<PAGE>
Dear Shareholder:
It is a pleasure to present the annual report for the AFBA Five Star Shares of
the M.S.D.&T. Funds, Inc. (the "Company") for the fiscal year ended May 31,
1996. The report includes financial information on the AFBA Five Star Shares
of the Value Equity and Intermediate Fixed Income Funds.
During calendar 1995, both the stock and bond markets provided investors with
some of the best returns in recent financial market history. The equity market
experienced its largest returns since 1958 while the bond market's performance
for the year was its best in a decade. So far in 1996, a huge inflow of capi-
tal has kept the stock market moving to a series of new highs even as longer
term interest rates drift higher. The popularity of 401(k) investment vehicles
for retirement has led to record inflows of funds into investment companies.
To date, this enormous amount of liquidity has been largely directed into eq-
uity funds, however, as interest rates reach higher levels this trend may
level out. Adding to the attraction of stocks, economic growth has defied the
consensus estimates and accelerated during 1996, providing companies with con-
tinued earnings increases.
The AFBA Five Star Shares of the M.S.D.&T. Value Equity Fund earned a total
return of 7.7% over the six months ended May 31, 1996(1). The Fund was aided
by its investments in cyclical and basic industry stocks. However, the cash
reserve position and interest rate sensitivity were, in retrospect, too large
as the Fund lagged the S&P 500's 11.8% return over the same period. During the
fiscal year, the portfolio management duties for the Fund were delegated to
Brian Topping, the adviser's Chief Investment Officer. Initially, Mr. Topping
acted as co-portfolio manager, although since April he has been serving as the
sole investment manager for the Fund. The adviser's strategy remains one of
achieving good inherent value through stock selection based on sound fundamen-
tal analysis and the application of a value discipline.
After enjoying a favorable environment throughout 1995, interest rates on term
debt securities have reversed their downward direction and are moving higher
during the current year. Concerns over the rapid pace of economic growth, a
lessened effort toward balancing the federal budget deficit and an increase in
basic commodities such as oil and grains have made bond investors nervous. In
this environment holders of AFBA Five Star Shares of the M.S.D.&T. Intermedi-
ate Fixed Income Fund have experienced a total return of -1.2%(1) over the six
month period ended May 31, 1996.
The Company's adviser believes that this year's growth spurt in economic ac-
tivity will slow down in the second half of 1996. A real Gross Domestic Prod-
uct growth rate of 2% or less should characterize the upcoming fiscal year.
This level of economic activity should not threaten to raise inflation above
the current favorable rate of 3%. Longer-term interest rates should decline
from current levels as business conditions lose momentum. Toward the end of
the calendar year, the Federal Reserve Bank may again lower short-term inter-
est rates. This would provide a generally favorable backdrop for the equity
markets, with the caveat that earnings growth has most likely seen its maximum
increases. Stock selection should be a key factor in establishing favorable
relative investment performance in the current fiscal year.
The pages that follow discuss the performance, structure and strategy of each
Fund, as well as providing a detailed list of assets held(2). We appreciate
your investment in the M.S.D.&T. Funds.
Sincerely,
LOGO
Leslie B. Disharoon
Chairman and President
<PAGE>
SHARES OF THE M.S.D.&T. FUNDS, INC. ARE NOT BANK DEPOSITS OR OBLIGATIONS OF,
OR GUARANTEED, ENDORSED, OR OTHERWISE SUPPORTED BY MERCANTILE-SAFE DEPOSIT AND
TRUST COMPANY OR AFBA INDUSTRIAL BANK, THEIR PARENT COMPANY OR AFFILIATES, AND
SUCH SHARES ARE NOT FEDERALLY INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DE-
POSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMEN-
TAL AGENCY. INVESTMENT IN THE FUNDS INVOLVES RISK, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL. FOR MORE COMPLETE INFORMATION ON THE AFBA FIVE STAR SHARES OF
THE M.S.D.&T. FUNDS, INC., PLEASE CALL (800) 782-4797 TO RECEIVE A PROSPECTUS,
WHICH SHOULD BE READ CAREFULLY BEFORE INVESTING. BISYS FUND SERVICES SERVES AS
THE FUNDS' DISTRIBUTOR.
(1) Total return and principal value of investments will fluctuate with market
changes and shares, when redeemed, may be worth more or less than their origi-
nal cost. Figures for the period indicated reflect fee waivers in effect, re-
investment of dividends, distributions, and capital gains as well as changes
in share price. Fee waivers may result in higher total returns than would oc-
cur if full fees were charged. Past performance is not a guarantee of future
results.
<TABLE>
<CAPTION>
VALUE INTERMEDIATE
EQUITY FUND FIXED INCOME FUND
(AFBA FIVE STAR (AFBA FIVE STAR
SHARES) SHARES)
--------------- -----------------
<S> <C> <C>
Inception Date.............................. 12/1/95 12/1/95
Total return since inception to June 30,
1996....................................... 7.7% -0.2%
</TABLE>
(2) The composition of the Funds' holdings is subject to change.
- --------
ii
<PAGE>
THE M.S.D.&T. VALUE EQUITY FUND
For the six months ended May 31, 1996, the AFBA Five Star Shares of the
M.S.D.&T. Value Equity Fund produced a total return of 7.7%. This return,
while well above historic average returns for the equity market on an
annualized basis, was disappointing when compared to the 11.8% return of the
S&P 500 Index over the same period. The Fund has been hampered by a relatively
high cash reserve position and by above average sensitivity to changes in in-
terest rates. The cash reserve position, which was 14.7% at the start of the
fiscal year, has gradually been reduced to the present level of 4.7%. Similar-
ly, the interest rate sensitivity present in the Fund has been reduced with
many of the replacement issues providing greater potential for long-term
growth in earnings and dividends.
The 1995-1996 market for U.S. stocks has been among the most productive on
record. Equities have benefited from a material improvement in corporate earn-
ings, a generally declining level of interest rates, relatively low inflation,
and record inflows of funds into equity mutual funds. A significant shift in
the patterns of saving and investment appear to be underway as a greater share
of the retirement burden is shifted to the individual, primarily through par-
ticipation in rapidly growing 401(k) plans. In recent months, a notable shift
in investor preference toward maximum growth and small company funds has sig-
naled the onset of a more speculative phase for the market. With valuation
levels, as measured by price earnings multiples, the relationship of price-to-
book value and current yield all exceeding or nearing record highs, we have
increased the Fund's focus on companies with strong financial characteristics
combined with good market liquidity, lower than market valuations, and higher
than market dividend yields. Recent emphasis has been placed on increasing the
Fund's exposure to technology and consumer non-durables, both of which are
groups with good earnings growth characteristics. Reductions have occurred in
the Fund's holdings of utilities and energy.
