Policies and Limitations....................................................................... 10
Investment Practices...................................................................................... 14
Portfolio Transactions.................................................................................... 22
Valuation of Portfolio Securities......................................................................... 24
Fund Performance.......................................................................................... 25
Additional Information Regarding Pricing and Redemptions.................................................. 30
Distributions and Taxes................................................................................... 31
Directors and Officers and Affiliated Persons............................................................. 35
The Adviser............................................................................................... 36
Administrator and Distributor............................................................................. 38
Transfer Agent............................................................................................ 40
Custodian................................................................................................. 41
Auditor................................................................................................... 41
Legal Counsel............................................................................................. 41
Principal Holders of Securities........................................................................... 41
Financial Statements...................................................................................... 43
Appendix.................................................................................................. 44
</TABLE>
<PAGE>
CRESTFUNDS, INC.
CrestFunds, Inc. (the Company) is a registered open-end management
investment company that currently consists of fifteen separate investment
portfolios (portfolios or series). The Company was established as a Maryland
corporation on March 17, 1986. The Company's Articles of Incorporation permit it
to offer separate series of common stock (shares) and separate classes of each
series. Except for the differences among the Trust Class shares, Investors Class
A shares and Investors Class B shares, each share of each series represents an
equal proportionate interest in that series with each other share of that
series.
This Statement of Additional Information relates to the following investment
portfolios: Cash Reserve Fund, U.S. Treasury Money Fund, Tax Free Money Fund,
Limited Term Bond Fund, Intermediate Bond Fund, Government Bond Fund, Maryland
Municipal Bond Fund, Virginia Intermediate Municipal Bond Fund, Virginia
Municipal Bond Fund, Value Fund, Capital Appreciation Fund and Special Equity
Fund (each a Fund and, collectively, the Funds). Shareholders may purchase
shares in the CrestFunds Family of Funds through three separate classes, the
Trust Class, Investors Class A and Investors Class B, which provide for
variations in distribution and servicing costs, transfer agent fees, voting
rights and dividends.
ADVISER:
Crestar Asset Management Company (the Adviser)
TRANSFER AGENT:
Crestar Bank (the Transfer Agent)
CUSTODIAN:
Crestar Bank (the Custodian)
ADMINISTRATOR:
SEI Investments Mutual Funds Services (the Administrator)
DISTRIBUTOR:
SEI Investments Distribution Co. (the Distributor)
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's objective, together with those policies identified as being
fundamental, may not be changed except by approval of the majority of the
outstanding shares of that Fund. All other investment policies of a Fund may be
changed by the Company's Board of Directors without shareholder approval. The
Adviser will manage each Fund consistently with that Fund's investment objective
and policies. There is no assurance that a Fund will achieve its investment
objective.
MONEY MARKET FUNDS:
The investment objective of each money market fund is to provide high
current income to the extent consistent with the preservation of capital and the
maintenance of liquidity. A further objective of Tax Free Money Fund is to
provide high current income exempt from federal income taxes.
Each money market fund invests in accordance with the requirements of Rule
2a-7 (Rule 2a-7) under the Investment Company Act of 1940, as amended (the 1940
Act). These requirements provide that money market funds must limit their
investments to securities with remaining maturities of 397 days or less and
maintain a dollar-weighted average maturity of 90 days or less. If the SEC
adopts new or amended
2
<PAGE>
requirements under Rule 2a-7, the money market funds will comply with all such
additional or amended requirements.
There may be occasions when, in order to raise cash to meet redemptions or
to maintain the quality standards of the portfolio, the Funds might be required
to sell securities at a loss.
CASH RESERVE FUND
Cash Reserve Fund invests only in high quality, U.S. dollar-denominated,
money market instruments of U.S. and foreign issuers including floating and
variable rate instruments. Investments include:
- obligations of institutions, such as banks and insurance companies,
including certificates of deposit, bankers' acceptances and time deposits;
- obligations of the U.S. and certain foreign governments and their agencies
or instrumentalities;
- short-term corporate obligations, including commercial paper, notes and
bonds; and
- other eligible debt obligations, including repurchase agreements.
The Fund's investments in domestic bank obligations (including their foreign
branches) are limited to those of banks having total assets in excess of one
billion dollars and subject to regulation by the U.S. Government. The Fund may
also invest in certificates of deposit issued by banks insured by the Federal
Deposit Insurance Corporation (FDIC) having total assets of less than one
billion dollars, provided that the Fund will at no time own more than an
aggregate of $100,000 in principal and interest obligations (or any higher
principal amount or principal and interest amount, which in the future may be
fully covered by FDIC insurance) of any one such issuer.
The Fund may invest in obligations of U.S. banks, foreign branches of U.S.
banks (Eurodollars), U.S. branches and agencies of foreign banks (Yankee
dollars), and foreign branches of foreign banks. Eurodollar, Yankee dollar, and
foreign bank obligation investments involve risks in addition to those inherent
in investing in domestic bank obligations. These risks may include future
unfavorable political and economic developments, withholding taxes, seizures of
foreign deposits, currency controls, interest limitations, or other governmental
restrictions that might affect payment of principal or interest. Additionally,
there may be less public information available about foreign banks and their
branches. Foreign branches of foreign banks are not regulated by U.S. banking
authorities and generally are not subject to accounting, auditing, or financial
reporting standards comparable to those applicable to U.S. banks. Although the
Adviser carefully considers these factors when making investments, the Fund does
not limit the amount of its assets that can be invested in any one type of
instrument or in any foreign country.
The Fund's investments in obligations of domestic or foreign branches of
foreign banks are limited to U.S. dollar-denominated obligations of foreign
banks which, at the time of investment: (i) have more than $5 billion, or the
equivalent in other currencies, in total assets; and (ii) have branches or
agencies in the United States. Investments in the foregoing foreign bank
obligations are further limited to banks headquartered in and to those branches
located in the United Kingdom, France, Germany, Belgium, the Netherlands, Italy,
Switzerland, Denmark, Norway, Sweden, Australia, Japan and Canada.
Cash Reserve Fund limits its investments in U.S. dollar-denominated foreign
government obligations to those obligations issued or guaranteed by the
governments of the countries listed above. Such obligations may be subject to
the risks described above in connection with the purchase of obligations of
foreign branches of domestic and foreign banks.
QUALITY. Pursuant to Rule 2a-7 and policies and procedures adopted by the
Company's Board of Directors, Cash Reserve Fund may purchase only high-quality
securities determined by the Adviser to present minimal credit risks. To be
considered high-quality, a security must be a U.S. Government security or rated
in accordance with applicable rules in one of the two highest categories for
short-term securities
3
<PAGE>
by at least two nationally recognized statistical rating organizations (NRSRO)
(or by one, if only one NRSRO has rated the security); or, if unrated, judged to
be of equivalent quality by the Adviser pursuant to procedures adopted by the
Company's Board of Directors. Purchases of unrated securities and securities
rated by only one NRSRO will be ratified by the Company's Board of Directors.
Foreign obligations are considered to be unrated.
High-quality securities are divided into "first tier" and "second tier"
securities. FIRST TIER securities have received the highest rating (e.g.,
Standard & Poor's Ratings Group (S&P) A-1 rating) from at least two NRSROs (or
one, if only one has rated the security). SECOND TIER securities have received
ratings within the two highest categories (e.g., S&P A-1 or A-2) from at least
two NRSROs (or one, if only one has rated the security), but do not qualify as
first tier securities. If a security has been assigned different ratings by
different NRSROs, at least two NRSROs must have assigned the higher rating in
order for the Adviser to determine eligibility on the basis of that higher
rating. The Fund does not currently intend to invest in commercial paper rated
below first tier and will not invest more than 10% of its net assets in illiquid
securities. Cash Reserve Fund may not invest more than 5% of its total assets in
second tier securities.
DIVERSIFICATION. The Fund may not invest more than 5% of its total assets
in the securities of any one issuer, except that it may invest up to 25% of its
assets in the first tier securities of a single issuer for up to three business
days. The Fund may not invest more than 25% of its total assets in any one
industry.
Cash Reserve Fund may not invest more than 5% of its total assets in second
tier securities. In addition, the Fund may not invest more than 1% of its total
securities or $1 million (whichever is greater) in the second tier securities of
a single issuer.
U.S. TREASURY MONEY FUND
U.S. Treasury Money Fund's investments are limited to obligations that are
issued by the U.S. Treasury and repurchase agreements that provide for
repurchase with 397 days and that are collateralized by obligations issued or
guaranteed by the U.S. Treasury. The investment policies of the Fund may result
in a lower yield than that of other money market funds, such as Cash Reserve
Fund, which may invest in other types of instruments.
U.S. Treasury Money Fund limits its investments so as to obtain the highest
investment quality rating by an NRSRO. These quality ratings are based on, but
not limited to, an analysis of the Fund's operational policies, investment
strategies and management. These rating organizations also may undertake an
ongoing analysis and assessment of these criteria in order to continually update
the Fund's rating.
TAX FREE MONEY FUND
Tax Free Money Fund invests only in high-quality municipal securities.
Although the Fund will attempt to invest 100% of its assets in tax-exempt
municipal securities, the interest on which is exempt from federal income tax,
including the federal alternative minimum tax, the Fund reserves the right to
invest up to 20% of the value of its net assets in securities, including private
activity bonds, the interest on which is fully taxable or subject to the
alternative minimum tax. As a fundamental policy, at least 80% of the Fund's
income will, under normal circumstances, be exempt from federal income tax
including the federal alternative minimum tax. Subject to such limitation, the
Fund may invest in any taxable investment, including repurchase agreements,
appropriate for investment by Cash Reserve Fund.
Municipal obligations, which are issued by states, cities, municipalities or
municipal agencies, will include variable rate demand obligations (VRDOs), tax
anticipation notes (TANs), revenue anticipation notes (RANs), bond anticipation
notes (BANs), construction loan notes, and tax-exempt commercial paper. The Fund
may also invest in municipal bonds within the maturity limitations discussed
above and may enter into commitments to purchase these securities on a delayed
delivery basis.
4
<PAGE>
QUALITY. Pursuant to Rule 2a-7 and policies and procedures adopted by the
Company's Board of Directors, the Fund may purchase securities determined by the
Adviser to present minimal credit risks. Securities must be rated in accordance
with applicable rules in the highest rating category for short-term securities
by at least one NRSRO and, if rated by more than one NRSRO, rated in one of the
two highest categories for short-term securities by another NRSRO, or, if
unrated, judged to be equivalent to the highest short-term rating category by
the Adviser pursuant to procedures adopted by the Company's Board of Directors.
The Fund will not invest more than 10% of its net assets in illiquid
securities. For purposes of this limitation, "illiquid securities" shall be
deemed to include municipal securities not rated at the time of purchase by the
requisite NRSROs, or not guaranteed or supported by a letter of credit issued
by, or subject to a remarketing agreement with, a responsible party, and not
otherwise determined by the Adviser to be readily marketable.
The Fund may from time to time have more than 25% of its assets invested in
municipal securities of issuers located in one or more of the following states:
Arizona, California, Maryland, New Jersey, New York and Pennsylvania, and will
invest more than 25% of its assets in municipal securities of issuers located in
Virginia.
The Fund may also purchase shares of other money market funds. Should the
Fund elect to do so, it will incur additional expenses charged by that money
market fund, such as management fees.
Yields on municipal obligations depend on a variety of factors, including
the general conditions of the money markets and of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Municipal obligations with longer
maturities tend to produce higher yields and generally are subject to
potentially greater price fluctuations than obligations with shorter maturities.
BOND FUNDS--CORPORATE BOND FUNDS
LIMITED TERM BOND FUND
Limited Term Bond Fund seeks to provide a high level of current income by
investing in investment-grade fixed-income debt obligations. The Fund is managed
to maintain a dollar-weighted average portfolio maturity of between one and five
years.
INTERMEDIATE BOND FUND
Intermediate Bond Fund seeks to provide a high level of current income by
investing in investment-grade fixed-income debt obligations. The Fund is managed
to maintain a dollar-weighted average portfolio maturity of between five and ten
years.
INVESTMENT POLICIES--CORPORATE BOND FUNDS
Each corporate bond fund will seek to obtain a high level of current income
by investing exclusively in investment-grade debt obligations of domestic and
foreign issuers as follows:
- corporate obligations which are rated at least Baa or its equivalent by an
NRSRO;
- obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and
- commercial paper which is rated Prime-1 or its equivalent by an NRSRO.
Each corporate bond fund also may purchase unrated securities that are
deemed by the Adviser to be of equivalent quality to investment-grade debt
obligations pursuant to procedures established by the Company's Board of
Directors. Credit ratings are considered at the time of purchase; the sale of
securities is not required in the event of a subsequent rating downgrade. In the
event that a security owned by a Fund
5
<PAGE>
is downgraded below the stated ratings categories, the Adviser will review the
security and take appropriate action.
Fixed-income securities held by each corporate bond fund may include (but
are not limited to), in any proportion, bonds, notes, mortgage-related and
asset-backed securities, U.S. Government and government agency obligations, zero
coupon securities, indexed securities, convertible notes and bonds, convertible
preferred securities, foreign securities (see "Foreign Investments" in
"Investment Practices" in this Statement of Additional Information) and
short-term obligations such as certificates of deposit, repurchase agreements,
bankers' acceptances, and commercial paper. The Funds may also enter into
reverse repurchase agreements. These funds also may purchase shares of money
market mutual funds. Should a Fund elect to purchase shares of money market
funds, it will incur additional expenses charged by that money market fund, such
as management fees.
Limited Term Bond Fund may hold individual securities with remaining
maturities of more than five years, as long as the Fund's dollar-weighted
average portfolio maturity is no more than five years. Intermediate Bond Fund
may hold individual securities with remaining maturities of more than ten years,
as long as its dollar-weighted average portfolio maturity is no more than ten
years. For the purpose of determining the dollar-weighted average portfolio
maturity of each corporate bond fund, the maturities of mortgage-backed
securities, collateralized mortgage obligations and asset-backed securities are
determined on a "weighted average life" basis. (The weighted average life is the
average time in which principal is repaid; for a mortgage security, this average
time is calculated by estimating the expected principal payments for the life of
the mortgage.) The weighted average life of such securities is likely to be
substantially shorter than their stated final maturity as a result of scheduled
and unscheduled principal prepayments. The maturities of most of the other
securities held by the corporate bond funds will be determined on a "stated
final maturity" basis. One exception would be "extendible" debt instruments,
which can be retired at the option of the corporate bond funds at various dates
prior to maturity, and which may be treated as maturing on the next optional
retirement date when calculating average portfolio maturity.
The corporate bond funds also may purchase obligations of U.S. banks
(including certificates of deposit and bankers' acceptances) which have capital,
surplus, and undivided profits (as of the date of their most recently published
annual financial statements) of $100 million or more.
In making investment decisions for the corporate bond funds, the Adviser
will consider many factors other than current yield, including preservation of
capital, the potential for realizing capital appreciation, maturity and yield to
maturity. The Adviser will monitor each corporate bond fund's investments in
particular securities or in types of debt securities in response to its
appraisal of changing economic conditions and trends. The Adviser may sell
securities in anticipation of a market decline or purchase securities in
anticipation of a market rise. Each corporate bond fund may invest a portion of
its assets in securities issued by foreign companies and foreign governments,
which may be less liquid or more volatile than domestic investments. The
corporate bond funds will only invest in U.S. dollar-denominated securities.
GOVERNMENT BOND FUNDS
GOVERNMENT BOND FUND
Government Bond Fund seeks to provide a high level of current income in a
manner consistent with preserving principal by investing primarily in
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (U.S. Government Securities). In seeking current income, the
Fund also may consider the potential for capital gain.
Under normal conditions, at least 65% of the Fund's total assets will be
invested in U.S. Government bonds or other debt instruments, including
repurchase agreements secured by U.S. Government Securities.
6
<PAGE>
Any remaining assets may be invested in fixed-income securities that are
eligible for purchase by the corporate bond funds. The Fund may purchase
securities on a delayed delivery basis. There are no limits on the
dollar-weighted average portfolio maturity of the Fund, and, consistent with its
investment objective of obtaining current income while preserving capital, the
Fund may acquire individual securities without regard to their remaining
maturities.
The Fund invests in various debt obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, including U.S. Treasury
Bonds, Notes and Bills, Government National Mortgage Association mortgage-backed
pass-through certificates (Ginnie Maes) and mortgage-backed securities issued by
the Federal National Mortgage Association (Fannie Maes) or the Federal Home Loan
Mortgage Corporation (Freddie Macs). The Fund is not restricted as to the
percentage of its assets that may be invested in any one type of U.S. Government
Security. The U.S. Government Securities in which the Fund invests may or may
not be fully backed by the U.S. Government. The Fund may enter into repurchase
agreements involving the U.S. Government Securities and any other securities in
which it may invest, and also may enter into reverse repurchase agreements. The
Fund considers government securities to include U.S. Government Securities
subject to repurchase agreements. The Fund may, for temporary defensive
purposes, invest without limit in U.S. Government Securities having a maturing
of 365 days or less.
MUNICIPAL BOND FUNDS
MARYLAND MUNICIPAL BOND FUND
Maryland Municipal Bond 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. 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.
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
Virginia Intermediate Municipal Bond Fund seeks to provide high current
income exempt from federal and Virginia income tax in a manner consistent with
the preservation of capital by investing in municipal bonds of investment-grade
quality. The Fund is managed to maintain a dollar-weighted average portfolio
maturity of between five and ten years. The Fund may hold individual securities
with remaining maturities of more than ten years, as long as the Fund's
dollar-weighted average maturity is no more than ten years. Stability and growth
of principal also will be considered when choosing securities.
VIRGINIA MUNICIPAL BOND FUND
Virginia Municipal Bond Fund seeks to provide high current income exempt
from federal and Virginia income tax in a manner consistent with the
preservation of capital by investing in municipal bonds of investment-grade
quality. 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.
INVESTMENT POLICIES--MUNICIPAL BOND FUNDS
Each municipal bond 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 its equivalent or
higher by an NRSRO, an unrated securities that are deemed by the Adviser to be
of comparable quality to each municipal bond fund's ratings requirements.
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 the 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
7
<PAGE>
may be supported by letters of credit furnished by domestic or foreign banks.
The Adviser monitors the financial condition of parties (including insurance
companies, banks, and corporations) upon whose creditworthiness is relied in
determining the credit quality of securities eligible for purchase by each
municipal bond fund. Each municipal bond fund may invest more than 25% of its
assets in industrial development bonds.
Generally, the municipal bond funds' 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 municipal bond funds may buy or sell securities
on a when-issued or delayed-delivery basis (including refunding contracts) and
may acquire standby commitments. See "Investment Practices" in this Statement of
Additional Information for a complete description of these types of securities.
Each municipal bond fund may deviate from its investment objective for
temporary defensive purposes. During periods when, in the Adviser's opinion, a
temporary defensive posture in the market is appropriate, each municipal bond
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 municipal bond
funds' defensive investments may include short-term municipal obligations, money
market instruments and shares of money market mutual funds. Should a 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 municipal bond funds may each temporarily invest so that less
that 80% of their income distributions are federally and/or state tax-free.
Federally taxable obligations in which a Fund may invest 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 or deposit, and
repurchase agreements.
Each municipal bond 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,
each of the municipal bond funds may present greater risks than a diversified
fund.
As a fundamental policy, at least 80% of each municipal bond 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. Each
municipal bond fund reserves the right to invest up to 100% of its assets in AMT
bonds, although none of the municipal bond funds have a current intention of
investing in such securities.
As a non-fundamental policy, at least 65% of each municipal bond fund's
assets will be invested in bonds that will, under normal circumstances, produce
income that is exempt from Virginia or Maryland income taxes, as the case may
be.
Investors should be aware of certain factors that might affect the financial
condition of issuers of Maryland and Virginia municipal securities. See
"Investment Practices."
EQUITY FUNDS
VALUE FUND
Value fund seeks to provide long-term capital appreciation and, as a
secondary objective, current income, by investing primarily in income producing
equity securities of companies with large market capitalizations.
The Fund's investments will be broadly diversified among major economic
sectors and among those securities with above-average total return potential. A
number of valuation criteria are considered in the
8
<PAGE>
equity selection process, the principal one being the issue's price to earnings
(P/E) ratio in relation to other stocks in the same industry. Stocks with the
lowest P/E ratios, along with strong financial quality and above-average
earnings momentum, are selected to secure the best relative values in each
economic sector. The Adviser believes that this approach will produce a
portfolio with less volatility and greater dividend yield than the market as a
whole. The Fund will invest primarily in the income producing equity securities
of companies with market capitalizations of at least $1 billion.
CAPITAL APPRECIATION FUND
Capital Appreciation Fund seeks to provide long-term capital appreciation by
investing primarily in the equity securities of companies with medium to large
market capitalizations.
The Fund may invest a portion of its assets in foreign securities,
securities of small capitalization companies, and in securities having common
stock characteristics, such as rights and warrants. The Adviser considers many
factors when evaluating the overall quality of a security for the Fund,
including, but not limited to, a company's current financial strength, earnings
momentum, and relative value. The Fund will invest primarily in the equity
securities of companies with market capitalization of at least $250 million.
INVESTMENT POLICIES--VALUE FUND AND CAPITAL APPRECIATION FUND
Value Fund and Capital Appreciation Fund each will invest primarily in
domestic and foreign common stock and in securities convertible into common
stock, such as convertible bonds and convertible preferred stock rated
investment-grade or better. The Adviser will select stocks for these Funds from
a list of companies traded in the U.S. securities markets, including sponsored
American Depositary Receipts (ADRs) of qualifying foreign companies. (See
"Foreign Investments" in "Investment Practices" in this Statement of Additional
Information.) A qualitative screening process is employed to exclude companies
with poor earnings results or highly leveraged balance sheets in an effort to
construct a portfolio with low risk characteristics relative to the major stock
market indices, although it is not the intention of either Fund to match the
risk or performance characteristics of any index. Each Fund may to the extent
consistent with its investment objective, invest in any debt security in which
the corporate bond funds may invest. (See "Investment Policies--Corporate Bond
Funds.") Each of the Value Fund and Capital Appreciation Fund may also invest up
to 10% and 5%, respectively, of its assets in U.S. Treasury obligations.
Although the Value Fund and Capital Appreciation Fund intend to be fully
invested at all times in the securities mentioned above, under normal
circumstances, each Fund may make substantial temporary investments in
high-quality, short-term debt securities and money market instruments, including
repurchase agreements, and in shares of other open-end management investment
companies which invest primarily in money market instruments, when the Adviser
believes market conditions warrant a defensive position. Should a Fund elect to
purchase shares of money market funds, it will incur additional expenses charged
by that money market fund, such as management fees.
SPECIAL EQUITY FUND
Special Equity Fund seeks to provide long-term capital appreciation by
investing primarily in the equity securities of companies with small to medium
market capitalizations.
Small to medium capitalization companies with rapid growth rates may have
higher P/E ratios than other companies. The market prices of securities with
higher P/E ratios than other companies. The market prices of securities with
higher P/E ratios tend to drop more suddenly in response to negative news than
securities with low P/E's. That is especially true for smaller, less well-known
companies that have a narrow product line or whose securities are thinly traded.
These companies typically tend to offer the potential for accelerated
earnings or revenue growth because of new products or technologies, new channels
of distribution, revitalized management or industry
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conditions, or similar new opportunities. Smaller companies often pay no
dividends, and current income is not a goal of the Fund. Representative
industries may include, but are not limited to, technology, health care and
biotechnology, environmental services, communications, and energy and
alternative energy.
The Fund will invest primarily in domestic and foreign common stock and
in securities convertible into common stock, such as convertible bonds and
convertible preferred stock. The Fund generally will invest primarily in the
securities of companies with market capitalizations between $250 million $2
billion. It also may invest a portion of its assets in sponsored ADRs of
qualifying foreign companies (see "Foreign Investments" in "Investment
Practices" in this Statement of Additional Information), and in securities
having common stock characteristics, such as rights and warrants. As a
non-fundamental investment policy, each Fund may to the extent consistent
with its investment objective, invest in any debt security in which the
corporate bond funds may invest. The Fund may also invest up to 5% of its
assets in obligations of the U.S. Treasury.
Although the Special Equity Fund intends, under normal circumstances, to be
fully invested in equity securities, the Fund may make substantial temporary
investments in high-quality, short-term debt securities and money market
instruments, including repurchase agreements, and in the securities of other
open-end management investment companies investing primarily in money market
instruments, when the Adviser believes market conditions warrant a defensive
position. Should the Fund elect to purchase shares of a money market fund, it
will incur additional expenses charged by that money market fund, such as
management fees.
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. 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
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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% 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. purchase Restricted Securities (as defined in Rule 144 under the Securities
Act of 1933 (the Securities Act));
14. make investments for the purpose of exercising control over any issuer or
other person; and
15. 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;
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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;
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;
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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 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 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.
vii. Each Fund does not currently intend to purchase any security if, as a
result, more than 15% 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.
viii. Each Fund does not currently intend to purchase securities of other
investment companies except pursuant to the provisions of the 1940 Act.
ix. Each Fund does not currently intend to sell securities short.
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CORPORATE BOND FUNDS, GOVERNMENT BOND FUND, AND EQUITY FUNDS ONLY
x. 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.
xi. 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.
xii. 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
xiii. 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.
xiv. 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.
xv. 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.
LIFE VISION MAXIMUM GROWTH PORTFOLIO, LIFE VISION GROWTH AND INCOME PORTFOLIO
AND LIFE VISION BALANCED PORTFOLIO:
xvi. Each of these Portfolios will operate as a fund of funds in reliance upon
Section 12(d)(1)(G) of the Investment Company Act of 1940. Each Portfolio
will not, to the extent it may acquire shares of registered open-end
investment companies or registered unit investment trusts, acquire such
shares in excess of the limits of Section 12(d)(1) by virtue of reliance
upon either Section 12(d)(1)(F) or Section 12(d)(1)(G) of the 1940 Act.
INVESTMENT PRACTICES
The following briefly describes the securities in which the Funds may invest
and the transactions they may make. The Funds are not limited by this
discussion, however, and may purchase other types of securities and enter into
other types of transactions if they meet each Fund's respective quality,
maturity, and liquidity requirements.
