<PAGE>
AFBA FIVE STAR SHARES
OF THE
M.S.D.& T. FUNDS, INC.
VALUE EQUITY FUND
INTERMEDIATE FIXED INCOME FUND
SUPPLEMENT DATED DECEMBER 15, 1995
TO THE PROSPECTUS DATED SEPTEMBER 29, 1995
AS REVISED DECEMBER 1, 1995
THE THIRD PARAGRAPH ON PAGE 24 OF THE PROSPECTUS UNDER THE HEADING "INVESTMENT
ADVISER" IS AMENDED AND RESTATED TO READ AS FOLLOWS:
David L. Donabedian and Brian B. Topping serve as Co-Portfolio Managers of
the Value Equity Fund. Mr. Donabedian, Vice President of Mercantile, has
managed the Value Equity Fund since 1992. During the past five years, he has
been a portfolio manager and economic analyst at Mercantile. Portfolios under
his management include employee benefit and endowment trust funds in addition
to the Value Equity Fund. Prior to joining Mercantile, Mr. Donabedian was
employed by Lehman Brothers. Mr. Topping, Vice Chairman of the Board, Chief
Investment Officer and head of the Trust Division at Mercantile, has co-
managed the Value Equity Fund since December, 1995. He has managed endowment,
employee benefit and foundation portfolios since joining Mercantile in 1976.
<PAGE>
AFBA FIVE STAR SHARES
ARMED FORCES BENEFIT SERVICES, INC.
909 N. WASHINGTON STREET
ALEXANDRIA, VA 22314
800-782-4797
SEPTEMBER 29, 1995
(AS REVISED DECEMBER 1, 1995)
The AFBA Five Star Shares of M.S.D.&T. Funds, Inc., an open-end management
investment company, offered by this Prospectus represent interests in two
separate investment portfolios, each having its own investment objective and
policies. The Value Equity Fund's investment objective is to seek long-term
capital appreciation, with income being a secondary objective. The
Intermediate Fixed Income Fund's investment objective is to seek as high a
level of current income as is consistent with protection of capital.
AFBA Five Star Shares provide a no-load investment program that allows you
to buy and sell shares without paying any sales charges. To open an AFBA Five
Star Share account, an initial investment of $1,000 ($250 for IRA accounts) is
generally required. AFBA Five Star Shares of the Funds are sold exclusively by
AEGON USA Securities, Inc. as selling dealer.
This Prospectus briefly sets forth information you should consider before
investing in the Funds. Please read this Prospectus and retain it for future
reference. Additional information about the Funds is contained in the
Statement of Additional Information ("SAI"), dated September 29, 1995, which
has been filed with the Securities and Exchange Commission and which is
incorporated by reference into (considered a part of) this Prospectus. The SAI
is available upon request without charge by calling or writing to Armed Forces
Benefit Services, Inc. ("AFBSI") at the above address.
SHARES OF THE FUNDS 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 COMPANIES OR AFFILIATES, AND SUCH SHARES ARE
NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY. INVESTMENTS IN THE FUNDS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE
This Prospectus does not constitute an offer to sell securities in any
jurisdiction or to any individual where such offer may not legally be made.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Fees & Expenses........................................................ 3
Financial Highlights................................................... 4
An Explanation of Financial Highlights................................. 6
Investment Objectives, Policies and Risks.............................. 7
Introduction.......................................................... 7
Value Equity Fund...................................................... 7
Intermediate Fixed Income Fund......................................... 8
Other Investment Policies and Related Risks............................ 9
Shareholder Information................................................ 14
Getting In Touch With Five Star....................................... 14
Minimum Investments................................................... 14
Types of Accounts..................................................... 15
Opening an Account.................................................... 15
Buying Additional Shares.............................................. 16
</TABLE>
<TABLE>
<S> <C>
Additional Purchase Information....................................... 16
Redeeming Shares...................................................... 17
Exchanging Shares..................................................... 18
Additional Redemption and Exchange Information........................ 18
Pricing of Shares...................................................... 20
Dividends and Distributions............................................ 21
Taxes.................................................................. 21
Statements & Reports................................................... 22
Description of the Company and its Shares.............................. 22
Fund Management........................................................ 23
Performance Information................................................ 25
Miscellaneous.......................................................... 26
</TABLE>
2
<PAGE>
FEES & EXPENSES
The following tables and example are provided to assist you in understanding
the fees and expenses that you will bear directly or indirectly as an investor
in the Funds:
SHAREHOLDER TRANSACTION EXPENSES are charges you pay when buying or selling
AFBA Five Star Shares. The table below indicates that AFBA Five Star
shareholders do not pay these fees.
ANNUAL OPERATING EXPENSES include fees for portfolio management,
maintenance of shareholder accounts, general Fund administration,
accounting and other services. These charges are levied as a specific
percentage of a Fund's average net assets. The expenses will vary for each
Fund because of differences in the management fees, shareholder account
size and transaction volume associated with each Fund.
The EXAMPLE provides an illustration of the expenses a shareholder would
bear on a $1,000 investment assuming (1) a 5% annual return and (2)
redemption at the end of the indicated time periods.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
VALUE INTERMEDIATE
EQUITY FIXED INCOME
FUND FUND
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases.................. None None
Sales Charge Imposed on Reinvested Dividends............... None None
Deferred Sales Charge Imposed on Redemptions............... None None
Redemption Fees(1)......................................... None None
Exchange Fees.............................................. None None
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (net of waivers)(2)........................ .40% .25%
12b-1 Fees................................................. None None
Other Expenses (net of waivers and reimbursements)(2)...... .58% .65%
---- ----
Total Fund Operating Expenses (net of waivers and reim-
bursements)(2)(3)......................................... .98% .90%
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</TABLE>
(1) Investors are charged a $7.00 fee if redemption proceeds are paid by wire.
(2) As stated in this Prospectus under "Fund Management," the Funds have
agreed to pay fees to the investment adviser at the maximum 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.
Shareholder servicing payments are payable at the maximum annual rate of
.25% of the average daily net asset value of each Fund's outstanding AFBA
Five Star Shares. The investment adviser and administrator expect to
voluntarily waive a portion of their fees otherwise payable by the Funds
for the fiscal year ended May 31, 1996 in order to assist the Funds in
maintaining competitive expense ratios. A portion of the shareholder
servicing and transfer agency payments also are expected to be waived
and/or reimbursed. Absent waivers and reimbursements, it is expected that
Management Fees, Other Expenses and Total Fund Operating Expenses would be
.60%, .95% and 1.55%, respectively, of the average daily net asset value
of the AFBA Five Star Shares of the Value Equity Fund, and .35%, .98% and
1.33%, respectively, of the average daily net asset value of the AFBA Five
Star Shares of the Intermediate Fixed Income Fund.
(3) This expense information is provided to help you understand the expenses
you would bear either directly (as with the shareholder transaction fees)
or indirectly (as with the annual operating expenses) as a shareholder of
one of the Funds. The operating expenses reflect estimated expenses and
projected assets of each Fund's outstanding AFBA Five Star shares for the
initial fiscal year during which the Funds offer AFBA Five Star Shares.
3
<PAGE>
EXAMPLE
(assuming $1,000 investment, 5% annual return and redemption at end of
indicated time period)
<TABLE>
<CAPTION>
VALUE INTERMEDIATE
EQUITY FIXED INCOME
FUND FUND
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<S> <C> <C>
1 Year...................................................... $ 10 $ 9
3 Years..................................................... $ 31 $ 29
5 Years..................................................... $ 54 $ 50
10 Years.................................................... $120 $111
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</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES AND RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN IN THE TABLE. THE AFBA FIVE STAR SHARES ARE A NEW
SERIES AND THE ABOVE FIGURES ARE BASED ON FEES AND EXPENSES EXPECTED TO BE
INCURRED BY AFBA FIVE STAR SHARES OF EACH FUND DURING THE CURRENT FISCAL YEAR.
FINANCIAL HIGHLIGHTS
M.S.D.& T. Funds, Inc. (the "Company") currently offers two series of shares
in each Fund--AFBA Five Star Shares and Institutional Shares. AFBA Five Star
Shares and Institutional Shares represent equal pro rata interests in each
Fund, except that AFBA Five Star Shares bear separate shareholder servicing
and other operating expenses that may be paid in differing amounts and enjoy
certain exclusive voting rights on matters relating to those expenses. For
example, AFBA Five Star Shares will bear the servicing fees payable under the
Servicing Agreement described in this Prospectus at an annual rate not to
exceed .25% of the average daily net asset value of each Fund's outstanding
AFBA Five Star Shares. (See "Description of the Company and its Shares--
Shareholder Servicing Arrangements.") Institutional Shares bear no such fees.
During the periods shown in the table below, the Funds offered only
Institutional Shares. The table sets forth information concerning the historic
investment results of the Institutional Shares of the Funds, and is intended
to give you a longer term perspective of the Funds' financial history. The
tables are a part of the financial statements for each Fund. The financial
statements for each Fund have been audited by Coopers & Lybrand L.L.P., the
Company's independent accountants, whose report thereon is included in the
Statement of Additional Information along with the financial statements. The
financial data included in the table should be read in conjunction with the
financial statements and related notes included in the Statement of Additional
Information. Further information about the performance of the Funds is
available in the Company's Annual Report to Shareholders. For a free copy of
the Statement of Additional Information or the Annual Report to Shareholders,
please contact AFBSI at the address or telephone number on the first page of
this Prospectus.
4
<PAGE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES
-----------------------------------------------------------------------------------------------
VALUE EQUITY FUND INTERMEDIATE FIXED INCOME FUND
---------------------------------------------- ----------------------------------------------
YEAR YEAR YEAR YEAR 2/28/91/1/ YEAR YEAR YEAR YEAR 3/14/91/1/
ENDED ENDED ENDED ENDED TO ENDED ENDED ENDED ENDED TO
5/31/95 5/31/94 5/31/93 5/31/92 5/31/91 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91
------- ------- ------- ------- ---------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $12.14 $12.39 $11.36 $10.69 $10.00 $10.10 $10.55 $10.31 $9.97 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income From Investment
Operations:
Net Investment Income.. 0.35 0.29 0.29 0.33 0.09 0.56 0.50 0.56 0.60 0.13
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.55 (0.18) 1.13 0.66 0.60 0.33 (0.39) 0.24 0.34 (0.03)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total From Investment
Operations........... 1.90 0.11 1.42 0.99 0.69 0.89 0.11 0.80 0.94 0.10
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends to
Shareholders from Net
Investment Income..... (0.34) (0.28) (0.30) (0.32) -- (0.56) (0.50) (0.56) (0.60) (0.13)
Distributions to
Shareholders from Net
Capital Gains......... (0.28) (0.08) (0.09) -- -- -- (0.06) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions... (0.62) (0.36) (0.39) (0.32) 0.00 (0.56) (0.56) (0.56) (0.60) (0.13)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period................. $13.42 $12.14 $12.39 $11.36 $10.69 $10.43 $10.10 $10.55 $10.31 $ 9.97
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return............ 16.22% 0.87% 12.87% 9.51% 6.90% 9.13% 0.94% 7.94% 9.68% 4.78%/2/
Ratios/Supplemental Data
Net Assets, End of
Period ($000).......... 91,277 53,240 46,754 17,463 4,801 44,652 35,008 28,078 17,549 1,298
Ratio of Expenses to
Average Net Assets/3/.. 0.73% 0.68% 0.68% 0.68% 0.68%/2/ 0.60% 0.55% 0.55% 0.55% 0.55%/2/
Ratio of Net Investment
Income to Average Net
Assets................. 2.99% 2.41% 2.68% 3.05% 4.10%/2/ 5.56% 4.75% 5.32% 5.76% 6.17%/2/
Portfolio turnover rate. 33.26% 61.16% 11.99% 9.57% 1.98% 22.01% 48.58% 12.29% 13.76% 34.73%
</TABLE>
- --------
/1/Commencement of operations.
/2/Annualized.
/3/Without the waiver of advisory fees and administration fees, the ratio of
expenses to average net assets for the years ended May 31, 1995, May 31,
1994, May 31, 1993 and May 31, 1992 and the period ended May 31, 1991 would
have been .89%, .87%, .88%, .96% and 1.20% (annualized), respectively, for
the Value Equity Fund; and .70%, .66%, .64%, .72% and .97% (annualized),
respectively, for the Intermediate Fixed Income Fund.
5
<PAGE>
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AN EXPLANATION OF FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Financial Highlights provide two types of information--financial
performance on a "per share basis" and selected supplemental data. The "per
share information" starts with the Net Asset Value at the beginning of each
fiscal period, identifies the events which increased or decreased share value
during the period, and concludes with the Net Asset Value at the end of the
period. The ratios and supplemental data provide selected information on the
total number and performance of all shares.
The following discussion provides a short explanation of the terminology
used in the Financial Highlights.
NET ASSET VALUE (NAV)--the value of a single share and therefore the price
at which a shareholder will buy or sell shares at a given point in time. The
NAV is computed on a daily basis by adding up the market value of all assets
owned by a Fund, deducting all liabilities, and dividing the balance by the
number of shares currently outstanding. The difference between the NAV at the
beginning of the period and the end of the period represents the change in
value of a share over the fiscal period, but not its total return.