In order to achieve the Fund's objective, the investment adviser employs a
value-oriented strategy. Securities purchased generally possess a price-to-
earnings or price-to-book ratio lower than the stock market as a whole. The
equity securities in the portfolio normally generate a higher dividend yield
than the S&P 500 Index.
iii
<PAGE>
THE M.S.D.&T. INTERMEDIATE FIXED INCOME FUND
Fiscal year 1996 was the mirror image of fiscal year 1995 for the intermediate
bond market. Shareholders may recall that during fiscal 1995, interest rates
rose for the first six months and then fell for the balance of the year. Dur-
ing fiscal 1996, interest rates continued falling for the first seven months
of the year, before turning around and moving higher. A net rise of nearly
0.60% on the yield of ten-year treasury notes resulted over the year.
Driving the market has been the changing perception by investors of the
economy's weakness and subsequent strength. During most of 1995, the
manufacturing/wholesale/retail sectors of the economy were going through an
inventory correction. Having been overzealous in their forecast of sales in
1995, decision makers spent most of the year reducing production and/or liqui-
dating inventories. However, both the economy and investors perceptions
changed in the Spring of 1996. The consumer sector of the economy bounced back
as evidenced by strengthening home and automobile sales. Businesses, which had
'downsizing' as their buzz word for four years, realized that it requires peo-
ple to keep an organization moving and profits rolling. Employment grew
smartly in the months following the poor winter weather and over a million new
jobs had been filled by May. The Federal Reserve, which had been lowering its
target rate on the Federal Funds rate, looks to be taking a "wait and see" at-
titude as to the magnitude and direction of its next policy change.
Crucial to the debate going on within the Federal Reserve is how fast the
economy can grow without igniting a rise in the inflation rate. Even in the
face of a sharp run up in commodity prices in the Spring and the unemployment
rate hovering around 5.6% for the past eighteen months, the annual inflation
as measured by PPI (2.2%) and CPI (3.0%) has been subdued. Additionally, both
energy and agricultural commodities have started to retreat from their peaks
reached in March and April.
In this environment, the AFBA Five Star Shares of the Fund suffered a slight
decline in total return during the six months as interest income helped offset
the decline in market value caused by the rise in interest rates. The AFBA
Five Star Shares of the Fund had a total return of -1.2% for the six months
ended May 31, 1996, trailing the benchmark Lehman G/C Intermediate Index which
returned -0.2% during the same period. As interest rates rose, investments
were made in U.S. Treasuries and Government Agency mortgage backed securities.
The average maturity of the Fund has been lengthened from 4.0 to 5.0 years.
iv
<PAGE>
Comparison of Change In Value of $10,000 Investment In
M.S.D.&T. Value Equity Fund and the S&P 500 Stock Index
[LINE GRAPH PERFORMANCE CHART APPEARS HERE]
VALUE EQUITY S&P 500
Nov-95 $10,000 $10,000
Dec-95 $10,184 $10,193
Jan-96 $10,284 $10,540
Feb-96 $10,379 $10,638
Mar-96 $10,424 $10,740
Apr-96 $10,604 $10,898
May-96 $10,775 $11.179
Comparison of Change In Value of $10,000 Investment In
M.S.D.&T. Intermediate Fixed Income Fund and the
Lehman G/C Intermediate Bond Index
[LINE GRAPH PERFORMANCE CHART APPEARS HERE]
Intermediate Fixed LB Int. G/C
Nov-95 $10,000 $10,000
Dec-95 $10,103 $10,105
Jan-96 $10,168 $10,192
Feb-96 $10,030 $10,073
Mar-96 $9,961 $10,021
Apr-96 $9,900 $9,986
May-96 $9,878 $9.978
THE S&P 500 Stock Index is an unmanaged index generally representative of the
performance of the U.S. stock market.
The Lehman Brothers Intermediate Government/Corporate Bond Index is an unmanaged
index generally representative of the performance of intermediate term
government and corporate bonds.
The above indexes do not reflect the deduction of expenses associated with a
mutual fund such as investment management fees.
The value of shares of the Funds will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost.
v
<PAGE>
M.S.D.&T. FUNDS, INC.
VALUE EQUITY FUND
STATEMENT OF NET ASSETS
MAY 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE OF NUMBER OF
NET ASSETS SHARES VALUE
------------- --------- -----
<S> <C> <C> <C>
COMMON STOCK............................... 93.6%
AUTOMOTIVE................................. 1.7%
General Motors Corp. .................... 32,900 $ 1,813,613
------------
BANKS...................................... 5.1%
Barnett Banks, Inc. ..................... 23,100 1,443,750
CoreStates Financial Corp. .............. 44,000 1,732,500
J.P. Morgan.............................. 27,000 2,345,625
------------
5,521,875
------------
BEVERAGES.................................. 2.3%
Pepsico Inc. ............................ 75,000 2,493,750
------------
CHEMICALS.................................. 4.9%
Air Products............................. 43,000 2,558,500
E.I. duPont DeNemours & Co. ............. 34,200 2,727,450
------------
5,285,950
------------
COMPUTER EQUIPMENT......................... 2.7%
Hewlett-Packard Co. ..................... 17,000 1,814,750
International Business Machine Corp. .... 10,000 1,067,500
------------
2,882,250
------------
CONSUMER GOODS............................. 1.8%
Colgate Palmolive........................ 24,700 1,945,125
------------
COSMETICS.................................. 1.4%
Tambrands, Inc. ......................... 32,500 1,499,063
------------
DRUGS...................................... 7.7%
Bristol-Myers Squibb Co. ................ 31,500 2,689,313
Pfizer Inc. ............................. 39,400 2,787,550
Warner Lambert Co. ...................... 51,000 2,856,000
------------
8,332,863
------------
ELECTRICAL EQUIPMENT....................... 4.7%
ABB AB American Depositary Receipt....... 15,000 1,533,750
General Electric Co. .................... 28,000 2,317,000
Hubbell, Inc. "B"........................ 17,900 1,250,763
------------
5,101,513
------------
</TABLE>
See Accompanying Notes to Financial Statements.
1
<PAGE>
M.S.D.&T. FUNDS, INC.