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.
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AMERICAN DEPOSITARY RECEIPTS (ADRS). Value Fund and Capital Appreciation
Fund may invest in sponsored ADRs which are certificates evidencing ownership of
shares of a foreign-based corporation held in trust by a bank or similar
financial institution. Designed for use in U.S. securities markets, ADRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies. A sponsored ADR is an ADR established jointly by the
issuer of the security underlying the receipt and the bank or other financial
institution holding the receipt.
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.
BANKERS' ACCEPTANCES. The money market funds may purchase bankers'
acceptances, which are time drafts drawn on and accepted by a bank, the
customary means of effecting payment for merchandise sold in import-export
transactions and a source of financing used extensively in international trade.
BANK OBLIGATIONS. The performance of the money market funds may be affected
by conditions affecting the banking industry. Banks are subject to extensive
governmental regulations which may limit both the amounts and types of loans and
other financial commitments they can make and the interest rates and fees they
can charge. Bank profitability is largely dependent on the availability and cost
of capital funds, and has shown significant fluctuation recently as a result of
volatile interest rate levels. In addition, general economic conditions are
important to bank operations, with exposure to credit losses potentially having
an adverse effect.
CERTIFICATES OF DEPOSIT. Cash Reserve Fund and Tax Free Money Fund may
purchase certificates of deposit, which are debt instruments issued by a bank
that usually pays interest. Maturities range from a few weeks to several years.
Interest rates are set by competitive forces in the marketplace.
COLLATERALIZED MORTGAGE OBLIGATIONS. The corporate bond funds may purchase
collateralized mortgage obligations (CMOs), which are pay-through securities
collateralized by mortgages or mortgage-backed securities. CMOs are issued in
classes and have different maturities and often are retired in sequence. CMOs
may be issued by governmental or non-governmental entities such as banks and
other mortgage lenders. CMOs may be volatile investments. During periods of
declining interest rates, prepayment of mortgages underlying CMOs 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 prepayment risks, the realized yield or total return of a particular issue
may be reduced.
COMMERCIAL PAPER. The money market funds may purchase commercial paper,
which is comprised of short-term obligations issued by banks, broker-dealers,
corporations, or other entities for purposes such as financing their current
obligations. Currently only the Cash Reserve Fund intends to purchase commercial
paper and will limit its purchase of these instruments to those rated Prime-1 by
Moody's or A-1 by S&P.
COMMON STOCK. The equity funds may purchase common stock which is evidence
of ownership of a corporation. Owners typically are entitled to vote on the
selection of directors and other important matters
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as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock. For the most part, however, common stock has more potential
for appreciation. PREFERRED STOCK is a class of capital stock that pays
dividends at a specified rate and that has preference over common stock in the
payment of dividends and the liquidation of assets. Preferred stock does not
ordinarily carry voting rights.
CONVERTIBLE PREFERRED STOCK. The corporate bond funds and the equity funds
may purchase convertible preferred stock, which is preferred stock that may be
converted or exchanged by the holder into shares of the underlying common stock
at a stated exchange ratio. A convertible security may also be subject to
redemption by the issuer after a particular date and under certain circumstances
(including a specified price) established upon issue. If a convertible security
held by a Fund is called for redemption, the Fund could be required to tender it
for redemption, convert it to the underlying common stock, or sell it to a third
party.
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.
DEMAND FEATURE. A put that entitles the security holder to repayment of the
principal amount of the underlying security on no more than 30 days' notice at
any time or at specified intervals is a demand feature. With respect to the
money market funds, such intervals may not exceed 397 days. A STANDBY COMMITMENT
is a put that entitles the security holder to same-day settlement at amortized
cost plus accrued interest.
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 the Adviser'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
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<PAGE>
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 Fund's
holdings would be affected and the Board of Directors would reevaluate the
Fund's 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.
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 the Adviser 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 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.
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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.
European Depositary Receipts (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 European securities markets, EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies.
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.
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.
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 a 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 seven days in
length. The Adviser will determine and monitor the liquidity of portfolio
securities subject to the supervision of the Fund's Board of Directors.
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
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<PAGE>
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.
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.
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.
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 not 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 the Adviser
pursuant to procedures established by the Board of Directors.
RESOURCE RECOVERY BONDS. The Tax Free Money Fund and the municipal bond
funds 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 municipal bond funds may invest in refunding
contracts which require the issuer to sell and a 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 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
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<PAGE>
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 the Adviser. 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 the Adviser to be creditworthy pursuant to
procedures established by the Board of Directors. Furthermore, they will only be
made if, in the Adviser'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).
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.
STRIPPED GOVERNMENT SECURITIES. Stripped securities are created by
separating the income and principal components of a debt instrument and selling
them separately. Each 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 each money market and bond fund.
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<PAGE>
Each Fund except the U.S. Treasury 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, a
Fund must treat them as it would non-government securities pursuant to
regulatory guidelines applicable to all money market funds. Accordingly, a 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 the Adviser.
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 or 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.
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.
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, the Adviser 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.
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.
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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.
ZERO COUPON BONDS. The corporate bond funds may purchase zero coupon bonds.
Zero coupon bonds do not make regular interest payments; instead, they are sold
at a deep discount from their face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its daily
dividend, each Fund takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value.
PORTFOLIO TRANSACTIONS
The Adviser may place portfolio transactions with broker-dealers which
furnish, without cost, certain research, statistical, and quotation services of
value to the Adviser 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 the Adviser. 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 than 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
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more clients of the Adviser on the same day. In such event, such transactions
will be allocated among the clients in a manner believed by the Adviser 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 the
Adviser 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.
The Adviser 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, the Adviser,
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 or execution services from broker-dealers that execute
portfolio transactions for clients of such advisers. Consistent with this
practice, the Adviser receives research or execution services from many
broker-dealers with which it places a Fund's portfolio transactions which
assists the Adviser in making investment decisions. Such services may include,
but are not limited to: on-line access to financial information (such as prices
and earnings estimates); technical as well as fundamental analyses of securities
and financial markets; portfolio strategy information; software and hardware
that assists in the investment decision-making process; portfolio performance
measurement; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). Some of these services
are of value to the Adviser 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
the Adviser is not reduced because the Adviser and its affiliates receive such
services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
1934 Act), as amended, the Adviser may cause a Fund to pay a broker-dealer that
provides brokerage and research services to the Adviser 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 the Adviser
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 the Adviser's
overall responsibilities to the Fund or its other clients. In reaching this
determination, the Adviser 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
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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
November 30, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Value...................................................... $1,031,949 1,248,896 813,371
Capital Appreciation....................................... 123,250 257,052 89,544
Special Equity............................................. 604,919 358,778 231,715
</TABLE>
During fiscal year ended 1998, the Funds paid brokerage commissions in
the amount of $0 to SEI Investments Distribution Co., which represented 0% of
the Fund's aggregate brokerage commissions for such period. The dollar amount
of transactions effected through such broker represented 0% 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 Investments Distribution Co. a fee with respect to repurchase
transactions. For fiscal year ended 1998 these fees were as follows: U.S.
Treasury Money Fund, $259,542; Cash Reserve Fund, $148,975; Limited Term Bond
Fund, $2,913; Intermediate Bond Fund, $8,025; Government Bond Fund $2,621;
Value Fund, $5,815; Special Equity Fund, $764; and Capital Appreciation Fund,
$454. 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 the Adviser'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
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<PAGE>
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 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
25
<PAGE>
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 1998. 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.
26
<PAGE>
1998 TAX RATES AND TAX EQUIVALENT YIELDS
<TABLE>
<CAPTION>
COMBINED COMBINED
FEDERAL AND FEDERAL AND
Taxable Income* VIRGINIA MARYLAND VIRGINIA MARYLAND
FEDERAL TAX TAX TAX TAX TAX
SINGLE RETURN BRACKET** BRACKET*** BRACKET**** BRACKETS BRACKETS
JOINT RETURN ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$0 - $25,350 $0 - $42,350 15.00% 5.75% 7.92% 19.89% 21.73%
$25,350 - $61,400 $42,350 - $102,300 28.00% 5.75% 7.92% 32.14% 33.70%
$61,400 - $128,100 $102,300 - $155,950 31.00% 5.75% 7.92% 34.97% 36.46%
$128,100 - $278,450 $155,950 - $278,450 36.00% 5.75% 7.92% 39.68% 41.07%
$278,450 - above $278,450 - above 39.60% 5.75% 7.92% 43.07% 44.38%
</TABLE>
- ------------------------
* 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 4.95% 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 Talbot and Worcester Counties currently impose
income taxes equal to 40% and 20%, respectively, 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 1998 is:
<TABLE>
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
</TABLE>
Then your tax-equivalent yield is:
<TABLE>
<CAPTION>
YIELD
- -----------
<S> <C> <C> <C> <C> <C>
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% 9.72% 10.14% 10.94% 11.59%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
If your effective combined federal and Virginia state tax rate is:
<TABLE>
<S> <C> <C> <C> <C> <C>
19.89% 32.14% 34.97% 39.68% 43.07%
</TABLE>
27
<PAGE>
Then your tax-equivalent yield is:
<TABLE>
<CAPTION>
YIELD
- -----------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
If your effective combined federal and Maryland state tax rate is:
<TABLE>
<S> <C> <C> <C> <C> <C>
21.73% 33.70% 36.46% 41.07% 44.38%
</TABLE>
Then your tax-equivalent yield is:
<TABLE>
<CAPTION>
YIELD
- -----------
<S> <C> <C> <C> <C> <C>
2.00% 2.56% 3.02% 3.15% 3.39% 3.60%
3.00% 3.83% 4.53% 4.72% 5.09% 5.39%
4.00% 5.11% 6.03% 6.30% 6.79% 7.19%
5.00% 6.39% 7.54% 7.87% 8.98% 8.99%
6.00% 7.67% 9.05% 9.44% 10.18% 10.79%
7.00% 8.94% 10.56% 11.02% 11.88% 12.59%
8.00% 10.22% 12.07% 12.59% 13.58% 14.38%
</TABLE>
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 account. Excluding A Shares' sales charge from a total return
calculation produces a higher total return figure. Total
28
<PAGE>
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 the Trust Class for the seven-day period ended
November 30, 1998.
<TABLE>
<CAPTION>
EFFECTIVE TAX-EQUIVALENT
YIELD YIELD YIELD
------------- ------------- ---------------
FUND TRUST CLASS TRUST CLASS TRUST CLASS
- ------------------------------------------------------------------------ ------------- ------------- ---------------
<S> <C> <C> <C>
Cash Reserve Fund....................................................... 4.66% 4.77% N/A
U.S. Treasury Money Fund................................................ 4.23% 4.32% N/A
Tax Free Money Fund..................................................... 2.69% 2.73% 4.52%
</TABLE>
- ------------------------
* Based on an assumed federal income tax rate of 39.6%.
The following table shows yields and effective yields for the Trust Class of
the bond funds for the 30-day period ended November 30, 1998 and the average
annual total returns for each bond and equity fund for the period ended November
30, 1998.
<TABLE>
<CAPTION>
TAX-EQUIVALENT
FUND YIELD YIELD
- --------------------------------------------------------------------------------------------- -------- -------------
<S> <C> <C>
Limited Term Bond Fund....................................................................... 5.11% N/A
Intermediate Bond Fund....................................................................... 4.98% N/A
Government Bond Fund......................................................................... 5.54% N/A
Virginia Intermediate Municipal Bond Fund.................................................... 4.16% 6.89%
Virginia Municipal Bond Fund................................................................. 4.35% 7.20%
Maryland Bond Fund........................................................................... 4.09% 6.77%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS+
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEAR 5 YEAR LIFE OF FUND*
- ----------------------------------------------------------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Limited Term Bond Fund........................................... 6.39% 5.58% 5.25% 5.49%
Intermediate Bond Fund........................................... 7.52% 5.96% 5.82% 6.04%
Government Bond Fund............................................. 8.63% 5.87% N/A 8.05%
Maryland Municipal Bond Fund..................................... 7.03% N/A N/A 5.18%
Virginia Intermediate Municipal Bond Fund........................ 6.10% 5.22% 4.79% 5.30%
Virginia Municipal Bond Fund..................................... 7.19% 5.69% N/A 6.78%
Value Fund....................................................... 13.64% 20.47% 17.50% 16.70%
Capital Appreciation Fund........................................ 18.59% 22.52% 18.25% 14.91%
Special Equity Fund.............................................. (13.77)% 7.37% 7.20% 10.08%
</TABLE>
- ------------------------
* Life of Fund figures are from commencement of operations per class to the
period ended November 30, 1998.
A shareholder service plan (Plan) for the Trust Class shares was adopted by
the Board of Directors on July 20, 1998. The Plan became effective
September 30, 1998. Under the Plan, all Trust Class shares pay the Distributor a
negotiated fee at a rate of 0.25% annually of the average daily net assets.
The Trust 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.
29
<PAGE>
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-Registered Trademark- 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-Registered Trademark- 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 regularly-scheduled close of normal trading
on the NYSE, normally 4:00 p.m. Eastern time. The NAV of each equity and bond
fund is determined as of the regularly-scheduled close of normal trading on the
NYSE. The NYSE and Crestar Bank have designated the following holiday closings
for 1997, and the Adviser 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.
In addition to the minimum investment requirements set forth in the
prospectus, the Company's Articles of Incorporation provide that the Company's
Board of Directors may establish a "Minimum Amount," not to exceed One Hundred
Thousand Dollars ($100,000), for each of the Funds. If the NAV of the shares
held by a shareholder is less than the Minimum Amount, the Company may redeem
those shares upon providing thirty days written notice to the shareholder. The
Company's Board of Directors have set the Minimum Amount for each of the Funds
at $100,000. Therefore, if the NAV of the Shares held by a shareholder in any of
the Funds is less than One Hundred Thousand Dollars ($100,000), the Fund may
redeem those Shares upon providing thirty days written notice to the
shareholder.
30
<PAGE>
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 the Adviser'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, 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, Government Bond Fund, Maryland Municipal
Bond Fund, Virginia Intermediate Municipal Bond Fund, Virginia Municipal Bond
Fund, Value Fund, Capital Appreciation Fund and Special Equity Fund each
qualified for the fiscal year ended November 30, 1997, and each 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
31
<PAGE>
shareholder receiving them regardless of the length of time the shares on which
such distributions are paid may have been held. The sale or exchange of a Share
is a taxable event for the shareholder. Generally, gain or loss on the sale or
exchange of a Share will be capital gain or loss that will be long-term if the
Share has been held for more than twelve months, and otherwise will be
short-term capital gain or loss. For individuals, long-term capital gains are
currently taxed at a maximum rate of 20% and short-term capital gains are
currently taxed at ordinary income tax rates. However, if a shareholder realizes
a loss on the sale, exchange or redemption of a Share held for six months or
less and has previously received a capital gains distribution, with respect to
the Share (or any undistributed net capital gains of the Fund with respect to
such Share are included in determining the shareholder's long-term capital
gains), the shareholder must treat the loss as a long-term capital loss to the
extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
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 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 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 alternative minimum tax (AMT securities). To
the extent that these Funds invest in AMT securities, shareholders who are
subject to the alternative minimum tax will be required to report a portion of
that Fund's dividends as a "tax preference item" in determining their federal
taxes.
Every shareholder that is 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
32
<PAGE>
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 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
that 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. In the case of corporate
shareholders, a portion of the equity funds' distributions may qualify for the
dividends-received deduction. 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.
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 Maryland
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.
33
<PAGE>
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
certain 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 (AMT Bonds) is a preference item for
purposes of calculating the federal alternative minimum tax. Accordingly, if the
Maryland Municipal Bond Fund holds AMT Bonds of an issuer other than the State
of Maryland or one of its political subdivisions, agencies or authorities
(Non-Maryland AMT Bonds), the excess of 50% of that portion of exempt interest
dividends which is attributable to interest on Non-Maryland AMT Bonds over a
threshold amount is subject to Maryland income tax. 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.
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 income taxation to the extent that such distributions
are attributable to interest from or gain on the exchange of (i) obligations
of Virginia, its political subdivisions, or its instrumentalities, or (ii)
obligations of the United States and its territories that are exempt from
state taxation under Federal law. 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.
Interest on indebtedness incurred (or continued) by a shareholder of
Virginia Intermediate Municipal Bond Fund or Virginia Municipal Bond Fund to
purchase or carry shares of these Funds will not be deductible for Virginia
income tax purposes to the extent such interest expense relates to the portions
of distributions exempt from Virginia income taxation. 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.
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.
34
<PAGE>
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 certain tax rules required for
treatment as a regulated investment company. 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. 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 the Adviser is indicated by an asterisk (*).
TODD CIPPERMAN, Vice President and Assistant Secretary. Vice President and
Assistant Secretary of SEI Investments, the Administrator and the Distributor
since 1995. Associate, Dewey Ballantine (law firm), 1994-1995. Associate,
Winston & Strawn (law firm) 1991-1994.
* 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
830 East Main Street, 5th Floor, Richmond, Virginia 23219.
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). Her business address is 3800 Patterson Avenue, Richmond, Virginia
23221.
GLEN DOUGLAS POND, Director. Retired. Formerly the Director of the Virginia
Retirement System. His address is 1545 Winona Park Drive, West Point, Virginia
23181.
DAVID M. CARTER, Secretary, Partner, Hunton and Williams, Fund Counsel.
KEVIN P. ROBINS, Vice President and Assistant Secretary. Senior Vice
President and General Counsel of SEI Investments, the Administrator and the
Distributor since 1994. Assistant Secretary of SEI Investments since 1992.
Secretary of the Administrator since 1994. Vice President, General Counsel and
Assistant Secretary of the Administrator and the Distributor, 1992-1994.
Associate, Morgan, Lewis & Bockius LLP (law firm), 1988-1992.
35
<PAGE>
ROBERT DELLACROCE, Controller and Chief Financial Officer. Director, Funds
Administration and Accounting of SEI Investments since 1994. Senior Audit
Manager, Arthur Andersen LLP, 1986-1994.
The Directors and officers of the Trust own less than 1% of the outstanding
shares of any Fund.
As of November 30, 1998, the Directors and officers of the Company received
the following compensation:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION FROM PENSION OR
REGISTRANT FOR RETIREMENT BENEFITS ESTIMATED ANNUAL
FISCAL YEAR ENDED ACCRUED AS PART OF BENEFITS UPON
NAME OF PERSON, POSITION 1998 FUND EXPENSES RETIREMENT
- --------------------------------- ------------------ ------------------- ----------------
<S> <C> <C> <C>
Jesse F. Williams, III, Chairman,
President and Director......... $9,000 0 0
John Bruce James, Jr.,
Director....................... $9,000 0 0
Jean L. Oakey, Director.......... $9,000 0 0
Glen Douglas Pond, Director...... $9,000 0 0
<CAPTION>
TOTAL COMPENSATION FROM REGISTRANT
AND FUND COMPLEX PAID TO DIRECTORS
NAME OF PERSON, POSITION FOR FISCAL YEAR ENDED 1998
- --------------------------------- -------------------------------------
<S> <C>
Jesse F. Williams, III, Chairman,
President and Director......... $9,000
John Bruce James, Jr.,
Director....................... $9,000
Jean L. Oakey, Director.......... $9,000
Glen Douglas Pond, Director...... $9,000
</TABLE>
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) Crestar Asset Management Company (formerly 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.
36
<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, 1998, 1997 and 1996, the advisory
fees paid to the Adviser with respect to each money market fund were as follows:
<TABLE>
<CAPTION>
11/30/98 WAIVED 11/30/97 WAIVED 11/30/96 WAIVED
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash Reserve Fund..................................... $4,309,642 $0 $3,195,116 $0 $2,315,239 $0
U.S. Treasury Money Fund.............................. $2,412,519 $0 $2,009,506 $0 $1,576,183 $0
Tax Free Money Fund................................... $ 963,089 $0 $ 861,325 $0 $ 732,401 $0
</TABLE>
Fees paid to the Adviser with respect to the bond and equity funds were as
follows:
<TABLE>
<CAPTION>
11/30/98 WAIVED 11/30/97 WAIVED 11/30/96 WAIVED
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Limited Term Bond Fund.................... $ 407,441 $0 $ 383,856 $0 $ 442,489 $0
Intermediate Bond Fund.................... $1,884,648 $0 $1,720,984 $0 $ 834,629 $0
Government Bond Fund...................... $ 282,663 $47,111 $ 210,388 $29,208 $ 96,203 $16,038
MD Municipal Bond Fund.................... $ 104,506 $60,961 $ 50,300 $31,143 $ 18,497 $15,422
VA Intermediate Municipal Bond Fund....... $1,248,320 $0 $1,232,770 $0 $ 460,612 $0
VA Municipal Bond Fund.................... $ 166,644 $27,777 $ 107,969 $17,385 $ 72,398 $12,074
Value Fund................................ $4,748,698 $0 $4,336,987 $0 $2,617,223 $0
Capital Appreciation Fund................. $ 948,330 $0 $ 613,737 $0 $ 211,351 $0
Special Equity Fund....................... $ 889,637 $0 $ 763,167 $0 $ 506,324 $0
</TABLE>
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.
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
37
<PAGE>
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 Investments Mutual Funds Services (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 Delaware business trust, has its principal business
offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation
(SIMC), a wholly-owned subsidiary of SEI Investments Company (SEI
Investments), is the owner of all beneficial interest in the Administrator.
SEI Investments and its subsidiaries and affiliates, including the
Administrator, 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
and its affiliates also serve as administrator or sub-administrator to the
following other mutual funds: The Achievement Funds Trust, The Advisors'
Inner Circle Fund, Alpha Select Funds, The Arbor Fund, ARK Funds, Armada
Funds, Bishop Street Funds, Boston 1784 Funds-Registered Trademark-, CUFUND,
The Expedition Funds, First American Funds, Inc., First American Investment
Funds, Inc., First American Strategy Funds, Inc., HighMark Funds, Huntington
Funds, The Nevis Fund, Inc., Oak Associates Funds, The PBHG Funds, Inc., PBHG
Advisor Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, SEI
Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust,
STI Classic Funds, STI Classic Variable Trust and TIP 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.
38
<PAGE>
For the fiscal years ended November 30, 1996, 1997 and 1998, the
Administrator was compensated for its services under the Administration
Agreement as follows:
<TABLE>
<CAPTION>
FEES PAID FEES WAIVED
---------------------------------- ----------------------------------
FUND 1998 1997 1996 1998 1997 1996
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash Reserve Fund....................... $1,779,809 $1,322,853 $828,715 $0 $0 $0
U.S. Treasury Money Fund................ $926,797 $761,282 $592,194 $0 $134 $0
Tax Free Money Fund..................... $361,160 $323,063 $275,026 $0 $65 $0
Limited Term Bond Fund.................. $122,233 $116,303 $132,747 $0 $1,146 $0
Intermediate Bond Fund.................. $471,162 $430,246 $208,658 $0 $0 $0
Government Bond Fund.................... $70,666 $54,362 $24,058 $56,497 $54,362 $24,058
MD Municipal Bond Fund.................. $26,127 $10,561 $4,627 $0 $0 $4,627
VA Intermediate Municipal Bond Fund..... $374,498 $370,217 $138,184 $0 $384 $0
VA Municipal Bond Fund.................. $41,661 $32,181 $18,111 $36,010 $27,381 $18,111
Value Fund.............................. $949,744 $867,402 $523,446 $0 $0 $0
Capital Appreciation Fund............... $189,667 $122,748 $42,270 $0 $0 $0
Special Equity Fund..................... $177,928 $152,634 $101,178 $0 $0 $0
</TABLE>
THE DISTRIBUTOR
SEI Investments Distribution Co. (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.
39
<PAGE>
The following represents expenses made pursuant to the Rule for the fiscal
year ended November 30, 1998.
<TABLE>
<CAPTION>
12b-1 EXPENSES
--------------------------------------------------------------------
THIRD PARTY PROMOTION AND MARKETING
FUND PAYMENTS ADVERTISING MANAGEMENT DISTRIBUTION MAINTENANCE
- ------------------------------------------- ----------- -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash Reserve Fund.......................... $ 384 -- -- -- --
Tax Free Money Fund........................ $ 0 -- -- -- --
Intermediate Bond Fund..................... $ 0 -- -- -- --
Government Bond Fund....................... $ 14,677 -- -- -- --
MD Municipal Bond Fund..................... $ 12,742 -- -- -- --
VA Intermediate Municipal Bond Fund........ $ 0 -- -- -- --
VA Municipal Bond Fund..................... $ 19,824 -- -- -- --
Value Fund................................. $ 184,217 -- -- -- --
Capital Appreciation Fund.................. $ 23,907 -- -- -- --
Special Equity Fund........................ $ 27,494 -- -- -- --
</TABLE>
In addition, the Adviser 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 the
Adviser. The Plans also provide that the Adviser may engage banks as Qualified
Recipients for performing certain shareholder support services. The Adviser 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
ge
nerally provided by a bank as may seem appropriate. The Adviser 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.
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
40
<PAGE>
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 .04% of each Fund's
average daily net assets.
AUDITOR
Deloitte & Touche LLP, Two World Financial Center, New York, NY 10281,
independent auditors, has been selected as auditors for the Company. Deloitte &
Touche LLP has acted as independent auditors of the Company since its inception.
LEGAL COUNSEL
Hunton & Williams, Riverfront Plaza, 951 E. Byrd Street, East Tower,
Richmond, VA 23219-4074 serves as legal counsel for the Company.
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. As of
March 1, 1999, the following persons were the only persons who were record
owners (or to the knowledge of the Company, beneficial owners) of 5% and 25% or
more of the Funds' Trust Class shares.