NET INVESTMENT INCOME--includes the dividend and interest income earned on
securities held by a Fund less management fees, administration fees and other
operating expenses of the Fund.
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--represents the
increase or decrease in value of the securities a Fund holds. When securities
are sold, the gain or loss is realized; when securities increase or decrease
in value but are not sold, the gain or loss is unrealized.
DISTRIBUTIONS--are the disbursements made to shareholders during the stated
period. DIVIDEND distributions are made from a Fund's net investment income
earnings while CAPITAL GAIN distributions are made from a Fund's net realized
earnings on the sale of securities held by the Fund.
TOTAL RETURN--is the percentage change in the value of an investment over a
stated period of time. The total return calculation assumes that all dividends
and distributions are reinvested in a Fund to buy more shares at the Fund's
net asset value on the day the distributions are made. PLEASE NOTE that it is
not possible to directly calculate a Fund's total return from the information
contained in the Financial Highlights.
RATIO OF EXPENSES TO AVERAGE NET ASSETS--represents a Fund's operating
expenses as a percentage of average net assets for the stated period.
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS--represents a Fund's
net investment income divided by its average net assets.
PORTFOLIO TURNOVER RATE--measures how frequently a Fund buys and sells its
security holdings. The calculation involves dividing the lower of total sales
or purchases by the average monthly market value of the Fund's portfolio
securities.
6
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, POLICIES AND RISKS
- --------------------------------------------------------------------------------
INTRODUCTION
The Company offers AFBA Five Star Shares in two investment portfolios--the
Value Equity Fund and the Intermediate Fixed Income Fund. The Funds are
classified as diversified investment companies which means that, except for
certain U.S. Government and agency obligations, no more than 5% of a Fund's
total assets will be invested in the securities of a single issuer and no more
than 10% of an issuer's outstanding voting securities will be owned by a Fund,
provided that up to 25% of a Fund's total assets may be invested without
regard to these limitations.
The investment objective and policies of each of the Funds are discussed in
the following paragraphs. The investment objective of a Fund may not be
changed without the approval of the holders of a majority of its outstanding
shares.
Although management will use its best efforts to achieve the investment
objective of each Fund, there can be no assurance that it will be able to do
so. Except as noted under "Investment Limitations" a Fund's investment
policies may be changed without shareholder approval.
- --------------------------------------------------------------------------------
VALUE EQUITY FUND
- --------------------------------------------------------------------------------
The Value Equity Fund's investment objective is to seek long-term capital
appreciation, with income being a secondary investment objective. The Fund
pursues its objective by investing substantially all of its assets in a
diversified portfolio of equity securities consisting of common stock,
preferred stock and debt obligations convertible into common stock which the
Fund's investment adviser believes to be undervalued.
The Fund's investment policy is to invest in individual stocks that appear
to represent good relative values and seem likely to appreciate in price.
Stocks are selected on the basis of fundamental and/or technical research.
Additionally, price to earnings ratio, earnings trend and dividend growth rate
will influence stock selection.
Although income is a secondary objective, the securities in which the Fund
invests may produce higher than average dividend yields. Under normal market
and economic conditions, the Fund will invest at least 65% of its total assets
in equity securities. The Fund's investment adviser will attempt to reduce
investment risk by investing in many different companies across a variety of
industries.
Although the Fund will invest primarily in publicly-traded common stock of
U.S. corporations, it may invest up to 25% of its total assets in the
securities of foreign issuers, either directly or through American Depository
Receipts ("ADRs") and European Depository Receipts ("EDRs"). The Fund may also
engage in forward foreign currency exchange transactions. See "Other
Investment Policies and Related Risks--Foreign Securities."
During normal market and economic conditions, the Fund may hold up to 25% of
its total assets in debt securities. These securities will either be issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or will
be debt obligations that at the time of purchase carry one of the three
highest ratings assigned by an unaffiliated national statistical rating
organization ("Rating Agency"). Investments may also be made in unrated debt
obligations which the investment adviser has determined to be of comparable
rating quality. See the SAI Appendix for a description of applicable debt
security ratings. The Fund may retain debt securities downgraded by a Rating
Agency subsequent to their purchase by the Fund.
7
<PAGE>
The Fund may from time to time reduce the percentage of its investments in
equity securities and temporarily invest its assets in fixed income
securities. These temporary investments will include both high quality, short-
term money market obligations and the types of securities in which the
Intermediate Fixed Income Fund may invest. This defensive investment strategy
will be implemented when warranted by market conditions or to meet anticipated
shareholder redemption requests.
- --------------------------------------------------------------------------------
INTERMEDIATE FIXED INCOME FUND
- --------------------------------------------------------------------------------
The investment objective of the Intermediate Fixed Income Fund is to seek as
high a level of current income as is consistent with the protection of
capital.
The Fund invests substantially all of its assets in:
-- corporate debt instruments
-- obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
-- foreign debt obligations (corporate and government)
-- asset-backed securities
-- collateralized mortgage obligations and other mortgage-related
securities with effective maturities of ten years or less
-- money market instruments.
The Fund may also invest in Municipal Obligations the income from which may
or may not be entirely exempt from federal income tax. The purchase of
Municipal Obligations may be advantageous when, as a result of economic,
regulatory or other circumstances, the pre-tax performance of these securities
is comparable to that of corporate or U.S. Government obligations.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in corporate debt obligations, obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, and
mortgaged-backed securities, including collateralized mortgage obligations. Up
to 25% of the Fund's total assets may be invested in foreign debt obligations.
The Fund may also invest in forward foreign currency exchange transactions.
The Fund will only invest in debt obligations that are rated at the time of
purchase within the three highest ratings assigned by a Rating Agency.
Investments may also be made in unrated debt obligations that are determined
by the investment adviser to be of comparable quality. The Fund may also
invest, without limitation, in high quality short-term money market
instruments for defensive purposes. The Fund may retain debt obligations
downgraded by a Rating Agency subsequent to their purchase by the Fund.
The value of the Fund's portfolio securities is determined primarily by
market interest rates and as these rates rise the value of the Fund's
securities will decline.
The investment adviser expects that under normal market conditions the
Intermediate Fixed Income Fund's portfolio securities will have an average
weighted maturity of three to ten years.
8
<PAGE>
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RELATED RISKS
- --------------------------------------------------------------------------------
The following discussion examines other investment policies of the Funds and
related risks.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. Some obligations, such as
those issued by the Government National Mortgage Association ("Ginnie Maes"),
are backed by the U.S. Treasury; others, including securities issued by the
Export-Import Bank, are supported by the issuer's right to borrow from the
U.S. Treasury; other securities, including those issued by the Federal
National Mortgage Association ("Fannie Maes"), are backed by the U.S.
Government's discretionary ability to purchase the agency's obligations; and
still others, such as securities issued by the Student Loan Marketing
Association ("Sallie Maes"), are backed solely by the issuer's credit. U.S.
Government obligations also include U.S. Government-backed trusts that hold
obligations of foreign governments and are guaranteed or backed by the full
faith and credit of the United States. There is no assurance that the U.S.
Government would support a U.S. Government-sponsored entity were it not
obligated to do so by law. The market value of U.S. Government obligations,
like other fixed income securities, can be expected to vary inversely to
changes in prevailing interest rates.
MUNICIPAL OBLIGATIONS
The two main types of Municipal Obligations in which the Intermediate Fixed
Income Fund may invest are "general obligation" securities and "revenue"
securities. General obligation securities are backed by the full faith, credit
and taxing power of the issuing entity while revenue securities are payable
only from the revenues received from the operation of a particular facility or
other specific revenue source. A third type of Municipal Obligation, normally
issued by special purpose public authorities, is known as a "moral obligation"
security because if the issuer cannot meet its obligations it then draws on a
reserve fund, the restoration of which is not a legal requirement. Private
activity bonds (such as bonds issued by industrial development authorities)
are usually revenue securities issued by or for public authorities to finance
a privately operated facility.
The Intermediate Fixed Income Fund may acquire "stand-by commitments" (which
are also referred to as "put" options) with respect to Municipal Obligations
in its portfolio. Under a stand-by commitment, a dealer will agree to purchase
at the Fund's option specified Municipal Obligations at a specified price.
These commitments will be used only to assist in maintaining the Fund's
liquidity and not for trading purposes.
MONEY MARKET INSTRUMENTS
Each Fund may from time to time invest in "money market instruments", a term
that includes bank obligations, commercial paper and corporate bonds with
remaining maturities of thirteen months or less.
Bank obligations include bankers' acceptances ("BAs"), negotiable
certificates of deposit ("CDs") and non-negotiable time deposits issued or
supported by U.S. or foreign banks. Investments in bank obligations are
limited to obligations of financial institutions having more than $1 billion
in total assets at the time of purchase. Investments in the obligations of
foreign banks and foreign branches of U.S. banks will not exceed 25% of a
Fund's total assets at the time of purchase.
Taxable commercial paper purchased by a Fund will be rated at the time of
purchase in the highest rating category by a Rating Agency. Each Fund may also
acquire unrated commercial paper and corporate
9
<PAGE>
bonds that are determined by the investment adviser at the time of purchase to
be of comparable quality to rated instruments that may be acquired by the
particular Fund. Commercial paper may include variable and floating rate
instruments. For additional information concerning the Funds' policies
regarding retention of securities that have been downgraded, see the
discussion under "Intermediate Fixed Income Fund" above.
ASSET-BACKED SECURITIES
The Intermediate Fixed Income Fund may invest in asset-backed securities
which represent a participation in, or are secured by and payable from, a
stream of payments generally consisting of both interest and principal
generated by particular assets, most often a pool of assets similar to one
another. Payments of interest and principal may be partially guaranteed by a
letter of credit issued by a financial institution such as a bank. Assets
generating such payments will consist of motor vehicle installment purchase
obligations, credit card receivables and home equity loans. The Fund may also
invest in other types of asset-backed securities that may be available in the
future.
The yield characteristics of asset-backed securities differ from traditional
debt securities. A major difference is that the principal amount of the
obligations may be prepaid at any time because the underlying assets (i.e.
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster
than expected prepayments will increase, while slower than expected
prepayments, will decrease, yield to maturity.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Like other fixed income securities, when interest rates rise, the
value of an asset-backed security generally will decline; however, when
interest rates decline, the value of an asset-backed security with prepayment
features may not increase as much as that of other fixed income securities.
Asset-backed securities are subject to greater risk of default during
periods of economic downturn. Also, the secondary market for certain asset-
backed securities may not be as liquid as the market for other types of
securities, which could result in the Fund's experiencing difficulty in
valuing or liquidating such securities. For these reasons, under certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitations described under the heading "Illiquid
Securities."
MORTGAGE-BACKED SECURITIES
The Intermediate Fixed Income Fund may invest in mortgage-backed securities
including collateralized mortgage obligations ("CMOs") and Government Stripped
Mortgage-Backed Securities. Mortgage-backed securities provide a monthly
payment consisting of interest and principal.
CMOs are obligations issued by non-governmental entities and are secured by
an underlying pool of mortgages or mortgage pass-through certificates that are
structured to direct payments on underlying collateral to different series or
classes of obligations.
Government Stripped Mortgage-Backed Securities are obligations issued or
guaranteed by various U.S. Government agencies and instrumentalities. These
securities represent interests in either the principal or interest
distributions that
10
<PAGE>
have been stripped or removed from the underlying mortgage-backed certificate
by private entities or by the agency or instrumentality that issued the
mortgage-backed certificate. The certificates underlying Government Stripped
Mortgage-Backed Securities represent interests in pools of mortgage loans.
Although certain mortgage-backed securities are guaranteed by a third party
or are otherwise similarly secured, the market value of the security, which
may fluctuate, is not secured. To the extent that the Intermediate Fixed
Income Fund purchases mortgage-backed securities at a premium, mortgage
foreclosures and prepayments of principal by mortgagors (which may be made at
any time without penalty) may result in some loss of the Fund's principal
investment to the extent of the premium paid. The yield of the Fund may be
affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the value of
mortgage-backed securities will generally fluctuate in response to market
interest rates.
REPURCHASE AGREEMENTS
Each Fund may buy securities subject to the seller's agreement to repurchase
them at an agreed upon date and price. These transactions are known as
repurchase agreements. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement at
not less than the repurchase price (including accrued interest). Default by
the seller would, however, expose a Fund to possible loss because of adverse
market action or delays connected with the disposition of the underlying
obligations. A Fund will enter into repurchase agreements only with financial
institutions deemed to be creditworthy by the investment adviser, pursuant to
guidelines established by the Board of Directors. During the term of any
repurchase agreement, the investment adviser will monitor the creditworthiness
of the seller, and the seller must maintain the value of the securities
subject to the agreement in an amount that is greater than the repurchase
price.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow for temporary purposes by entering into reverse
repurchase agreements in accordance with its investment limitations. Under the
terms of a reverse repurchase agreement, a Fund would sell portfolio
securities to a financial institution and agree to repurchase them at an
agreed upon date and price. A Fund would enter into reverse repurchase
agreements to avoid selling securities during unfavorable market conditions in
order to meet shareholder redemption requests. Reverse repurchase agreements
involve the risk that the market value of the portfolio securities sold by a
Fund may decline below the price of the securities the Fund is obligated to
repurchase. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
WHEN ISSUED PURCHASES AND FORWARD COMMITMENTS
The Intermediate Fixed Income Fund may purchase securities on a "when-
issued" basis and may purchase or sell securities on a "forward commitment"
basis. These transactions, which involve a commitment by the Fund to purchase
and sell particular securities with payment and delivery taking place at a
future date (perhaps one or two months later), permit the Fund to "lock-in" a
price or yield on a security it intends to purchase or sell, regardless of
future changes in interest rates. When-issued and forward commitment
transactions involve the risk that the price or yield obtained may be less
favorable than the price or yield available when the delivery takes place.