VALUE EQUITY FUND
STATEMENT OF NET ASSETS -- CONTINUED
MAY 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE OF NUMBER OF
NET ASSETS SHARES VALUE
------------- --------- -----
<S> <C> <C> <C>
COMMON STOCKS -- CONTINUED
ELECTRONICS............................... 1.7%
Intel Corp. ............................ 24,300 $ 1,834,650
------------
FINANCIAL SERVICES........................ 1.4%
H.F. Amhanson........................... 57,000 1,467,750
------------
FOOD PROCESSING........................... 1.4%
Universal Foods......................... 42,800 1,508,700
------------
FOODS..................................... 6.2%
Giant Food, Inc. "A".................... 73,500 2,535,750
McCormick & Co., Inc. .................. 78,000 1,774,500
Nestle Registered American Depositary
Receipt................................ 41,900 2,358,957
------------
6,669,207
------------
HOME FURNISHINGS.......................... 1.5%
Maytag Corp............................. 73,000 1,569,500
------------
INDUSTRIAL GOODS.......................... 4.1%
Corning Inc. ........................... 68,400 2,616,300
PPG Industries Inc. .................... 34,000 1,759,500
------------
4,375,800
------------
INSURANCE................................. 6.7%
Chubb Corp. ............................ 55,000 2,564,375
Lincoln National Corp. ................. 42,100 1,978,700
Unum Corp. ............................. 46,000 2,714,000
------------
7,257,075
------------
IRON/STEEL................................ 1.6%
Worthington Industries.................. 85,000 1,710,625
------------
MACHINERY & HEAVY EQUIPMENT............... 2.9%
Giddings & Lewis Inc. .................. 78,000 1,296,750
Illinois Tool Works, Inc. .............. 27,600 1,849,200
------------
3,145,950
------------
MEDICAL INSTRUMENTS & SUPPLIES............ 2.5%
Johnson & Johnson....................... 27,500 2,677,813
------------
</TABLE>
See Accompanying Notes to Financial Statements.
2
<PAGE>
M.S.D.&T. FUNDS, INC.
VALUE EQUITY FUND
STATEMENT OF NET ASSETS -- CONTINUED
MAY 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE OF NUMBER OF
NET ASSETS SHARES VALUE
------------- --------- -----
<S> <C> <C> <C>
COMMON STOCKS -- CONTINUED
MULTI-INDUSTRY............................ 0.9%
Minnesota Mining & Manufacturing Co. ... 15,000 $ 1,023,750
------------
NATURAL GAS............................... 3.0%
Equitable Resources Inc................. 57,825 1,720,294
Questar Corp............................ 45,400 1,486,850
------------
3,207,144
------------
OIL....................................... 6.4%
Amoco Corp. ............................ 29,725 2,155,062
Atlantic Richfield Co. ................. 19,850 2,374,556
Exxon Corp. ............................ 27,500 2,330,625
------------
6,860,243
------------
OIL EQUIPMENT & SERVICES.................. 3.1%
Landmark Graphics Corp.* ............... 71,700 1,344,375
Schlumberger Ltd. American Depositary
Receipt................................ 23,300 1,942,637
------------
3,287,012
------------
PAPER & FOREST PRODUCTS................... 1.7%
Westvaco Corp. ......................... 58,000 1,856,000
------------
RETAIL DEPARTMENT STORES.................. 1.8%
May Department Stores Co. .............. 41,300 1,956,587
------------
SHOES..................................... 1.4%
Stride Rite............................. 165,500 1,489,500
------------
TECHNOLOGY................................ 3.0%
Motorola, Inc. ......................... 48,500 3,237,375
------------
TELECOMMUNICATIONS........................ 2.2%
GTE Corp. .............................. 55,750 2,383,312
------------
TOBACCO................................... 1.6%
Philip Morris Inc. ..................... 17,000 1,689,375
------------
UTILITIES -- ELECTRIC..................... 1.7%
Northeast Utilities, Inc. .............. 22,575 327,338
Texas Utilities......................... 35,500 1,451,063
------------
1,778,401
------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE>
M.S.D.&T. FUNDS, INC.
VALUE EQUITY FUND
STATEMENT OF NET ASSETS -- CONTINUED
MAY 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE OF NUMBER OF
NET ASSETS SHARES VALUE
------------- --------- -----
<S> <C> <C> <C>
COMMON STOCKS -- CONTINUED
UTILITIES -- TELEPHONE..................... 4.5%
BellSouth Corp. ......................... 67,300 $ 2,734,062
MCI Communications....................... 72,300 2,105,737
------------
4,839,799
------------
TOTAL COMMON STOCK
(Cost $81,472,865)..................... 100,701,570
------------
PREFERRED STOCK............................ 1.5%
News Corp. Ltd. ......................... 82,500 1,598,437
------------
TOTAL PREFERRED STOCK
(Cost $1,651,076)...................... 1,598,437
------------
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE>
M.S.D.&T. FUNDS, INC.
VALUE EQUITY FUND
STATEMENT OF NET ASSETS -- CONCLUDED
MAY 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE OF
NET ASSETS MATURITY PAR VALUE
------------- -------- --- -----
<S> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS.......... 2.6%
U.S. Treasury Notes
7.25%............................. 11/30/96 $2,750,000 $ 2,773,100
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $2,746,661).............. 2,773,100
------------
REPURCHASE AGREEMENT............... 2.0%
Goldman Sachs & Co.
(Agreement dated 5/31/96 to be
repurchased at $2,212,940,
collateralized by $1,505,000
(Value $2,246,000) U.S. Treasury
Notes, 13.875%, due 5/15/11)
5.10%............................ 06/03/96 2,212,000 2,212,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $2,212,000).............. 2,212,000
------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $88,082,602**)........... 99.7% 107,285,107
OTHER ASSETS IN EXCESS OF
LIABILITIES....................... 0.3% 278,181
----- ------------
NET ASSETS......................... 100.0% $107,563,288
===== ============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE:
INSTITUTIONAL SHARES
($107,233,079 / 7,356,638)....... $14.58
======
AFBA FIVE STAR SHARES
($330,209 / 22,681).............. $14.56
======
</TABLE>
- --------
* Non-income producing securities.
** Cost for Federal income tax purposes is $88,153,760. The aggregate gross
unrealized appreciation (depreciation) for all securities is as follows:
<TABLE>
<S> <C>
Excess of value over tax cost........ $19,950,483
Excess of tax cost over value........ $ (819,136)
</TABLE>
See Accompanying Notes to Financial Statements.
5
<PAGE>
M.S.D.&T. FUNDS, INC.