41
<PAGE>
<TABLE>
<CAPTION>
Fund Name Shareholder %
- --------- ----------- -
<S> <C> <C>
Cash Reserve Fund Hamac & Co. 87.63%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23261
Crestar Bank - AMA 6.74%
919 East Main Street
Richmond, Va. 23219
Attn: Nian Cauffman
U.S. Treasury Money Hamac & Co. 98.91%
Fund Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23261
Tax Free Money Fund Hamac & Co. 92.86%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23261
Crestar Bank - AMA 6.77%
919 East Main Street
Richmond, Va. 23219
Attn: Nian Cauffman
Limited Term Bond Fund Hamac & Co. 63.94%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - Div Re 17.67%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - 401K 18.39%
Expediter
C/O Crestar Bank
Attn: Barbara Holloway
Attn: Demetrius Murray
PO Box 26665
Richmond, Va. 23219
Intermediate Bond Fund Hamac & Co. 90.22%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - Div Re 9.18%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Government Bond Fund Hamac & Co. 63.93%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - Div Re 27.13%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Virginia Intermediate Hamac & Co. 99.28%
Municipal Bond Fund Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Virginia Municipal Hamac & Co. 95.92%
Bond Attn: Barbara Holloway
Fund PO Box 26665
Richmond, Va. 23219
MD Municipal Bond Fund Hamac & Co. 95.35%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Value Fund Hamac & Co. 69.04%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - Div Re 13.84%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - 401K 17.12%
Expediter
C/O Crestar Bank
Attn: Barbara Holloway
Attn: Demetrius Murray
PO Box 26665
Richmond, Va. 23219
Capital Appreciation Hamac & Co. 61.03%
Fund Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - Div Re 26.37%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - 401K 12.60%
Expediter
C/O Crestar Bank
Attn: Barbara Holloway
Attn: Demetrius Murray
PO Box 26665
Richmond, Va. 23219
Fund Name Shareholder %
Special Equity Fund Hamac & Co. 38.11%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - Div Re 35.96%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - 401K 25.93%
Expediter
C/O Crestar Bank
Attn: Barbara Holloway
Attn: Demetrius Murray
PO Box 26665
Richmond, Va. 23219
</TABLE>
42
<PAGE>
FINANCIAL STATEMENTS
The financial statements and financial highlights for the fiscal year ended
November 30, 1998 for Cash Reserve Fund, U.S. Treasury Money Fund, Tax Free
Money Fund, Limited Term Bond Fund, Intermediate Bond Fund, Government Bond
Fund, Maryland Municipal Bond Fund, Virginia Intermediate 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.
43
<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.
44
<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.
45
<PAGE>
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.
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.
46
<PAGE>
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.
47
<PAGE>
CRESTFUNDS-Registered Trademark-
Trust Class
(Including Life Vision Portfolios)
PROSPECTUS
MARCH 30, 1999
CASH RESERVE FUND
U.S. TREASURY MONEY FUND
TAX FREE MONEY FUND
LIMITED TERM BOND FUND
INTERMEDIATE BOND FUND
GOVERNMENT BOND FUND
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
VIRGINIA MUNICIPAL BOND FUND
MARYLAND MUNICIPAL BOND FUND
VALUE FUND
CAPITAL APPRECIATION FUND
SPECIAL EQUITY FUND
MAXIMUM GROWTH PORTFOLIO
GROWTH AND INCOME PORTFOLIO
BALANCED PORTFOLIO
INVESTMENT ADVISER: CRESTAR ASSET MANAGEMENT COMPANY
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY FUND SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
IT IS A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
<PAGE>
HOW TO READ THIS PROSPECTUS
CrestFunds is a mutual fund family that offers shares in separate investment
portfolios (Funds). The Funds have individual investment goals and strategies.
This prospectus gives you important information about the Trust Class of the
Funds that you should know before investing. Please read this prospectus and
keep it for future reference.
This prospectus has been arranged into different sections so that you can easily
review this important information. On the next page, there is some general
information you should know about the Funds.
For more detailed information about each Fund, please see:
<TABLE>
<CAPTION>
PAGE
<S> <C>
CASH RESERVE FUND 4
U.S. TREASURY MONEY FUND 7
TAX FREE MONEY FUND 10
LIMITED TERM BOND FUND 13
INTERMEDIATE BOND FUND 16
GOVERNMENT BOND FUND 19
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND 22
VIRGINIA MUNICIPAL BOND FUND 26
MARYLAND MUNICIPAL BOND FUND 29
VALUE FUND 32
CAPITAL APPRECIATION FUND 35
SPECIAL EQUITY FUND 38
MORE INFORMATION ABOUT RISK 41
FUND INVESTMENTS 45
THE INVESTMENT ADVISER AND INVESTMENT TEAM 45
PURCHASING, SELLING AND EXCHANGING FUND SHARES 46
DIVIDENDS, DISTRIBUTIONS AND TAXES 50
DISTRIBUTION OF FUND SHARES 51
FINANCIAL HIGHLIGHTS 52
MAXIMUM GROWTH PORTFOLIO 4-LV
GROWTH AND INCOME PORTFOLIO 8-LV
BALANCED PORTFOLIO 12-LV
MORE INFORMATION ABOUT RISK OF THE UNDERLYING 17-LV
CRESTFUNDS
PORTFOLIO INVESTMENTS 21-LV
THE INVESTMENT ADVISER AND INVESTMENT TEAM 21-LV
PURCHASING, SELLING AND EXCHANGING PORTFOLIO SHARES 23-LV
DIVIDENDS AND DISTRIBUTIONS 25-LV
FINANCIAL HIGHLIGHTS 26-LV
HOW TO OBTAIN MORE INFORMATION ABOUT
CRESTFUNDS Inside Back Cover
</TABLE>
<PAGE>
CRESTFUNDS-Registered Trademark-
Trust Class
PROSPECTUS
MARCH 30, 1999
CASH RESERVE FUND
U.S. TREASURY MONEY FUND
TAX FREE MONEY FUND
LIMITED TERM BOND FUND
INTERMEDIATE BOND FUND
GOVERNMENT BOND FUND
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
VIRGINIA MUNICIPAL BOND FUND
MARYLAND MUNICIPAL BOND FUND
VALUE FUND
CAPITAL APPRECIATION FUND
SPECIAL EQUITY FUND
INVESTMENT ADVISER: CRESTAR ASSET MANAGEMENT COMPANY
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY FUND SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
IT IS A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
Page 1 of 55
<PAGE>
HOW TO READ THIS PROSPECTUS
CrestFunds is a mutual fund family that offers shares in separate investment
portfolios (Funds). The Funds have individual investment goals and
strategies. This prospectus gives you important information about the Trust
Class of the Funds that you should know before investing. Please read this
prospectus and keep it for future reference.
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN
EASILY REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME
GENERAL INFORMATION YOU SHOULD KNOW ABOUT THE FUNDS.
FOR MORE DETAILED INFORMATION ABOUT EACH FUND, PLEASE SEE:
<TABLE>
PAGE
<S> <C>
CASH RESERVE FUND 4
U.S. TREASURY MONEY FUND 7
TAX FREE MONEY FUND 10
LIMITED TERM BOND FUND 13
INTERMEDIATE BOND FUND 16
GOVERNMENT BOND FUND 19
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND 22
VIRGINIA MUNICIPAL BOND FUND 26
MARYLAND MUNICIPAL BOND FUND 29
VALUE FUND 32
CAPITAL APPRECIATION FUND 35
SPECIAL EQUITY FUND 38
MORE INFORMATION ABOUT RISK 41
FUND INVESTMENTS 45
THE INVESTMENT ADVISER AND INVESTMENT TEAM 45
PURCHASING, SELLING AND EXCHANGING FUND SHARES 46
DIVIDENDS, DISTRIBUTIONS AND TAXES 50
DISTRIBUTION OF FUND SHARES 51
FINANCIAL HIGHLIGHTS 52
HOW TO OBTAIN MORE INFORMATION ABOUT
CRESTFUNDS Inside Back Cover
</TABLE>
Page 2 of 55
<PAGE>
RISK RETURN SUMMARY
INTRODUCTION
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
Each Fund has its own investment goal and strategies for reaching that goal.
Crestar Asset Management Company (the Adviser) invests Fund assets in a way
that the Adviser believes will help the Fund achieve its goal. Still,
investing in each Fund involves risk and there is no guarantee that a Fund
will achieve its goal. The Adviser's judgments about the markets, the
economy, or companies may not anticipate actual market movements, economic
conditions or company performance, and these judgments may affect the return
on your investment. In fact, no matter how good a job the Adviser does, you
could lose money on your investment in a Fund, just as you could with other
investments. A Fund share is not a bank deposit and it is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any government
agency.
The value of your investment in a Fund (other than a money market fund) is
based on the market value of the securities the Fund holds. These prices
change daily due to economic and other events that affect particular
companies and other issuers. These price movements, sometimes called
volatility, may be greater or lesser depending on the types of securities a
Fund owns and the markets in which they trade. The effect on a Fund of a
change in the value of a single security will depend on how widely the Fund
diversifies its holdings.
THE CASH RESERVE FUND, U.S. TREASURY MONEY FUND AND TAX FREE MONEY FUND TRY
TO MAINTAIN A CONSTANT PRICE PER SHARE OF $1.00, BUT THERE IS NO GUARANTEE
THAT A FUND WILL ACHIEVE THIS GOAL.
Page 3 of 55
<PAGE>
CASH RESERVE FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income, while maintaining
a share price of $1.00
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in a broad range of short-term,
high quality U.S. dollar denominated debt
securities
Investor Profile Conservative, income-oriented investors with
short-to medium-term time horizons who seek
current income, preservation of capital and
liquidity
</TABLE>
INVESTMENT STRATEGY OF THE CASH RESERVE FUND
The Fund invests primarily in U.S. dollar denominated money market
instruments, such as U.S. Government securities; short-term debt obligations
of high quality corporate issuers including commercial paper, notes and
bonds; high quality debt obligations of foreign issuers; repurchase
agreements; and obligations of institutions such as banks and insurance
companies including certificates of deposit, bankers' acceptances and time
deposits. The Fund's portfolio is comprised only of short-term, high quality
debt securities. High quality securities are securities rated in the top two
ratings categories by a nationally recognized statistical rating
organization. The Fund will maintain an average maturity of 90 days or less,
and will acquire only securities that have a remaining maturity of 397 days
or less. The Fund's investment approach, with its emphasis on high quality,
short-term money market instruments, is expected to produce current income
with low risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE CASH RESERVE FUND
Although a money market fund seeks to keep a constant price per share of
$1.00, you may lose money by investing in a money market fund.
The Fund can be expected to produce lower income levels than fixed income funds
that invest in longer-term securities.
Page 4 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1989 9.22%
1990 8.08%
1991 5.91%
1992 3.34%
1993 2.75%
1994 3.64%
1995 5.49%
1996 4.96%
1997 5.18%
1998 5.08%
BEST QUARTER WORST QUARTER
2.35% 0.67%
(6/30/89) (6/30/93)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S RETURNS FOR THE PERIODS ENDING DECEMBER 31,
1998 TO THOSE OF THE IBC/FINANCIAL DATA FIRST TIER AVERAGE.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Reserve Fund 5.08% 4.87% 5.35% 5.64%*
IBC/Financial Data First Tier Average 4.96% 4.79% N/A N/A**
</TABLE>
*Since December 8, 1986
**Since June 1, 1991
<TABLE>
<CAPTION>
TRUST CLASS SHARES 7 DAY YIELD
- ------------------------------------------------------
<S> <C>
Cash Reserve Fund 4.55%
IBC/Financial Data First Tier Average 4.52%
</TABLE>
WHAT IS AN AVERAGE?
An average measures the share prices of a specific group of mutual funds with
a particular investment objective. You cannot invest directly in an average.
The IBC/Financial Data First Tier Average is a composite of mutual funds
with investment goals similar to the Fund's goals.
Page 5 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN
THE FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------
<S> <C>
Management Fees 0.36%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.27%
-----
Total Annual Fund Operating Expenses 0.78%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.36%, 0.00% and 0.63%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and that
you sell your shares at the end of the period. The Example also assumes that
each year your investment has a 5% return and Fund expenses remain the same.
Although your actual costs and returns might be different, your approximate
costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $80 $249 $433 $966
</TABLE>
Page 6 of 55
<PAGE>
U.S. TREASURY MONEY FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income while maintaining a share
price of $1.00
Investment Focus Money market instruments issued and
guaranteed by the U.S. Treasury
Share Price Volatility Very low
Principal Investment Strategy Investing in U.S. Treasury obligations and
repurchase agreements
Investor Profile Conservative, income-oriented investors with
short-to medium-term time horizons who seek
current income, preservation of capital and
liquidity
</TABLE>
INVESTMENT STRATEGY OF THE U.S. TREASURY MONEY FUND
The Fund invests solely in U.S. Treasury obligations and repurchase
agreements that are collateralized by obligations issued or guaranteed by the
U.S. Treasury. The Fund limits its investments so as to obtain the highest
investment quality rating by a nationally recognized statistical rating
organization. The Fund will maintain an average maturity of 90 days or less,
and will acquire only securities that have a remaining maturity of 397 days
or less. The Fund's investment approach, with its emphasis on U.S. Treasury
obligations, is expected to produce current income with low risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE U.S. TREASURY MONEY FUND
Although the Fund's U.S. Treasury securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates.
Although a money market fund seeks to keep a constant price per share of
$1.00, you may lose money by investing in a money market fund.
The Fund can be expected to produce lower income levels than fixed income
funds that invest in longer-term or riskier securities.
Page 7 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1989 8.84%
1990 7.86%
1991 5.75%
1992 3.40%
1993 2.51%
1994 3.50%
1995 5.33%
1996 4.77%
1997 4.93%
1998 4.82%
BEST QUARTER WORST QUARTER
2.25% 0.61%
(6/30/89) (12/31/93)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S RETURNS FOR THE PERIODS ENDING DECEMBER 31,
1998 TO THOSE OF THE IBC/FINANCIAL DATA U.S. TREASURY & REPO AVERAGE.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Money Fund 4.82% 4.67% 5.15% 5.38%*
IBC/Financial Data U.S. Treasury & Repo Average 4.81% 4.66% N/A N/A**
</TABLE>
*Since February 18, 1987
**Since June 1, 1991
<TABLE>
<CAPTION>
TRUST CLASS SHARES 7 DAY YIELD
- ----------------------------------------------------------
<S> <C>
U.S. Treasury Money Fund 4.21%
IBC/Financial Data U.S. Treasury & Repo Average 4.20%
</TABLE>
WHAT IS AN AVERAGE?
An average measures the share prices of a specific group of mutual funds with
a particular investment objective. You cannot invest directly in an average.
The IBC/Financial Data U.S. Treasury & Repo Average is a composite of mutual
funds with investment goals similar to the Fund's goals.
Page 8 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------
<S> <C>
Management Fees 0.38%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.28%
-----
Total Annual Fund Operating Expenses 0.81%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.38%, 0.00% and 0.66%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and that
you sell your shares at the end of the period. The Example also assumes that
each year your investment has a 5% return and Fund expenses remain the same.
Although your actual costs and returns might be different, your approximate
costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $83 $259 $450 $1,002
</TABLE>
Page 9 of 55
<PAGE>
TAX FREE MONEY FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income exempt from federal
income tax, while maintaining a share price
of $1.00
Investment Focus Money market instruments
Share Price Volatility Very low
Principal Investment Strategy Investing in high quality municipal
securities
Investor Profile Conservative, income-oriented investors with
short-to medium-term time horizons who seek
current tax exempt income, preservation of
capital and liquidity
</TABLE>
INVESTMENT STRATEGY OF THE TAX FREE MONEY FUND
The Fund invests primarily in high quality municipal securities that are free
from federal income tax. The Fund focuses on municipal securities that pay
interest that is not includable in federal alternative minimum tax
calculations, however, the Fund reserves the right to invest up to 20% of the
value of its net assets in securities, including private bonds, the interest
on which is fully taxable or subject to the alternative minimum tax. As a
fundamental policy, at least 80% of the Fund's income will, under normal
circumstances, be exempt from such taxes. Subject to such limitation, the
Fund may invest in any taxable investment, including repurchase agreements.
The Fund's portfolio is diversified among issuers and comprised only of
short-term, high quality debt securities. High quality securities are
securities rated in the top two ratings categories by a nationally recognized
statistical rating organization. The Fund will maintain an average weighted
maturity of 90 days or less, and will only acquire securities that have a
remaining maturity of 397 days or less. The Fund's investment approach, with
its emphasis on high-quality, short-term money market instruments, is
expected to produce current income with low risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE TAX FREE MONEY FUND
Although a money market fund seeks to keep a constant price per share of
$1.00, you may lose money by investing in a money market fund.
There may be economic or political changes that impact the ability of
municipal issuers to repay principal and to make interest payments on
municipal securities. Changes to the financial condition or credit rating of
municipal issuers also may adversely affect the value of the Fund's municipal
securities.
The Fund can be expected to produce lower income levels than fixed income
funds that invest in longer-term securities.
Page 10 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1990 5.86%
1991 4.55%
1992 2.86%
1993 1.84%
1994 2.18%
1995 3.28%
1996 3.11%
1997 3.08%
1998 2.93%
BEST QUARTER WORST QUARTER
1.47% 0.43%
(6/30/90) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S RETURNS FOR THE PERIODS ENDING DECEMBER 31, 1998
TO THOSE OF THE IBC/FINANCIAL DATA ALL TAX-FREE AVERAGE.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Free Money Fund 2.93% 2.92% 3.45%*
IBC/Financial Data All Tax-Free Average 2.93% 2.96% 3.34%**
</TABLE>
* Since June 15, 1989
** Since June 30, 1989
<TABLE>
<CAPTION>
TRUST CLASS SHARES 7 DAY YIELD
- ----------------------------------------------------------
<S> <C>
Tax Free Money Fund 3.12%
IBC/Financial Data All Tax-Free Average 2.98%
</TABLE>
WHAT IS AN AVERAGE?
An average measures the share prices of a specific group of mutual funds with a
particular investment objective. You cannot invest directly in an average. The
IBC/Financial Data All Tax-Free Average is a composite of mutual funds with
investment goals similar to the Fund's goals.
Page 11 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN
THE FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------
<S> <C>
Management Fees 0.40%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.26%
-----
Total Annual Fund Operating Expenses 0.81%
</TABLE>
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.40%, 0.00% and 0.66%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $83 $259 $450 $1,002
</TABLE>
Page 12 of 55
<PAGE>
LIMITED TERM BOND FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income
Investment Focus Bonds and other fixed income securities
Share Price Volatility Low
Principal Investment Strategy Investing in investment grade fixed
income debt obligations of domestic
issuers
Investor Profile Conservative, income-oriented investors
who have short- to medium-term time
horizons and who seek current income and
a relatively low degree of price
fluctuation
</TABLE>
INVESTMENT STRATEGY OF THE LIMITED TERM BOND FUND
The Fund invests primarily in bonds and other fixed income securities issued
by domestic issuers, such as corporate obligations; obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
commercial paper rated Prime-1 by Moody's or A-1 by S&P; and mortgage-backed
securities. All such instruments must be investment grade. Investment grade
securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. In selecting the
Fund's investments, the Adviser will consider preservation of capital, the
potential for realizing capital appreciation, sector rotation, maturity and
yield to maturity. The Adviser will monitor the Fund's investments in
response to its appraisal of changing economic conditions and trends. The
Fund is managed to maintain a dollar-weighted average maturity of between one
and five years. The Fund's investment approach, with its emphasis on bonds
and other fixed income securities with a relatively short average weighted
maturity, is expected to produce current income with low risk to principal.
Due to its investment strategy, the Fund may buy and sell securities
frequently. This may result in higher transaction costs and additional
capital gains tax liabilities.
PRINCIPAL RISKS OF INVESTING IN THE LIMITED TERM BOND FUND
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if
interest rates rise and vice versa, and the volatility of lower rated
securities is even greater than that of higher rated securities. Also,
longer-term securities are generally more volatile, so the average maturity
or duration of these securities affects risk.
Page 13 of 55
<PAGE>
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies
are backed by the U.S. Treasury, while others are backed solely by the ability
of the agency to borrow from the U.S. Treasury or by the agency's own resources.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1993 8.40%
1994 (1.83)%
1995 12.30%
1996 3.18%
1997 6.73%
1998 6.22%
BEST QUARTER WORST QUARTER
4.08% (1.88)%
(6/30/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE MERRILL LYNCH 1-5 YEAR
CORPORATE/GOVERNMENT BOND INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Limited Term Bond Fund 6.22% 5.22% 5.47%*
Merrill Lynch 1-5 Year Corporate/Government Bond Index 7.64% 6.27% 6.12%**
</TABLE>
* Since September 28, 1992
**Since September 30, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 14 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.52%
-----
Total Annual Fund Operating Expenses 1.17%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.82%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $119 $372 $644 $1,420
</TABLE>
Page 15 of 55
<PAGE>
INTERMEDIATE BOND FUND
FUND SUMMARY
<TABLE>
<S> <C>
Investment Goal High current income
Investment Focus Bonds and other fixed income securities
Share Price Volatility Medium
Principal Investment Strategy Investing in investment grade fixed
income debt obligations of domestic
issuers
Investor Profile Conservative, income-oriented investors
who have a medium-term time horizon and
who seek a relatively high level of
current income and are willing to
tolerate a moderate degree of price
fluctuation
</TABLE>
INVESTMENT STRATEGY OF THE INTERMEDIATE BOND FUND
The Fund invests primarily in bonds and other fixed income securities issued
by domestic issuers such as corporate obligations; obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
commercial paper rated Prime-1 by Moody's or A-1 by S&P; and asset-backed and
mortgage-backed securities. All such instruments must be investment grade.
Investment grade securities are securities rated in the top four ratings
categories by a nationally recognized statistical rating organization. In
selecting the Fund's investments, the Adviser will consider preservation of
capital, the potential for realizing capital appreciation, sector rotation,
maturity and yield to maturity. The Adviser will monitor the Fund's
investments in response to its appraisal of changing economic conditions and
trends. The Fund is managed to maintain a dollar-weighted average maturity
of between five and ten years. The Fund's investment approach, with its
emphasis on bonds and other fixed income securities is expected to produce
current income with moderate risk to capital.
Due to its investment strategy, the Fund may buy and sell securities
frequently. This may result in higher transaction costs and additional
capital gains tax liabilities.
PRINCIPAL RISKS OF INVESTING IN THE INTERMEDIATE BOND FUND
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if
interest rates rise and vice versa, and the volatility of lower rated
securities is even greater than that of higher rated securities. Also,
longer-term securities are generally more volatile, so the average maturity
or duration of these securities affects risk.
Page 16 of 55
<PAGE>
The mortgages underlying mortgage-backed securities may be paid off early,
which makes it difficult to determine their actual maturity and therefore
calculate how they will respond to changes in interest rates. The Fund may
have to reinvest prepaid amounts at lower interest rates. This risk of
prepayment is an additional risk of mortgage-backed securities.
Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies
are backed by the U.S. Treasury, while others are backed solely by the
ability of the agency to borrow from the U.S. Treasury or by the agency's own
resources.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<S> <C>
1993 9.61%
1994 (4.87)%
1995 18.09%
1996 1.58%
1997 8.63%
1998 6.66%
BEST QUARTER WORST QUARTER
6.42% (3.99)%
(6/30/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS AGGREGATE BOND INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate Bond Fund 6.66% 5.75% 5.99%*
Lehman Brothers Aggregate Bond Index 8.67% 7.27% 7.41%**
</TABLE>
*Since September 28, 1992
**Since September 30, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 17 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- ------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.52%
-----
Total Annual Fund Operating Expenses 1.27%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.60%, 0.00% and 0.92%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $129 $403 $697 $1,534
</TABLE>
Page 18 of 55
<PAGE>
<TABLE>
<S> <C>
GOVERNMENT BOND FUND
FUND SUMMARY
Investment Goal High current income with preservation of
capital
Investment Focus Bonds and other fixed income securities
Share Price Volatility Medium
Principal Investment Strategy Investing in bonds issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities
Investor Profile Conservative, income-oriented investors who
have medium- to long-term time horizon and
who seek a high level of current income and
are willing to tolerate a moderate degree of
price fluctuation
</TABLE>
INVESTMENT STRATEGY OF THE GOVERNMENT BOND FUND
The Fund invests primarily in bonds and other fixed income securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities including
U.S. Treasury bonds, notes and bills, Government National Mortgage Association
mortgage-backed pass-through certificates and mortgage-backed securities issued
by the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation. Under normal conditions, at least 65% of the Fund's total assets
will be invested in U.S. Government securities, including bonds and repurchase
agreements secured by U.S. Government securities. Any remaining assets may be
invested in fixed income securities that are not U.S. Government securities.
There are no limits on the dollar-weighted average portfolio maturity of the
Fund. The Fund's investment approach, with its emphasis on debt obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
is expected to produce current income with moderate risk to principal.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities.
PRINCIPAL RISKS OF INVESTING IN THE GOVERNMENT BOND FUND
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa, and the volatility of lower rated securities is even
greater than that of higher rated securities. Also, longer-term securities are
generally more volatile, so the average maturity or duration of these securities
affects risk.
Page 19 of 55
<PAGE>
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
Although the Fund's U.S. Government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. Government agencies
are backed by the U.S. Treasury, while others are backed solely by the ability
of the agency to borrow from the U.S. Treasury or by the agency's own resources.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<S> <C>
1996 0.40%
1997 8.22%
1998 7.80%
</TABLE>
<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
<S> <C>
3.82% (3.00)%
(9/30/98) (3/31/96)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GOVERNMENT BOND INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------
<S> <C> <C>
Government Bond Fund 7.80% 7.92%*
Lehman Brothers Government Bond Index 9.85% 9.18%**
</TABLE>
*Since April 5, 1995
**Since April 30, 1995
Page 20 of 55
<PAGE>
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.50%
-----
Total Annual Fund Operating Expenses 1.25%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.71%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example
Page 21 of 55
<PAGE>
also assumes that each year your investment has a 5% return and Fund expenses
remain the same. Although your actual costs and returns might be different,
your approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $127 $397 $686 $1,511
</TABLE>
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from federal and
Virginia income tax
Investment Focus Virginia municipal bonds
Share Price Volatility Low to medium
Principal Investment Strategy Investing in municipal bonds of investment
grade quality
Investor Profile Conservative, income-oriented investors who
are Virginia residents, have short- to
medium-term time horizons, and seek current
tax exempt income with a relatively low to
moderate degree of price fluctuation
INVESTMENT STRATEGY OF THE VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds which
are free from federal and Virginia income tax. Such investments include fixed,
variable, or floating rate general obligation and revenue bonds; zero coupon and
asset-backed securities; tax, revenue, or bond anticipation notes; and tax
exempt commercial paper. All such instruments must be investment grade.