When-issued and forward commitment transactions are not expected to exceed 25%
of the value of the Fund's total assets under normal circumstances. These
transactions will not be entered into for speculative purposes but only in
furtherance of the Fund's investment objective.
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<PAGE>
LOANS OF PORTFOLIO SECURITIES
Each Fund may loan its portfolio securities to financial institutions such
as banks and broker-dealers in accordance with its investment limitations.
Loans will be made pursuant to agreements that require the loans to be
continuously secured by collateral equal at all times to the market value of
the securities loaned. Such loans may involve risks of delay in receiving
additional collateral or in recovering the securities loaned or even loss of
rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the
Funds' investment adviser to be of good standing and only when, in the
judgment of the investment adviser, the income to be earned from the loans
justifies the attendant risks.
OTHER INVESTMENT COMPANIES
Each Fund may invest in the securities of other mutual funds that invest in
the particular instruments in which a Fund may invest, subject to the
requirements of applicable securities laws. When a Fund invests in another
mutual fund, it pays a pro rata portion of the advisory and other expenses of
that fund as a shareholder of the fund. These expenses are in addition to the
advisory and other expenses a Fund pays in connection with its own operations.
FOREIGN SECURITIES
Each Fund may invest in foreign securities and obligations of foreign banks
or foreign branches of U.S. banks. Investments in foreign securities may be in
the form of ADRs, EDRs and similar securities. These securities may not be
denominated in the same currency as the securities they represent. ADRs are
receipts typically issued by U.S. banks or trust companies and EDRs are
receipts issued by European financial institutions. Both forms of receipts
evidence ownership in underlying foreign securities. ADRs, in registered form,
are designed for use in U.S. securities markets, while EDRs, in bearer form,
are generally designed for use in European securities markets.
In comparison to U.S. investments, the purchase of foreign securities
carries additional risks and costs including:
-- higher transaction costs
-- additional taxation by foreign governments
-- exchange rate fluctuation
-- reduced availability of financial information about the issuer
-- less market liquidity
-- unfavorable future political or economic developments
-- possible imposition of withholding taxes on interest income
-- possible seizure or nationalization of foreign deposits
-- possible establishment of exchange rate controls
-- possible adoption of other governmental restrictions adversely affecting
payment of principal and interest on foreign obligations.
Investment by the Value Equity Fund in foreign equity securities may present
additional risks, including the difficulty of predicting international trade
patterns. Further, foreign stock markets are generally not as developed or
efficient as those in the U.S., and in most foreign markets volume and
liquidity are less than in the U.S. Fixed commissions on foreign stock
exchanges are generally higher than the negotiated commissions on U.S.
exchanges, and there is generally less government supervision and regulation
of foreign stock exchanges, brokers and companies than in the U.S. The
Intermediate Fixed Income Fund does not invest directly in foreign equity
securities.
Foreign banks and foreign branches of domestic banks also may be subject to
less stringent reserve requirements, and to different accounting, auditing and
record keeping requirements.
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<PAGE>
FOREIGN CURRENCY EXCHANGE CONTRACTS
Because the Funds are authorized to buy and sell securities denominated in
currencies other than the U.S. dollar, and receive interest, dividends and
sale proceeds in currencies other than the U.S. dollar, the Funds may from
time to time enter into forward foreign currency exchange contracts to convert
to and from different foreign currencies and to convert foreign currencies to
and from the U.S. dollar. These contracts involve an obligation to purchase or
sell a specified currency at a future date at a price set at the time of the
contract. Forward currency contracts do not eliminate fluctuations in the
values of portfolio securities or in foreign exchange rates, or prevent loss
if the prices of the securities decline, but rather allow a Fund to establish
a rate of exchange for a future point in time. The Funds expect that less than
5% of their respective net assets will be invested in such instruments during
the current fiscal year.
ILLIQUID SECURITIES
Disposing of illiquid investments may involve time-consuming negotiations
and legal expenses, and it may be difficult or impossible to dispose of such
investments promptly at an acceptable price. Additionally, the absence of a
trading market can make it difficult to value a security. For these and other
reasons, neither Fund will knowingly invest more than 10% of its net assets in
illiquid securities. Illiquid securities include repurchase agreements and
time deposits that do provide for payment to the Fund within seven days after
notice, commercial paper issued in reliance upon the exemption in Section 4(2)
of the Securities Act of 1933 and variable or floating rate obligations that
cannot be disposed of promptly within seven business days. Certain securities
that might otherwise be considered illiquid, however, such as variable amount
master demand notes with maturities of nine months or less or securities for
which the investment adviser has determined, pursuant to guidelines adopted by
the Board of Directors, that a liquid trading market exists (including certain
securities that may be purchased by institutional investors under SEC Rule
144A) are not subject to this 10% limitation.
RISK FACTORS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
Each Fund may purchase certain "derivative instruments." Derivative
instruments are instruments that derive value from the performance of
underlying assets, interest or currency exchange rates, or indices, and
include, but are not limited to, forward currency contracts and structured
debt obligations (including collateralized mortgage obligations and other
types of asset-backed securities, "stripped" securities and various floating
rate instruments).
Derivative instruments present, to varying degrees, market risk that the
performance of the underlying assets, exchange rates or indices will decline;
credit risk that the dealer or other counterparty to the transaction will fail
to pay its obligations; volatility and leveraging risk that, if interest or
exchange rates change adversely, the value of the derivative instrument will
decline more than the assets, rates or indices on which it is based; liquidity
risk that a Fund will be unable to sell a derivative instrument when it wants
because of lack of market depth or market disruption; pricing risk that the
value of a derivative instrument will not correlate exactly to the value of
the underlying assets, rates or indices on which it is based; and operations
risk that loss will occur as a result of inadequate systems and controls,
human error or otherwise. Some derivative instruments are more complex than
others, and for those instruments that have been developed recently, data are
lacking regarding their actual performance over complete market cycles.
The investment adviser will evaluate the risks presented by the derivative
instruments purchased by the Funds, and will determine, in connection with its
day-to-day management of the Funds, how they will be used in furtherance of
the Funds' investment objectives. It is possible, however, that the
13
<PAGE>
investment adviser's evaluations will prove to be inaccurate or incomplete
and, even when accurate and complete, it is possible that the Funds will,
because of the risks discussed above, incur loss as a result of their
investments in derivative instruments.
INVESTMENT LIMITATIONS
Each Fund has in place certain "fundamental" investment limitations that may
not be changed without the approval of the holders of a majority of that
Fund's outstanding shares. Some of these fundamental limitations are
summarized below, and all of the Funds' fundamental limitations are set out in
full in the SAI (see "Investment Limitations"), which you may request by
calling the telephone number on the cover page of this Prospectus.
1. Issuer Limitation--A Fund may not purchase securities (with certain
exceptions, including U.S. Government securities) if more than 5% of its total
assets will be invested in the securities of any one issuer, except that up to
25% of the Fund's total assets can be invested without regard to this 5%
limitation. A Fund may not purchase more than 10% of the outstanding voting
securities of any issuer subject, however, to the foregoing 25% exception.
2. Industry Limitation--A Fund may not invest 25% or more of its total
assets in one or more issuers conducting their principal business activities
in the same industry.
3. Borrowing Limitation--A Fund may not borrow money except for temporary
purposes in amounts up to 10% of the value of its total assets at the time of
such borrowing. Whenever borrowings exceed 5% of a Fund's total assets, the
Fund will not make any investments.
If a percentage limitation is satisfied at the time of investment, any
subsequent change in the percentage that results from a change in the value of
a Fund's securities will not constitute a violation of the limitation.
In order to permit the sale of Fund shares in certain states, the Company
may make commitments more restrictive than the investment policies and
limitations described above. If the Company determines that any such
commitment is no longer in its best interests, it will revoke the commitment
by terminating the sale of shares in the state involved.
* * *
Each Fund may sell portfolio securities shortly after they are purchased,
which may result in higher transaction costs and taxable gains to the Fund.
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SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
GETTING IN TOUCH WITH FIVE STAR
If you have questions concerning AFBA Five Star Shares, please contact our
Shareholder Service Representatives at 800-782-4797 (TTY 800-300-TTY3) or
write us at:
AFBA FIVE STAR Shares
909 N. Washington Street
Alexandria, VA 22314
MINIMUM INVESTMENTS*
<TABLE>
<S> <C>
New Account............................................................. $1,000
New IRA................................................................. $ 250
New Account with Automatic Investment Plan.............................. $ 50
To Add To Any Type of Account........................................... $ 50
</TABLE>
- --------
* The Funds reserve the right to waive these minimums.
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<PAGE>
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TYPES OF ACCOUNTS
- --------------------------------------------------------------------------------
INDIVIDUAL AND JOINT ACCOUNTS
Individual accounts have one owner and joint accounts have two or more
owners.
BUSINESSES
Business organizations, including corporations and partnerships, may open an
account. A corporation's duly appointed authorized officer or a general
partner in the partnership must sign the application.
TRUST ACCOUNTS
A legally established trust may open an account. Required information
includes the name of the trust, the names of the trustees and the date of the
trust's origination.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
All individuals under the age of 70 1/2 may open an IRA and contribute
earned income of up to $2,000 annually.
SIMPLIFIED EMPLOYEE PENSION PLAN ACCOUNTS (SEPS)
Simplified Employee Pension Plans, a form of retirement plan for sole
proprietors, partnerships and corporations, may open an account.
Call Shareholder Services at 800-782-4797 for detailed information
concerning eligibility for IRAs and SEPs and for an application.
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OPENING AN ACCOUNT
-------------------------------------------------------------------------------
The minimum initial investment to open an account is $1,000
($250 for an IRA or SEP; $50 with Automatic Investment Plan)
By Mail
Send your completed and signed application and check, indicating the
amount(s) and Fund(s) in which you wish to invest, by mail to the lockbox
address provided below. The lockbox address is for all regular, express,
registered or certified mail (except overnight delivery services) in which you
include a check:
Lockbox Address:
AFBA Five Star Shares
Dept. L 1634
Columbus, OH 43260-1634
Address for overnight delivery services:
AFBA Five Star Shares
Huntington National Bank
Lockbox Department 0P10
Reference AFBA-1634
2361 Morse Road
Columbus, OH 43229
All checks should be made payable to AFBA Five Star Shares.
By Wire
Please call Shareholder Services at 800-782-4797 for a purchase application
and to obtain wire instructions.
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<PAGE>
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BUYING ADDITIONAL SHARES
- --------------------------------------------------------------------------------
The minimum additional investment is $50. There is no minimum on the
reinvestment of dividends and distributions.
By Mail
Send a check with an AFBA Five Star investment stub or with a letter of
instruction stating that you want to purchase additional shares, indicating
the Fund name, dollar amount to be purchased and your account number to the
following lockbox address:
AFBA Five Star Shares
Dept. L 1634
Columbus, OH 43260-1634
Please make your check payable to AFBA Five Star Shares.
By Wire
Please call Shareholder Services (800-782-4797) for wire instructions to
make additional investments.
By Automatic Investment Plan
($50 Initial Minimum/Monthly Additions)
You may arrange to make investments on a regular basis through automatic
deductions from your bank checking account. These transfers will be
accomplished through a funds transfer network called the Automated Clearing
House (ACH).
Please call Shareholder Services (800-782-4797) for more information and an
Automatic Investment Plan Application.
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ADDITIONAL PURCHASE INFORMATION
- --------------------------------------------------------------------------------
PURCHASES BY MAIL
Your check must be drawn on a bank located in the U.S. and must be payable
in U.S. dollars. A $15.00 fee may be charged if any check used for investment
does not clear. In addition, you will be responsible for any loss suffered by
a Fund.
If you purchase AFBA Five Star Shares by check and subsequently request the
redemption of those shares, a Fund will delay payment of the redemption
proceeds until the Transfer Agent is satisfied the check has cleared which may
take up to 15 days from the purchase date. Consequently, if you anticipate
redemptions soon after purchase, you may want to wire funds to avoid delays.
The Funds will not accept payment in cash or third party checks for the
purchase of shares.
PURCHASES BY WIRE
Your financial institution may charge you a fee for wiring funds.
PURCHASES BY AUTOMATIC INVESTMENT
Under the Automatic Investment Plan, your financial institution will forward
funds on a regular monthly, bi-monthly or quarterly basis to the Transfer
Agent to purchase AFBA Five Star Shares. You may also elect to process special
purchase orders by telephone.