INTERMEDIATE FIXED INCOME FUND
STATEMENT OF NET ASSETS
MAY 31, 1996
<TABLE>
<CAPTION>
PERCENTAGE OF
NET ASSETS MATURITY PAR VALUE
------------- -------- --- -----
<S> <C> <C> <C> <C>
AGENCY OBLIGATIONS............... 22.5%
FEDERAL HOME LOAN BANK........... 2.1%
Medium Term Notes
6.34%.......................... 06/13/05 $1,000,000 $ 948,020
----------
FEDERAL HOME LOAN MORTGAGE
CORP............................ 4.9%
Medium Term Notes
7.31%.......................... 09/03/99 1,000,000 1,000,490
8.14%.......................... 05/20/04 1,000,000 1,009,110
Mortgage Backed Securities
6.50% (Pool #E00201)........... 03/01/08 175,659 168,907
----------
2,178,507
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION..................... 6.6%
Medium Term Notes
6.08%.......................... 09/03/03 500,000 469,255
6.625%......................... 03/21/06 1,000,000 962,620
Mortgage Backed Securities
6.00% (Pool #227994)........... 07/01/08 779,534 732,271
7.50% (Pool #282608)........... 05/01/09 762,781 764,688
----------
2,928,834
----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION..................... 8.9%
Mortgage Backed Securities
8.00% (Pool #308751)........... 11/15/06 265,122 271,418
8.00% (Pool #312726)........... 12/15/06 33,636 34,435
8.00% (Pool #319511)........... 12/15/06 87,085 89,153
6.50% (Pool #351994)........... 12/15/08 253,524 244,412
6.50% (Pool #359462)........... 01/15/09 272,281 262,495
6.00% (Pool #372668)........... 01/15/09 895,273 847,429
8.00% (Pool #389481)........... 04/15/09 291,313 298,231
8.00% (Pool #401484)........... 11/15/09 950,089 972,654
6.00% (Pool #410492)........... 01/15/11 169,844 160,768
6.00% (Pool #410497)........... 02/15/11 798,592 755,916
----------
3,936,911
----------
TOTAL AGENCY OBLIGATIONS
(Cost $10,214,035)........... 9,992,272
----------
</TABLE>
See Accompanying Notes to Financial Statements.
6
<PAGE>
M.S.D.&T. FUNDS, INC.
INTERMEDIATE FIXED INCOME FUND
STATEMENT OF NET ASSETS -- CONTINUED
MAY 31, 1996
<TABLE>
<CAPTION>
PECENTAGE OF
NET ASSETS MATURITY PAR VALUE
------------ -------- --- -----
<S> <C> <C> <C> <C>
CORPORATE BONDS.................. 8.2%
BEVERAGES........................ 0.5%
Coca-Cola Co., Inc. (Aa3, AA)
7.875%.......................... 09/15/98 $ 200,000 $ 205,500
-----------
CHEMICALS........................ 0.5%
E.I. duPont de Nemours & Co.
(Aa3, AA-)
6.00%........................... 12/01/01 250,000 238,750
-----------
FINANCE.......................... 1.8%
General Electric Capital Corp.
(Aaa, AAA)
6.125%.......................... 04/15/97 500,000 501,585
Norwest Financial Inc. (Aa3, AA-)
6.125%.......................... 08/01/03 300,000 282,750
-----------
784,335
-----------
FOODS............................ 0.6%
Kellogg Corp. (Aaa, AAA)
5.90%........................... 07/15/97 250,000 249,375
-----------
RETAIL MERCHANDISING............. 0.6%
Wal-Mart Stores, Inc. (Aa2, AA)
5.50%........................... 09/15/97 250,000 247,812
-----------
UTILITIES -- GAS................. 2.6%
Consolidated Natural Gas Co. (A1,
AA-)
5.75%........................... 08/01/03 475,000 437,000
Northern Illinois Gas Co. (Aa1,
AA)
5.875%.......................... 05/01/00 500,000 480,000
Wisconsin Natural Gas Co. (Aa3,
AA)
6.125%.......................... 09/01/97 260,000 259,675
-----------
1,176,675
-----------
UTILITIES -- TELEPHONE........... 1.6%
General Telephone Co. Illinois
1st Mortgage
(Aa3, AA)
7.50%.......................... 02/01/02 250,000 $248,750
New England Telephone & Telegraph
Co.
(Aa2, AA-)
5.05%.......................... 10/01/98 500,000 482,500
-----------
731,250
-----------
TOTAL CORPORATE BONDS**
(Cost $3,742,716)............ 3,633,697
-----------
</TABLE>
See Accompanying Notes to Financial Statements.
7
<PAGE>
M.S.D.&T. FUNDS, INC.
INTERMEDIATE FIXED INCOME FUND
STATEMENT OF NET ASSETS -- CONTINUED
MAY 31, 1996
<TABLE>
<CAPTION>
PECENTAGE OF
NET ASSETS MATURITY PAR VALUE
------------ -------- --- -----
<S> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS.......... 67.3%
U.S. Treasury Notes
7.00%............................. 09/30/96 $ 835,000 $ 839,484
4.375%............................ 11/15/96 600,000 597,312
6.50%............................. 05/15/97 1,000,000 1,006,140
6.75%............................. 05/31/97 300,000 302,565
7.375%............................ 11/15/97 1,000,000 1,017,650
6.00%............................. 11/30/97 1,000,000 998,850
5.875%............................ 04/30/98 500,000 496,810
7.125%............................ 10/15/98 1,000,000 1,017,760
5.50%............................. 11/15/98 2,000,000 1,961,880
5.125%............................ 12/31/98 1,000,000 971,220
5.00%............................. 01/31/99 1,000,000 966,610
7.00%............................. 04/15/99 1,000,000 1,015,110
6.50%............................. 04/30/99 1,000,000 1,002,260
6.875%............................ 07/31/99 1,000,000 1,010,430
6.00%............................. 10/15/99 1,000,000 986,180
5.75%............................. 10/31/00 1,500,000 1,450,665
5.50%............................. 12/31/00 1,000,000 955,930
5.625%............................ 02/28/01 600,000 575,520
6.25%............................. 04/30/01 1,000,000 983,810
7.50%............................. 11/15/01 450,000 466,389
6.25%............................. 02/15/03 1,300,000 1,265,251
7.25%............................. 05/15/04 3,000,000 3,076,110
7.25%............................. 08/15/04 2,300,000 2,358,075
7.875%............................ 11/15/04 1,000,000 1,064,220
7.50%............................. 02/15/05 1,100,000 1,145,375
6.50%............................. 05/15/05 1,500,000 1,464,240
5.875%............................ 11/15/05 1,000,000 932,260
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $30,072,830).............. 29,928,106
-----------
REPURCHASE AGREEMENT............... 1.6%
Goldman, Sachs & Co.