Investment grade securities are securities rated in the top four ratings
categories by a nationally recognized statistical rating organization. In
selecting the Fund's investments, stability and growth of principal are
considered. The Fund is managed to maintain a dollar-weighted average maturity
of between five and ten years. The Fund's investment approach, with its
emphasis on municipal bonds, is expected to produce current income with moderate
risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Virginia municipal
securities, may underperform other equity market segments or the equity market
as a whole.
Page 22 of 55
<PAGE>
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Virginia subjects the Fund to economic and government policies of that state.
As a result the Fund will be more susceptible to factors which adversely affect
issuers of Virginia obligations than a mutual fund that does not have as great a
concentration in Virginia municipal obligations.
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<S> <C>
1994 (6.45)%
1995 14.25%
1996 2.95%
1997 7.25%
1998 5.22%
BEST QUARTER WORST QUARTER
5.99% (6.80)%
(3/31/95) (3/31/94)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Virginia Intermediate Municipal Bond Fund 5.22% 4.43% 5.29%*
Lehman Brothers General Obligation Bond Index 6.68% 6.13% 6.92%**
</TABLE>
*Since January 11, 1993
**Since January 31, 1993
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an
Page 23 of 55
<PAGE>
index does not have an investment adviser and does not pay any commissions or
expenses. If an index had expenses, its performance would be lower.
Page 24 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
ANNUAL FUND OPERATING EXPENSES*+
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.50%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.53%
-----
Total Annual Fund Operating Expenses 1.18%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.83%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $120 $375 $649 $1,432
</TABLE>
Page 25 of 55
<PAGE>
VIRGINIA MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from federal and
Virginia income tax
Investment Focus Virginia municipal bonds
Share Price Volatility Medium
Principal Investment Strategy Investing in municipal bonds of investment
grade quality
Investor Profile Conservative, income-oriented investors who
are Virginia residents, have medium- to long-
term time horizons, seek current tax exempt
income and are willing to tolerate a moderate
degree of price fluctuation
INVESTMENT STRATEGY OF THE VIRGINIA MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds
which are free from federal and Virginia income tax. Such investments
include fixed, variable, or floating rate general obligation and revenue
bonds; zero coupon and asset-backed securities; tax revenue, or bond
anticipation notes; and tax exempt commercial paper. All such instruments
must be investment grade. Investment grade securities are securities rated
in the top four ratings categories by a nationally recognized statistical
rating organization. There are no limits on the dollar weighted average
portfolio maturity of the Fund. The Fund's investment approach, with its
emphasis on municipal bonds, is expected to produce current income with
moderate risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE VIRGINIA MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Virginia municipal
securities, may underperform other equity market segments or the equity market
as a whole.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Virginia subjects the Fund to economic and government policies of that state.
As a result, the Fund will be more
Page 26 of 55
<PAGE>
susceptible to factors which adversely affect issuers of Virginia obligations
than a mutual fund that does not have as great a concentration in Virginia
municipal obligations.
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<S> <C>
1996 1.68%
1997 8.82%
1998 5.86%
BEST QUARTER WORST QUARTER
3.41% (2.73)%
(6/30/97) (3/31/96)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C>
Virginia Municipal Bond Fund 5.86% 6.69%*
Lehman Brothers General Obligation Bond Index 6.68% 7.99%**
</TABLE>
*Since April 5, 1995
**Since April 30, 1995
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 27 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.55%
-----
Total Annual Fund Operating Expenses 1.30%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.50%, 0.00% and 0.74%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $132 $412 $713 $1,568
</TABLE>
Page 28 of 55
<PAGE>
MARYLAND MUNICIPAL BOND FUND
FUND SUMMARY
Investment Goal High current income exempt from federal and
Maryland income tax
Investment Focus Maryland municipal bonds
Share Price Volatility Medium
Principal Investment Strategy Investing in municipal bonds of investment
grade quality
Investor Profile Conservative, income-oriented investors who
are Maryland residents, have medium- to long-
term horizons, seek current tax exempt income
and are willing to tolerate a moderate degree
of price fluctuation
INVESTMENT STRATEGY OF THE MARYLAND MUNICIPAL BOND FUND
The Fund invests primarily (at least 80% of its assets) in municipal bonds
which are free from federal and Maryland income tax. Such investments
include fixed, variable, or floating rate general obligation and revenue
bonds; zero coupon and asset-backed securities; tax revenue, or bond
anticipation notes; and tax exempt commercial paper. All such instruments
must be investment grade. Investment grade securities are securities rated
in the top four ratings categories by a nationally recognized statistical
rating organization. There are no limits on the dollar weighted average
portfolio maturity of the Fund. The Fund's investment approach, with its
emphasis on municipal bonds, is expected to produce current income with
moderate risk to principal.
PRINCIPAL RISKS OF INVESTING IN THE MARYLAND MUNICIPAL BOND FUND
The Fund is subject to the risk that its market segment, Maryland municipal
securities, may underperform other equity market segments or the equity market
as a whole.
There may be economic or political changes that impact the ability of municipal
issuers to repay principal and to make interest payments on municipal
securities. Changes in the financial condition or credit rating of municipal
issuers also may adversely affect the value of the Fund's securities.
The Fund's concentration of investments in securities of issuers located in
Maryland subjects the Fund to economic and government policies of that state.
As a result, the Fund will be more
Page 29 of 55
<PAGE>
susceptible to factors which adversely affect issuers of Maryland obligations
than a mutual fund that does not have as great a concentration in Maryland
municipal obligations.
The Fund is non-diversified, which means that it may invest in the securities of
relatively few issuers. As a result, the Fund may be more susceptible to a
single adverse economic or political occurrence affecting one or more of these
issuers, and may experience increased volatility due to its investments in those
securities.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
1997 8.78%
1998 5.87%
BEST QUARTER WORST QUARTER
3.58% (0.70)%
(6/30/97) (3/31/97)
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE LEHMAN BROTHERS GENERAL OBLIGATION BOND
INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- ----------------------------------------------------------------------------
<S> <S> <C>
Maryland Municipal Bond Fund 5.87% 5.12%*
Lehman Brothers General Obligation Bond Index 6.68% 7.60%**
</TABLE>
*Since March 1, 1996
**Since March 31, 1996
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 30 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.60%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.63%
-----
Total Annual Fund Operating Expenses 1.38%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.25%, 0.00% and 0.68%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $140 $437 $755 $1,657
</TABLE>
Page 31 of 55
<PAGE>
VALUE FUND
FUND SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility Medium
Principal Investment Strategy Investing in a diversified portfolio of
equity securities of domestic companies with
market capitalizations of at least $1 billion
Investor Profile Investors with medium- to long-term time
horizons who can tolerate a moderate degree
of price fluctuation and who wish to
establish core equity holdings of a
diversified investment portfolio
INVESTMENT STRATEGY OF THE VALUE FUND
The Fund invests primarily in common stock of domestic companies with market
capitalizations of at least $1 billion. Such investments include securities
convertible into common stock, such as convertible bonds and convertible
preferred stock rated investment grade or better. Investment grade
securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. The Adviser selects
these stocks from a list of companies traded in the U.S. securities markets.
In choosing its investments, the Adviser considers the fundamental
characteristics of growth and value in determining the price to earnings
ratio and the financial strength of the Fund's securities. The Fund's
investment approach, with its emphasis on common stocks of larger
capitalization companies, is expected to provide returns consistent with the
performance of the U.S. stock market.
PRINCIPAL RISKS OF INVESTING IN THE VALUE FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer
a decline in response. These factors contribute to price volatility, which is
the principal risk of investing in the Fund.
Page 32 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past performance
does not necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<CAPTION>
<S> <C>
1993 10.20%
1994 (0.81)%
1995 29.38%
1996 19.06%
1997 27.69%
1998 18.20%
BEST QUARTER WORST QUARTER
17.38% (10.36)%
(6/30/97) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE S&P 500 COMPOSITE INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Value Fund 18.20% 18.19% 17.27%*
S&P 500 Composite Index 28.60% 24.05% 21.60%**
</TABLE>
*Since September 28, 1992
**Since September 30, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 33 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN THE
FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.52%
-----
Total Annual Fund Operating Expenses 1.42%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to the
Fund. Actual expenses are lower because the Adviser and the Distributor are
voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.00% and 1.12%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends, Distributions and Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return and Fund expenses remain the same. Although your
actual costs and returns might be different, your approximate costs of investing
$10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $145 $449 $776 $1,702
</TABLE>
Page 34 of 55
<PAGE>
CAPITAL APPRECIATION FUND
FUND SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of domestic
companies with above average growth rates and
medium to large market capitalizations
Investor Profile Investors with long-term time horizons who
can tolerate a moderate to above average
degree of price fluctuation
INVESTMENT STRATEGY OF THE CAPITAL APPRECIATION FUND
The Fund invests primarily in common stock of domestic companies with medium to
large market capitalizations of at least $250 million. Such investments include
securities convertible into common stock, such as convertible bonds and
convertible preferred stock rated investment grade or better. Investment grade
securities are securities rated in the top four ratings categories by a
nationally recognized statistical rating organization. The Adviser selects
these stocks from a list of companies traded in the U.S. securities markets. In
choosing its investments, the Adviser considers the fundamental characteristics
of growth and value in determining the price to earnings ratio and the financial
strength of the Fund's securities. The Fund's investment approach, with its
emphasis on common stocks, is expected to provide returns consistent with the
performance of the U.S. stock market.
PRINCIPAL RISKS OF INVESTING IN THE CAPITAL APPRECIATION FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer
a decline in response. These factors contribute to price volatility, which is
the principal risk of investing in the Fund.
The medium capitalization companies the Fund invests in may be more
vulnerable to adverse business or economic events than larger, more
established companies. In particular, these mid-size companies may have
limited product lines, markets and financial resources.
Page 35 of 55
<PAGE>
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1994 (1.91)%
1995 23.78%
1996 20.96%
1997 26.75%
1998 28.88%
BEST QUARTER WORST QUARTER
26.34% (13.63)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE RUSSELL 1000 GROWTH INDEX.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR 5 YEARS SINCE INCEPTION
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Appreciation Fund 28.88% 19.13% 16.35%*
Russell 1000 Growth Index 38.71% 25.70% 22.15%**
</TABLE>
*Since January 11, 1993
**Since January 31, 1993
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest
directly in an index. Unlike a mutual fund, an index does not have an
investment adviser and does not pay any commissions or expenses. If an index
had expenses, its performance would be lower.
FUND FEES AND EXPENSES
This table describes the shareholder fees that you may pay if you purchase or
sell Fund shares. You would pay these fees directly from your investment in
the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
Page 36 of 55
<PAGE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.52%
-----
Total Annual Fund Operating Expenses 1.42%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.00% and 1.12%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and that
you sell your shares at the end of the period. The Example also assumes that
each year your investment has a 5% return and Fund expenses remain the same.
Although your actual costs and returns might be different, your approximate
costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $145 $449 $776 $1,702
</TABLE>
Page 37 of 55
<PAGE>
SPECIAL EQUITY FUND
Fund Summary
Investment Goal Long-term capital appreciation
Investment Focus Common stocks
Share Price Volatility High
Principal Investment Strategy Investing in equity securities of
domestic companies with market
capitalizations between $250 million and
$2 billion
Investor Profile Investors with long-term time horizons
who can tolerate an above average degree
of price fluctuation
INVESTMENT STRATEGY OF THE SPECIAL EQUITY FUND
The Fund invests primarily in common stock of domestic companies with market
capitalizations between $250 million and $2 billion. Such investments
include securities convertible into common stock, such as convertible bonds
and convertible preferred stock. The Fund may also invest in securities
having common stock characteristics, such as rights and warrants.
Representative industries may include, but are not limited to, technology,
health care and biotechnology, environmental services, communications, energy
and alternative energy. In choosing its investments, the Adviser considers
the fundamental characteristics of growth and value in determining the price
to earnings ratio and the financial strength of the Fund's securities. The
Fund's investment approach, with its emphasis on common stocks of smaller
capitalization companies, is expected to offer potentially higher returns and
a significant level of volatility relative to equity funds that invest in
stocks of larger companies.
Due to its investment strategy, the Fund may buy and sell securities
frequently. This may result in higher transaction costs and additional
capital gains tax liabilities.
PRINCIPAL RISKS OF INVESTING IN THE SPECIAL EQUITY FUND
Since it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Historically,
the equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies
may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies
may suffer a decline in response. These factors contribute to price
volatility, which is the principal risk of investing in the Fund.
Page 38 of 55
<PAGE>
The medium capitalization companies the Fund invests in may be more
vulnerable to adverse business or economic events than larger, more
established companies. In particular, these mid-size companies may have
limited product lines, markets and financial resources.
The smaller capitalization companies the Fund invests in may be more
vulnerable to adverse business or economic events than larger, more
established companies. In particular, these small companies may have limited
product lines, markets and financial resources, and may depend upon a
relatively small management group. Therefore, small cap stocks may be more
volatile than those of larger companies. These securities may be traded
over-the-counter or listed on an exchange and may or may not pay dividends.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Fund. Of course, the Fund's past
performance does not necessarily indicate how the Fund will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class
Shares from year to year.*
<TABLE>
<S> <C>
1993 14.18%
1994 (10.89)%
1995 24.32%
1996 15.70%
1997 23.07%
1998 (8.47)%
BEST QUARTER WORST QUARTER
21.57% (27.23)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE FUND'S AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS
ENDING DECEMBER 31, 1998 TO THOSE OF THE RUSSELL 2000 GROWTH INDEX.
<TABLE>
<CAPTION>
TRUST SHARES CLASS 1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Special Equity Fund (8.47)% 7.63% 11.24%*
Russell 2000 Growth Index 1.23% 10.22% 13.08%**
</TABLE>
*Since September 28, 1992
**Since September 30, 1992
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest
directly in an index. Unlike a mutual fund, an index does not have an
investment adviser and does not pay any commissions or expenses. If an index
had expenses, its performance would be lower.
Page 39 of 55
<PAGE>
FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE SHAREHOLDER FEES THAT YOU MAY PAY IF YOU PURCHASE OR
SELL FUND SHARES. YOU WOULD PAY THESE FEES DIRECTLY FROM YOUR INVESTMENT IN
THE FUND.
<TABLE>
<CAPTION>
SHAREHOLDER FEES TRUST CLASS SHARES
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of net asset value) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends and other
Distributions (as a percentage of offering price) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None
Maximum Account Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- -------------------------------------------------------------------------------
<S> <C>
Management Fees 0.75%
Distribution and Service (12b-1) Fees 0.15%
Other Expenses 0.51%
-----
Total Annual Fund Operating Expenses 1.41%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of the Fund.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE FUND.
* The table shows the highest expenses that could be currently charged to
the Fund. Actual expenses are lower because the Adviser and the Distributor
are voluntarily waiving a portion of their fees. Actual Management Fees,
Distribution Fees and Total Operating Expenses are 0.75%, 0.00% and 1.11%,
respectively. The Adviser and Distributor could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends, Distributions and
Taxes."
+ The Annual Fund Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and that
you sell your shares at the end of the period. The Example also assumes that
each year your investment has a 5% return and Fund expenses remain the same.
Although your actual costs and returns might be different, your approximate
costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $144 $446 $771 $1,691
</TABLE>
Page 40 of 55
<PAGE>
MORE INFORMATION ABOUT RISK
<TABLE>
<S> <C>
EQUITY RISK - Investments in equity securities Limited Term Bond Fund
and equity derivatives in general are subject
to market risks that may cause their prices to Intermediate Bond Fund
fluctuate over time. The value of securities
convertible into equity securities, such as Value Fund
warrants or convertible debt, is also affected
by prevailing interest rates, the credit Capital Appreciation Fund
quality of the issuer and any call provision.
Fluctuations in the value of equity securities Special Equity Fund
in which a mutual fund invests will cause a
fund's net asset value to fluctuate. An
investment in a portfolio of equity securities
may be more suitable for long-term investors
who can bear the risk of these share price
fluctuations.
CONVERTIBLE SECURITIES - Convertible securities Limited Term Bond Fund
have characteristics of both fixed income and
equity securities. The value of the Intermediate Bond Fund
convertible security tends to move with the
market value of the underlying stock, but may Value Fund
also be affected by interest rates, credit
quality of the issuer and any call provisions. Capital Appreciation Fund
Special Equity Fund
FIXED INCOME RISK - The market value of fixed Limited Term Bond Fund
income investments change in response to
interest rate changes and other factors. Intermediate Bond Fund
During periods of falling interest rates, the
values of outstanding fixed income securities Government Bond Fund
generally rise. Moreover, while securities
with longer maturities tend to produce higher
yields, the prices of longer maturity
securities are also subject to greater market
fluctuations as a result of changes in interest
rates. In addition to these fundamental risks,
different types of fixed income securities may
be subject to the following additional risks:
CALL RISK - During periods of falling interest Limited Term Bond Fund
rates, certain debt obligations with high
interest rates may be prepaid (or called) by Intermediate Bond Fund
the issuer prior to maturity. This may cause a
Fund's average weighted maturity to fluctuate, Government Bond Fund
and may require a Fund to invest the resulting
proceeds at lower interest rates.
Page 41 of 55
<PAGE>
CREDIT RISK - The possibility that an issuer Limited Term Bond Fund
will be unable to make timely payments of
either principal or interest. Since a Fund Intermediate Bond Fund
purchases securities backed by credit
enhancements from banks and other financial Government Bond Fund
institutions, changes in the credit ratings of
these institutions could cause the Fund to lose
money and may affect the Fund's share price.
MUNICIPAL ISSUER RISK - There may be economic Virginia Intermediate
or political changes that impact the ability of Municipal Bond Fund
municipal issuers to repay principal and to
make interest payments on municipal securities. Virginia Municipal Bond
Changes to the financial condition or credit Fund
rating of municipal issuers may also adversely
affect the value of a Fund's municipal Maryland Municipal Bond
securities. Constitutional or legislative Fund
limits on borrowing by municipal issuers may
result in reduced supplies of municipal
securities. Moreover, certain municipal
securities are backed only by a municipal
issuer's ability to levy and collect taxes. In
addition, a Fund's concentration of investments
in issuers located in a single state makes the
Fund more susceptible to adverse political or
economic developments affecting that state. A
Fund also may be riskier than mutual funds that
buy securities of issuers in numerous states.
MORTGAGE-BACKED SECURITIES - Mortgage-backed Limited Term Bond Fund
securities are fixed income securities
representing an interest in a pool of Intermediate Bond Fund
underlying mortgage loans. They are sensitive
to changes in interest rates, but may respond Government Bond Fund
to these changes differently from other fixed
income securities due to the possibility of
prepayment of the underlying mortgage loans.
As a result, it may not be possible to
determine in advance the actual maturity date
or average life of a mortgage-backed security.
Rising interest rates tend to discourage
refinancings, with the result that the average
life and volatility of the security will
increase, exacerbating its decrease in market
price. When interest rates fall, however,
mortgage-backed securities may not gain as much
in market value because of the expectation of
additional mortgage prepayments that must be
reinvested at lower interest rates. Prepayment
risk may make it difficult to calculate the
average maturity of a fund of mortgage-backed
securities and, therefore, to assess the
volatility risk of that fund.
Page 42 of 55
<PAGE>
FOREIGN SECURITY RISKS - Investments in Limited Term Bond Fund
securities of foreign companies or governments
can be more volatile than investments in U.S. Intermediate Bond Fund
companies or governments. Diplomatic,
political, or economic developments, including Value Fund
nationalization or appropriation, could affect
investments in foreign countries. Foreign Capital Appreciation Fund
securities markets generally have less trading
volume and less liquidity than U.S. markets. Special Equity Fund
In addition, the value of securities
denominated in foreign currencies, and of
dividends from such securities, can change
significantly when foreign currencies
strengthen or weaken relative to the U.S.
dollar. Foreign companies or governments
generally are not subject to uniform
accounting, auditing, and financial reporting
standards comparable to those applicable to
domestic U.S. companies or governments.
Transaction costs are generally higher than
those in the U.S. and expenses for custodial
arrangements of foreign securities may be
somewhat greater than typical expenses for
custodial arrangements of similar U.S.
securities. Some foreign governments levy
withholding taxes against dividend and interest
income. Although in some countries a portion
of these taxes are recoverable, the
non-recovered portion will reduce the income
received from the securities comprising the
portfolio.
EVENT RISK - Securities may suffer declines in Limited Term Bond Fund
credit quality and market value due to
corporate or governmental restructurings. Intermediate Bond Fund
While this risk may be high for certain
securities held by a Fund, the overall risk Government Bond Fund
should be reduced because of the Fund's
multiple holdings.
YEAR 2000 RISK - The Funds depend on the smooth All Funds
functioning of computer systems in almost every
aspect of their business. Like other mutual
funds, businesses and individuals around the
world, the Funds could be adversely affected if
the computer systems used by its service
providers do not properly process dates on and
after January 1, 2000, and distinguish between
the year 2000 and the year 1900. The Funds
have asked their service providers whether they
expect to have their computer systems adjusted
for the year 2000 transition, and are seeking
assurances from each service provider that they
are devoting significant resources to prevent
material adverse consequences to the Funds.
While it is likely that
Page 43 of 55
<PAGE>
such assurances will be obtained, the Funds and
their shareholders may experience losses if these
assurances prove to be incorrect or as a result of
year 2000 computer difficulties experienced by
issuers of portfolio securities or third parties,
such as custodians, banks, broker-dealers or others
with which the Funds do business.
</TABLE>
Page 44 of 55
<PAGE>
FUND INVESTMENTS
In addition to the investments and strategies described in this prospectus,
each Fund also may invest in other securities, use other strategies and
engage in other investment practices, which are described in detail in our
Statement of Additional Information (SAI). Of course, we cannot guarantee
that any Fund will achieve its investment goal.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions,
or for temporary defensive or liquidity purposes, each municipal bond fund
may invest up to 100% of its assets in short-term municipal obligations,
money market instruments and shares of money market mutual funds; each equity
fund may invest up to 100% of its assets in high-quality, short-term debt
securities and money market instruments, including repurchase agreements, and
in the securities of other open-end management companies investing primarily
in money market instruments that would not ordinarily be consistent with the
Fund's objectives. A Fund will do so only if the Adviser believes that the
risk of loss outweighs the opportunity for capital gains or higher income.
THE INVESTMENT ADVISER AND INVESTMENT TEAM
INVESTMENT ADVISER
The Investment Adviser makes investment decisions for the Funds and
continuously reviews, supervises and administers each Fund's respective
investment program. The Board of Directors supervises the Adviser and
establishes policies that the Adviser must follow in its management
activities.
Crestar Asset Management Company serves as the Adviser to the Funds. As of
December 31, 1998, Crestar Asset Management Company had approximately $17
billion in assets under management. For the fiscal year ended November 30,
1998, Crestar Asset Management Company received advisory fees of:
<TABLE>
<S> <C>
CASH RESERVE FUND 0.36%
U.S. TREASURY MONEY FUND 0.38%
TAX FREE MONEY FUND 0.40%
LIMITED TERM BOND FUND 0.50%
INTERMEDIATE BOND FUND 0.60%
GOVERNMENT BOND FUND 0.50%
VIRGINIA INTERMEDIATE MUNICIPAL BOND FUND 0.50%
VIRGINIA MUNICIPAL BOND FUND 0.50%
MARYLAND MUNICIPAL BOND FUND 0.25%
VALUE FUND 0.75%
CAPITAL APPRECIATION FUND 0.75%
SPECIAL EQUITY FUND 0.75%
</TABLE>
Page 45 of 55
<PAGE>
On December 31, 1998, Crestar Financial Corporation (Crestar), the parent of
Crestar Bank which is the parent of Crestar Asset Management Corporation, the
Funds' Adviser, was acquired by SunTrust Banks, Inc. (SunTrust). On February
19, 1999, the Board of Directors of the CrestFunds approved a plan of
reorganization with the STI Classic Funds (mutual funds that are served by
investment advisers that are subsidiaries of SunTrust). Under the plan of
reorganization, shareholders of each Fund of the CrestFunds will receive shares
of a comparable class of the corresponding STI Fund. This plan of
reorganization will be submitted for approval by shareholders of the CrestFunds
at a Special Meeting of Shareholders expected to be held on May 7, 1999. The
plan is also conditioned upon receiving the appropriate exemptive relief from
the Securities and Exchange Commission.
INVESTMENT TEAM
The Funds are managed by teams of investment professionals from the Crestar
Asset Management Company. No one person is primarily responsible for making
investment recommendations to the teams.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to buy, sell (sometimes called "redeem") or exchange
Trust Class Shares of the Funds.
HOW TO PURCHASE FUND SHARES
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange and the
Federal Reserve are open for business (a Business Day). Shares cannot be
purchased by Federal Reserve Wire on days when either the New York Stock
Exchange or the Federal Reserve is closed.
You may purchase shares through a representative of certain correspondent banks
of Crestar Asset Management Company, or other financial institutions that have
executed dealer agreements. Shares of the Funds may be purchased through
procedures established by the banks in connection with the requirements of
customer accounts.
A Fund may reject any purchase order if it is determined that accepting the
order would not be in the best interests of the Fund or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Fund receives your purchase order.
The Adviser calculates each bond and equity fund's NAV once each Business Day
at the regularly scheduled close of normal trading on the New York Stock
Exchange (NYSE) (normally 4:00 p.m., Eastern time). The NAV of the Tax Free
Money Fund is determined as of 12:00 noon, Eastern time, and as of the
regularly-scheduled close of normal trading on the NYSE. The NAV of the Cash
Reserve Fund and the U.S. Treasury Money Fund is determined as of 1:00 p.m.,
Page 46 of 55
<PAGE>
Eastern time and as of the regularly-scheduled close of normal trading on the
NYSE. So, to be eligible to receive dividends declared on the day you submit
your purchase order, generally a Fund must receive your order before 4:00
p.m., Eastern time for each non-money market fund, 12:00 noon, Eastern time
for the Tax Free Money Fund, and 1:00 p.m., Eastern time for the Cash
Reserve Fund and the U.S. Treasury Money Fund.