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<PAGE>
To establish the Automatic Investment Plan, complete the appropriate section
on the purchase application when opening an account or, if you already have an
account, call Shareholder Services at 800-782-4797. You may establish an
Automatic Investment Plan with any financial institution that participates in
the Automated Clearing House funds transfer system. If an investor
discontinues participation in the Plan, the Funds reserve the right to redeem
the investor's account involuntarily, upon 60 days' written notice, if the
account's net asset value is less than $1,000.
PURCHASES BY DIRECTED REINVESTMENTS
You may choose to have dividends and capital gains distributions
automatically invested in either the Fund from which they are paid or in
another Fund offering AFBA Five Star Shares. Systematic withdrawals from one
account and reinvestments in another existing account may also be established.
See "Additional Redemption and Exchange Information--Redemptions by Systematic
Withdrawals." Reinvestments can only be directed to an existing investment
account (which must meet the minimum investment requirements described above).
Directed reinvestments may be used to invest funds from a regular account to
another regular account, from a qualified plan account to another qualified
plan account, or from a qualified plan account to a regular account. Directed
reinvestments from a qualified plan account to a regular account may have
adverse tax consequences including imposition of a penalty tax and therefore
you should consult your own tax adviser before commencing these transactions.
PURCHASES BY EXCHANGE
The exchange privilege allows you to open a new investment account or add to
an existing account by exchanging AFBA Five Star shares of one Fund for AFBA
Five Star Shares of another Fund. For details see "Additional Redemption and
Exchange Information--Redemptions by Exchange".
EFFECTIVE TIME AND PRICE OF PURCHASES
A purchase order for AFBA Five Star Shares of a Fund received by the
Transfer Agent on a Business Day (i.e. a day on which shares of the Fund are
priced) prior to the close of regular trading hours (currently 4:00 P.M.,
Eastern Time) on the New York Stock Exchange ("NYSE") will be priced at the
net asset value determined on that day, provided that the order is accompanied
by all completed documents in good form and payment of the purchase price.
MISCELLANEOUS PURCHASE INFORMATION
You must provide a social security number or other certified taxpayer
identification number when opening or reopening an account.
Purchase applications cannot be processed without an appropriate
identification number.
Additions or changes to any information in your account registration may be
made by submitting a written request to the Transfer Agent with the
signature(s) guaranteed by a financial institution that participates in the
Stock Transfer Agency Medallion Program (STAMP).
In the interests of economy and convenience, share certificates will not be
issued.
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REDEEMING SHARES
- --------------------------------------------------------------------------------
BY WIRE
Redemption proceeds can be paid by wire transfer to a pre-designated bank
account or by payment by check. There is a $1,000 minimum redemption for
payment by wire although the Funds reserve the right to waive this minimum.
There is no minimum redemption for payment by check.
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<PAGE>
BY MAIL
Send a written redemption request stating the Fund name, number of shares or
dollar amount to be redeemed, account number, and desired method of payment
(wire or check) to:
AFBA Five Star Shares
Dept. L 1634
Columbus, OH 43260-1634
BY TELEPHONE
If you elected telephone privileges you may request redemptions by calling
Shareholder Services (800-782-4797) between 8 A.M. and 9 P.M. (Eastern Time).
Redemption orders received after 4:00 P.M. (Eastern Time) will be effective on
the next business day at the net asset value next determined.
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EXCHANGING SHARES
- --------------------------------------------------------------------------------
The minimum value of shares being exchanged is $50. The minimum value of
shares being exchanged to establish a new account is $1,000. The Funds reserve
the right to waive these minimums.
BY MAIL
Send written instructions indicating your name, address and daytime
telephone number, the dollar amount or number of shares that you wish to
exchange, the name and account number of the Fund that you are exchanging from
and the name and account number, if any, of the Fund you are exchanging into.
Send your signed instructions to the following address:
AFBA Five Star Shares
Dept. L 1634
Columbus, OH 43260-1634
BY TELEPHONE
Please call Shareholder Services (800-782-4797) between the hours of 8 A.M.
and 9 P.M. (Eastern Time). Exchanges made after 4:00 P.M. (Eastern Time) will
not be processed until the next business day at the net asset value next
determined.
- --------------------------------------------------------------------------------
ADDITIONAL REDEMPTION AND EXCHANGE INFORMATION
- --------------------------------------------------------------------------------
REDEMPTIONS BY MAIL
If redemption proceeds are to be sent to someone other than the shareholder
of record or to an address other than the address of record, each signature on
the redemption request must be guaranteed in writing by a financial
institution that participates in STAMP. A signature notarized by a notary
public is unacceptable. Written requests for redemptions exceeding $100,000
also must be guaranteed by a financial institution that participates in STAMP.
The Company reserves the right to require signature guarantees in other
circumstances based on the amount of the redemption request or other factors,
and may impose additional requirements.
REDEMPTIONS BY WIRE
The minimum amount that may be redeemed by wire is $1,000 and you may be
subject to a $7.00 fee for each wire redemption. The Funds reserve the right
18
<PAGE>
to change this minimum or to terminate the wire redemption privilege at any
time without notice.
REDEMPTIONS BY SYSTEMATIC WITHDRAWAL
Through the Systematic Withdrawal Plan, if you own shares of a Fund with a
minimum value of $10,000, you may elect to have a fixed sum ($100 minimum per
withdrawal) redeemed at regular intervals. These redemptions may be
distributed in cash or reinvested in AFBA Five Star Shares of another Fund. An
application form and additional information may be obtained by calling
Shareholder Services at 800-782-4797.
REDEMPTIONS BY EXCHANGE
The Exchange Privilege permits you to exchange AFBA Five Star Shares of one
Fund for AFBA FIVE STAR Shares of another Fund. You must establish or maintain
accounts with an identical title in each Fund involved in an exchange
transaction.
Since an excessive number of exchanges may be disadvantageous to the Funds,
the Company reserves the right, at any time without prior notice, to suspend,
limit or terminate the exchange privilege of any shareholder who makes more
than eight exchanges of shares in a year and/or four exchanges of shares in a
calendar quarter. A shareholder may continue making exchanges until notified
that the exchange privilege has been suspended, limited or terminated.
Exchanges will be processed only when the shares being acquired can be legally
sold in the state of the investor's residence.
Exchanges may have tax consequences. Although no exchange fee is currently
imposed by the Company on exchanges, the Company reserves the right to impose
a charge in the future.
TELEPHONE PRIVILEGE
The telephone privilege permits you to redeem or exchange AFBA Five Star
Shares by telephone. Call Shareholder Services (800-782-4797) to establish or
elect the privilege, to use the privilege or to terminate the privilege.
The Company and its service providers have adopted procedures in an effort
to establish reasonable safeguards against fraudulent telephone transactions.
These procedures include:
1. recording all telephone transactions;
2. making all check disbursements payable to the shareholder of record;
3. mailing all check disbursements to the shareholder's address of record;
4. sending wire transfers only to previously designated bank accounts; and
5. Requiring STAMP guarantees on any change in address to which redemption
proceeds should be sent or any change in bank instructions for
redemptions by wire.
Neither the Company nor its service providers will be responsible for the
authenticity of instructions received by telephone that are reasonably
believed to be genuine. To the extent that the Company fails to use procedures
designed to provide assurance that the instructions are genuine, it or its
service providers may be liable for instructions that prove to be fraudulent
or unauthorized. In all other cases, a shareholder will bear the risk of loss.
The Company reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for redeeming AFBA Five Star
Shares by telephone may be modified or terminated by the Company at any time
without notice. During periods of substantial economic or market change,
telephone redemptions may be difficult to place. If you are unable to place a
redemption order by telephone, AFBA Five Star Shares may be redeemed by mail
as described above under the discussion of redemptions by mail.
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<PAGE>
EFFECTIVE TIME AND PRICE OF REDEMPTIONS AND EXCHANGES
Redemption orders for AFBA Five Star Shares of a Fund which are received on
a Business Day prior to the close of regular trading hours on the NYSE will be
executed at the net asset value determined on that day. Redemption orders
received after the close of regular trading hours on the NYSE or on a non-
Business Day will be priced as of the time the net asset value is next
determined.
PAYMENT OF REDEMPTION PROCEEDS
Payment for redemption orders is normally made within three Business Days.
The Company reserves the right to pay redemption proceeds within seven days
after receiving the redemption order if, in the judgment of the investment
adviser, an earlier payment could adversely affect the Company. If any portion
of the AFBA Five Star Shares to be redeemed represents an investment made by
check, the Funds may delay the payment of the redemption proceeds until the
Transfer Agent is reasonably satisfied that the check has been collected,
which could take up to fifteen days from the purchase date. This procedure
does not apply to AFBA Five Star Shares purchased by money order or wire
payment. During the period prior to the time that the shares are redeemed,
dividends will accrue on the shares.
MISCELLANEOUS REDEMPTION INFORMATION
All redemption proceeds will be sent by check unless the Company or the
Transfer Agent is directed otherwise. The ACH system may also be used for
payment of redemption proceeds. The Company may require any information
reasonably necessary to ensure that a redemption has been duly authorized.
To relieve the Company of the cost of maintaining uneconomical accounts, the
Company reserves the right to redeem the shares held in any account where the
net asset value of the remaining shares falls below $1,000. Before initiating
an involuntary redemption, 60 days' written notice will be provided. During
that period, the shareholder may make additional investments to restore the
account to at least the minimum balance. Involuntary redemptions will not be
made because the value of the shares in an account falls below the minimum
amount due solely to a decline in a Fund's net asset value. Any involuntary
redemption will be at net asset value. The Company also reserves the right to
redeem shares involuntarily if it is otherwise appropriate to do so under the
1940 Act.
The Company further reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of a
Fund's shares by making payment in whole or in part in readily marketable
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing the Fund's net asset value. In such an event,
a shareholder would incur transaction costs in selling the securities.
- --------------------------------------------------------------------------------
PRICING OF SHARES
- --------------------------------------------------------------------------------
The pricing of purchase and redemption orders will be based upon the "net
asset value per share". The net asset value per share is calculated by
dividing the value of all of a Fund's securities and other assets that are
allocable to AFBA Five Star Shares, less the liabilities allocable to AFBA
Five Star Shares by the number of outstanding AFBA Five Star Shares in the
Fund.
The net asset value per share of each Fund will fluctuate as the value of
the respective Fund's investment portfolio changes.
Generally, the investments of each of the Funds are valued at market value
or, in the absence of market value, at fair value as determined by or under
the direction of the Company's Board of Directors.
20
<PAGE>
The net asset value per share is determined as of 4:00 P.M. (Eastern Time)
on each weekday with the exception of those holidays on which the Federal
Reserve Bank of Cleveland, AFBSI, the Funds investment adviser, Transfer
Agent, Custodian or the NYSE is closed, which currently include New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and Christmas
Day.
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DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The net investment income of the Value Equity Fund is declared and paid
quarterly as dividends to its shareholders. The net investment income of the
Intermediate Fixed Income Fund is declared daily and paid monthly as dividends
to its shareholders. Distributions of any long-term and short-term capital
gains earned by a Fund will be made at least annually.
Shares in each Fund begin earning dividends on the day the purchase order is
executed and continue earning dividends through and including the day before
the redemption order for the shares is executed.
All dividends will be paid within five Business Days after the end of the
month or quarter to which the dividends relate. All dividends will be
automatically reinvested in additional AFBA Five Star Shares of the Fund on
which the dividend was declared at the net asset value of the shares on the ex
dividend date. Please call Shareholder Services at 800-782-4797 if you wish to
receive dividends in cash. Reinvested dividends receive the same tax treatment
as those paid in cash.
Because of the separate shareholder servicing and transfer agency fees
payable with respect to AFBA Five Star Shares, the amount of each Fund's net
investment income available for distribution to the holders of such Shares
will be effectively reduced by the amount of such fees. See "Description of
the Company and its Shares--Shareholder Servicing Arrangements."
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). This means that as
long as a Fund distributes substantially all of its earnings to shareholders
as required by the Code, the taxes on Fund income will be paid only once --at
the shareholder level, rather then twice--at both the Fund and shareholder
level.
In order to so qualify, each Fund will pay as dividends at least 90% of its
investment company taxable income and 90% of its exempt-interest income (if
any). Investment company taxable income includes taxable interest, dividends,
gains attributable to market discount, and the excess of net short-term
capital gain over net long-term capital loss. To the extent you receive a
dividend based on investment company taxable income, you must treat that
dividend as ordinary income in determining your gross income for tax purposes,
whether you received it in the form of cash or additional shares. Unless you
are exempt from federal income taxes, the dividends you receive from each Fund
will be taxable to you.
It is anticipated that none of the distributions made by the Intermediate
Fixed Income Fund will be eligible for the dividends received deduction
allowed to corporations under the Code. In the case of the Value Equity Fund,
such ordinary income distributions will qualify for the dividends received
deduction for corporations to the extent of the total qualifying dividends
received by the Value Equity Fund from domestic corporations for the taxable
year.
Any distribution you receive of net long-term capital gain over net short-
term capital loss will be
21
<PAGE>
taxed as a long-term capital gain, no matter how long you have held Fund
shares. If you hold shares for six months or less, and during that time
receive a distribution that is taxable as a long-term capital gain, any loss
you realize on the sale of those shares will be treated as a long-term loss to
the extent of the earlier capital gains distribution.