(Agreement dated 5/31/96 to be re-
purchased at $714,303 collateral-
ized by $615,000 (Value $726,000)
U.S. Treasury Notes, 8.75%, due
5/15/20)
5.10%............................ 06/03/96 714,000 714,000
-----------
TOTAL REPURCHASE AGREEMENT
(Cost $714,000)................ 714,000
-----------
</TABLE>
See Accompanying Notes to Financial Statements.
8
<PAGE>
M.S.D.&T. FUNDS, INC.
INTERMEDIATE FIXED INCOME FUND
STATEMENT OF NET ASSETS -- CONCLUDED
MAY 31, 1996
<TABLE>
<CAPTION>
PECENTAGE OF
NET ASSETS VALUE
------------ -----
<S> <C> <C>
TOTAL INVESTMENTS IN SECURITIES
(Cost $44,743,581*)................. 99.6% $44,268,075
OTHER ASSETS IN EXCESS OF LIABILI-
TIES................................ 0.4% 179,991
----- -----------
NET ASSETS........................... 100.0% $44,448,066
===== ===========
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE:
INSTITUTIONAL SHARES
($44,101,736 / 4,327,461).......... $10.19
======
AFBA FIVE STAR SHARES
($346,330 / 33,943)................ $10.20
======
</TABLE>
- --------
* Cost for Federal income tax purposes is $44,775,554. The aggregate gross
unrealized appreciation (depreciation) for all securities is as follows:
<TABLE>
<S> <C>
Excess of value over tax cost.......... $ 309,358
Excess of tax cost over value.......... $(816,837)
</TABLE>
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at May 31, 1996. These ratings are not cov-
ered by the Report of Independent Accountants.
-------------------------------------------------------------------------------
INTERMEDIATE FIXED INCOME FUND
MATURITY SCHEDULE OF PORTFOLIO
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
MATURITY
PERIOD AMOUNT PAR PERCENTAGE OF PORTFOLIO
-------- ---------- -----------------------
(CUM)
<S> <C> <C> <C>
1- 6 months $ 2,149,000 4.81% 4.81%
7-12 months 1,800,000 4.03% 8.84%
13-18 months 2,760,000 6.18% 15.02%
19-24 months 500,000 1.12% 16.14%
25-36 months 7,700,000 17.24% 33.38%
37-48 months 3,765,000 8.43% 41.81%
49-60 months 4,512,000 10.10% 51.91%
Over 60 months 21,482,732 48.09% 100.00%
----------- -----------
$44,668,732 100.00%
=========== ===========
</TABLE>
Average Weighted Maturity -- 5.0 years
- --------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
9
<PAGE>
M.S.D.&T. FUNDS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1996
<TABLE>
<CAPTION>
INTERMEDIATE
VALUE EQUITY FIXED INCOME
FUND FUND
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest.......................................... $ 562,817 $ 2,708,086
Dividends......................................... 2,553,134 --
----------- -----------
TOTAL INVESTMENT INCOME......................... 3,115,951 2,708,086
----------- -----------
EXPENSES:
Investment advisory fees.......................... 600,399 151,371
Administration fees............................... 125,083 54,061
Accounting agent fees............................. 45,002 22,265
Custodian fees.................................... 14,882 10,108
Directors' fees................................... 5,130 2,308
Transfer agent fees............................... 44,806 31,596
Legal............................................. 16,095 6,973
Audit............................................. 11,787 5,139
Registration fees................................. 2,252 2,181
Amortization of organizational costs.............. 6,636 6,636
Pricing service fees.............................. 1,775 6,590
Other............................................. 15,812 11,288
----------- -----------
889,659 310,516
Fees waived by Investment Adviser................. (159,036) (43,249)
Fees waived by Administrator...................... -- (7,573)
----------- -----------
TOTAL EXPENSES.................................. 730,623 259,694
----------- -----------
NET INVESTMENT INCOME.............................. 2,385,328 2,448,392
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY:
Net realized gain (loss) from:
Investments...................................... 3,132,449 (58,107)
Net unrealized appreciation (depreciation):
Investments...................................... 10,331,201 (1,034,652)
----------- -----------
Net gain (loss) on investments.................... 13,463,650 (1,092,759)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS................................... $15,848,978 $ 1,355,633
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
10
<PAGE>
M.S.D.&T. FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INTERMEDIATE INTERMEDIATE
VALUE VALUE FIXED FIXED
EQUITY FUND EQUITY FUND INCOME FUND INCOME FUND
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1996 MAY 31, 1995
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
Operations:
Net investment income.. $ 2,385,328 $ 2,324,502 $ 2,448,392 $ 2,274,051
Net realized gain
(loss) on
investments........... 3,132,449 2,649,128 (58,107) (104,261)
Net increase (decrease)
in unrealized
appreciation
(depreciation) on
investments........... 10,331,201 7,369,860 (1,034,652) 1,431,759
------------ ------------ ------------ ------------
Net increase (decrease)
in net assets
resulting from
operations............ 15,848,978 12,343,490 1,355,633 3,601,549
------------ ------------ ------------ ------------
Distributions to
shareholders from:
Net investment income
Institutional Class
($.35, $.34, $.59,
and $.56 per share,
respectively)........ (2,496,063) (2,063,461) (2,444,640) (2,274,051)
AFBA Five Star Class
($.10, .00, .28, and
$.00 per share,
respectively)........ (375) -- (3,752) --
Net realized capital
gains
Institutional Class
($.71, $.28, $.00,
and $.00 per share,
respectively)........ (4,969,957) (1,856,680) -- --
------------ ------------ ------------ ------------
Total distributions
to shareholders..... (7,466,395) (3,920,141) (2,448,392) (2,274,051)
------------ ------------ ------------ ------------
Capital Share
Transactions:
Proceeds of shares sold
Institutional Class... 23,438,948 43,358,779 12,256,511 19,879,026
AFBA Five Star Class.. 316,761 -- 354,044
Cost of shares redeemed
Institutional Class... (20,452,056) (15,427,649) (12,858,524) (12,149,096)
AFBA Five Star Class.. (100) -- (2,093) --
Value of shares issued
in reinvestment of
dividends
Institutional Class... 4,599,394 1,682,665 1,138,177 586,531