HOW WE CALCULATE NAV
NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.
In calculating NAV, the Adviser generally values a Fund's investment
portfolio at market price (except the Cash Reserve Fund, U.S. Treasury Money
Fund and Tax Free Money Fund). If market prices are unavailable or the
Adviser believes that they are unreliable, fair value prices may be
determined in good faith using methods approved by the Board of Directors.
In calculating NAV for the Cash Reserve Fund, U.S. Treasury Money Fund and Tax
Free Money Fund, the Adviser generally values a Fund's investment portfolio
using the amortized cost valuation method, which is described in detail in the
SAI. If the Adviser believes that this method is unreliable during certain
market conditions or for other reasons, fair value prices may be determined in
good faith using methods approved by the Board of Directors.
Some Funds hold securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the NAV of these Fund shares may change on days when you
cannot purchase or sell Fund shares.
MINIMUM PURCHASES
To purchase Trust Class Shares for the first time, you must invest at least $1
million, except for agency accounts for which the minimum is $10,000, and
qualified cash management accounts for which the minimum is waived, in any Fund.
There is no minimum for subsequent investments.
We may accept investments of smaller amounts at our discretion.
HOW TO SELL YOUR FUND SHARES
You may sell (sometimes called "redeem") your shares on any Business Day by
contacting your bank or financial institution directly. 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.
No charge for wire redemption payments is imposed by the Funds, although banks
may charge their customer accounts for services provided in connection with the
redemption of shares of the Funds.
If you would like to sell your shares, please notify us in writing and include a
signature guarantee by a bank or other financial institution (a notarized
signature is not sufficient).
Page 47 of 55
<PAGE>
RECEIVING YOUR MONEY
Normally, we will send your sale proceeds within seven days after we receive
your request. Your proceeds can be wired to your bank account (subject to a
nominal fee) or sent to you by check. IF YOU RECENTLY PURCHASED YOUR SHARES BY
CHECK, REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED
(WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE OF PURCHASE).
REDEMPTIONS IN KIND
The Funds generally pay sale (redemption) proceeds in cash. However, under
unusual conditions that make the payment of cash unwise (and for the protection
of a Fund's remaining shareholders) a Fund might pay all or part of your
redemption proceeds in liquid securities with a market value equal to the
redemption price (redemption in kind). Although it is highly unlikely that your
shares would ever be redeemed in kind, you would probably have to pay brokerage
costs to sell the securities distributed to you, as well as taxes on any capital
gains from the sale as with any redemption.
INVOLUNTARY SALES OF YOUR SHARES
If your account balance drops below $1 million because of redemptions you may be
required to sell your shares. But, we will always give you at least 30 days'
written notice to give you time to add to your account and avoid the sale of
your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
A Fund may suspend your right to sell your shares if the NYSE restricts trading,
the SEC declares an emergency or for other reasons. More information about this
is in the SAI.
Page 48 of 55
<PAGE>
HOW TO EXCHANGE YOUR SHARES
You may exchange shares on any Business Day by contacting your financial
institution by mail or telephone. This exchange privilege may be changed or
canceled at any time upon 60 days' notice.
When you exchange shares, you are really selling your shares and buying other
Fund shares. So, your sale price and purchase price will be based on the NAV
next calculated after a Fund receives your exchange request.
You may exchange Trust Class Shares of any Fund for Trust Class Shares of any
other Fund. Trust Class Shares may be exchanged for Class A Shares or Class B
Shares of the same Fund should the holder of the Trust Class Shares cease to be
eligible to invest in the Trust Class. Additionally, Class A Shares or Class B
Shares may be exchanged for Trust Class Shares if the investor is eligible to
invest in the Trust Class.
Page 49 of 55
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes its income as follows:
<TABLE>
<CAPTION>
Declared Daily and Distributed Monthly Declared and Paid Monthly
-------------------------------------- -------------------------
<S> <C>
Cash Reserve Fund Value Fund
U.S. Treasury Money Fund Capital Appreciation Fund
Tax Free Money Fund Special Equity Fund
Limited Term Bond Fund
Intermediate Bond Fund
Government Bond Fund
Virginia Intermediate Municipal Bond Fund
Virginia Municipal Bond Fund
Maryland Municipal Bond Fund
</TABLE>
Each Fund makes distributions of capital gains, if any, at least annually. If
you own Fund shares on a Fund's record date, you will be entitled to receive the
distribution.
You will receive dividends and distributions in the form of additional Fund
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Fund in writing prior to the date of the distribution. Your
election will be effective for dividends and distributions paid after the Fund
receives your written notice. To cancel your election, simply send the Fund
written notice.
TAXES
PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax
issues that affect the Funds and their shareholders. This summary is based on
current tax laws, which may change.
Each Fund will distribute substantially all of its income and capital gains, if
any. The dividends you receive are taxed as ordinary income. Any capital gains
distributions may be taxable to you as capital gains. For individuals, long-
term capital gains are currently taxed at a maximum rate of 20% and short-term
capital gains are currently taxed at ordinary income tax rates.
If you redeem a Fund's shares, you will be subject to tax on any gain. The
character of such gain will generally be based on your holding period for the
shares. An exchange of shares of a Fund for shares of another Fund is a sale of
Fund shares for tax purposes.
Because each investor's tax circumstances are unique and because the tax laws
are subject to change, you should consult your tax adviser about your
investment.
More information about taxes is in the SAI.
Page 50 of 55
<PAGE>
DISTRIBUTION OF FUND SHARES
Each Fund has adopted a distribution plan that allows the Fund to pay
distribution and service fees for the sale and distribution of its shares, and
for services provided to shareholders. Because these fees are paid out of a
Fund's assets continuously, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Under this Plan, the Distributor is compensated at the annual rate of 0.15% of
the aggregate average daily net assets of the Trust Class Shares of each Fund.
The Distributor has agreed to waive any fees payable pursuant to the Plan. The
Distributor reserves the right to terminate its waiver at any time at is sole
discretion.
The Distributor may, from time to time in its sole discretion, institute one or
more promotional incentive programs for dealers, which will be paid for by the
Distributor from any sales charge it receives or from any other source available
to it. Under any such program, the Distributor may provide incentives, in the
form of cash or other compensation, including merchandise, airline vouchers,
trips and vacation packages, to dealers selling shares of a Fund.
Page 51 of 55
<PAGE>
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about each Fund. This
information is intended to help you understand each Fund's financial performance
for the past five years, or, if shorter, the period of the Fund's operations.
Some of this information reflects financial information for a single Fund share.
The total returns in the table represent the rate that you would have earned (or
lost) on an investment in a Fund, assuming you reinvested all of your dividends
and distributions. This information has been audited by Deloitte & Touche LLP,
independent public accountants. Their report, along with each Fund's financial
statements, appears in the annual report that accompanies the SAI. You can
obtain the annual report, which contains more performance information, at no
charge by calling 1-800-273-7827.
Page 52 of 55
<PAGE>
Financial Highlights CrestFunds, Inc.
For a Share Outstanding Throughout the Year
<TABLE>
<CAPTION>
Investment Activities Distributions
------------------------ ------------------
Net
Realized Ratio Ratio
Net and Net Net of Expenses of Net
Asset Unrealized Asset Assets, Ratio of to Average Investment
Value, Net Gain (Loss) Net Value, End of Expenses Net Assets Income
Beginning Investment on Investment Capital End of Total Period to Average Excluding to Average
of Period Income Investments Income Gains Period Return (000) Net Assets Fee Waivers Net Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Reserve Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $1.00 0.050 - (0.050) - $1.00 5.13% $1,135,571 0.63% 0.78% 5.01%
1997 1.00 0.050 - (0.050) - 1.00 5.16% 848,140 0.65% 0.80% 5.04%
1996 1.00 0.049 - (0.049) - 1.00 4.98% 621,139 0.66% 0.81% 4.87%
1995 1.00 0.053 - (0.053) - 1.00 5.45% 520,185 0.66% 0.81% 5.31%
1994 1.00 0.034 - (0.034) - 1.00 3.46% 377,493 0.66% 0.66% 3.37%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Money Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $1.00 0.048 - (0.048) - $1.00 4.89% $ 699,923 0.66% 0.81% 4.77%
1997 1.00 0.048 - (0.048) - 1.00 4.91% 632,381 0.65% 0.80% 4.82%
1996 1.00 0.047 - (0.047) - 1.00 4.80% 389,051 0.66% 0.81% 4.69%
1995 1.00 0.052 - (0.052) - 1.00 5.29% 370,454 0.66% 0.81% 5.16%
1994 1.00 0.033 - (0.033) - 1.00 3.30% 319,477 0.66% 0.66% 3.23%
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Money Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $1.00 0.029 - (0.029) - $1.00 2.97% $ 270,899 0.66% 0.81% 2.92%
1997 1.00 0.030 - (0.030) - 1.00 3.06% 226,837 0.66% 0.81% 3.02%
1996 1.00 0.029 0.002 (0.029) (0.002) 1.00 3.14% 182,320 0.66% 0.81% 2.88%
1995 1.00 0.032 - (0.032) - 1.00 3.26% 202,333 0.66% 0.81% 3.19%
1994 1.00 0.021 - (0.021) - 1.00 2.07% 157,602 0.67% 0.67% 2.06%
- ------------------------------------------------------------------------------------------------------------------------------------
Limited Term Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $ 9.92 0.557 0.061 (0.558) - $ 9.98 6.39% $ 83,980 0.76% 0.95% 5.57%
1997 9.93 0.570 (0.010) (0.570) - 9.92 5.84% 77,696 0.75% 0.90% 5.79%
1996 10.03 0.534 (0.097) (0.537) - 9.93 4.52% 84,973 0.78% 0.93% 5.41%
1995 9.49 0.532 0.534 (0.526) - 10.03 11.50% 88,789 0.78% 0.93% 5.44%
1994 10.16 0.480 (0.640) (0.480) (0.030) 9.49 (1.56%) 83,369 0.76% 0.76% 4.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Intermediate Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $ 9.96 0.564 0.167 (0.561) - $10.13 7.52% $ 310,885 0.88% 1.06% 5.60%
1997 9.94 0.594 0.021 (0.595) - 9.96 6.46% 299,820 0.87% 1.02% 6.07%
1996 10.12 0.550 (0.175) (0.555) - 9.94 3.92% 281,187 0.88% 1.03% 5.70%
1995 9.16 0.569 0.954 (0.563) - 10.12 17.07% 81,870 0.88% 1.03% 5.89%
1994 10.20 0.530 (1.000) (0.530) (0.040) 9.16 (4.72%) 77,143 0.88% 0.88% 5.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Government Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $10.36 0.591 0.281 (0.592) - $10.64 8.63% $ 50,051 0.67% 1.07% 5.60%
1997 10.37 0.605 (0.010) (0.605) - 10.36 6.04% 34,013 0.66% 1.06% 5.99%
1996 10.66 0.591 (0.290) (0.591) - 10.37 3.02% 20,171 0.69% 1.09% 5.75%
1995(1) 10.00 0.412 0.753 (0.412) (0.093) 10.66 11.85%* 10,211 0.71%* 1.11%* 6.00%*
Ratio of
Net Investment
Income to
Average
Net Assets Portfolio
Excluding Turnover
Fee Waivers Rate
<C> <C>
- -----------------------------
- -----------------------------
4.86% -
4.89% -
4.72% -
5.16% -
3.37% -
- -----------------------------
- -----------------------------
4.62% -
4.67% -
4.54% -
5.01% -
3.23% -
- -----------------------------
- -----------------------------
2.77% -
2.87% -
2.73% -
3.04% -
2.06% -
- -----------------------------
- -----------------------------
5.38% 142%
5.64% 64%
5.26% 51%
5.29% 36%
4.92% 47%
- -----------------------------
- -----------------------------
5.42% 178%
5.92% 66%
5.55% 35%
5.74% 37%
5.53% 39%
- -----------------------------
- -----------------------------
5.20% 220%
5.59% 144%
5.35% 16%
5.60%* 28%
</TABLE>
Page 53 of 55
<PAGE>
Financial Highlights CrestFunds, Inc.
For a Share Outstanding Throughout the Year
<TABLE>
<CAPTION>
Investment Activities Distributions
------------------------ ------------------
Net
Realized Ratio Ratio
Net and Net Net of Expenses of Net
Asset Unrealized Asset Assets, Ratio of to Average Investment
Value, Net Gain (Loss) Net Value, End of Expenses Net Assets Income
Beginning Investment on Investment Capital End of Total Period to Average Excluding to Average
of Period Income Investments Income Gains Period Return (000) Net Assets Fee Waivers Net Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Virginia Intermediate Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $10.31 0.449 0.166 (0.450) (0.035) $10.44 6.10% $ 243,606 0.79% 0.97% 4.33%
1997 10.22 0.463 0.089 (0.462) - 10.31 5.55% 237,096 0.78% 0.93% 4.57%
1996 10.24 0.419 (0.021) (0.418) - 10.22 4.01% 243,137 0.78% 0.93% 4.35%
1995 9.21 0.428 1.030 (0.428) - 10.24 16.09% 43,373 0.72% 0.94% 4.34%
1994 10.33 0.440 (1.100) (0.440) (0.020) 9.21 (6.53%) 41,365 0.65% 0.77% 4.48%
- ------------------------------------------------------------------------------------------------------------------------------------
Virginia Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $10.44 0.468 0.267 (0.468) (0.026) $10.68 7.19% $ 29,252 0.69% 1.10% 4.41%
1997 10.28 0.475 0.168 (0.475) (0.008) 10.44 6.46% 20,044 0.69% 1.09% 4.65%
1996 10.40 0.465 (0.120) (0.465) - 10.28 3.48% 15,911 0.71% 1.11% 4.61%
1995(1) 10.00 0.309 0.445 (0.310) (0.044) 10.40 7.67%* 6,247 0.71%* 1.11%* 4.61%*
- ------------------------------------------------------------------------------------------------------------------------------------
Maryland Municipal Bond Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $ 9.95 0.416 0.270 (0.416) - $10.22 7.03% $ 19,115 0.62% 1.15% 4.11%
1997 9.76 0.426 0.190 (0.426) - 9.95 6.50% 11,461 0.63% 1.16% 4.38%
1996(2) 10.00 0.309 (0.240) (0.309) - 9.76 1.07%* 5,808 0.71%* 1.36%* 4.30%*
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $16.55 0.093 1.638 (0.095) (3.085) $15.10 13.64% $ 577,042 1.03% 1.21% 0.63%
1997 13.39 0.137 3.237 (0.145) (0.070) 16.55 25.41% 590,824 1.02% 1.17% 0.92%
1996 11.60 0.166 2.380 (0.165) (0.591) 13.39 22.68% 553,648 1.02% 1.17% 1.38%
1995 10.73 0.245 2.619 (0.262) (1.732) 11.60 28.76% 220,386 1.02% 1.17% 2.16%
1994 11.38 0.200 (0.240) (0.190) (0.420) 10.73 (0.49%) 166,713 1.01% 1.01% 1.82%
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $15.96 (0.018) 2.780 (0.007) (0.935) $17.78 18.59% $ 124,182 1.03% 1.21% (0.11%)
1997 13.58 0.037 3.005 (0.041) (0.621) 15.96 23.71% 99,364 1.02% 1.17% 0.27%
1996 10.87 0.043 2.709 (0.042) - 13.58 25.38% 32,983 1.10% 1.25% 0.37%
1995 10.17 0.043 2.035 (0.046) (1.332) 10.87 20.74% 19,592 1.10% 1.25% 0.40%
1994 9.79 0.010 0.380 (0.010) - 10.17 4.13% 12,869 1.05% 1.05% 0.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Special Equity Fund
- ------------------------------------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30:
1998 $16.45 (0.031) (2.013) - (2.176) $12.23 (13.77%) $ 90,311 1.04% 1.22% (0.21%)
1997 13.73 (0.009) 3.114 (0.005) (0.380) 16.45 23.28% 112,403 1.01% 1.16% (0.07%)
1996 12.12 0.050 1.926 (0.053) (0.313) 13.73 16.44% 77,931 1.04% 1.19% 0.39%
1995 10.56 0.100 1.928 (0.108) (0.360) 12.12 20.07% 54,221 1.04% 1.19% 0.90%
1994 12.76 0.030 (0.460) (0.020) (1.750) 10.56 (4.74%) 43,640 1.03% 1.03% 0.32%
Ratio of
Net Investment
Income to
Average
Net Assets Portfolio
Excluding Turnover
Fee Waivers Rate
<C> <C>
- -----------------------------
- -----------------------------
4.15% 24%
4.42% 30%
4.20% 25%
4.12% 28%
4.36% 24%
- -----------------------------
- -----------------------------
4.00% 28%
4.25% 39%
4.21% 24%
4.21%* 35%
- -----------------------------
- -----------------------------
3.58% 12%
3.85% 5%
3.65%* 9%
- -----------------------------
- -----------------------------
0.45% 71%
0.77% 100%
1.23% 82%
2.01% 175%
1.82% 116%
- -----------------------------
- -----------------------------
(0.29%) 39%
0.12% 123%
0.22% 86%
0.25% 470%
0.17% 271%
- -----------------------------
- -----------------------------
(0.39%) 231%
(0.22%) 148%
0.24% 98%
0.75% 81%
0.32% 117%
</TABLE>
Amounts designated as "-" are either $0 or have been rounded to $0.
(1) Commencement of operations for this class April 5, 1995.
(2) Commencement of operations for this class March 1, 1996.
* Annualized.
Page 54 of 55
<PAGE>
CRESTFUNDS-REGISTERED TRADEMARK-
Life Vision Portfolios
Trust Class
PROSPECTUS
MARCH 30, 1999
MAXIMUM GROWTH PORTFOLIO
GROWTH AND INCOME PORTFOLIO
BALANCED PORTFOLIO
INVESTMENT ADVISER: CRESTAR ASSET MANAGEMENT COMPANY
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED ANY PORTFOLIO SHARES OR
DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE.
IT IS A CRIME FOR ANYONE TO TELL YOU OTHERWISE.
Page 1-LV of 28-LV
<PAGE>
HOW TO READ THIS PROSPECTUS
CrestFunds is a mutual fund family that offers shares in separate investment
portfolios (Portfolios). The Portfolios have individual investment goals and
strategies. This prospectus gives you important information about the Trust
Class of the Portfolios that you should know before investing. Please read this
prospectus and keep it for future reference.
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT THE PORTFOLIOS.
FOR MORE DETAILED INFORMATION ABOUT EACH PORTFOLIOS, PLEASE SEE:
<TABLE>
<CAPTION>
PAGE
<S> <C>
MAXIMUM GROWTH PORTFOLIO 4-LV
GROWTH AND INCOME PORTFOLIO 8-LV
BALANCED PORTFOLIO 12-LV
MORE INFORMATION ABOUT RISK OF THE UNDERLYING CRESTFUNDS 17-LV
PORTFOLIO INVESTMENTS 21-LV
THE INVESTMENT ADVISER AND INVESTMENT TEAM 21-LV
PURCHASING, SELLING AND EXCHANGING PORTFOLIO SHARES 23-LV
DIVIDENDS AND DISTRIBUTIONS 25-LV
FINANCIAL HIGHLIGHTS 26-LV
HOW TO OBTAIN MORE INFORMATION ABOUT
CRESTFUNDS INSIDE BACK COVER
</TABLE>
Page 2-LV of 28-LV
<PAGE>
RISK RETURN SUMMARY
Introduction
The Portfolios provide investors of tax-advantaged and other employee benefit or
retirement accounts which have entered into certain management, administration
and/or servicing agreements with Crestar Bank or its affiliates, with the
opportunity to pursue three distinct asset allocations strategies implemented
through investments in Trust Class Shares of selected CrestFunds. By investing
in the Portfolios, investors have the opportunity to diversify and allocate
their assets among the broad range of funds in CrestFunds.
The assets of each Portfolio will be allocated among underlying CrestFunds in
accordance with its investment objective, Crestar Asset Management Company's
(the Adviser) outlook for the economy, the financial markets and the relative
market valuations of the underlying CrestFunds. Each Portfolio has the ability
to invest its assets allocated to a particular asset class in one or more of the
underlying CrestFunds, which have different investment objectives, policies and
risk characteristics. Although the Portfolios currently expect to invest in one
or more of the underlying CrestFunds identified below, the Adviser has the
discretion to change the particular CrestFunds used as underlying investments
for the Portfolios. If determined to be in the best interest of the Portfolios,
the Adviser reserves the right to substitute or include other underlying
CrestFunds, including CrestFunds that do not currently exist.
Each Portfolio has its own investment goal and strategies for reaching that
goal. The Adviser invests Portfolio assets in a way that the Adviser
believes will help the Portfolio achieve its goal. We cannot guarantee that
a Portfolio will achieve its goal. The Adviser's judgments about the markets,
the economy or companies may not anticipate actual market movements, economic
conditions or company performance and these judgments may affect the return
on your investment. In fact, no matter how good a job the Adviser does, you
could lose money on your investment in a Portfolio, just as you could with
other investments. A Portfolio share is not a bank deposit and it is not
insured or guaranteed by the FDIC or any government agency.
Each Portfolio's objective, the asset allocation percentage ranges described
below, the list of underlying CrestFunds described above, and those policies
identified as non-fundamental may be changed by the CrestFunds' Board of
Directors without shareholder approval. A Portfolio's investment policies
identified as fundamental may not be changed except by approval of the majority
of the outstanding shares of that Portfolio.
The value of your investment in a Portfolio is based on the market value of the
securities the Portfolio holds. These prices change daily due to economic and
other events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the underlying CrestFunds own and the markets in which
they trade. The effect on an underlying Fund of a change in the value of a
single security will depend on how widely the Fund diversifies its holdings.
INVESTING IN A PORTFOLIO INVOLVES RISKS THAT MAY ADVERSELY AFFECT THE
PORTFOLIO'S NET ASSET VALUE, YIELD, AND TOTAL RETURN.
Page 3-LV of 28-LV
<PAGE>
MAXIMUM GROWTH PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal High capital appreciation
Investment Focus Equity and money market funds
Share Price Volatility High
Principal Investment Strategy Investing at least 80% of the
Portfolio's total assets in
shares of underlying
CrestFunds that invest
primarily in equity securities
Investor Profile Investors seeking capital
appreciation potential and who
are willing to be subject to
the risks of equity securities
INVESTMENT STRATEGY OF THE MAXIMUM GROWTH PORTFOLIO
The Portfolio invests at least 80% of the Portfolio's total assets in shares of
underlying CrestFunds that invest primarily in equity securities. The
Portfolio's remaining assets may be invested in shares of underlying CrestFunds
that invest primarily in fixed income securities, shares of underlying
CrestFunds that are money market funds, securities issued by the U.S.
Government, its agencies or instrumentalities, repurchase agreements and
short-term paper. In selecting a diversified portfolio of underlying CrestFunds,
the Adviser analyzes many factors, including the underlying CrestFunds'
investment objectives, total return, volatility and expenses.
The Portfolio's investment approach, with its emphasis on funds which invest in
equity and fixed income securities, is expected to produce high capital
appreciation with a medium to high risk to principal.
The Portfolio currently plans to invest in shares of the following underlying
CrestFunds within the percentage ranges indicated:
<TABLE>
<CAPTION>
INVESTMENT RANGE (PERCENTAGE OF THE
ASSET CLASS MAXIMUM GROWTH PORTFOLIO'S ASSETS)
- --------------------------------------------------------------------------------
<S> <C>
Equity 80-100%
Value Fund
Capital Appreciation Fund
Special Equity Fund
Money Market 0-20%
Cash Reserve Fund
</TABLE>
Page 4-LV of 28-LV
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE MAXIMUM GROWTH PORTFOLIO
The underlying Funds of the Portfolio invest primarily in U.S. common stocks.
As a result, the underlying Funds of the Portfolio are subject to the risk that
stock prices will fall over short or extended periods of time. Stock markets
tend to move in cycles, with periods of rising prices and periods of falling
prices. This price volatility is the principal risk of investing in the
Portfolio.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
This bar chart shows changes in the performance of the Portfolio's Trust Class
Shares from year to year.*
<TABLE>
<CAPTION>
1998 12.31%
<S> <C>
BEST QUARTER WORST QUARTER
18.72% (15.23)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE
PERIODS ENDING DECEMBER 31, 1998 TO A 60/30/10 BLEND OF THE FOLLOWING
INDICES: THE S&P 500 INDEX, THE RUSSELL 2000 INDEX AND THE SALOMON 3 MONTH
T-BILL.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum Growth Portfolio 12.31% 5.76%*
S&P 500 Index 28.60% 26.45%**
Russell 2000 Index (2.55)% 5.40%**
Salomon 3 Month T-Bill 5.05% 5.12%**
</TABLE>
*Since June 30, 1997
**Since June 30, 1997
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Page 5-LV of 28-LV
<PAGE>
PORTFOLIO FEES AND EXPENSES
Shares of the Portfolio are currently offered, without payment of any sales
charge, primarily to investors of tax-advantaged and other employee benefit or
retirement accounts which have entered into certain management, administration
and/or servicing agreements with Crestar Bank, or affiliates thereof. Such
relationships may involve the payment of account or service fees.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE
PORTFOLIO.
ANNUAL PORTFOLIO OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.25%
Distribution and Service (12b-1) Fees None
Other Expenses 0.41%
-----
Total Annual Portfolio Operating Expenses 0.66%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of a Fund.
* The table shows the highest expenses that could be currently charged to the
Portfolio. Actual expenses are lower because the Adviser is voluntarily
waiving a portion of its fees. Actual Management Fees and Total Operating
Expenses are 0.09% and 0.25%, respectively. The Adviser could discontinue
these voluntary waivers at any time. For more information about these fees,
see the "The Investment Adviser and Investment Team" and "Dividends and
Distributions."