A shareholder considering purchasing shares of a Fund on or just before the
record date of any capital gains distribution or dividend should be aware that
the amount of the forthcoming distribution, although in effect a return of
capital, will be taxable.
Any dividends declared by a Fund in October, November or December of a
particular year and payable to shareholders of record on a date during those
months will be deemed to have been paid by the Fund and received by
shareholders on December 31 of that year, so long as the dividends are
actually paid in January of the following year.
Shareholders in the Funds may realize a taxable gain or loss when redeeming,
transferring or exchanging shares of a Fund, depending on the difference in
the prices at which the shareholder purchased and sold the shares.
Because your state and local taxes may be different than the federal taxes
described above, you should see your tax adviser regarding these taxes.
- --------------------------------------------------------------------------------
STATEMENTS AND REPORTS
- --------------------------------------------------------------------------------
Each Fund will provide quarterly statements of account which will detail all
purchases, exchanges, redemptions and distributions affecting a shareholder's
investment.
Each Fund will send you a confirmation statement after every transaction
that affects your account balance.
Information regarding the tax status of income dividends and capital gains
distributions will be mailed to shareholders on or before January 31st of each
year. Account tax information will also be sent to the Internal Revenue
Service.
Financial reports for the Funds, which include a list of the Funds'
portfolio holdings, will be mailed semiannually to all shareholders.
- --------------------------------------------------------------------------------
DESCRIPTION OF THE COMPANY AND ITS SHARES
- --------------------------------------------------------------------------------
The Company was incorporated in Maryland on March 7, 1989 and is a mutual
fund of the type known as an "open-end management investment company". A
mutual fund permits an investor to pool his or her assets with those of others
in order to achieve economies of scale, take advantage of professional money
managers and enjoy other advantages traditionally reserved for large
investors. The Company's Articles of Incorporation authorize the Board of
Directors to classify any unissued shares into one or more classes of shares
and to classify any class of shares into one or more series of shares. The
Board has authorized the issuance of shares in each of two series of shares
(AFBA Five Star Shares and Institutional Shares) in the Value Equity Fund and
Intermediate Fixed Income Fund. The Board of Directors has also authorized the
issuance of additional classes of shares representing interests in other
portfolios of the Company. Information regarding Institutional Shares of the
Funds and regarding other portfolios offered by the Company may be obtained by
calling the Company at (800) 551-2145.
AFBA Five Star Shares of the Value Equity and Intermediate Fixed Income
Funds are described in
22
<PAGE>
this Prospectus. These Funds also offer Institutional Shares which are sold to
(i) customers having qualified accounts with the trust or banking department
of Mercantile-Safe Deposit and Trust Company and its affiliates and
correspondent banks or with affiliates of the transfer agent for Institutional
Shares, State Street Bank and Trust Company, and (ii) individual investors who
purchase them directly from the Company without maintaining qualified accounts
with such banks. Shares of each series in a Fund bear their pro rata portion
of all operating expenses paid by the Fund, except for payments under the
Company's Service Plan applicable only to AFBA Five Star Shares discussed
below and certain series-specific other operating expenses. Differences in the
expenses paid by the respective series will affect their performance.
Shares of all of the Company's portfolios vote together and not by class,
unless otherwise required by law or permitted by the Board of Directors. All
shareholders of a particular Fund will vote together as a single class on
matters pertaining to the Fund's investment advisory agreement, investment
objective and fundamental investment limitations. Only holders of AFBA Five
Star Shares, however, will vote on matters relating to the Service Plan for
AFBA Five Star Shares. More information on shareholder voting rights can be
found in the Statement of Additional Information under "Additional Information
Concerning Shares."
Shareholders are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held. The Company is
not required to and does not currently expect to hold annual meetings but
special meetings may be called for purposes such as electing or removing
directors, changing fundamental policies or approving certain contracts.
As of July 1, 1995, Mercantile-Safe Deposit and Trust Company (the "Bank")
held of record, in a fiduciary or other representative capacity for beneficial
owners, substantially all of the shares of the Company. The Bank does not,
however, have any economic interest in such shares which are held solely for
the benefit of its customers. The Bank may be deemed to be a controlling
person of the Company within the meaning of the 1940 Act by reason of its
record ownership of such shares.
SHAREHOLDER SERVICING ARRANGEMENTS
Pursuant to a Service Plan adopted by the Board of Directors of the Company,
the Company has entered into an agreement (the "Servicing Agreement") with
AFBSI concerning the provision of administrative shareholder support services
to holders of AFBA Five Star Shares of the Funds. These services may include
support services such as assisting investors in opening investment accounts;
aggregating and processing purchase, exchange and redemption requests;
processing dividend and distribution payments from the Funds; providing
information to customers showing their positions in the Funds; and providing
subaccounting with respect to Fund Shares beneficially owned by customers or
the information necessary for subaccounting. For its services, AFBSI will
receive fees from a Fund at an annual rate of up to .25% of the average daily
net asset value of the AFBA Five Star Shares of the Fund. AFBSI may appoint
one or more agents in the performance of its obligations under the Servicing
Agreement.
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
The business and affairs of the Company are managed under the direction of
the Company's Board of Directors. The SAI contains the name of each Director
and other background information.
INVESTMENT ADVISER
Mercantile-Safe Deposit and Trust Company ("Mercantile") serves as the
Funds' investment adviser.
23
<PAGE>
Mercantile is the lead bank of the Mercantile Bankshares Corporation, a
multi-bank holding company organized in Maryland in 1969. Mercantile has acted
as investment adviser to the Funds since their commencement of operations. In
addition, Mercantile and its predecessors have been in the business of
managing the investments of fiduciary and other accounts since 1864.
Mercantile's address is Two Hopkins Plaza, Baltimore, Maryland 21201.
As investment adviser, Mercantile manages the Funds' portfolios and is
responsible for all purchases and sales of portfolio securities. A Fund's
portfolio manager is primarily responsible for the day-to-day management of a
Fund's investment portfolio.
David L. Donabedian, Vice-President of Mercantile, has managed the Value
Equity Fund since 1992. During the past four years Mr. Donabedian has been a
portfolio manager and economic analyst at Mercantile. Portfolios under his
management include employee benefit and endowment trust funds in addition to
the Value Equity Fund. Prior to joining Mercantile, Mr. Donabedian was
employed by Lehman Brothers.
Mark G. McGlone, Vice-President of Mercantile, has managed the Intermediate
Fixed Income Fund since June 1992. During the past five years Mr. McGlone has
managed institutional fixed income portfolios at Mercantile. Portfolios under
his supervision include pension plans, endowment funds and self-insurance
funds in addition to the Intermediate Fixed Income Fund.
ADMINISTRATOR
Mercantile also serves as the Funds' administrator. In this capacity,
Mercantile generally assists in all aspects of the Funds' operation and
administration.
DISTRIBUTOR
Shares of each Fund are sold on a continuous basis without a sales load by
the Company's Distributor, BISYS Fund Services (formerly the Winsbury
Company).
The Distributor's principal offices are located at 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
TRANSFER AGENT & FUND ACCOUNTANT
BISYS Fund Services Ohio, Inc., an affiliate of the Distributor, serves as
the transfer agent and dividend disbursing agent for the AFBA Five Star Shares
of the Funds. This means that its job is to maintain the account records of
all holders of record of AFBA Five Star Shares of the Funds, as well as to
distribute any dividends or distributions declared by the Funds with respect
to AFBA Five Star Shares. The Transfer Agent also provides full fund
accounting services including the computation of each Fund's net asset value,
net income and realized capital gains. BISYS Fund Services Ohio, Inc.'s
principal offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
CUSTODIAN
The Fifth Third Bank, located at 38 Fountain Square Plaza, Cincinnati, Ohio
45263, serves as the Custodian of the Funds' assets and provides associated
support services including the maintenance of the portfolio securities of each
Fund and the collection of all income and other payments received by each
Fund.
EXPENSES
In order to support the services described above as well as other matters
essential to the operation of the Funds, the Funds incur certain expenses.
Expenses are paid out of a Fund's assets, and thus are reflected in the Fund's
dividends and net asset value, but they are not billed directly to you or
deducted from your account.
In its capacity as investment adviser, Mercantile is entitled to advisory
fees that are completed daily
24
<PAGE>
and paid monthly at the 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. The Adviser may from time to time voluntarily
waive all or a portion of its advisory fees in order to assist a Fund in
maintaining a competitive expense ratio. For the fiscal year ended May 31,
1995, Mercantile received advisory fees (after waivers) at the effective rate
of .44% of the average daily net assets of the Value Equity Fund and .25% of
the average daily net assets of the Intermediate Fixed Income Fund.
In its capacity as administrator, Mercantile is entitled to administration
fees that are computed daily and paid monthly at the annual rate of .125% of
the average daily net assets of each Fund.
Operating expenses borne by the Funds include taxes; interest; fees and
expenses of directors and officers; Securities and Exchange commission fees;
state securities registration and qualification fees; advisory fees;
administration fees; fund accounting fees; charges of the custodian and
transfer and dividend dispersing agent; certain insurance premiums; outside
auditing and legal expenses; cost of preparing and printing prospectuses for
regulatory purposes and for distribution to shareholders; costs of shareholder
reports and meetings; and any extraordinary expenses. Each Fund also pays any
brokerage fees, commissions and other transaction charges (if any) incurred in
connection with the purchase and sale of its portfolio securities.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Performance information provides you with a method of measuring and
monitoring your investment. Each Fund may quote its performance in
advertisements or shareholder communications. The performance for each series
of shares of a Fund is calculated separately from the performance of the
Fund's other series.
Total return for each Fund may be calculated on an average annual total
return basis or an aggregate total return basis. Average annual total return
reflects the average annual percentage change in value of an investment over
the measuring period. Aggregate total return reflects the total percentage
change in value of an investment over the measuring period. Both measures
assume the reinvestment of dividends and distributions.
Yields for the Funds are calculated for a specified 30-day (or one-month)
period by dividing the net income for the period by the maximum offering price
on the last day of the period, and annualizing the result on a semi-annual
basis. Net income used in yield calculations may be different than net income
used for accounting purposes.
The Funds may compare their yields and total returns to those of mutual
funds with similar investment objectives and to bond, stock or other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor mutual fund performance. For example, the
performance of the Funds may be compared to data prepared by Lipper Analytical
Service, Inc., a widely recognized independent service which monitors the
performance of mutual funds.
Total return and yield data as reported in national financial publications
such as Money, Forbes, Barron's, The Wall Street Journal and The New York
Times, as well as in publications of a local or regional nature, may also be
used for comparison.
It is important to note that performance figures, which are based on
historical earnings, will fluctuate and are not intended to indicate future
performance. In addition, the investment return and principal value of an
investment in the Value Equity Fund and Intermediate Fixed Income Fund will
fluctuate so that
25
<PAGE>
an investor's shares, when redeemed, may be worth more or less than their
original cost. A Fund's performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Yield and total return data should be
considered in light of the risks associated with each Fund's portfolio
composition, quality, maturity, operating expenses and market condition. From
time to time, the Company's service contractors may voluntarily waive all or a
portion of their compensation in order to assist a Fund in maintaining a
competitive expense ratio. The Statement of Additional Information describes
the method used to determine each Fund's performance.
- --------------------------------------------------------------------------------
MISCELLANEOUS
- --------------------------------------------------------------------------------
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Company or a particular Fund means the affirmative
vote of the lesser of (a) 50% or more of the outstanding shares of the Company
or such Fund or (b) 67% or more of the outstanding shares of the Company or
such Fund if more than 50% of the outstanding shares of the Company or such
Fund are represented at the meeting in person or by proxy.
26
<PAGE>
[LOGO OF AFBA FIVE STAR SHARES APPEARS HERE]
of M.S.D.&T. Funds, Inc.
Prospectus
* Value Equity Fund
* Intermediate Fixed Income Fund
September 29, 1995
(as revised December 1, 1995)
SERVICE PROVIDERS:
Management and support services are provided to M.S.D. & T. Funds, Inc. by
several organizations. A complete discussion of service providers and their
respective fees is provided in this Prospectus.
INVESTMENT ADVISER AND ADMINISTRATOR:
[LOGO OF MERCANTILE-SAFE DEPOSIT & TRUST COMPANY APPEARS HERE]
Baltimore, MD
CUSTODIAN:
Fifth Third Bank
Cincinnati, OH
TRANSFER AGENT:
BISYS Fund Services Ohio, Inc.
Columbus, OH
DISTRIBUTOR:
BISYS Fund Services
Columbus, OH
In considering this investment please read this Prospectus carefully.
AFBA INDUSTRIAL BANK IS A WHOLLY-OWNED SUBSIDIARY OF ARMED FORCES BENEFIT
SERVICES, INC. AFBA INDUSTRIAL BANK IS NOT AFFILIATED WITH AEGON USA,
MERCANTILE-SAFE DEPOSIT AND TRUST, BISYS FUND SERVICES OHIO, INC.,
BISYS FUND SERVICES,FIFTH THIRD BANK OR STATE STREET BANK AND TRUST COMPANY.