AFBA Five Star Class.. 369 -- 949 --
------------ ------------ ------------ ------------
Increase (decrease) in
net assets derived from
capital share
transactions........... 7,903,316 29,613,795 889,064 8,316,461
------------ ------------ ------------ ------------
TOTAL INCREASE
(DECREASE) IN NET
ASSETS................. 16,285,899 38,037,144 (203,695) 9,643,959
NET ASSETS:
Beginning of period.... 91,277,389 53,240,245 44,651,761 35,007,802
------------ ------------ ------------ ------------
End of period.......... $107,563,288 $ 91,277,389 $ 44,448,066 $ 44,651,761
============ ============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
11
<PAGE>
M.S.D.&T. FUNDS, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
VALUE EQUITY FUND
----------------------------------------------------------------------------------------------
AFBA FIVE
INSTITUTIONAL SHARES STAR SHARES
------------------------------------------------------------------------ -------------------
FOR THE PERIOD
FOR THE YEARS ENDED DECEMBER 1, 1995(4)
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 MAY 31, 1993 MAY 31, 1992 TO MAY 31, 1996
------------ ------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 13.42 $ 12.14 $ 12.39 $ 11.36 $ 10.69 $13.61
-------- ------- ------- ------- ------- ------
Income From Investment
Operations:
Net Investment Income.. 0.33 0.35 0.29 0.29 0.33 0.14
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.89 1.55 (0.18) 1.13 0.66 0.91
-------- ------- ------- ------- ------- ------
Total From
Investment
Operations......... 2.22 1.90 0.11 1.42 0.99 1.05
-------- ------- ------- ------- ------- ------
Less Distributions:
Dividends to
Shareholders from Net
Investment Income..... (0.35) (0.34) (0.28) (0.30) (0.32) (0.10)
Distributions to
Shareholders from Net
Capital Gains......... (0.71) (0.28) (0.08) (0.09) -- 0.00
-------- ------- ------- ------- ------- ------
Total Distribu-
tions.............. (1.06) (0.62) (0.36) (0.39) (0.32) (0.10)
-------- ------- ------- ------- ------- ------
Net Asset Value, End of
Period................. $ 14.58 $ 13.42 $ 12.14 $ 12.39 $ 11.36 $14.56
======== ======= ======= ======= ======= ======
- ------------------------------------------------------------------------------------------------------------------------
Total Return............ 17.24% 16.22% 0.87% 12.87% 9.51% 7.72%
- ------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of
Period (000).......... $107,233 $91,277 $53,240 $46,754 $17,463 $ 330
Ratio of Expenses to
Average Net Assets.... 0.73%(1) 0.73%(1) 0.68%(1) 0.68%(1) 0.68%(1) 0.98%(2)(3)
Ratio of Net Income to
Average Net Assets.... 2.38% 2.99% 2.41% 2.68% 3.05% 2.36%(3)
Portfolio turnover
rate................... 45.15% 33.26% 61.16% 11.99% 9.57% 45.15%
</TABLE>
- --------
(1) Without the waiver of advisory fees and administration fees, the ratio of
expenses to average net assets for the years ended May 31, 1996, May 31,
1995, May 31, 1994, May 31, 1993, and May 31, 1992 would have been .89%,
.89%, .87%, .88%, and .96%. (annualized), respectively.
(2) Without the waiver of advisory fees and administration fees, the ratio of
expenses to average net assets for the period ended May 31, 1996 would
have been 1.15% (annualized).
(3) Annualized.
(4) Commencement of Operations.
See Accompanying Notes to Financial Statements.
12
<PAGE>
M.S.D.&T. FUNDS, INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
INTERMEDIATE FIXED INCOME FUND
----------------------------------------------------------------------------------------------
AFBA FIVE
INSTITUTIONAL SHARES STAR SHARES
------------------------------------------------------------------------ -------------------
FOR THE PERIOD
FOR THE YEARS ENDED DECEMBER 1, 1995(4)
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994 MAY 31, 1993 MAY 31, 1992 TO MAY 31, 1996
------------ ------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $10.43 $10.10 $10.55 $10.31 $9.97 $10.61
------- ------- ------- ------- ------- ------
Income From Investment
Operations:
Net Investment Income.. 0.59 0.56 0.50 0.56 0.60 0.28
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.24) 0.33 (0.39) 0.24 0.34 (0.41)
------- ------- ------- ------- ------- ------
Total From
Investment
Operations......... 0.35 0.89 0.11 0.80 0.94 (0.13)
------- ------- ------- ------- ------- ------
Less Distributions:
Dividends to
Shareholders from Net
Investment Income..... (0.59) (0.56) (0.50) (0.56) (0.60) (0.28)
Distributions to
Shareholders from Net
Capital Gains......... -- -- (0.06) -- -- --
------- ------- ------- ------- ------- ------
Total Distribu-
tions.............. (0.59) (0.56) (0.56) (0.56) (0.60) (0.28)
------- ------- ------- ------- ------- ------
Net Asset Value,
End of Period.......... $10.19 $10.43 $10.10 $10.55 $10.31 $10.20
======= ======= ======= ======= ======= ======
- ------------------------------------------------------------------------------------------------------------------------
Total Return............ 3.38% 9.13% 0.94% 7.94% 9.68% (1.23)%
- ------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of
Period (000).......... $44,102 $44,652 $35,008 $28,078 $17,549 $346
Ratio of Expenses to
Average Net Assets.... 0.60%(1) 0.60%(1) 0.55%(1) 0.55%(1) 0.55%(1) 0.90%(2)(3)
Ratio of Net Income to
Average Net Assets.... 5.66% 5.56% 4.75% 5.32% 5.76% 5.50%(3)
Portfolio turnover
rate................... 52.79% 22.01% 48.58% 12.29% 13.76% 52.79%
</TABLE>
- --------
(1) Without the waiver of advisory fees and administration fees, the ratio of
expenses to average net assets for the years ended May 31, 1996, May 31,
1995, May 31, 1994, May 31, 1993, and May 31, 1992 would have been .72%,
.70%, .66%, .64%, and .72%, (annualized), respectively.
(2) Without the waiver of advisory fees and administration fees, the ratio of
expenses to average net assets for the period ended May 31, 1996 would
have been 1.06% (annualized).
(3) Annualized.
(4) Commencement of Operations.
See Accompanying Notes to Financial Statements.
13
<PAGE>
M.S.D.&T. FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
1.SIGNIFICANT ACCOUNTING POLICIES
M.S.D.&T. Funds, Inc. (the "Company") is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company.