+ The Annual Portfolio Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
The table does not reflect any of the operating costs and Management fees of the
underlying CrestFunds. The Portfolio and its shareholders will indirectly bear
a pro-rata share of the expenses of the underlying CrestFunds.
EXPENSES
Every Portfolio has operating expenses to pay for professional advisory,
shareholder, distribution, administration and custody services. The Portfolio's
expenses in the table are shown as a percentage of the Portfolio's net assets.
These expenses are deducted from the Portfolio's assets. The expenses and fees
of the underlying CrestFunds are not reflected in the above expense table. The
actual fees charged to the underlying CrestFunds can be found in the attached
Trust Class Prospectus.
Page 6-LV of 28-LV
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other Portfolios. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return and
Portfolio expenses remain the same. Although your actual costs and returns
might be different, your approximate costs (including the costs of the
underlying CrestFunds) of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $205 $632 $1,085 $2,343
</TABLE>
Page 7-LV of 28-LV
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Long-term capital appreciation
Investment Focus Equity and bond funds
Share Price Volatility Moderate
Principal Investment Strategy Investing at least 80% of the Portfolio's
total assets in shares of underlying
CrestFunds that invest primarily in
equity securities or fixed income
securities
Investor Profile Investors seeking long-term capital
appreciation potential and current income
who are willing to be subject to the
risks of equity securities
INVESTMENT STRATEGY OF THE GROWTH AND INCOME PORTFOLIO
The Portfolio invests at least 80% of the Portfolio's total assets in shares of
underlying CrestFunds that invest primarily in equity securities or fixed income
securities. The Portfolio's remaining assets may be invested in shares of
underlying CrestFunds that are money market funds, securities issued by the U.S.
Government, its agencies or instrumentalities, repurchase agreements and
short-term paper. In selecting a diversified portfolio of underlying
CrestFunds, the Adviser analyzes many factors, including the underlying
CrestFunds' investment objectives, total return, volatility and expenses.
The Portfolio's investment approach, with its emphasis on funds which invest in
equity and fixed income securities, is expected to produce long-term capital
appreciation and current income with a medium risk to principal.
The Portfolio currently plans to invest in shares of the following underlying
CrestFunds within the percentage ranges indicated:
<TABLE>
<CAPTION>
INVESTMENT RANGE (PERCENTAGE OF THE GROWTH
ASSET CLASS AND INCOME PORTFOLIO'S ASSETS)
- --------------------------------------------------------------------------------
<S> <C>
Equity 60-80%
Value Fund
Capital Appreciation Fund
Special Equity Fund
Bond 20-40%
Limited Term Bond Fund
Intermediate Bond Fund
Government Bond Fund
Money Market 0-20%
Cash Reserve Fund
</TABLE>
Page 8-LV of 28-LV
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE GROWTH AND INCOME PORTFOLIO
The underlying Funds of the Portfolio invest in both common stocks and bonds.
As a result, the underlying Funds are subject to the risk that stock prices will
fall over short or extended periods of time. In addition, the value of bonds
held by the underlying Funds may decline due to rising interest rates. Stock
markets tend to move in cycles, with periods of rising and periods of falling
prices. This price volatility is the principal risk of investing in the
Portfolio. An issuer of fixed income securities may be unable to make timely
payments of principal or interest. Some investment grade bonds may have
speculative characteristics. Fixed income securities regardless of credit
quality, also experience price volatility, especially in response to interest
rate changes. The underlying Funds may have more assets than usual invested in
bonds during periods of rising interest rates or less assets than usual invested
in bonds during falling interest rates.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
This bar chart shows changes in the performance of the Portfolio's Trust Class
Shares from year to year.*
<TABLE>
<CAPTION>
1998 11.16%
<S> <C>
BEST QUARTER WORST QUARTER
13.65% (10.20)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE
PERIODS ENDING DECEMBER 31, 1998 TO THOSE OF A 50/25/20/5 BLEND OF THE
FOLLOWING INDICES: THE S&P 500 INDEX, LEHMAN BROTHERS AGGREGATE BOND INDEX,
RUSSELL 2000 INDEX AND THE SALOMON 3 MONTH T-BILL.
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Growth and Income Portfolio 11.16% 2.30%*
S&P 500 Index 28.60% 26.45%**
Lehman Brothers Aggregate Bond Index 8.67% 10.15%**
Russell 2000 Index (2.55)% 5.40%**
Salomon 3 Month T-Bill 5.05% 5.12%**
</TABLE>
*Since June 30, 1997
**Since June 30, 1997
Page 9-LV of 28-LV
<PAGE>
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
PORTFOLIO FEES AND EXPENSES
Shares of the Portfolio are currently offered, without payment of any sales
charge, primarily to tax-advantaged and other employee benefit or retirement
accounts which have entered into certain management, administration and/or
servicing agreements with Crestar Bank, or affiliates thereof. Such
relationships may involve the payment of account or service fees.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE
PORTFOLIO.
ANNUAL PORTFOLIO OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.25%
Distribution and Service (12b-1) Fees None
Other Expenses 0.34%
-----
Total Annual Portfolio Operating Expenses 0.59%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of a Fund.
* The table shows the highest expenses that could be currently charged to the
Portfolio. Actual expenses are lower because the Adviser is voluntarily waiving
a portion of its fees. Actual Management Fees and Total Operating Expenses are
0.10% and 0.25%, respectively. The Adviser could discontinue these voluntary
waivers at any time. For more information about these fees, see "The Investment
Adviser and Investment Team" and "Dividends and Distributions."
+ The Annual Portfolio Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
The table does not reflect any of the operating costs and Management fees of the
underlying CrestFunds. The Portfolio and its shareholders will indirectly bear
a pro-rata share of the expenses of the underlying CrestFunds.
EXPENSES
Every Portfolio has operating expenses to pay for professional advisory,
shareholder, distribution, administration and custody services. The Portfolio's
expenses in the table are shown as a percentage of the Portfolio's net assets.
These expenses are deducted from the Portfolio's assets. The expenses and fees
of the underlying CrestFunds are not reflected in the above expense table. The
actual fees charged to the underlying CrestFunds can be found in the attached
Trust Class Prospectus.
Page 10-LV of 28-LV
<PAGE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other Portfolios. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return and
Portfolio expenses remain the same. Although your actual costs and returns
might be different, your approximate costs (including the costs of the
underlying CrestFunds) of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TRUST CLASS SHARES $193 $598 $1,029 $2,227
</TABLE>
Page 11-LV of 28-LV
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO SUMMARY
Investment Goal Capital appreciation and current income
Investment Focus Equity and bond funds
Share Price Volatility Low
Principal Investment Strategy Investing principally in shares of
underlying CrestFunds that invest
primarily in equity securities, but at
least 25% of the Portfolio's total
assets are in shares of underlying
CrestFunds that invest primarily in
fixed income securities
Investor Profile Investors seeking capital appreciation
potential and current income who are
willing to be subject to the risks of
equity securities
INVESTMENT STRATEGY OF THE BALANCED PORTFOLIO
The Portfolio principally invests in shares of underlying CrestFunds that invest
primarily in equity securities, but at least 25% of the Portfolio's total assets
are invested in shares of underlying CrestFunds that invest primarily in fixed
income securities. The Portfolio's remaining assets may be invested in shares
of underlying CrestFunds that are money market funds, securities issued by the
U.S. Government, its agencies or instrumentalities, repurchase agreements and
short-term paper. In selecting a diversified portfolio of underlying
CrestFunds, the Adviser analyzes many factors, including the underlying
CrestFunds' investment objectives, total return, volatility and expenses.
The Portfolio's investment approach, with its emphasis on funds which invest in
fixed income securities, is expected to produce capital appreciation and current
income with a low risk to principal.
The Portfolio currently plans to invest in shares of the following underlying
CrestFunds within the percentage ranges indicated:
Page 12-LV of 28-LV
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT RANGE (PERCENTAGE OF THE
ASSET CLASS BALANCED PORTFOLIO'S ASSETS)
- --------------------------------------------------------------------------------
<S> <C>
Equity 40-70%
Value Fund
Capital Appreciation Fund
Special Equity Fund
Bond 30-60%
Limited Term Bond Fund
Intermediate Bond Fund
Government Bond Fund
Money Market 0-20%
Cash Reserve Fund
</TABLE>
PRINCIPAL RISKS OF INVESTING IN THE BALANCED PORTFOLIO
The underlying Funds of the Portfolio invest in both common stocks and bonds.
As a result, the underlying Funds are subject to the risk that stock prices will
fall over short or extended periods of time. In addition, the value of bonds
held by the underlying Funds may decline due to rising interest rates. Stock
markets tend to move in cycles, with periods of rising and periods of falling
prices. This price volatility is the principal risk of investing in the
Portfolio. An issuer of fixed income securities may be unable to make timely
payments of principal or interest. Some investment grade bonds may have
speculative characteristics. Fixed income securities regardless of credit
quality, also experience price volatility, especially in response to interest
rate changes. The underlying Funds may have more assets than usual invested in
bonds during periods of rising interest rates or less assets than usual invested
in bonds during falling interest rates.
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the risks and
volatility of an investment in the Portfolio. Of course, the Portfolio's past
performance does not necessarily indicate how the Portfolio will perform in the
future.
This bar chart shows changes in the performance of the Fund's Trust Class Shares
from year to year.*
<TABLE>
<CAPTION>
1998 11.15%
<S> <C>
BEST QUARTER WORST QUARTER
11.24% (7.99)%
(12/31/98) (9/30/98)
</TABLE>
* The performance information shown above is based on a calendar year.
THIS TABLE COMPARES THE PORTFOLIO'S AVERAGE ANNUAL TOTAL RETURNS FOR THE
PERIODS ENDING DECEMBER 31, 1998 TO THOSE OF A 40/35/20/5 BLEND OF THE
FOLLOWING INDICES: THE S&P 500 INDEX, LEHMAN BROTHERS AGGREGATE BOND INDEX,
RUSSELL 2000 INDEX AND THE SALOMON 3 MONTH T-BILL.
Page 13-LV of 28-LV
<PAGE>
<TABLE>
<CAPTION>
TRUST CLASS SHARES 1 YEAR SINCE INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Balanced Portfolio 11.15% 6.60%*
S&P 500 Index 28.60% 26.45%**
Lehman Brothers Aggregate Bond Index 8.67% 10.15%**
Russell 2000 Index (2.55)% 5.40%**
Salomon 3 Month T-Bill 5.05% 5.12%**
</TABLE>
*Since June 30, 1997
**Since June 30, 1997
WHAT IS AN INDEX?
An index measures the market prices of a specific group of securities in a
particular market or securities in a market sector. You cannot invest directly
in an index. Unlike a mutual fund, an index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
PORTFOLIO FEES AND EXPENSES
Shares of the Portfolio are currently offered, without payment of any sales
charge, primarily to tax-advantaged and other employee benefit or retirement
accounts which have entered into certain management, administration and/or
servicing agreements with Crestar Bank, or affiliates thereof. Such
relationships may involve the payment of account or service fees.
EVERY MUTUAL FUND HAS OPERATING EXPENSES TO PAY FOR SERVICES SUCH AS
PROFESSIONAL ADVISORY, SHAREHOLDER, DISTRIBUTION, ADMINISTRATION AND CUSTODY
SERVICES AND OTHER COSTS OF DOING BUSINESS. THIS TABLE DESCRIBES THE HIGHEST
FEES AND EXPENSES THAT YOU MAY PAY INDIRECTLY IF YOU HOLD SHARES OF THE
PORTFOLIO.
ANNUAL PORTFOLIO OPERATING EXPENSES*+
<TABLE>
<CAPTION>
TRUST CLASS SHARES
- --------------------------------------------------------------------------------
<S> <C>
Management Fees 0.25%
Distribution and Service (12b-1) Fees None
Other Expenses 0.17%
-----
Total Annual Portfolio Operating Expenses 0.42%
</TABLE>
Under the shareholder service plan, the Trust Class Shares may pay the
Distributor a negotiated fee at a rate of up to 0.25% annually of the average
daily net assets of a Fund.
* The table shows the highest expenses that could be currently charged to the
Portfolio. Actual expenses are lower because the Adviser is voluntarily waiving
a portion of its fees. Actual Management Fees and Total Operating Expenses are
0.12% and 0.25%, respectively. The Adviser could discontinue these voluntary
waivers at any time. For more information about these fees, see "The
Investment Adviser and Investment Team" and "Dividends and Distributions."
+ The Annual Portfolio Operating Expenses have been restated from fiscal year
amounts to reflect current fees.
The table does not reflect any of the operating costs and Management fees of the
underlying CrestFunds. The Portfolio and its shareholders will indirectly bear
a pro-rata share of the expenses of the underlying CrestFunds.
EXPENSES
Every Portfolio has operating expenses to pay for professional advisory,
shareholder, distribution, administration and custody services. The Portfolio's
expenses in the table are shown as a
Page 14-LV of 28-LV
<PAGE>
percentage of the Portfolio's net assets. These expenses are deducted from
the Portfolio's assets. The expenses and fees of the underlying CrestFunds
are not reflected in the above expense table. The actual fees charged to the
underlying CrestFunds can be found in the attached Trust Class Prospectus.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other Portfolios. The Example assumes
that you invest $10,000 in the Portfolio for the time periods indicated and that
you sell your shares at the end of the period.
The Example also assumes that each year your investment has a 5% return and
Portfolio expenses remain the same. Although your actual costs and returns
might be different, your approximate costs (including the costs of the
underlying CrestFunds) of investing $10,000 in the Portfolio would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trust Class Shares $173 $537 $926 $2,014
</TABLE>
Page 15-LV of 28-LV
<PAGE>
INVESTMENTS IN SHARES OF THE UNDERLYING CRESTFUNDS
A more detailed description of each of the underlying CrestFunds appears in the
accompanying Trust Class Prospectus.
CASH RESERVE FUND - The Fund invests primarily in U.S. dollar denominated money
market instruments, such as U.S. Government securities; short-term debt
obligations of high quality corporate issuers, including commercial paper, notes
and bonds; high quality debt obligations of foreign issuers; repurchase
agreements; and obligations of institutions such as banks and insurance
companies including certificates of deposit, bankers' acceptances and time
deposits.
LIMITED TERM BOND FUND - The Fund invests primarily in bonds and other fixed
income securities issued by domestic issuers, such as corporate obligations;
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; commercial paper rated Prime-1 by Moody's or A-1 by S&P;
and mortgage-backed securities. All such instruments must be investment
grade (denominated in U.S. dollars and must be rated at least Baa or its
equivalent by a nationally recognized statistical rating organization). The
Fund is managed to maintain a dollar-weighted average maturity of between one
and five years.
INTERMEDIATE BOND FUND - The Fund invests primarily in bonds and other fixed
income securities issued by domestic issuers, such as corporate obligations;
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; commercial paper rated Prime-1 by Moody's or A-1 by S&P;
and asset-backed and mortgage-backed securities. All such instruments must
be investment grade. The Fund is managed to maintain a dollar-weighted
average maturity of between five and ten years.
GOVERNMENT BOND FUND - The Fund invests primarily in bonds and other fixed
income securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including U.S. Treasury bonds, notes and bills, Government
National Mortgage Association mortgage-backed pass-through certificates and
mortgage-backed securities issued by the Federal National Mortgage Association
or the Federal Home Loan Mortgage Corporate.
VALUE FUND - The Fund invests primarily in common stock of domestic companies
with large market capitalizations of at least $1 billion. Such investments
include securities convertible into common stock, such as convertible bonds and
convertible preferred stock rated investment grade or better.
CAPITAL APPRECIATION FUND - The Fund invests primarily in common stock of
domestic companies with medium to large market capitalizations of at least $250
million. Such investments include securities convertible into common stock,
such as convertible bonds and convertible preferred stock rated investment grade
or better.
SPECIAL EQUITY FUND - The Fund invests primarily in common stock of domestic
companies with small to medium market capitalizations of less than $2 billion.
Such investments include securities convertible into common stock, such as
convertible bonds and convertible preferred stock.
Page 16-LV of 28-LV
<PAGE>
MORE INFORMATION ABOUT RISK OF THE UNDERLYING CRESTFUNDS
<TABLE>
<S> <C>
EQUITY RISK - Equity securities include public Limited Term Bond Fund
and privately issued equity securities, common
and preferred stocks, warrants, rights to subscribe Intermediate Bond Fund
to common stock and convertible securities, as well
as instruments that attempt to track the price Value Fund
movement of equity indices. Investments in equity
securities and equity derivatives in general are Capital Appreciation Fund
subject to market risks that may cause their prices
to fluctuate over time.The value of securities Special Equity Fund
convertible into equity securities, such as warrants
or convertible debt, is also affected by prevailing
interest rates, the credit quality of the issuer and
any call provision. Fluctuations in the value of
equity securities in which a mutual fund invests will
cause a fund's net asset value to fluctuate. An
investment in a portfolio of equity securities may be
more suitable for long-term investors who can bear the
risk of these share price fluctuations.
CONVERTIBLE SECURITIES - Convertible securities Limited Term Bond Fund
have characteristics of both fixed income and
equity securities. The value of the convertible Intermediate Bond Fund
security tends to move with the market value of
the underlying stock, but may also be affected by Value Fund
interest rates, credit quality of the issuer and
any call provisions. Capital Appreciation Fund
Special Equity Fund
FIXED INCOME RISK - The market value of fixed income Limited Term Bond Fund
investments change in response to interest rate changes
and other factors. During periods of falling interest Intermediate Bond Fund
rates, the values of outstanding fixed income securities
generally rise. Moreover, while securities with longer Government Bond Fund
maturities tend to produce higher yields, the prices of
longer maturity securities are also subject to greater
market fluctuations as a result of changes in interest
rates. In addition to these fundamental risks, different
types of fixed income securities may be subject to the
following additional risks:
Page 17-LV of 28-LV
<PAGE>
CALL RISK - During periods of falling interest Limited Term Bond Fund
rates, certain debt obligations with high interest
rates may be prepaid (or "called") by the issuer Intermediate Bond Fund
prior to maturity. This may cause a Fund's average
weighted maturity to fluctuate, and may require a Government Bond Fund
Fund to invest the resulting proceeds at lower
interest rates.
CREDIT RISK - The possibility that an issuer will Limited Term Bond Fund
be unable to make timely payments of either principal
or interest. Since a Fund purchases securities backed Intermediate Bond Fund
by credit enhancements from banks and other financial
institutions, changes in the credit ratings of these Government Bond Fund
institutions could cause a Fund to lose money and may
affect a Fund's share price.
MORTGAGE-BACKED SECURITIES - Mortgage-backed Limited Term Bond Fund
securities are fixed income securities representing
an interest in a pool of underlying mortgage loans. Intermediate Bond Fund
They are sensitive to changes in interest rates,
but may respond to these changes differently from Government Bond Fund
other fixed income securities due to the possibility
of prepayment of the underlying mortgage loans. As a
result, it may not be possible to determine in advance
the actual maturity date or average life of a mortgage
- -backed security. Rising interest rates tend to
discourage refinancings, with the result that the
average life and volatility of the security will
increase, exacerbating its decrease in market price.
When interest rates fall, however, mortgage-backed
securities may not gain as much in market value because
of the expectation of additional mortgage prepayments
that must be reinvested at lower interest rates.
Prepayment risk may make it difficult to calculate
the average maturity of a portfolio of mortgage-backed
securities and, therefore, to assess the volatility risk
of that portfolio.
Page 18-LV of 28-LV
<PAGE>
FOREIGN SECURITY RISKS - Investments in securities Limited Term Bond Fund
of foreign companies or governments can be more
volatile than investments in U.S. companies or Intermediate Bond Fund
governments. Diplomatic, political, or economic
developments, including nationalization or Value Fund
appropriation, could affect investments in foreign
countries. Foreign securities markets generally Capital Appreciation Fund
have less trading volume and less liquidity than
U.S. markets. In addition, the value of securities Special Equity Fund
denominated in foreign currencies, and of dividends
from such securities, can change significantly when
foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign companies or governments
generally are not subject to uniform accounting,
auditing, and financial reporting standards
comparable to those applicable to domestic U.S.
companies or governments. Transaction costs are
generally higher than those in the U.S. and expenses
for custodial arrangements of foreign securities may
be somewhat greater than typical expenses for
custodial arrangements of similar U.S. securities.
Some foreign governments levy withholding taxes
against dividend and interest income. Although in
some countries a portion of these taxes are
recoverable, the non-recovered portion will reduce
the income received from the securities comprising
the portfolio.
EVENT RISK - Securities may suffer declines in Limited Term Bond Fund
credit quality and market value due to issuer
corporate or governmental restructurings. While Intermediate Bond Fund
this risk may be high for certain securities held by
a Fund, the overall risk should be reduced because Government Bond Fund
of the Fund's multiple holdings.
Page 19-LV of 28-LV
<PAGE>
YEAR 2000 RISK - The underlying Funds depend on the All Funds
smooth functioning of computer systems in almost
every aspect of their business. Like other mutual
funds, businesses and individuals around the world,
the Funds could be adversely affected if the
computer systems used by its service providers do
not properly process dates on and after January 1,
2000, and distinguish between the year 2000 and the
year 1900. The Funds have asked their service
providers whether they expect to have their computer
systems adjusted for the year 2000 transition, and
are seeking assurances from each service provider
that they are devoting significant resources to
prevent material adverse consequences to the Funds.
While it is likely that such assurances will be
obtained, the Funds and their shareholders may
experience losses if these assurances prove to be
incorrect or as a result of year 2000 computer
difficulties experienced by issuers of portfolio
securities or third parties, such as custodians,
banks, broker dealers or others with which the Funds
do business.
</TABLE>
Page 20-LV of 28-LV
<PAGE>
PORTFOLIO INVESTMENTS
In addition to the investments and strategies described in this prospectus, each
Portfolio also may invest in other securities, use other strategies and engage
in other investment practices, which are described in detail in our Statement of
Additional Information (SAI). Of course, we cannot guarantee that any Portfolio
will achieve its investment goal.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, each Portfolio may invest up to
100% of its assets in securities that would not ordinarily be consistent with
the Portfolio's objectives. A Portfolio will do so only if the Adviser believes
that the risk of loss outweighs the opportunity for capital gains or higher
income.
INVESTMENT ADVISER AND INVESTMENT TEAM
INVESTMENT ADVISER
The Investment Adviser makes investment decisions for the Portfolios and
continuously reviews, supervises and administers each Portfolio's respective
investment program. The Board of Directors supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.
Crestar Asset Management Company serves as the Adviser to the CrestFunds. As
of December 31, 1998, Crestar Asset Management Company had approximately $17
billion in assets under management. For the fiscal year ended November 30,
1998, Crestar Asset Management Company received advisory fees of:
<TABLE>
<S> <C>
MAXIMUM GROWTH PORTFOLIO 0.09%
GROWTH AND INCOME PORTFOLIO 0.10%
BALANCED PORTFOLIO 0.12%
</TABLE>
On December 31, 1998, Crestar Financial Corporation (Crestar), the parent of
Crestar Bank which is the parent of Crestar Asset Management Corporation, the
Funds' Adviser, was acquired by SunTrust Banks, Inc. (SunTrust). On February
19, 1999, the Board of Directors of the CrestFunds approved a plan of
reorganization with the STI Classic Funds (mutual funds that are served by
investment advisers that are subsidiaries of SunTrust). Under the plan of
reorganization, shareholders of each Fund of the CrestFunds will receive shares
of a comparable class of the corresponding STI Fund. This plan of
reorganization will be submitted for approval by shareholders of the CrestFunds
at a Special Meeting of Shareholders expected to be held on May 7, 1999. The
plan is also conditioned upon receiving the appropriate exemptive relief from
the Securities and Exchange Commission.
PERFORMANCE INFORMATION FOR THE ADVISER'S ASSET ALLOCATION PROGRAMS
The assets now in the Maximum Growth, Growth and Income and Balanced Portfolios
previously were managed by Crestar Asset Management Company pursuant to
discretionary asset allocation programs prior to each such Portfolio's
commencement of operations.
Page 21-LV of 28-LV
<PAGE>
Set forth below is certain performance data for these predecessor asset
allocation programs, which were managed using substantially the same investment
objectives, policies and restrictions as apply to each respective Portfolio.
Please note, however, that the predecessor asset allocation programs were not
subject to certain investment limitations, diversification requirements, and
other restrictions imposed by the Investment Company Act of 1940 and the
Internal Revenue Code, which, if they had been applicable, may have adversely
affected the predecessor asset allocation programs' performance. Moreover, the
performance data shown below does not represent the historical performance of
any Portfolio and should not be interpreted as indicative of future performance
of any Portfolio.
The predecessor asset allocation programs did not incur expenses that directly
correspond to the advisory, administrative and other fees to which the
Portfolios are subject. Accordingly, the performance information has been
adjusted by applying the total expense ratios before voluntary waivers and
reimbursements for the corresponding Portfolio, as disclosed herein, which
reduced the actual performance of the asset allocation programs. The
Portfolios, however, currently operate subject to total expense ratios which, as
a result of certain waivers of fees and reimbursements of expenses, are lower
expense ratios than those applied to the performance information below.
The average annual total returns for each asset allocation program (adjusted to
reflect Portfolio expenses, net of voluntary waivers and reimbursements) for the
one-year and three-year periods ended June 30, 1997, as well as the period from
inception of the asset allocation programs through that date, were as follows:
<TABLE>
<CAPTION>
One Year Three Years Since Inception
(Ending 6/30/97) (Ending 6/30/97) (1/1/93-6/30/97)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Growth Asset Allocation
Program (1).......................... 21.66% 18.96% 13.75%
Growth and Income Asset Allocation
Program (2).......................... 17.10% 15.44% 11.25%
Balanced Asset Allocation
Program (3).......................... 15.21% 13.77% 10.12%
</TABLE>
(1) After voluntary waivers and reimbursements currently in effect, the average
annual total returns for the Maximum Growth Asset Allocation Program for the
above periods were 22.16%, 19.45% and 14.21%, respectively.
(2) After voluntary waivers and reimbursements currently in effect, the average
annual total returns for the Growth and Income Asset Allocation Program for the
above periods were 17.50%, 15.83% and 11.63%, respectively.