<PAGE>
M.S.D.& T. FUNDS, INC.
INSTITUTIONAL SHARES OF THE
VALUE EQUITY FUND
INTERNATIONAL EQUITY FUND
INTERMEDIATE FIXED INCOME FUND
MARYLAND TAX-EXEMPT BOND FUND
SUPPLEMENT DATED DECEMBER 15, 1995
TO THE PROSPECTUS DATED SEPTEMBER 29, 1995
THE LAST PARAGRAPH ON PAGE 26 OF THE PROSPECTUS UNDER THE HEADING
"INVESTMENT ADVISER AND SUB-ADVISER" IS AMENDED AND RESTATED TO READ AS
FOLLOWS:
David L. Donabedian and Brian B. Topping serve as Co-Portfolio Managers of
the Value Equity Fund. Mr. Donabedian, Vice President of Mercantile, has
managed the Value Equity Fund since 1992. During the past five years, he has
been a portfolio manager and economic analyst at Mercantile. Portfolios under
his management include employee benefit and endowment trust funds in addition
to the Value Equity Fund. Prior to joining Mercantile, Mr. Donabedian was
employed by Lehman Brothers. Mr. Topping, Vice Chairman of the Board, Chief
Investment Officer and head of the Trust Division at Mercantile, has co-
managed the Value Equity Fund since December, 1995. He has managed endowment,
employee benefit and foundation portfolios since joining Mercantile in 1976.
<PAGE>
M.S.D.&T.
FUNDS, INC.
Prospectus
*Value Equity Fund
*International Equity Fund
*Intermediate Fixed Income Fund
*Maryland Tax-Exempt Bond Fund
Institutional Shares
September 29, 1995
<PAGE>
M.S.D. & T. FUNDS, INC.
Two Hopkins Plaza
Baltimore, MD 21201
For current yield, purchase and redemption information, call (800) 551-2145.
M.S.D. & T. Funds, Inc. (the "Company") is a no-load, open-end,
professionally managed investment company offering in this Prospectus shares
("Institutional Shares" or "Shares") in four separate investment portfolios
(the "Funds"), each having its own investment objective and policies.
THE VALUE EQUITY FUND'S investment objective is to seek long-term capital
appreciation, with income being a secondary objective. The Fund pursues its
objective by investing substantially all of its assets in common stock,
preferred stock and debt securities convertible into common stock that the
Fund's investment adviser believes are undervalued. The Fund may invest in
both domestic and foreign securities.
THE INTERNATIONAL EQUITY FUND'S investment objective is to seek long-term
growth of capital and income consistent with reasonable risk. Under normal
market and economic conditions, the Fund invests at least 65% of its total
assets in equity securities in at least three different countries outside the
United States, as determined by the location of the principal business of each
issuer.
THE INTERMEDIATE FIXED INCOME FUND'S investment objective is to seek as
high a level of current income as is consistent with protection of capital.
Under normal market and economic conditions, the Fund invests substantially
all of its assets in fixed income obligations, including a broad range of
corporate, government, bank, commercial, asset-backed and mortgage-related
obligations, all having remaining effective maturities of ten years or less.
The Fund may invest in both domestic and foreign securities.
THE MARYLAND TAX-EXEMPT BOND FUND'S investment objective is to seek a high
level of interest income that is exempt from Federal and Maryland state and
local income taxes.
Mercantile-Safe Deposit and Trust Company is the Funds' investment
adviser. Dunedin Fund Managers Ltd is the International Equity Fund's sub-
adviser. Shares of each Fund are sold without a sales charge by BISYS Fund
Services (formerly The Winsbury Company), the Funds' distributor.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED, ENDORSED OR OTHERWISE SUPPORTED BY, MERCANTILE-SAFE DEPOSIT AND
TRUST COMPANY, ITS PARENT COMPANY OR ITS AFFILIATES, AND SUCH SHARES ARE NOT
FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY. INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
This Prospectus briefly sets forth information about the Funds that a
prospective investor should consider before investing. Investors are advised
to read this Prospectus and retain it for future reference. Additional
information about the Funds, contained in a Statement of Additional
Information dated September 29, 1995 has been filed with the Securities and
Exchange Commission (the "SEC") and is available upon request without charge
by writing to the Company at the above address or by calling (800) 551-2145.
The Statement of Additional Information is incorporated by reference into this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SEPTEMBER 29, 1995
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE FUNDS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE COMPANY, THE FUNDS OR THEIR DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE TABLE.............................................................. 3
FINANCIAL HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVES AND POLICIES......................................... 6
INVESTMENT LIMITATIONS..................................................... 17
HOW TO PURCHASE AND REDEEM SHARES.......................................... 18
PRICING OF SHARES.......................................................... 22
DIVIDENDS AND DISTRIBUTIONS................................................ 22
TAXES...................................................................... 23
MANAGEMENT OF THE COMPANY.................................................. 26
EXPENSES OF THE COMPANY.................................................... 28
DESCRIPTION OF THE COMPANY AND ITS SHARES.................................. 28
PERFORMANCE INFORMATION.................................................... 29
MISCELLANEOUS.............................................................. 31
</TABLE>
2
<PAGE>
EXPENSE TABLE
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS
AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS*
<TABLE>
<CAPTION>
INTERNATIONAL INTERMEDIATE MARYLAND
VALUE EQUITY FIXED TAX-EXEMPT
EQUITY FUND FUND INCOME FUND BOND FUND
(INSTITUTIONAL (INSTITUTIONAL (INSTITUTIONAL (INSTITUTIONAL
SHARES) SHARES) SHARES) SHARES)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Management Fees (net of
waivers)............... .44% .74% .25% .20%
Other Expenses (net of
waivers) (includes
administration, custody
and transfer agency,
and miscellaneous other
charges)............... .29% .31% .35% .42%
---- ----- ---- ----
Total Fund Operating
Expenses (net of
waivers)............... .73% 1.05% .60% .62%
==== ===== ==== ====
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return (a hypothetical return required by SEC
regulations for this calculation) and (2) redemption at the end of the
following time periods:
1 Year.................. $ 7 $ 11 $ 6 $ 6
3 Years................. $23 $ 33 $19 $20
5 Years................. $41 $ 58 $33 $35
10 Years................ $91 $128 $75 $77
</TABLE>
- -------------------
*Other credits or charges, not reflected in the Expense Table, may be
borne directly by shareholders who invest in the Funds through financial
institutions.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN IN THE TABLE.
The purpose of this Expense Table is to assist investors in understanding
the various costs and expenses that investors in Institutional Shares of the
Funds will bear indirectly as shareholders. Except as stated below, the
Expense Table reflects expenses the Funds incurred during the fiscal year
ended May 31, 1995 on their Institutional Shares. With respect to the Value
Equity and Intermediate Fixed Income Funds, the Expense Table has been
restated to reflect the expenses these Funds expect to incur during the
current fiscal year on their Institutional Shares. The investment adviser and
administrator waived a portion of their fees otherwise payable by the Funds
for the fiscal year ended May 31, 1995 and expect to voluntarily waive a
portion of their fees otherwise payable by the Funds for the fiscal year
ending May 31, 1996 in order to assist the Funds in maintaining competitive
expense ratios. Stated as a percentage of average daily net assets, absent fee
waivers, (i) it is expected that Management Fees, Other Expenses and Total
Fund Operating Expenses would be .60%, .29%, and .89%, respectively, with
respect to the Institutional Shares of the Value Equity Fund; and .35%, .35%
and .70%, respectively, with respect to the Institutional Shares of the
Intermediate Fixed Income Fund; and (ii) Management Fees, Other Expenses and
Total Fund Operating Expenses would have been .50%, .47% and .97%,
respectively, with respect to the Institutional Shares of the Maryland Tax-
Exempt Bond Fund; and .80%, .36% and 1.16%, respectively, with respect to the
Institutional Shares of the International Equity Fund. For more complete
descriptions of the Funds' operating expenses, see "Management of the Company"
and "Expenses" in this Prospectus.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain information concerning the historic
investment results of the Institutional Shares of the Funds. The table has
been derived from the financial statements for each Fund. The financial
statements for each Fund have been audited by Coopers & Lybrand L.L.P., the
Company's independent accountants, whose report thereon is included in the
Statement of Additional Information along with the financial statements. The
financial data included in these tables should be read in conjunction with the
financial statements and related notes included in the Statement of Additional
Information. Further information about the performance of the Funds is
available in the Company's Annual Report to Shareholders. For a free copy of
the Statement of Additional Information or the Annual Report to Shareholders,
contact the Company at the address or telephone number on the first page of
this Prospectus.
As of the date of this Prospectus, only Institutional Shares have been
sold, although the Company plans to offer AFBA Five Star Shares in the Value
Equity and Intermediate Fixed Income Funds. AFBA Five Star Shares of these
Funds are sold exclusively by AEGON USA Securities, Inc. as selling dealer
primarily to members of the Armed Forces Benefit Association and their
families. The Institutional Shares and AFBA Five Star Shares will represent
equal pro rata interests in the respective Funds, except that the AFBA Five
Star Shares will bear separate shareholder servicing and other operating
expenses that may be paid in differing amounts and will enjoy certain
exclusive voting rights on matters relating to those expenses. For example,
AFBA Five Star Shares will bear the servicing fees payable under the Servicing
Agreement described in the prospectus relating to such shares, whereas the
Institutional Shares bear no such expenses.
INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
INTERNATIONAL
VALUE EQUITY FUND EQUITY FUND
---------------------------------------------- ------------------
YEAR YEAR YEAR YEAR 2/28/91/1/ YEAR 7/2/93/1/
ENDED ENDED ENDED ENDED TO ENDED TO
5/31/95 5/31/94 5/31/93 5/31/92 5/31/91 5/31/95 5/31/94
------- ------- ------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Period......... $12.14 $12.39 $11.36 $10.69 $10.00 $11.81 $10.00
------ ------ ------ ------ -------- ------ --------
Income From Investment
Operations:
Net Investment Income.. 0.35 0.29 0.29 0.33 0.09 0.03 0.08
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currency...... 1.55 (0.18) 1.13 0.66 0.60 0.08 1.81
------ ------ ------ ------ -------- ------ --------
Total From Investment
Operations............ 1.90 0.11 1.42 0.99 0.69 0.11 1.89
------ ------ ------ ------ -------- ------ --------
Less Distributions:
Dividends to Sharehold-
ers from Net Invest-
ment Income........... (0.34) (0.28) (0.30) (0.32) -- (0.04) (0.07)
Distributions to Share-
holders from Net Capi-
tal Gains............. (0.28) (0.08) (0.09) -- -- (0.28) (0.01)
------ ------ ------ ------ -------- ------ --------
Total Distributions.... (0.62) (0.36) (0.39) (0.32) 0.00 (0.32) (0.08)
------ ------ ------ ------ -------- ------ --------
Net Asset Value, End of
Period................. $13.42 $12.14 $12.39 $11.36 $10.69 $11.60 $11.81
====== ====== ====== ====== ======== ====== ========
Total Return............ 16.22% 0.87% 12.87% 9.51% 6.90% 0.82% 18.98%
Ratios/Supplemental Data
Net Assets, End of Pe-
riod ($000)........... 91,277 53,240 46,754 17,463 4,801 69,172 47,472
Ratio of Expenses to
Average Net As-
sets/3/............... 0.73% 0.68% 0.68% 0.68% 0.68%/2/ 1.05% 1.00%/2/
Ratio of Net Investment
Income to Average Net
Assets................ 2.99% 2.41% 2.68% 3.05% 4.10%/2/ 1.20% 0.82%/2/
Portfolio turnover
rate................... 33.26% 61.16% 11.99% 9.57% 1.98% 42.15% 39.49%
</TABLE>
- -------------------
/1/ Commencement of operations.
/2/ Annualized.
/3/ Without the waiver of advisory fees and administration fees, the ratio of
expenses to average net assets for the years ended May 31, 1995, May 31, 1994,
May 31, 1993 and May 31, 1992 and the period ended May 31, 1991 would have
been .89%, .87%, .88%, .96% and 1.20% (annualized), respectively, for the
Value Equity Fund; 1.16% and 1.20%, respectively, for the year ended May 31,
1995 and for the period ended May 31, 1994 for the International Equity Fund.