The Company was incorporated in Maryland on March 7, 1989. The Articles of In-
corporation of the Company authorize the Board of Directors to issue up to ten
billion shares, having a par value of $.001 per share. The Company is a series
fund which is currently authorized to issue ten classes of common stock, which
represent interests in eight investment portfolios: the Prime Money Market
Fund (Class A), the Government Money Market Fund (Class B), the Tax-Exempt
Money Market Fund (Class C), the Tax-Exempt Money Market Fund (Trust) (Class
D), the Value Equity Fund (Class E and Class E -- Special Series 1), the In-
termediate Fixed Income Fund (Class F and Class F -- Special Series 1), the
Maryland Tax-Exempt Bond Fund (Class G) and the International Equity Fund
(Class H). Class E shares (Institutional Shares) and Class E -- Special Series
1 shares (AFBA Five Star Shares) of the Value Equity Fund and Class F shares
(Institutional Shares) and Class F -- Special Series 1 shares (AFBA Five Star
Shares) of the Intermediate Fixed Income Fund represent equal pro rata inter-
ests in the respective Fund and bear the same fees and expenses, except that
AFBA Five Star Shares of a Fund bear the fees that are payable under a Service
Plan (the "Service Plan") adopted by the Board of Directors and each class
bears certain class specific expenses. The financial statements herein relate
to the Value Equity Fund and the Intermediate Fixed Income Fund -- (the
"Funds").
The preparation of financial statements in conformity with generally ac-
cepted accounting principles requires management to make estimates and assump-
tions that affect the reported amounts of assets and liabilities and disclo-
sure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the re-
porting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements.
A) Security Valuation: Investments held by the Value Equity Fund and Inter-
mediate Fixed Income Fund are valued at market value or, in the absence
of a market value with respect to any portfolio securities, at fair val-
ue. A security that is primarily traded on a domestic security exchange
(including securities traded through the National Market System) is val-
ued at the last sale price on that exchange or, if there were no sales
during the day, at the current quoted bid price. Over-the-counter secu-
rities are valued at the mean of the most recent available quoted bid
and asked prices in the over-the-counter market. Market or fair value
may be determined on the basis of valuations provided by one or more
recognized pricing services approved by the Board of Directors, which
may rely on matrix pricing systems, electronic data processing tech-
niques and/or quoted bid and asked prices provided by investment deal-
ers. Short-term investments with maturities of 60 days or less are val-
ued at amortized cost which approximates fair value. The net asset value
per share of each Fund will fluctuate as the values of investment port-
folios change.
B) Security Transactions and Investment Income: Security transactions are
accounted for on the trade date. The cost of investments sold is deter-
mined by use of the specific identification
14
<PAGE>
M.S.D.&T. FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1.SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
method for both financial reporting and income tax purposes. Interest
income is recorded on the accrual basis; dividend income is recorded on
the ex-dividend date. The Company accounts separately for the assets,
liabilities and operations of each Fund. Direct expenses of a Fund are
charged to that Fund while general expenses of the Company are allocated
among the Funds based on relative net assets. Investment income and ex-
penses (other than the expenses incurred under the Service Plan and
class specific expenses) and realized and unrealized gains and losses on
investments are allocated to the separate classes of shares of each fund
based upon their relative net asset value on the date income is earned
or expenses and realized and unrealized gains and losses are incurred.
C) Dividends and Distributions to Shareholders: Dividends from net invest-
ment income are declared daily and paid monthly to shareholders of the
Intermediate Fixed Income Fund, and are declared and paid quarterly to
shareholders of the Value Equity Fund. Any net realized capital gains
are distributed annually.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principals.
D) Federal Income Taxes: Each of the Funds is a separate taxable entity and
intends to qualify for the tax treatment applicable to regulated invest-
ment companies under the Internal Revenue Code of 1986, as amended, and,
among other things, is required to make the requisite distributions to
its shareholders which will relieve it from Federal income or excise
taxes. Therefore, no provision has been recorded for Federal income or
excise taxes.
Under current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fis-
cal year. The following losses will be treated as arising on the first
day of fiscal year ended May 31, 1997.
<TABLE>
<CAPTION>
CAPITAL LOSSES
DEFERRED
--------------
<S> <C>
Intermediate Fixed Income Fund............................. 73,725
</TABLE>
E) Organizational Costs: Costs incurred in connection with the registration
and initial public offering of shares of the Funds have been deferred
and are being amortized on a straight-line basis for a five-year period.
F) Repurchase Agreements: The Value Equity Fund and Intermediate Fixed In-
come Fund may agree to purchase portfolio securities from financial in-
stitutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase them at an agreed upon date and price. The
seller will be required on a daily basis to maintain the value of the
securities subject to the repurchase agreement at not less than the re-
purchase price (including accrued interest), plus the transaction costs
the Funds could expect to incur if the seller defaults, marked-to-market
daily.
15
<PAGE>
M.S.D.&T. FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. INVESTMENT ADVISER, DISTRIBUTOR AND OTHER RELATED PARTY TRANSACTIONS
Mercantile-Safe Deposit and Trust Company ("Mercantile") provides investment
advisory and administration services to each Fund pursuant to Investment Advi-
sory Agreements and an Administration Agreement. For its services as Adviser,
Mercantile receives an advisory fee computed daily and payable monthly at an
annual rate of .60% of the average daily net assets of the Value Equity Fund
and .35% of the average daily net assets of the Intermediate Fixed Income
Fund. For its services as Administrator, Mercantile receives an administration
fee computed daily and payable monthly at an annual rate of .125% of the aver-
age daily net assets of each Fund. Mercantile may, at its discretion, volun-
tarily waive any portion of its advisory fee or its administration fee for any
Fund.
Under the Service Plan with respect to AFBA Five Star Shares, institutions
("Service Organizations") agree to provide support service to their clients
who are the beneficial owners of AFBA Five Star Shares of the Value Equity and
Intermediate Fixed Income Funds. For these services, the Funds agree to pay
the Service Organizations a fee at the annual rate of .25% of the average
daily net assets of each Fund's outstanding AFBA Five Star Shares.
Shares in each Fund are sold on a continuous basis without a sales load by
the Company's distributor, BISYS Fund Services ("the Distributor"). The Dis-
tributor receives no fee for these services.
Directors of the Company each receive from the Company an annual fee of
$3,500 and a fee of $1,625 for each Board meeting attended and are reimbursed
for all out-of-pocket expenses relating to attendance at meetings. Officers of
the Company do not receive compensation from the Company for serving as offi-
cers. No person who is a director, officer or employee of the Adviser serves
as a director, officer or employee of the Company. During the year ended May
31, 1996, the Funds paid legal fees to a law firm, a partner of which serves
as Secretary of the Company.