(3) After voluntary waivers and reimbursements currently in effect, the average
annual total returns for the Balanced Asset Allocation Program for the above
periods were 15.41%, 13.96% and 10.31%, respectively.
INVESTMENT TEAM
The Portfolios are managed by the Adviser's Policy and Strategy Committee. The
Adviser's Policy and Strategy committee is comprised of the President & Chief
Investment Officer, Director of Equity Investment Management, Director of
Fixed Income Investment Management, Director of Cash Investment Management
and senior Portfolio managers.
Page 22-LV of 28-LV
<PAGE>
PURCHASING, SELLING AND EXCHANGING PORTFOLIO SHARES
This section tells you how to buy, sell (sometimes called "redeem") or exchange
Trust Class Shares of the Portfolios
The classes have different expenses and other characteristics.
HOW TO PURCHASE PORTFOLIO SHARES
Your Portfolios may purchase shares through a representative of certain
correspondent banks of Crestar Asset Management Company, or other financial
institutions that have executed dealer agreements.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange is open for
business (a Business Day). Shares cannot be purchased by Federal Reserve Wire
on days when the New York Stock Exchange is closed.
A Portfolio may reject any purchase order if it is determined that accepting the
order would not be in the best interests of the Portfolio or its shareholders.
The price per share (the offering price) will be the net asset value per share
(NAV) next determined after a Portfolio receives your purchase order.
HOW WE CALCULATE NAV
NAV for one Portfolio share is the value of that share's portion of all of the
assets in the Portfolio.
In calculating NAV, a Portfolio generally values its investment portfolio at
market price. If market prices are unavailable or a Portfolio thinks that they
are unreliable, fair value prices may be determined in good faith using methods
approved by the Board of Directors.
The assets of each Portfolio consist primarily of shares of the underlying
CrestFunds, which are valued at their respective net asset values. Excluding
shares of the underlying CrestFunds, portfolio securities are generally valued
at the last quoted sales price for such securities. NAV per share is determined
daily as of the regularly scheduled close of normal trading on the New York
Stock Exchange (NYSE) (normally 4:00 p.m., Eastern time) on each Business day.
MINIMUM PURCHASES
To purchase shares for the first time, you must invest at least $1 million
($10,000 for agency accounts) in any Portfolio.
Page 23-LV of 28-LV
<PAGE>
We may accept investments of smaller amounts at our discretion.
For information on opening an account, contact your plan sponsor or financial
intermediary for the services and procedures which pertain to your account.
HOW TO SELL YOUR PORTFOLIO SHARES
If you own your shares directly, you may sell (sometimes called "redeem") your
shares on any Business Day by contacting a Portfolio directly by mail or
telephone at 1-800-273-7827.
If you would like to sell your shares, please notify us in writing and include a
signature guarantee by a bank or other financial institution (a notarized
signature is not sufficient).
The sale price of each share will be the next NAV determined after the Portfolio
receives your request.
RECEIVING YOUR MONEY
Normally, we will send your sale proceeds within seven Business Days after we
receive your request. Your proceeds can be wired to your bank account or sent
to you by check. IF YOU RECENTLY PURCHASED YOUR SHARES BY CHECK, REDEMPTION
PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED (WHICH MAY TAKE UP TO
15 BUSINESS DAYS).
REDEMPTIONS IN KIND
We generally pay sale (redemption) proceeds in cash. However, under unusual
conditions that make the payment of cash unwise (and for the protection of a
Fund's remaining shareholders) we might pay all or part of your redemption
proceeds in liquid securities with a market value equal to the redemption price
(redemption in kind). It is highly unlikely that your shares would ever be
redeemed in kind, but if they were you would probably have to pay transaction
costs to sell the securities distributed to you, as well as taxes on any capital
gains from the sale as with any redemption.
INVOLUNTARY SALES OF YOUR SHARES
If your account balance drops below $1 million ($10,000 for agency accounts)
because of redemptions you may be required to sell your shares. But, we will
always give you at least 30 days' written notice to give you time to add to
your account and avoid the sale of your shares.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
A Portfolio may suspend your right to sell your shares if the NYSE restricts
trading, the SEC declares an emergency or for other reasons. More information
about this is in our SAI.
Page 24-LV of 28-LV
<PAGE>
HOW TO EXCHANGE YOUR SHARES
You may exchange your shares on any Business Day by contacting your plan sponsor
or financial intermediary. You may exchange shares through your financial
institution by mail or telephone.
This exchange privilege may be changed or canceled at any time upon 60 days
notice.
When you exchange shares, you are really selling your shares and buying other
Portfolio Fund shares. So, your sale price and purchase price will be based on
the NAV next calculated after a Portfolio receives your exchange request.
DIVIDENDS AND DISTRIBUTIONS
Income dividends from the Portfolios are declared and distributed monthly.
Each Portfolio makes distributions of capital gains, if any, at least annually.
If you own Portfolio shares on a Portfolio's record date, you will be entitled
to receive the distribution.
You will receive dividends and distributions in the form of additional Portfolio
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Portfolio in writing prior to the date of the distribution.
Your election will be effective for dividends and distributions paid after the
Portfolio receives your written notice. To cancel your election, simply send
the Portfolio written notice.
Page 25-LV of 28-LV
<PAGE>
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about each Portfolio.
This information is intended to help you understand each Portfolio's financial
performance for the past five years, or, if shorter, the period of the
Portfolio's operations. Some of this information reflects financial information
for a single Portfolio share. The total returns in the table represent the rate
that you would have earned (or lost) on an investment in a Portfolio, assuming
you reinvested all of your dividends and distributions. This information has
been audited by Deloitte & Touche LLP, independent public accountants. Their
report, along with each Portfolio's financial statements, appears in the annual
report that accompanies our SAI. You can obtain the annual report, which
contains more performance information, at no charge by calling 1-800-273-7827.
Page 26-LV of 28-LV
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS CRESTFUNDS, INC.
FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR
Investment Activities Distributions
Net -------------------------- ------------------- Net
Asset Net Realized Asset
Value, Net and Unrealized Net Value,
Beginning Investment Gain(Loss) Investment Capital End
of Period Income on Investments Income Gains of Period
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maximum Growth Portfolio
- --------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $ 10.65 0.025 0.670 (0.025) -- $11.32
1997(1) 10.00 0.032 0.650 (0.032) -- 10.65
- --------------------------------------------------------------------------------------
Growth and Income Portfolio
- --------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $ 10.51 0.183 0.561 (0.184) (0.010) $11.06
1997(1) 10.00 0.091 0.506 (0.087) -- 10.51
- --------------------------------------------------------------------------------------
Balanced Portfolio
- --------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 $ 10.46 0.239 0.579 (0.240) (0.028) $11.01
1997(1) 10.00 0.116 0.454 (0.110) -- 10.46
<CAPTION>
Ratio of
Ratio Net Investment
Net of Expenses Ratio of Income to
Assets, Ratio to Average Net Investment Average
End of Expenses Net Assets Income Net Assets Portfolio
Total of Period to Average Excluding to Average Excluding Turnover
Return (000) Net Assets Fee Waivers Net Assets Fee Waivers Rate
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Maximum Growth Portfolio
- --------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 6.53% $16,230 0.25% 0.66% 0.23% (0.18)% 75%
1997(1) 6.82% 13,712 0.25%* 0.73%* 0.72%* 0.24%* 34%
- --------------------------------------------------------------------------------------------------------
Growth and Income Portfolio
- --------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 7.12% $19,042 0.25% 0.59% 1.68% 1.34% 57%
1997(1) 5.97% 22,521 0.25%* 0.59%* 2.11%* 1.77%* 25%
- --------------------------------------------------------------------------------------------------------
Balanced Portfolio
- --------------------------------------------------------------------------------------------------------
Trust Class
For the years ended November 30,:
1998 7.90% $93,211 0.25% 0.42% 2.21% 2.04% 52%
1997(1) 5.70% 89,442 0.25%* 0.42%* 2.66%* 2.49%* 43%
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) Commencement of operations June 30, 1997.
* Annualized.
** Total return does not reflect the sales charge or redemption charge,
where applicable.
Page 27-LV of 28-LV
<PAGE>
CRESTFUNDS
INVESTMENT ADVISER
Crestar Asset Management Company
919 E. Main Street
Richmond, Virginia 23219
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
More information about the Portfolios are available without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated March 30, 1999, includes detailed information about CrestFunds
Portfolios. The SAI is on file with the SEC and is incorporated by reference
into this prospectus. This means that the SAI, for legal purposes, is a part
of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list each Portfolio's holdings and contain information from the
Portfolio's managers about strategies and recent market conditions and trends
and their impact on the Portfolios' performance. The reports also contain
detailed financial information about the Portfolios.
To Obtain More Information contact your plan sponsor or financial intermediary.
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual
reports, as well as any other information about CrestFunds, from the SEC's
website ("http://www.sec.gov"). You may review and copy documents at the SEC
Public Reference Room in Washington, DC (for information call 1-800-SEC-0330).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-6009. The CrestFunds' Investment Company Act
registration number is 811-4620.
Page 28-LV of 28-LV
<PAGE>
CRESTFUNDS-REGISTERED TRADEMARK-, INC.
LIFE VISION MAXIMUM GROWTH PORTFOLIO, LIFE VISION GROWTH AND INCOME
PORTFOLIO, AND LIFE VISION BALANCED PORTFOLIO
TRUST CLASS SHARES
STATEMENT OF ADDITIONAL INFORMATION
MARCH 30, 1999
This Statement is not a prospectus but should be read in conjunction with
the current Trust Class Prospectus which includes the Asset Allocation
Portfolios (dated March 30, 1999) for the above-referenced portfolios of
CrestFunds, Inc. (the Company). 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, 1998 are incorporated
herein by reference. To obtain without charge additional copies of the Trust
Class Prospectus which includes the Asset Allocation Prospectus for the above
referenced Portfolios, the Annual Report, or the Class A Shares and Class B
Shares Prospectus or Statement of Additional Information in the CrestFunds
Family of Funds, please call 1-800-273-7827.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Limitations of the Portfolios..................... 2
Investment Objectives and Policies........................................ 4
Investment Practices of the Underlying Crestfunds......................... 5
Portfolio Transactions.................................................... 11
Valuation of Portfolio Securities......................................... 11
Portfolio Performance..................................................... 12
Additional Information Regarding Pricing and Redemptions.................. 13
Additional Description of Common Stock.................................... 15
Distributions and Taxes................................................... 15
Directors and Officers and Affiliated Persons............................. 17
The Adviser............................................................... 18
Administrator and Distributor............................................. 19
Transfer Agent............................................................ 21
Custodian................................................................. 21
Auditor................................................................... 21
Legal Counsel............................................................. 21
Principal Holders of Securities........................................... 21
Appendix.................................................................. 23
</TABLE>
<PAGE>
CRESTFUNDS, INC.
CrestFunds, Inc. (the Company) is a registered open-end management
investment company that currently consists of fifteen separate investment
portfolios (portfolios or series). The Company was established as a Maryland
corporation on March 17, 1986. The Company's Articles of Incorporation permit it
to offer separate series of common stock (shares) and separate classes of each
series. Except for the differences among the Trust Class shares, Investors Class
A shares and Investors Class B shares, each share of each series represents an
equal proportionate interest in that series with each other share of that
series.
This Statement of Additional Information relates to the following investment
portfolios: Maximum Growth Portfolio, Growth and Income Portfolio, and Balanced
Portfolio (each a Portfolio and, collectively, the Portfolios). Shareholders may
purchase shares in the Portfolios through one class, the Trust Class. Investors
may purchase shares of the other series in the CrestFunds Family of Funds
through three separate classes, the Trust Class, Investors Class A and Investors
Class B, which provide for variations in distribution and servicing costs,
transfer agent fees, voting rights and dividends.
ADVISER:
Crestar Asset Management Company (the Adviser)
TRANSFER AGENT:
Crestar Bank (the Transfer Agent)
CUSTODIAN:
Crestar Bank (the Custodian)
ADMINISTRATOR:
SEI Investments Mutual Funds Services (the Administrator)
DISTRIBUTOR:
SEI Investments Distribution Co. (the Distributor)
INVESTMENT POLICIES AND LIMITATIONS OF THE PORTFOLIOS
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 Portfolio'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 Portfolio'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 Portfolio's investment policies and limitations.
Each Portfolio's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting securities,"
of the Portfolio (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.
2
<PAGE>
THE FOLLOWING ARE THE FUNDAMENTAL INVESTMENT LIMITATIONS OF MAXIMUM GROWTH
PORTFOLIO, GROWTH AND INCOME PORTFOLIO, AND BALANCED PORTFOLIO SET FORTH IN
THEIR ENTIRETY. EACH PORTFOLIO MAY NOT:
1. with respect to 75% of its total assets, purchase the securities of any
issuer (other than securities of other investment companies and 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
Portfolio's total assets would be invested in the securities of that issuer,
or (b) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer;
2. borrow money, except that a Portfolio (a) may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the Portfolio's total
assets determined at the time of the borrowing and (b) may borrow money from
banks or by engaging in reverse repurchase agreements. Asset coverage of at
least 300% is required for all borrowings, except where a Portfolio has
borrowed money for temporary purposes in amounts not exceeding 5% of its
total assets;
3. underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the
Securities Act of 1933 (the Securities Act) in the disposition of restricted
securities;
4. issue senior securities (as defined in the 1940 Act), except as permitted by
rule, regulation or order of the Securities and Exchange Commission (the
SEC);
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 or securities issued by investment companies) if, as a
result, more than 25% of the Portfolio's total assets would be invested in
the securities of companies whose principal business activities are in the
same industry. In addition, each Portfolio may not invest more than 25% of
its assets in underlying CrestFunds that, as a matter of policy, concentrate
their assets in any one industry. However, a Portfolio may indirectly invest
more than 25% of its total assets in one industry through its investments in
the underlying CrestFunds. Each Portfolio may invest up to 100% of its
assets in securities issued by investment companies;
6. purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Portfolio from
investing in securities or other instruments either issued by companies that
invest in real estate, 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, except as permitted by the 1940
Act.
THE FOLLOWING LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED WITHOUT
SHAREHOLDER APPROVAL.
1. Each Portfolio does not currently intend to purchase securities on margin,
except that a Portfolio may obtain such short-term credits as are necessary
for the clearance of transactions.
2. Each Portfolio does not currently intend to purchase any security if, as a
result, more than 15% of its net assets would be invested in securities that
are deemed to be illiquid because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued.
3. Each Portfolio does not currently intend to sell securities short.
4. Each Portfolio does not currently intend to purchase or sell futures
contracts or put or call options.
5. Each Portfolio may not invest in shares of unaffiliated money market funds,
except as permitted by the SEC.
3
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Portfolios provide investors with the opportunity to pursue three
distinct asset allocation strategies implemented through investments in shares
of selected CrestFunds. By investing in the Portfolios, investors have the
opportunity to diversify and allocate their assets among the broad range of
funds in CrestFunds. The Adviser simplifies the diversification and asset
allocation process by reviewing, analyzing, selecting, monitoring, reallocating
and rebalancing each Portfolio's holdings of CrestFunds for investors.
The assets of each Portfolio will be allocated among underlying CrestFunds
in accordance with its investment objective, the Adviser's outlook for the
economy, the financial markets and the relative market valuations of the
underlying CrestFunds. Each Portfolio has the ability to invest its assets
allocated to a particular asset class in one or more of the underlying
CrestFunds, which have differing investment objectives, policies and risk
characteristics (see "Investment Practices of the Underlying CrestFunds"). The
risks associated with investing in a Portfolio will vary depending upon how the
assets within its asset classes are allocated from time to time among the
underlying CrestFunds. Although the Portfolios currently expect to invest in one
or more of the underlying CrestFunds identified below, the Adviser has the
discretion to change the particular CrestFunds used as underlying investments
for the Portfolios. If the Adviser determines in the future that it is in a
Portfolio's best interest, the Adviser may substitute or include other
underlying CrestFunds, including CrestFunds that do not currently exist.
CASH RESERVE FUND
LIMITED TERM BOND FUND
INTERMEDIATE BOND FUND
GOVERNMENT BOND FUND
CAPITAL APPRECIATION FUND
SPECIAL EQUITY FUND
VALUE FUND
The investment objective of each Portfolio is set forth below. Each
Portfolio's objective, the asset allocation percentage ranges described below,
the list of underlying CrestFunds described above, and those policies identified
as non-fundamental may be changed by the Company's Board of Directors without
shareholder approval. A Portfolio's investment policies identified as
fundamental may not be changed except by approval of the majority of the
outstanding shares of that Portfolio. The Adviser will manage each Portfolio
consistent with that Portfolio's investment objective and policies. There is no
assurance that a Portfolio will achieve its investment objective.
MAXIMUM GROWTH PORTFOLIO
The Maximum Growth Portfolio seeks to provide a high level of capital
appreciation, without regard to current income. Under normal market conditions,
at least 80% of the Portfolio's total assets will be invested in shares of
underlying CrestFunds that invest primarily in equity securities that seek
capital appreciation. The Portfolio's remaining assets may be invested in shares
of underlying CrestFunds that invest primarily in fixed-income securities,
shares of underlying CrestFunds that are money market funds, securities issued
by the U.S. Government, its agencies or instrumentalities, repurchase agreements
and short-term paper.
In general, relative to the other Portfolios, the Maximum Growth Portfolio
should offer investors the potential for a high level of capital growth, and the
potential for a lower level of current income, while subjecting investors to a
medium to high level of principal risk.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio seeks to provide long-term capital
appreciation, with current income as a secondary objective. Under normal market
conditions, at least 80% of the Portfolio's total
4
<PAGE>
assets will be invested in shares of underlying CrestFunds that invest primarily
in either equity securities that seek capital appreciation, or invest primarily
in fixed-income securities that seek income. The Portfolio's remaining assets
may be invested in shares of underlying CrestFunds that are money market funds,
securities issued by the U.S. Government, its agencies or instrumentalities,
repurchase agreements and short-term paper.
In general, relative to the other Portfolios, the Growth and Income
Portfolio should offer investors the potential for a medium to high level of
capital growth and the potential for a medium level of income, while subjecting
investors to a medium level of principal risk.
BALANCED PORTFOLIO
The Balanced Portfolio seeks both capital appreciation and current income.
Under normal market conditions, the Portfolio will invest primarily in shares of
underlying CrestFunds that invest primarily in equity securities, but at least
25% of the Portfolio's total assets will be invested in shares of underlying
CrestFunds that invest primarily in fixed-income securities. The Portfolio's
remaining assets may be invested in shares of underlying CrestFunds that are
money market funds, securities issued by the U.S. Government, its agencies or
instrumentalities, repurchase agreements and short-term paper.
In general, relative to the other Portfolios, the Balanced Portfolio should
offer investors a balanced level of income and capital appreciation, while
subjecting investors to a lower level of principal risk.
GENERAL INVESTMENT POLICIES OF THE PORTFOLIOS
To achieve each Portfolio's investment objective, the Adviser will attempt
to identify and select a diversified portfolio of underlying CrestFunds. In the
selection process, the Adviser analyzes many factors, including the underlying
CrestFunds' investment objectives, total return, volatility and expenses. Each
Portfolio invests a percentage of its assets, within percentage ranges the
Adviser believes appropriate, in select underlying CrestFunds, which are
separately-managed series of the Company. The percentages will reflect the
extent to which each Portfolio invests in the particular market segment
represented by each underlying fund in CrestFunds, and the varying degrees of
potential investment risk and reward represented by each Portfolio's investments
in those corresponding underlying funds. These percentage ranges may change when
it is appropriate in light of each Portfolio's investment objective. Each
Portfolio may invest up to 100% of its assets in shares of the underlying
CrestFunds. In addition, when the Adviser deems it appropriate, for temporary
defensive purposes, each Portfolio may invest 100% of its assets directly in
securities issued by the U.S. Government or its agencies or instrumentalities,
repurchase agreements, short-term paper and shares of underlying CrestFunds that
are money market funds (and shares of unaffiliated money market funds, as
permitted by the SEC). To the extent that a Portfolio is engaged in temporary
defensive investing, it will not be pursuing its investment objective. When the
adviser deems it appropriate, in order to meet liquidity needs, each Portfolio
may invest its assets directly in securities issued by the U.S. Government or
its agencies or instrumentalities, repurchase agreements, short-term paper and
shares of underlying CrestFunds that are money market funds (and shares of
unaffiliated money market funds, as permitted by the SEC).
INVESTMENT PRACTICES OF THE UNDERLYING CRESTFUNDS
The following briefly describes the securities in which the Funds may invest
and the transactions they may make. The Funds are not limited by this
discussion, however, and may purchase other types of securities and enter into
other types of transactions if they meet each Fund's respective quality,
maturity, and liquidity requirements.
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.
5
<PAGE>
AMERICAN DEPOSITARY RECEIPTS (ADRS). Value Fund and Capital Appreciation
Fund may invest in sponsored ADRs which are certificates evidencing ownership of
shares of a foreign-based corporation held in trust by a bank or similar
financial institution. Designed for use in U.S. securities markets, ADRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies. A sponsored ADR is an ADR established jointly by the
issuer of the security underlying the receipt and the bank or other financial
institution holding the receipt.
ASSET-BACKED SECURITIES. Asset-backed securities are securities secured by
non- mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity, such as a trust,
organized solely for the purpose of owning such assets and issuing such debt.
Asset-backed securities are not issued or guaranteed by the U.S. Government
or its agencies or instrumentalities; however, the payment of principal and
interest on such obligations may be guaranteed up to certain amounts and for a
certain period by a letter of credit issued by a financial institution (such as
a bank or insurance company) unaffiliated with the issuers of such securities.
The purchase of asset-backed securities raises risk considerations peculiar to
the financing of the instruments underlying such securities. For example, there
is a risk that another party could acquire an interest in the obligations
superior to that of the holders of the asset-backed securities. There also is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on those securities. Asset-backed
securities entail prepayment risk, which may vary depending on the type of
asset, but is generally less than the prepayment risk associated with
mortgage-backed securities. In addition, credit card receivables are unsecured
obligations of the card holder.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
BANKERS' ACCEPTANCES. Bankers' acceptances are time drafts or bills of
exchange drawn on and accepted by a bank, the customary means of effecting
payment for merchandise sold in import-export transactions and a source of
financing used extensively in international trade. Maturities are generally six
months or less.
CERTIFICATES OF DEPOSIT. Certificates of deposit are interest bearing
instruments with a specific maturity. They are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity.
COMMERCIAL PAPER. Commercial paper is comprised of short-term obligations
issued by banks, broker-dealers, municipalities, corporations or other entities
for purposes such as financing their current obligations.
DELAYED DELIVERY TRANSACTIONS. These transactions involve a commitment by a
mutual 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.
When purchasing securities on a delayed delivery basis, the purchaser
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. These securities are subject to market fluctuation due to changes
in market interest rates and it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. Because the purchaser is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with other investments. If a mutual fund remains substantially fully
invested at a time when delayed delivery purchases are outstanding, the delayed
delivery purchases may
6
<PAGE>
result in a form of leverage. When a mutual fund has sold a security on a
delayed delivery basis, the mutual 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 mutual fund could
miss a favorable price or yield opportunity, or could suffer a loss. A mutual
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.
EQUITY SECURITIES. Equity securities, such as common stocks, are units of
ownership of a corporation. Owners typically are entitled to vote on the
selection of directors and other important matters as well as to receive
dividends on their holdings. In the event that a corporation is liquidated, the
claims of secured and unsecured creditors and owners of bonds and preferred
stock take precedence over the claims of those who own common stock. For the
most part, however, common stock has more potential for appreciation.
Investments in common stocks are subject to market risks which may cause their
prices to fluctuate over time. Changes in value of portfolio securities will not
necessarily affect cash income derived from these securities but will affect a
mutual fund's net asset value. Investments in small capitalization companies
involve greater risk than is customarily associated with larger, more
established companies due to the greater business risks of small size, limited
markets and financial resources, narrow product lines and the frequent lack of
depth of management.
FIXED-INCOME SECURITIES. Fixed-income securities are debt obligations
issued by governments, corporations, municipalities and other borrowers. The
market value of fixed income investments will change in response to interest
rate changes and other factors. During periods of falling interest rates, the
values of outstanding fixed income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Moreover, while securities with longer maturities tend to produce
higher yields, the prices of longer maturity securities are also subject to
greater market fluctuations as a result of changes in interest rates. Changes by
recognized agencies in the rating of any fixed income security and in the
ability of an issuer to make payments of interest and principal will also affect
the value of these investments.
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. A mutual fund may be affected favorably or
unfavorably by changes in the exchange rates or exchange control regulations
between foreign currencies and the U.S. dollar. Changes in foreign currency
exchange rates also may affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed to shareholders by a mutual fund.
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. The considerations noted above generally are
intensified for investments in developing countries. Developing countries may
have
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<PAGE>
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 than securities of comparable
U.S. issuers. Foreign security trading practices, including those involving
securities settlement where mutual fund assets may be released prior to receipt
of payment, may expose a mutual 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.
U.S. dollar denominated foreign securities 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.
European Depositary Receipts (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 European securities markets, EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies. EDRs are securities, typically issued by a non-U.S.
financial institution, that evidence ownership interests in a security or a pool
of securities issued by either a U.S. or foreign issuer. EDRs may be available
for investment through "sponsored" or "unsponsored" facilities.
INDEXED SECURITIES. Indexed securities are 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.
INVESTMENT-GRADE SECURITIES. Investment-grade securities include securities
rated BBB or higher by Standard & Poor's Corporation (S&P) or Baa or higher by
Moody's Investors Service (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 weakened capacity to make principal and interest payments, and may have
speculative characteristics as well.
LENDING OF SECURITIES. Securities lending allows a mutual fund to retain
ownership of the securities loaned and, at the same time, to earn additional
income. There may be delays in the recovery of loaned securities, or even a loss
of rights in collateral supplied should the borrower fail financially.
It is the current view of the staff of the SEC that a mutual fund may engage
in loan transactions only under the following conditions: (1) the mutual fund
must receive at least 100% collateral in the form of
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<PAGE>
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 mutual fund must be able to terminate
the loan at any time; (4) the mutual 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 mutual 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).