4
<PAGE>
INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
MARYLAND TAX-EXEMPT BOND
INTERMEDIATE FIXED INCOME FUND FUND
---------------------------------------------- ---------------------------
YEAR YEAR YEAR YEAR 3/14/91/1/ YEAR YEAR 6/2/92/1/
ENDED ENDED ENDED ENDED TO ENDED ENDED TO
5/31/95 5/31/94 5/31/93 5/31/92 5/31/91 5/31/95 5/31/94 5/31/93
------- ------- ------- ------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Period......... $10.10 $10.55 $10.31 $ 9.97 $ 10.00 $10.25 $10.55 $ 10.00
------ ------ ------ ------ -------- ------ ------ ---------
Income From Investment
Operations:
Net Investment Income.. 0.56 0.50 0.56 0.60 0.13 0.49 0.50 0.48
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.33 (0.39) 0.24 0.34 (0.03) 0.15 (0.28) 0.55
------ ------ ------ ------ -------- ------ ------ ---------
Total From Investment
Operations............ 0.89 0.11 0.80 0.94 0.10 0.64 0.22 1.03
------ ------ ------ ------ -------- ------ ------ ---------
Less Distributions:
Dividends to
Shareholders from Net
Investment Income..... (0.56) (0.50) (0.56) (0.60) (0.13) (0.49) (0.50) (0.48)
Distributions to
Shareholders from Net
Capital Gains......... -- (0.06) -- -- -- -- (0.02) --
------ ------ ------ ------ -------- ------ ------ ---------
Total Distributions.... (0.56) (0.56) (0.56) (0.60) (0.13) (0.49) (0.52) (0.48)
------ ------ ------ ------ -------- ------ ------ ---------
Net Asset Value, End of
Period................. $10.43 $10.10 $10.55 $10.31 $ 9.97 $10.40 $10.25 $ 10.55
====== ====== ====== ====== ======== ====== ====== =========
Total Return............ 9.13% 0.94% 7.94% 9.68% 4.78%/2/ 6.48% 1.99% 10.59%/2/
Ratios/Supplemental Data
Net Assets, End of Pe-
riod ($000)........... 44,652 35,008 28,078 17,549 1,298 12,360 20,008 15,707
Ratio of Expenses to
Average Net As-
sets/3/............... 0.60% 0.55% 0.55% 0.55% 0.55%/2/ 0.62% 0.55% 0.55%/2/
Ratio of Net Investment
Income to Average Net
Assets................ 5.56% 4.75% 5.32% 5.76% 6.17%/1/ 4.83% 4.66% 4.78%/2/
Portfolio turnover
rate................... 22.01% 48.58% 12.29% 13.76% 34.73% 36.80% 33.89% 17.59%
</TABLE>
- -------------------
/1/ Commencement of operations.
/2/ Annualized.
/3/ Without the waiver of advisory fees and administration fees, the ratio of
expenses to average net assets for the years ended May 31, 1995, May 31, 1994,
May 31, 1993 and May 31, 1992 and the period ended May 31, 1991 would have
been .70%, .66%, .64%, .72% and .97% (annualized), respectively, for the years
ended May 31, 1995, May 31, 1994, May 31, 1993 and May 31, 1992 and the period
ended May 31, 1991 for the Intermediate Fixed Income Fund; and .97%, .86%, and
.94% (annualized), respectively, for the years ended May 31, 1995 and May 31,
1994 and for the period ended May 31, 1993 for the Maryland Tax-Exempt Bond
Fund.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INTRODUCTION
The Company is a no-load, open-end, professionally managed investment
company offering in this Prospectus Shares in four investment portfolios (the
"Funds"). The Maryland Tax-Exempt Bond Fund is classified as a non-diversified
investment company; the other Funds are classified as diversified investment
companies. The Value Equity Fund may be referred to as the "Equity Fund"; the
International Equity Fund may be referred to as the "International Fund"; the
Intermediate Fixed Income Fund may be referred to as the "Fixed Income Fund";
and the Maryland Tax-Exempt Bond Fund may be referred to as the "Maryland
Fund." The investment objective of a Fund may not be changed without the
approval of the holders of a majority of its outstanding shares (as defined in
"Miscellaneous"). Although management will use its best efforts to achieve the
investment objective of each Fund, there can be no assurance it will be able
to do so. Except as noted below under "Investment Limitations," a Fund's
investment policies may be changed without shareholder approval.
VALUE EQUITY FUND
The Value Equity Fund's investment objective is to seek long-term capital
appreciation, with income being a secondary objective. The Equity Fund pursues
its objective by investing substantially all of its assets in a diversified
portfolio of equity securities consisting of common stock, preferred stock and
debt obligations convertible into common stock that the Equity Fund's
investment adviser believes to be undervalued. The Equity Fund's investment
policy is to invest in individual stocks, selected on the basis of fundamental
and/or technical research, that appear to represent good relative values and
seem likely to appreciate in price. The ratios of a stock's price to earnings
and book value, its earnings trend and its dividend growth rate will be
factors considered in stock selection. The securities in which the Equity Fund
invests may produce higher than average dividend yields, although income is a
secondary objective in the selection of investments. Under normal market and
economic conditions, the Equity Fund will invest at least 65% of its total
assets in equity securities. The Equity Fund's investment adviser will attempt
to reduce investment risks by investing in many different companies and a
variety of industries.
Although the Equity Fund will invest primarily in publicly-traded common
stocks of companies incorporated in the United States, the Fund may invest up
to 25% of its total assets in securities of foreign issuers, either directly
or through American Depository Receipts ("ADRs") and European Depository
Receipts ("EDRs"). See "Other Investment Policies--Foreign Securities" and
"Other Investment Policies--American Depository Receipts ("ADRs") and European
Depository Receipts ("EDRs")." During normal market and economic conditions,
the Equity Fund may also hold up to 25% of its total assets in instruments
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and debt obligations which are rated at the time of
purchase within the three highest rating categories generally assigned by an
unaffiliated national statistical rating organization (each a "Rating Agency")
or, if unrated, are determined by the investment adviser to be of comparable
quality. See the Appendix to the Statement of Additional Information for a
description of applicable debt security ratings.
The Equity Fund may reduce the percentage of its investments in equity
securities and temporarily invest its assets in fixed-income securities,
including the types of securities in which the Fixed Income Fund may invest
and high quality short-term money market instruments, when, in the opinion of
the Equity Fund's investment adviser, a defensive posture is warranted, or to
meet anticipated redemption requests.
For additional information concerning the Equity Fund's investment
practices, see "Other Investment Policies" below.
THE INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is long-term
growth of capital and income consistent with reasonable risk. Although the
International Fund may earn income from dividends, the production of current
income will be a secondary consideration for the Fund. Under normal market and
economic conditions,
6
<PAGE>
at least 65% of its assets will be invested in equity securities in at least
three different foreign countries, as determined by the location of the
principal business of each issuer. (Currently, the International Equity Fund
expects that substantially all of its assets will be invested in these
securities.) The International Fund expects to invest primarily in equity
securities of issuers in Japan, the United Kingdom, Western European countries
such as France, Germany, the Netherlands and Spain, and Far Eastern countries
such as Hong Kong, Malaysia and Singapore. Investments may also be made from
time to time in securities of issuers in other countries outside the United
States.
Foreign securities which the International Fund may acquire include common
stock, preferred stock, debt securities convertible into common stock,
warrants, bonds, notes and other debt obligations issued by foreign entities.
The International Fund will generally acquire stocks with relatively low
ratios of market values to earnings and to book values. There are no
limitations on the amount of the International Fund's assets that can be
invested in securities of issuers in any one country. The International Fund
may also purchase securities of issuers in the United States, although it has
no present intention of doing so.
The International Fund may hold assets in cash and short-term money market
instruments when Fund management believes that the Fund should assume a
temporary defensive position because of unfavorable investment conditions, to
meet redemption requests, or to take advantage of emerging investment
opportunities.
For additional information concerning the International Fund's investment
practices, see "Other Investment Policies" below.
RISK FACTORS REGARDING INVESTMENT IN FOREIGN SECURITIES
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or
other foreign governmental laws or restrictions. Since the International Fund
will invest heavily in securities denominated or quoted in foreign currencies,
changes in currency exchange rates will, to the extent the International Fund
does not adequately hedge against such fluctuations, affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. In addition, with respect
to certain countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which could adversely affect investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Transaction costs on foreign securities markets are generally
higher than in the United States. There is generally less government
supervision and regulation of foreign exchanges, brokers and issuers than
there is in the United States. The International Fund might have greater
difficulty taking appropriate legal action in a foreign court.
Dividends and interest payable on the International Equity Fund's foreign
portfolio securities may be subject to foreign withholding taxes. To the
extent such taxes are not offset by credits or deductions allowed to investors
under the Federal income tax provisions--see "Taxes"--they may reduce the net
return to the International Fund's shareholders. Investors should also
understand that the expense ratio of the International Fund can be expected to
be higher than those of funds investing in domestic securities. The costs
attributable to investing abroad are usually higher for several reasons, such
as the higher cost of investment research, higher cost of custody of foreign
securities, higher commissions paid on comparable transactions on foreign
markets and additional costs arising from delays in settlements of
transactions involving foreign securities.
INTERMEDIATE FIXED INCOME FUND
The Intermediate Fixed Income Fund's investment objective is to seek as
high a level of current income as is consistent with protection of capital.
The Fixed Income Fund invests substantially all of its assets in corporate
7
<PAGE>
debt obligations such as bonds and debentures; obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; debt
obligations of foreign issuers, including foreign corporations and foreign
governments and their political subdivisions; asset-backed securities;
collateralized mortgage obligations and other mortgage-related securities with
effective maturities of ten years or less; and money market instruments. The
Fixed Income Fund may also invest, from time to time, in Municipal Obligations
(as defined below under "Maryland Tax-Exempt Bond Fund") whether or not the
income thereon is entirely exempt from Federal income taxes. The purchase of
such Municipal Obligations may be advantageous when, as a result of prevailing
economic, regulatory or other circumstances, the performance of such
securities, on a pre-tax basis, is comparable to that of corporate or U.S.
Government debt obligations. The value of the Fixed Income Fund's portfolio
securities can be expected to vary inversely with changes in prevailing
interest rates.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in corporate debt obligations such as bonds and
debentures, obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and mortgage-backed securities, including
collateralized mortgage obligations. Up to 25% of the total assets of the
Fixed Income Fund may be invested in debt obligations of foreign issuers. The
Fixed Income Fund will invest only in debt obligations that are rated at the
time of purchase within the three highest rating categories by a Rating Agency
or, if unrated, are determined by the investment adviser to be of comparable
quality. The Fixed Income Fund may also invest, without limitation, in high
quality short-term money market instruments for temporary defensive purposes.
See the Appendix to the Statement of Additional Information for a description
of the applicable debt security ratings.
The investment adviser expects that under normal market conditions the
Fixed Income Fund's portfolio securities will have an average weighted
maturity of three to ten years. For additional information concerning the
Fixed Income Fund's investment practices, see "Other Investment Policies"
below.
MARYLAND TAX-EXEMPT BOND FUND
The Maryland Tax-Exempt Bond Fund's investment objective is to seek a high
level of interest income that is exempt from Federal and Maryland state and
local income taxes. The Fund invests substantially all of its assets in debt
instruments issued by or on behalf of the State of Maryland and other states,
territories and possessions of the United States, the District of Columbia,
and their respective political subdivisions, agencies, instrumentalities, and
authorities ("Municipal Obligations"). Dividends paid by the Maryland Fund
which are derived from interest attributable to tax-exempt obligations of the
State of Maryland and its political subdivisions, agencies, instrumentalities
and authorities, as well as certain other governmental issuers such as the
Commonwealth of Puerto Rico ("Maryland Municipal Obligations"), will be exempt
from regular Federal income taxes and Maryland state income taxes. Dividends
derived from interest on debt obligations of other governmental issuers will
be exempt from regular Federal income tax but generally will be subject to
Maryland state and local income taxes. (See "Taxes--Maryland Tax-Exempt Bond
Fund" below.) The Maryland Fund expects that, except during temporary
defensive periods or when acceptable securities are unavailable for investment
by the Fund, at least 65% of the Fund's total assets will be invested in
Maryland Municipal Obligations.
Except during periods of unusual market conditions or during temporary
defensive periods, at least 80% of the Fund's net assets will be invested in
securities the interest on which is exempt from Federal income tax. For
purposes of this policy, securities the interest on which is treated as a
specific tax preference item under the Federal alternative minimum tax will be
considered taxable. The Maryland Fund may also hold uninvested cash reserves
pending investment, to meet anticipated redemption requests, or during
temporary defensive periods. There is no percentage limitation on the amount
of assets which may be held uninvested by the Fund. For additional information
concerning the Fund's investment practices, see "Other Investment Policies"
below.
The Maryland Fund may from time to time invest a portion of its assets on
a temporary basis (for example, during unusual market conditions or when
appropriate Maryland Municipal Obligations are unavailable) or for temporary
defensive purposes in short-term taxable money market instruments as described
below under "Other Investment Policies--Money Market Instruments," securities
issued by other investment companies which invest
8
<PAGE>
in taxable or tax-exempt money market instruments, U.S. Government
obligations, and other securities as described below under "Other Investment
Policies."
Municipal Obligations acquired by the Maryland Fund will generally be
rated at the time of purchase within one of the four highest investment grade
categories assigned by a Rating Agency. Obligations rated within the lowest of
the top four rating categories are considered to have speculative
characteristics, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds. The Fund may also acquire
short-term Municipal Obligations such as tax-exempt commercial paper,
municipal notes, and variable rate demand obligations that are rated at the
time of purchase within the two highest rating categories assigned by a Rating
Agency. Unrated obligations purchased by the Maryland Fund will be determined
by the Fund's investment adviser to be comparable in quality to rated
obligations that may be acquired by the Fund. Subsequent to its purchase by
the Maryland Fund, an issue of Municipal Obligations may cease to be rated, or
its rating may be reduced below the minimum rating required for purchase by
the Fund. The Maryland Fund's investment adviser will consider such an event
in determining whether the Fund should continue to hold the security. See
Appendix A to the Statement of Additional Information for a description of
applicable debt obligation ratings.