3. NET ASSETS
At May 31, 1996, net assets consisted of the following:
<TABLE>
<CAPTION>
VALUE INTERMEDIATE
EQUITY FIXED INCOME
FUND FUND
------ ------------
<S> <C> <C>
Capital Paid-In
Institutional Class............................... $ 86,861,309 $44,738,792
AFBA Five Star Class.............................. 317,030 352,900
Accumulated Realized Gain (Loss) on Investments..... 798,638 (171,015)
Net Unrealized Appreciation (Depreciation) on
Investments ....................................... 19,202,505 (475,506)
Undistributed Net Investment Income................. 383,806 2,895
------------ -----------
$107,563,288 $44,448,066
============ ===========
</TABLE>
16
<PAGE>
M.S.D.&T. FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. CAPITAL STOCK
Transactions in shares of the Value Equity and Intermediate Fixed Income
Funds are summarized as follows:
<TABLE>
<CAPTION>
VALUE EQUITY FUND
---------------------------------------------------
INSTITUTIONAL SHARES AFBA FIVE STAR SHARES
------------------------- ---------------------
FOR THE YEAR FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1996
------------ ------------ --------------
<S> <C> <C> <C>
Shares Sold............... 1,678,924 3,524,889 22,663
Shares Redeemed........... (1,459,804) (1,245,712) (7)
Shares Reinvested......... 335,598 137,627 25
---------- ---------- ------
Net Increase (Decrease) in
Shares................... 554,718 2,416,804 22,681
Shares Outstanding:
Beginning of Period...... 6,801,920 4,385,116 0
---------- ---------- ------
End of Period............ 7,356,638 6,801,920 22,681
========== ========== ======
<CAPTION>
INTERMEDIATE FIXED INCOME FUND
-----------------------------------------------
INSTITUTIONAL SHARES AFBA FIVE STAR SHARES
------------------------- ---------------------
FOR THE YEAR FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1996
------------ ------------ --------------
<S> <C> <C> <C>
Shares Sold............... 1,170,604 1,968,576 34,055
Shares Redeemed........... (1,232,150) (1,215,322) (204)
Shares Reinvested......... 108,696 60,963 92
---------- ---------- ------
Net Increase (Decrease) in
Shares................... 47,150 814,217 33,943
Shares Outstanding:
Beginning of Period...... 4,280,311 3,466,094 0
---------- ---------- ------
End of Period............ 4,327,461 4,280,311 33,943
========== ========== ======
</TABLE>
5. PURCHASES & SALES OF SECURITIES
For the year ended May 31, 1996, total aggregate purchases and proceeds from
sales of investment securities (excluding short-term securities) were as fol-
lows:
<TABLE>
<CAPTION>
U.S. U.S.
GOVERNMENT GOVERNMENT
PURCHASES * SALES * PURCHASES SALES
----------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Value Equity Fund............. $48,513,480 $38,715,567 $ 0 $ 4,011,250
Intermediate Fixed Income
Fund......................... 0 1,988,815 22,902,846 20,203,410
</TABLE>
*(excluding short-term and U.S. Government securities)
6. CAPITAL LOSS CARRYOVERS
At May 31, 1996, the Intermediate Fixed Income Fund had capital loss carryo-
vers of $65,316 expiring in 2003.
The capital loss carryovers are available to offset possible future capital
gains, if any, of the Fund.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of
Directors of the M.S.D.&T. Funds,
Inc.
We have audited the accompanying statements of net assets of the Value Equity
Fund and Intermediate Fixed Income Fund of M.S.D.&T. Funds, Inc. as of May 31,
1996, and the related statements of operations for the year then ended, and
the statements of changes in net assets and the financial highlights for each
of the periods presented. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to ex-
press an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1996, by correspondence with the custodian and brokers. An audit also in-
cludes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presenta-
tion. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
the Value Equity Fund and Intermediate Fixed Income Fund of the M.S.D.&T.
Funds, Inc. as of May 31, 1996, the results of its operations for the year
then ended, and the changes in its net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted account-
ing principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 18, 1996
18
<PAGE>
IMPORTANT TAX INFORMATION (UNAUDITED)
During the fiscal year ended May 31, 1996:
100.0% of the distributions paid by the Intermediate Fixed Income Fund
were derived from net investment income and are taxable as ordinary in-
come.
33.4% of the distributions paid by the Value Equity Fund were derived
from net investment income and short-term capital gains and are taxable
as ordinary income and 66.6% were derived from long term capital gains
and are taxable at the long term capital gain rate. Of such distribu-
tions derived from net investment income and short-term capital gains,
100% qualify for the dividends received deduction available to corpo-
rate shareholders.
19
<PAGE>
INVESTMENT ADVISER AND ADMINISTRATOR:
[LOGO OF MERCANTILE-SAFE DEPOSIT & TRUST COMPANY APPEARS HERE]
Baltimore, Maryland
CUSTODIAN:
Fifth Third Bank
Cincinnati, Ohio
TRANSFER AGENT:
BISYS Fund Services Ohio, Inc.
Columbus, Ohio
DISTRIBUTOR:
BISYS Fund Services
Columbus, Ohio
AFBA INDUSTRIAL BANK IS A WHOLLY-OWNED SUBSIDIARY OF ARMED FORCES BENEFIT SERV-
ICES, INC. AFBA INDUSTRIAL BANK IS NOT AFFILIATED WITH AEGON USA, MERCANTILE-
SAFE DEPOSIT AND TRUST, BISYS FUND SERVICES OHIO, INC., BISYS FUND SERVICES OR
FIFTH THIRD BANK.
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
AFBA FIVE STAR SHARES OF THE M.S.D.&T. FUNDS, INC. IT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR PRECEDED BY THE
CURRENT PROSPECTUS.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED, EN-
DORSED OR OTHERWISE SUPPORTED BY MERCANTILE-SAFE DEPOSIT AND TRUST CO. OR AFBA
INDUSTRIAL BANK, THEIR PARENT COMPANIES OR AFFILIATES AND ARE NOT FEDERALLY IN-
SURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORP., THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT
IN THE FUNDS, INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
[LOGO OF AFBA FIVE STAR SHARES(SM) APPEARS HERE]
of M.S.D.&T. Funds, Inc.
ANNUAL REPORT
. Value Equity Fund
. Intermediate Fixed Income Fund
May 31, 1996