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.
MORTGAGE-BACKED SECURITIES. 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. Non-government mortgage-backed
securities may offer higher yields than those issued by government entities, but
also may be subject to greater price changes than government issues.
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.
PREFERRED STOCK. Preferred stock is a class of capital stock that pays
dividends at a specified rate and that has preference over common stock in the
payment of dividends and the liquidation of assets. Preferred stock does not
ordinarily carry voting rights.
REPURCHASE AGREEMENTS. In a repurchase agreement, a mutual fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a number of days from the date
of purchase. A custodian holds the security as collateral for the repurchase
agreement. 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. A mutual fund bears a risk of loss in
the event the other party defaults on its obligations and the mutual fund is
delayed or prevented from exercising its right to dispose of the collateral or
if the mutual fund realizes a loss on the sale of the collateral. A mutual fund
may experience a loss if the market value of the underlying securities declines.
Generally, mutual funds enter into repurchase agreements only with financial
institutions deemed to present minimal risk of bankruptcy during the term of the
agreement based on established guidelines. Repurchase agreements are considered
loans under the 1940 Act.
9
<PAGE>
RESTRAINTS ON INVESTMENTS BY MONEY MARKET FUNDS. Investments by a money
market fund are subject to limitations imposed under regulations adopted by the
SEC. Under these regulations, money market funds may only acquire obligations
that present minimal credit risk and that are "eligible securities," which means
they are (i) rated, at the time of investment, by at least two nationally
recognized security rating organizations (one if it is the only organization
rating such obligation) in the highest rating category or, if unrated,
determined to be of comparable quality (a first tier security), or (ii) rated
according to the foregoing criteria in the second highest rating category or, if
unrated, determined to be of comparable quality (second tier security). A
security is not considered to be unrated if its issuer has outstanding
obligations of comparable priority and security that have a short-term rating.
In the case of taxable money market funds, investments in second tier securities
are subject to the further constraints in that (i) no more than 5% of a Fund's
assets may be invested in second tier securities and (ii) any investment in
securities of any one such issuer is limited to the greater of 1% of the Fund's
total assets or $1 million. A taxable money market fund may also hold more than
5% of its assets in first tier securities of a single issuer for three "business
days" (that is, any day other than a Saturday, Sunday or customary business
holiday).
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are agreements
by which a mutual fund sells securities to financial institutions and
simultaneously agrees to repurchase those securities at a mutually agreed-upon
date and price. At the time a mutual fund enters into a reverse repurchase
agreement, the mutual fund places liquid assets having a value equal to the
repurchase price in a segregated custodial account and monitors this account to
ensure equivalent value is maintained. Reverse repurchase agreements involve the
risk that the market value of securities sold by the mutual fund may decline
below the price at which the mutual fund is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings by the
mutual fund under the 1940 Act.
SHORT-TERM PAPER. Short-term paper is comprised of instruments, such as
notes and bills of exchange, that are payable on demand or that have a maturity
of nine months or less.
STANDBY COMMITMENTS. Securities subject to standby commitments or puts
permit the holder thereof to sell the securities at a fixed price prior to
maturity. Securities subject to a standby commitment or put may be sold at any
time at the current market price. However, unless the standby commitment or put
was an integral part of the security as originally issued, it may not be
marketable or assignable; therefore, the standby commitment or put would only
have value to the mutual fund owning the security to which it relates. In
certain cases, a premium may be paid for a standby commitment or put, which
premium will have the effect of reducing the yield otherwise payable on the
underlying security. Generally, mutual funds limit standby commitment or put
transactions to institutions believed to present minimal credit risk.
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 mutual
funds; and the possibility that the maturities of the underlying securities may
be different from those of the commitments.
TIME DEPOSITS. Time deposits are non-negotiable receipts issued by a bank
in exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market.
Pursuant to Rule 11a-3 under the 1940 Act, a Portfolio is required to give
shareholders at least 60 days' notice prior to terminating or modifying a
Portfolio's exchange privilege. Under the Rule, the 60 day notification
requirement may be waived if (1) 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 (2) a Portfolio
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 Portfolios 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 the Adviser's judgment, a
Portfolio would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise potentially be adversely
affected.
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U.S. GOVERNMENT SECURITIES. U.S. Government securities are securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. 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.
VARIABLE OR FLOATING RATE DEMAND OBLIGATIONS (VRDOS/FRDOS). Variable or
floating rate demand obligations 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. The interest rates on these
securities may be reset daily, weekly, quarterly or some other reset period, and
may have a floor or ceiling on interest rate changes. There is a risk that the
current interest rate on such obligations may not accurately reflect existing
market interest rates. A demand instrument with a demand notice exceeding seven
days may be considered illiquid if there is no secondary market for such
security.
Fixed-rate bonds may be subject to third party puts. These bonds and
participation interests in such bonds held by a bank in trust or otherwise have
tender options or demand features that permit the holder to tender (or put)
their bonds to an institution at periodic intervals of up to one year and to
receive the principal amount thereof. Variable rate instruments structured in
this way (participating VRDOs) are essentially equivalent to other VRDOs. The
IRS has not ruled whether the interest on participating VRDOs is tax-exempt.
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.
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.
PORTFOLIO TRANSACTIONS
The Portfolios will primarily invest in shares of the underlying CrestFunds.
Orders for transactions in these underlying funds will be placed with SEI
Investments Distribution Co., distributor for the underlying CrestFunds and the
Portfolios.
VALUATION OF PORTFOLIO SECURITIES
The assets of each Portfolio consist primarily of shares of the underlying
CrestFunds, which are valued at their respective net asset values. The net asset
value (NAV) per share of each of the underlying CrestFunds is determined by
dividing the total market value of such Fund's investments and other assets,
less any liabilities, by the total number of outstanding shares of that Fund.
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<PAGE>
Excluding shares of the underlying CrestFunds, portfolio securities are
valued at the last quoted sales price for such securities, or, if there is no
such reported sales price on the valuation date, at the most recent quoted bid
price. 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.
A pricing service may be used to obtain last sale price of each security
held. Valuations of portfolio securities furnished by the pricing service
employed by the Portfolios 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 Portfolios and the Portfolios'
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.
PORTFOLIO PERFORMANCE
YIELD CALCULATIONS. The yield of a Portfolio refers to the annualized
income generated by an investment in the Portfolio over a specified 30-day
period. The yield is calculated by assuming that the income generated by the
investment during that period generated each period over one year and is shown
as a percentage of the investment. In particular, yield will be calculated
according to the following formula: Yield = 2[((a-b)/(cd)+1)(6)-1] in which a =
dividends and interest earned during the period; b = expenses accrued for the
period (net of reimbursements); c = the average daily number of shares
outstanding during the period that were entitled to receive dividends; and d =
the maximum offering price per share on the last day of the period.
Yield information may be useful in reviewing a Portfolio's performance and
in providing a basis for comparison with other investment alternatives. However,
each Portfolio's 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
Portfolio's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates a Portfolio's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to a Portfolio from the continuous sale of its shares will likely be
invested in instruments producing lower yields than the balance of the
Portfolio's holdings, thereby reducing the Portfolio's 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.
TOTAL RETURN CALCULATIONS. The total return of a Portfolio refers to the
average compounded rate of return to a hypothetical investment for designated
time periods (including but not limited to, the period from which the Portfolio
commenced operations through the specified date), assuming that the entire
investment is redeemed at the end of each period. In particular, total return
will be calculated according to the following formula: P(1 + T)(n)= ERV, where P
= a hypothetical initial payment of $1,000; T = average annual total return; n =
number of years; and ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the designated time period as of the end of
such period.
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Total returns quoted in advertising reflect all aspects of the Portfolio's
return, including the effect of reinvesting dividends and capital gain
distributions (if any), and any change in the Portfolio's 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 Portfolio 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 Portfolio's
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 Portfolio.
In addition to average annual total returns, each Portfolio may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields and other performance information may be quoted
numerically or in a table, graph, or similar illustration.
AVERAGE ANNUAL TOTAL RETURNS. The following table shows the average annual
total returns for the Portfolios for the period ended November 30, 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
LIFE OF
PORTFOLIO 1 YEAR FUND*
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
MAXIMUM GROWTH PORTFOLIO 6.53% 9.53%
- ----------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO 7.12% 9.34%
- ----------------------------------------------------------------------------------------------
BALANCED PORTFOLIO 7.90% 9.71%
- ----------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------
* Life of Fund figures are from commencement of operations to the period ended
November 30, 1998.
A Portfolio's 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.
ADDITIONAL INFORMATION REGARDING PRICING AND REDEMPTIONS
The Portfolios are open for business and their NAVs are calculated each day
the NYSE and Crestar Bank, the Custodian, are open. The NAV of each Portfolio is
determined as of the regularly-scheduled
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close of normal trading on the NYSE, normally 4:00 p.m. Eastern time. The NYSE
and Crestar Bank have designated the following holiday closings for 1998, and
the Adviser 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 Portfolios will determine NAVs at the close of business, the
time of which will coincide with the closing of the NYSE. To the extent that
Portfolio securities are traded in other markets on days the NYSE or Crestar
Bank are closed (and a Portfolio is not open for business), a Portfolio's NAV
may be significantly affected on days when investors do not have access to the
Portfolio 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 Portfolio. 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.
In addition to the minimum investment requirements set forth in the
prospectus, the Company's Articles of Incorporation provide that the Company's
Board of Directors may establish a "Minimum Amount," not to exceed One Hundred
Thousand Dollars ($100,000), for each of the Funds. If the NAV of the shares
held by a shareholder is less than the Minimum Amount, the Company may redeem
those shares upon providing thirty days written notice to the shareholder. The
Company's Board of Directors have set the Minimum Amount for each of the Funds
at $100,000. Therefore, if the NAV of the Shares held by a shareholder in any of
the Funds is less than One Hundred Thousand Dollars ($100,000), the Fund may
redeem those Shares upon providing thirty days written notice to the
shareholder.
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ADDITIONAL DESCRIPTION OF COMMON STOCK
The following information may be important to those investors who may
want to exchange shares of a Portfolio for shares of underlying CrestFunds.
Investors Class A shares and Investors Class B shares are offered
continuously to individual and institutional customers investing directly in
CrestFunds. The U.S. Treasury Money Fund has indefinitely suspended its
offering of Investors Class A shares. The offering may recommence upon
supplementing the Investors Class A shares and Investors Class B shares
Prospectus. Shares of the Cash Reserve Fund, the U.S. Treasury Money Fund and
the Tax Free Money Fund (the money market funds) are offered at NAV.
Investors Class A shares of Intermediate Bond Fund are offered at NAV plus a
maximum 3.0% sales charge. Investors Class A shares of Virginia Intermediate
Municipal Bond Fund are offered at NAV plus a maximum 3.5% sales charge.
Equity funds are offered at NAV plus a maximum 4.5% sales charge. Investors
Class A shares of each money market fund pay an additional
distribution-related 12b-1 fee at annual rate of .25% of the average net
assets of the Investors Class A shares of that Fund. The Investors Class A
shares and Investors Class B shares of each Fund also pay a fee for transfer
agency services at an annual rate of .06% of the average net assets of that
Fund. Performance of Investors Class A shares and Investors Class B shares is
lower than that of Trust Class shares of the same Fund due to Investors Class
A shares' and the Investors Class B shares' higher total expenses. Investors
Class A shares and Investors Class B shares bond fund yields and bond and
equity fund total returns 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.
Investors Class B shares are offered with a contingent deferred sales charge
to retail investors who engage an investment professional for investment advice.
Investors Class B shares are subject to an annual distribution fee at the rate
of .75% of average net assets, an annual shareholder service fee at the rate of
.25% of average net assets, and a contingent deferred sales charge upon
redemption within seven years of purchase, which decreases from a maximum of 5%
to 0%. At the end of seven years, Investors Class B shares automatically convert
to Investors Class A shares. Investors Class B shares are available for the
Special Equity Fund, the Value Fund, the Capital Appreciation Fund, the Cash
Reserve Fund, the Government Bond Fund, the Maryland Municipal Bond Fund, and
the Virginia Municipal Bond Fund. Performance for Investors Class B shares is
expected to be lower than that of Investors Class A shares and Trust Class
shares of a Fund due to Investors Class B shares' higher total expenses.
DISTRIBUTIONS AND TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the Portfolios' prospectus. No attempt is made to present a
detailed explanation of the federal, state or local tax treatment of the
Portfolios or their shareholders and the discussion here and in the Portfolios'
prospectus is not intended as a substitute for careful tax planning.
This general discussion of certain federal income tax consequences is based
on the Internal Revenue Code of 1986, as amended (the Code), and the regulations
issued thereunder, in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio is treated as a separate entity for federal income tax
purposes and is not combined with the Trust's other Portfolios. Each Portfolio
intends to qualify as a regulated investment company (RIC) under Subchapter M of
the Code so that it will be relieved of federal income tax on that part of its
income that is distributed to shareholders. In order to qualify for treatment as
a RIC, a Portfolio must distribute annually to its shareholders at least 90% of
its investment company taxable income which is, generally, net investment income
plus the excess, if any, of net short-term capital gain over net long- term
capital loss
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(Distribution Requirement) and also must meet several additional requirements.
Among these requirements are the following (1) at least 90% of a Portfolio's
gross income each taxable year must be derived from dividends, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of stock or securities, or other income derived with respect to its
business of investing in such stock or securities; (2) at the close of each
quarter of a Portfolio's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with such other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of a Portfolio's assets and that does not represent more than 10% of
the outstanding voting securities of such issuer; and (3) at the close of each
quarter of a Portfolio's taxable year, not more than 25% of the value of its
assets may be invested in securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer or of two or more issuers which
are engaged in the same, similar, or related trades or businesses, if the
Portfolio owns at least 20% of the voting power of such issuers.
Notwithstanding the Distribution Requirement described above, which only
requires a Portfolio to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital
gain, a Portfolio will be subject to a nondeductible 4% federal excise tax to
the extent it fails to distribute by the end of any calendar year at least 98%
of its ordinary income for that year and 98% of its capital gain net income (the
excess of short- and long-term capital gain over short-and long-term capital
loss) for the one-year period ending on October 31 of that year, plus certain
other amounts. Each Portfolio intends to make sufficient distributions to avoid
liability for the federal excise tax applicable to RICs. A Portfolio may in
certain circumstances be required to liquidate portfolio investments in order to
make sufficient distributions to avoid federal excise tax liability when the
investment advisor might not otherwise have chosen to do so, and liquidation of
investments in such circumstances may affect the ability of a Portfolio to
satisfy the requirements for qualification as a RIC.
If capital gain distributions have been made with respect to shares that are
sold at a loss after being held for six months or less, then the loss is treated
as a long-term capital loss to the extent of the capital gain distributions. If
a Portfolio fails to qualify as a RIC for any year, all of its income will be
subject to tax at corporate rates, and its distributions (including capital gain
distributions) generally will be taxable as ordinary income dividends to its
shareholders, subject to the corporate dividends received deduction for
shareholders who have held shares for more than 45 days.
A Portfolio will be required in certain cases to withhold and remit to the
United States Treasury 31% of amounts payable to any shareholder who: (1) has
provided the Portfolio an incorrect tax identification number; (2) is subject to
backup withholding by the Internal Revenue Service for failure to properly
report payments of interest or dividends; or (3) has failed to certify to the
Portfolio that such shareholder is not subject to backup withholding.
DISTRIBUTIONS. If distributions are mailed and the U.S. Postal Service
cannot deliver the checks, or if the checks remain uncashed for six months, the
Portfolios will hold distributions without interest or until you provide the
Portfolio with alternate instructions.
Each Portfolio declares and pays dividends equal to its entire net
investment income on a monthly basis. Net capital gains, if any, are declared
and distributed annually by all Portfolios, normally in December. Unless the
Portfolio'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 Portfolio immediately upon payment thereof.
FEDERAL TAXES. Distributions from each Portfolio'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. In the case of corporate
shareholders, a portion of a Portfolio's distribution may qualify for the
dividends-received deduction. The Portfolios' 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
16
<PAGE>
shareholders of record in such month and paid the subsequent January will be
taxed as though paid on December 31.
The Portfolios will send shareholders a tax statement by January 31 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
Portfolio'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 record
keeping.
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.
CAPITAL GAINS. Shareholders may realize a capital gain or loss when they
redeem (sell) or exchange shares of the Portfolios. For most types of accounts,
the Portfolios 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 a Portfolio's distribution,
the Portfolio'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. Each Portfolio is treated as a separate entity in
all respects for tax purposes. There is a risk that a Portfolio may be unable to
meet certain tax rules required for treatment as a regulated investment company.
If this were to occur, the affected Portfolio 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 Portfolios 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 Portfolios. Investors should consult their tax advisers to
determine whether a Portfolio 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 the Adviser is indicated by an asterisk (*).
TODD CIPPERMAN, Vice President and Assistant Secretary. Vice President and
Assistant Secretary of SEI Investments, the Administrator and the Distributor
since 1995. Associate, Dewey Ballantine (law firm), 1994-1995. Associate,
Winston & Strawn (law firm) 1991-1994.
* 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
830 East Main Street, 5th Floor, Richmond, Virginia 23219.
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.
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<PAGE>
JEAN L. OAKEY, Director. Partner at Wells Coleman & Co. (public
accountants). Her business address is 3800 Patterson Avenue, Richmond, Virginia
23221.
GLEN DOUGLAS POND, Director. Retired. Formerly the Director of the Virginia
Retirement System. His address is 1545 Winona Park Drive, West Point, Virginia
23181.
DAVID M. CARTER, Secretary, Partner, Hunton and Williams, Fund Counsel.
KEVIN P. ROBINS, Vice President and Assistant Secretary. Senior Vice
President and General Counsel of SEI Investments, the Administrator and the
Distributor since 1994. Assistant Secretary of SEI Investments since 1992.
Secretary of the Administrator since 1994. Vice President, General Counsel and
Assistant Secretary of the Administrator and the Distributor, 1992-1994.
Associate, Morgan, Lewis & Bockius LLP (law firm), 1988-1992.
ROBERT DELLACROCE, Controller and Chief Financial Officer. Director, Funds
Administration and Accounting of SEI Investments since 1994. Senior Audit
Manager, Arthur Andersen LLP, 1986-1994.
The Directors and officers of the Trust own less than 1% of the outstanding
shares of any Fund.
As of November 30, 1998, the Directors and officers of the Company received
the following compensation:
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION FROM TOTAL COMPENSATION FROM
REGISTRANT FOR PENSION OR RETIREMENT ESTIMATED ANNUAL REGISTRANT AND FUND COMPLEX
FISCAL YEAR ENDED BENEFITS ACCRUED AS BENEFITS UPON PAID TO DIRECTORS FOR
NAME OF PERSON, POSITION 1998 PART OF FUND EXPENSES RETIREMENT FISCAL YEAR ENDED 1998
- ------------------------------------ ----------------- --------------------- --------------------- ---------------------------
<S> <C> <C> <C> <C>
Jesse F. Williams, III, Chairman,
President and Director............. $9,000 0 0 $9,000
John Bruce James, Jr., Director..... $9,000 0 0 $9,000
Jean L. Oakey, Director............. $9,000 0 0 $9,000
Glen Douglas Pond, Director......... $9,000 0 0 $9,000
</TABLE>
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
The Portfolios will be managed by the Adviser's Policy & Strategy Committee.
The Adviser's Policy & Strategy Committee is comprised of the President & Chief
Investment Officer, Director of Equity Investment Management, Director of Fixed
Income Investment Management, Director of Cash Investment Management, and senior
portfolio managers. This committee meets regularly, usually on a weekly basis,
to review the financial market outlook and implement asset allocation
adjustments as needed.
Pursuant to investment advisory agreements, as amended (the Advisory
Agreements), the Adviser, 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
Portfolio's investments and effecting portfolio transactions for each Portfolio.
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 Portfolio 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.
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<PAGE>
Each Advisory Agreement also provides that, with respect to each Portfolio,
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 Portfolio, 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 Portfolio at the annual rate of .25% of the average
daily net assets of each Portfolio. The Adviser may choose to waive or reimburse
a Portfolio for a portion of that Portfolio's investment advisory fee.
For the fiscal years ended November 30, 1998 and 1997, the advisory fees
paid to the Adviser with respect to each Portfolio were as follows:
<TABLE>
<CAPTION>
11/30/98 WAIVED 11/30/97 WAIVED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Maximum Growth Portfolio.................................................... $ 39,508 $ 25,574 $13,269 $ 9,042
Growth and Income Portfolio................................................. $ 53,342 $ 32,109 $22,542 $13,685
Balanced Portfolio.......................................................... $233,180 $119,987 $93,141 $48,499
</TABLE>
In addition to receiving its advisory fee from the Portfolios, the Adviser
may also act and be compensated as investment manager for its clients with
respect to assets which are invested in a Portfolio. 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 Portfolio an amount equal to all or a
portion of the fees received by the Adviser and its affiliates from a Portfolio
with respect to the client's assets invested in the Portfolio.
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 Portfolio accounting and other required books and accounts and of
calculating the NAV of shares of the Portfolios; 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 Portfolio pursuant to the Administration Plans or
Distribution Plans.
ADMINISTRATOR AND DISTRIBUTOR
THE ADMINISTRATOR
The Company and 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.
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The Administrator, a Delaware business trust, has its principal business
offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation
(SIMC), a wholly-owned subsidiary of SEI Investments Company (SEI
Investments), is the owner of all beneficial interest in the Administrator.
SEI Investments and its subsidiaries and affiliates, including the
Administrator, 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
and its affiliates also serve as administrator or sub-administrator to the
following other mutual funds: The Achievement Funds Trust, The Advisors'
Inner Circle Fund, Alpha Select Funds, The Arbor Fund, ARK Funds, Armada
Funds, Bishop Street Funds, Boston 1784 Funds-Registered Trademark-, CUFUND,
The Expedition Funds, First American Funds, Inc., First American Investment
Funds, Inc., First American Strategy Funds, Inc., HighMark Funds, Huntington
Funds, The Nevis Fund, Inc., Oak Associates Funds, The PBHG Funds, Inc., PBHG
Advisor Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, SEI
Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust,
STI Classic Funds, STI Classic Variable Trust and TIP Funds.
The Administrator is entitled to a fee of $40,000 annually from each
Portfolio. Commencing with the operation of each Portfolio, the Administrator
has voluntarily agreed to waive its fee for a twelve month period.
THE DISTRIBUTOR
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 (1) by the Company's Directors or by the vote of a majority of
the outstanding shares of the Company, and (2) 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 Portfolio on not less than sixty days' notice by the Directors, by
vote of a majority of the outstanding shares of such Portfolio or by the
Distributor. The Distributor receives no compensation for its services.
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<PAGE>
TRANSFER AGENT
The Transfer Agent and the Company, on behalf of each of the Portfolios,
have entered into a transfer agent agreement (the Transfer Agent Agreement)
dated as of July 10, 1992. 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 Portfolio. For these services,
the Transfer Agent will be paid an annual fee of .05% of the average daily net
assets of each Portfolio.
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
The Custodian, 919 East Main Street, Richmond, Virginia 23219, and the
Company, on behalf of each of the Portfolios, have entered into a custodian
agreement dated as of July 10, 1992. The Custodian's responsibilities include
safeguarding and controlling the Portfolios' cash and securities, handling the
receipt and delivery of securities and collecting income on Portfolio
investments. For these services, the Custodian will receive a fee computed and
paid monthly, based on the total net assets of each such Portfolio, the number
of portfolio transactions of the Portfolio and the number of securities in the
Portfolio's portfolio. The Custodian's fee for any fiscal year of the Company
will be paid at an annual rate of .03% of each Portfolio's average daily net
assets.
AUDITOR
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, independent auditors, has been selected as auditors for the Company.
Deloitte & Touche LLP has acted as independent auditors of the Company since
its inception.
LEGAL COUNSEL
Hunton & Williams, Riverfront Plaza, 951 E. Byrd Street, East Tower,
Richmond, VA 23219-4074 serves as legal counsel for the Company.
PRINCIPAL HOLDERS OF SECURITIES
A shareholder owning of record or beneficially more than 25% of a
particular Portfolio's shares may be considered to be a "controlling person"
of that Portfolio. Accordingly, its vote could have a more significant effect
on matters presented at shareholder meetings than the votes of the
Portfolio's other shareholders. As of March 1, 1999, the following persons
were the only persons who were record owners (or to the knowledge of the
Company, beneficial owners) of 5% and 25% or more of the Portfolio's Trust Class
shares:
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<PAGE>
(Asset Allocation SAI)
----------------------
<TABLE>
<CAPTION>
Portfolio Name Shareholder %
-------------- ----------- ---
<S> <C> <C>
Maximum Growth Portfolio Hamac & Co. - Div Re 88.57%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - 401K 11.43%
Expediter
C/O Crestar Bank
Attn: Barbara Holloway
Attn: Demetrius Murray
PO Box 26665
Richmond, Va. 23219
Growth and Income Portfolio Hamac & Co. - Div Re 98.41%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Balanced Portfolio Hamac & Co. - Div Re 87.29%
Attn: Barbara Holloway
PO Box 26665
Richmond, Va. 23219
Hamac & Co. - 401K 12.71%
Expediter
C/O Crestar Bank
Attn: Barbara Holloway
Attn: Demetrius Murray
PO Box 26665
Richmond, Va. 23219
</TABLE>
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<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS:
The following descriptions of corporate bond ratings have been published by
S&P and Moody's.
S&P RATINGS
Bonds rated AAA have the highest rating S&P assigns to a debt obligation.
Such a rating indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA by S&P also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree. Debt rated A by S&P
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 than debt in higher rated categories.
Bonds which are rated BBB by S&P 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 RATINGS
Bonds which are rated Aaa by Moody's 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 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. Bonds rated Aa by
Moody's are judged by Moody's to be of high quality by all standards. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities. Together with
bonds rated Aaa, they comprise what are generally known as high-grade bonds.
Bonds which are rated A by Moody's possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Debt rated Baa by Moody's 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 rated categories.
23