The Maryland Fund's average weighted maturity will vary from time to time
in light of current market and economic conditions, the comparative yields on
instruments with different maturities, and other factors. Although the Fund
anticipates that Municipal Obligations acquired by it will normally have
intermediate or long-term maturities, when, in the opinion of the investment
adviser, a defensive investment position is warranted, the Fund may invest
temporarily and without limitation in high-grade, short-term instruments of
the types listed above.
The yields of Municipal Obligations depend, among other things, upon
conditions in the Municipal Obligations market and fixed income markets
generally, the size of a particular offering, the maturity of the obligation
and the rating of the issue. A general decline in interest rates will
generally increase the market value of Municipal Obligations while a rise in
interest rates will tend to have the opposite effect.
OTHER INVESTMENT POLICIES
GOVERNMENT OBLIGATIONS
The Equity Fund, Fixed Income Fund and the Maryland Fund may invest in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The obligations of certain agencies and instrumentalities
of the U.S. Government, such as the Government National Mortgage Association,
are supported by the full faith and credit of the U.S. Treasury; others, such
as those of the Export-Import Bank of the United States, are supported by the
right of the issuer to borrow from the Treasury; others, such as those of the
Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
MUNICIPAL OBLIGATIONS
The two principal classifications of the Municipal Obligations in which
the Fixed Income Fund and Maryland Fund may invest are "general obligation"
securities and "revenue" securities. General obligation securities are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific
revenue source such as the user of the facility being financed. Revenue
securities include private activity bonds which are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of
private activity bonds is usually directly related to the credit standing of
the corporate user of the facility involved.
The portfolios of the Fixed Income and Maryland Funds may include "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If the issuer of moral obligation bonds is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of
the state or municipality which created the issuer.
9
<PAGE>
Certain of the Municipal Obligations held by the Maryland Fund may be
insured as to the timely payment of principal and interest. The insurance
policies will usually be obtained by the issuer of the Municipal Obligation at
the time of its original issuance. In the event that the issuer defaults on an
interest or principal payment, the insurer will be notified and will be
required to make payment to the bondholders. There is, however, no guarantee
that the insurer will meet its obligations. In addition, such insurance will
not protect against market fluctuations caused by changes in interest rates
and other factors.
Further, the Maryland Fund may purchase Municipal Obligations in the form
of "certificates of participation" which represent undivided proportional
interests in lease payments by a governmental or nonprofit entity.
Certificates of participation may be purchased from a bank, broker-dealer, or
other financial institution. The lease payments and other rights under the
lease provide for and secure the payments on the certificates. Lease
obligations may be limited by applicable municipal charter provisions or the
nature of the appropriation for the lease. In particular, lease obligations
may be subject to periodic appropriation. If the entity does not appropriate
funds for future lease payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may or may not provide that the certificate
trustee can accelerate lease obligations upon default. If the trustee could
not accelerate lease obligations upon default, the trustee would only be able
to enforce lease payments as they became due. In the event of a default or
failure of appropriation, it is unlikely that the trustee would be able to
obtain an acceptable substitute source of payment. Certificates of
participation are generally subject to redemption by the issuing municipal
entity under specified circumstances. If a specified event occurs, a
certificate is callable at par either at any interest payment date or, in some
cases, at any time. As a result, certificates of participation are not as
liquid or marketable as other types of Municipal Obligations and are generally
valued at par or less than par in the open market. To the extent that these
securities are illiquid, they will be subject to the Maryland Fund's 10%
limitation on investments in illiquid securities. The liquidity of these
securities will be determined based on a variety of factors which may include,
among others: (1) the frequency of trades and quotes for the obligation; (2)
the number of dealers willing to purchase or sell the security and the number
of other potential buyers; (3) the willingness of dealers to undertake to make
a market in the security; and (4) the nature of the marketplace trades,
including the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer. To alleviate potential liquidity
problems with respect to these investments, the Maryland Fund may enter into
remarketing agreements which may provide that the seller or a third party will
repurchase the obligation within seven days after demand by the Maryland Fund
and upon certain conditions (such as the Fund's payment of a fee).
The Maryland Fund may acquire zero coupon obligations (discount debt
obligations) on which the payment of interest is not made until maturity,
although income is generally imputed to the holder on a current basis. Such
obligations may have higher price volatility than those that require the
payment of interest periodically.
In addition, the Maryland Fund may acquire custodial receipts evidencing
the right to receive either specific future interest payments, principal
payments or both on certain Municipal Obligations. Such obligations are held
in custody by a bank on behalf of holders of the receipts. These custodial
receipts are known by various names, including "Municipal Receipts,"
"Municipal Certificates of Accrual on Tax-Exempt Securities" or "M-CATS", and
"Municipal Zero-Coupon Receipts."
The Maryland Fund may also make privately arranged loans to municipal
borrowers. Generally such loans are unrated, in which case they will be
determined by the Maryland Fund's investment adviser to be of comparable
quality at the time of purchase to rated instruments that may be acquired by
the Maryland Fund. Frequently, privately arranged loans have variable interest
rates and may be backed by a bank letter of credit. In other cases they may be
unsecured or may be secured by assets not easily liquidated. Moreover, such
loans in most cases are not backed by the taxing authority of the issuers and
may have limited marketability or may be marketable only by virtue of a
provision requiring repayment following demand by the lender. Such loans made
by the Maryland Fund may have a demand provision permitting the Maryland Fund
to require repayment within seven days. To the extent these securities are
illiquid, they will be subject to the Maryland Fund's 10% limitation on
investments in illiquid securities.
The Fixed Income Fund and Maryland Fund may also acquire "stand-by
commitments" with respect to the Municipal Obligations in their portfolios.
Under a stand-by commitment, a dealer would agree to purchase at
10
<PAGE>
such Fund's option specified Municipal Obligations at a specified price.
Stand-by commitments acquired by a Fund may also be referred to as "put"
options. A Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes.
Opinions relating to the validity of Municipal Obligations and the
exemption of interest thereon from regular Federal income tax (and, with
respect to Maryland Municipal Obligations, to the exemption of interest from
Maryland state or local income tax) are rendered by bond counsel to the
respective issuers at the time of issuance. Neither the Fund nor its
investment adviser will review the proceedings relating to the issuance of
Municipal Obligations or the bases for such opinions.
MONEY MARKET INSTRUMENTS
Each Fund may from time to time invest in "money market instruments," a
term that includes, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of thirteen months or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
obligations issued or supported by the credit of U.S. or foreign banks.
Although the Equity Fund, Fixed Income Fund and the Maryland Fund will invest
in obligations of foreign banks or foreign branches of U.S. banks only when
the investment adviser determines that the instrument presents minimal credit
risks, such investments nevertheless entail risks that are different from
those of investments in domestic obligations of U.S. banks due to differences
in political, regulatory and economic systems and conditions. Investments in
bank obligations are limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase, and
investments in the obligations of foreign banks and foreign branches of U.S.
banks will not exceed 25% of the particular Fund's total assets at the time of
purchase.
Investments by the Equity Fund, Fixed Income Fund and the Maryland Fund in
taxable commercial paper will consist of issues that are rated at the time of
purchase within the highest rating category assigned by a Rating Agency. In
addition, each of the Equity, Fixed Income and the Maryland Funds may acquire
unrated commercial paper and corporate bonds that are determined by the
investment adviser at the time of purchase to be of comparable quality to
rated instruments that may be acquired by the particular Fund. Commercial
paper may include variable and floating rate instruments.
Investments by the Maryland Fund in money market instruments, together
with investments in other instruments (such as U.S. Government obligations and
repurchase agreements) that are subject to Federal income tax, will not exceed
20% of the net assets of the Fund, except during periods of unusual market
conditions or when made for temporary defensive purposes.
VARIABLE AND FLOATING RATE INSTRUMENTS
Municipal Obligations and other instruments purchased by the Maryland Fund
may include variable and floating rate instruments issued by corporations,
industrial development authorities and governmental entities. While there may
be no active secondary market with respect to a particular variable or
floating rate instrument purchased by the Maryland Fund, the Fund may from
time to time as specified in the instrument demand payment of principal and
accrued interest or may resell the instrument to a third party. The absence of
a secondary market, however, could make it difficult for the Maryland Fund to
dispose of a variable or floating rate instrument if the issuer defaulted on
its payment obligations or during periods that the Maryland Fund is not
entitled to exercise its demand rights, and the Fund could, for these or other
reasons, suffer a loss.
ASSET-BACKED SECURITIES
The Fixed Income Fund may purchase asset-backed securities which represent
a participation in, or are secured by and payable from, a stream of payments
generally consisting of both interest and principal generated by particular
assets, most often a pool of assets similar to one another. Payments of
interest and principal may be partially guaranteed by a letter of credit
issued by a financial institution such as a bank. Assets generating such
payments will consist of motor vehicle installment purchase obligations,
credit card receivables and home equity loans. The Fixed Income Fund may also
invest in other types of asset-backed securities that may be
11
<PAGE>
available in the future. The acquisition of asset-backed securities issued by
companies which are investment companies within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"), will be subject to the
percentage limitations described under the heading "Securities of Other
Investment Companies."
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e. loans) generally may be prepaid at any time. As a result, if an asset-
backed security is purchased at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an asset-backed security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments, will decrease, yield to maturity.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Like other fixed income securities, when interest rates rise, the
value of an asset-backed security generally will decline; however, when
interest rates decline, the value of an asset-backed security with prepayment
features may not increase as much as that of other fixed income securities.
Asset-backed securities are subject to greater risk of default during
periods of economic downturn. Also, the secondary market for certain asset-
backed securities may not be as liquid as the market for other types of
securities, which could result in the Fund's experiencing difficulty in
valuing or liquidating such securities. For these reasons, under certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitations described under the heading "Illiquid
Securities."
MORTGAGE-RELATED SECURITIES
The Fixed Income Fund may invest in mortgage-backed securities, including
collateralized mortgage obligations ("CMOs") and Government Stripped Mortgage-
Backed Securities. Mortgage-backed securities provide a monthly payment
consisting of interest and principal.
CMOs are a type of bond issued by non-governmental entities which are
secured by an underlying pool of mortgages or mortgage pass-through
certificates that are structured to direct payments on underlying collateral
to different series or classes of the obligations.
Government Stripped Mortgage-Backed Securities are mortgage-backed
securities issued or guaranteed by the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") or
Federal Home Loan Mortgage Corporation ("FHLMC"). These securities represent
beneficial ownership interests in either periodic principal distributions
("principal-only") or interest distributions ("interest-only") on mortgage-
backed certificates issued by GNMA, FNMA or FHLMC, as the case may be. These
principal-only or interest-only distributions are stripped from the underlying
mortgage-backed security by private entities or by the agency that issued the
mortgage-backed certificate. The certificates underlying the Government
Stripped Mortgage-Backed Securities represent all or part of the beneficial
interest in pools of mortgage loans. Investing in Government Stripped
Mortgage-Backed Securities involves the risks normally associated with
investing in mortgage-backed securities.
Although certain mortgage-related securities are guaranteed by a third
party or are otherwise similarly secured, the market value of the security,
which may fluctuate, is not secured. To the extent that the Fixed Income Fund
purchases mortgage-related or mortgage-backed securities at a premium,
mortgage foreclosures and prepayments of principal by mortgagors (which may be
made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The yield of the Fund
may be affected by reinvestment of prepayments at higher or lower rates than
the original investment. In addition, like other debt securities, the value of
mortgage-related securities, including government and government-related
mortgage pools, will generally fluctuate in response to market interest rates.
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REPURCHASE AGREEMENTS
Each Fund may agree to purchase portfolio securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase them at an agreed upon date and price ("repurchase
agreements"). The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement at not less than
the repurchase price (including accrued interest). Default by the seller
would, however, expose the Fund to possible loss because of adverse market
action or delays in connection with the disposition of the underlying
obligations. The Funds' investment adviser will enter into repurchase
agreements only with financial institutions it deems creditworthy, pursuant to
guidelines established by the Board of Directors, and during the term of any
repurchase agreement, the investment adviser will continue to monitor the
creditworthiness of the seller.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow for temporary purposes by entering into reverse
repurchase agreements in accordance with its investment limitations. Under the
terms of a reverse repurchase agreement a Fund would sell portfolio securities
to a financial institution and agree to repurchase them at an agreed upon date
and price. The Funds would consider entering into reverse repurchase
agreements to avoid otherwise selling securities during unfavorable market
conditions to meet redemptions. Reverse repurchase agreements involve the risk
that the market value of the portfolio securities sold by a Fund may decline
below the price of the securities the Fund is obligated to repurchase. Reverse
repurchase agreements are considered to be borrowings under the 1940 Act.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
The Fixed Income Fund and Maryland Fund may purchase securities on a firm
commitment or "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by
a Fund to purchase, or in the case of the Fixed Income Fund, to sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk that the price or yield
obtained in a transaction may be less favorable than the price or yield
available in the market when delivery of the securities takes place.
Securities purchased on a firm commitment or when-issued basis are recorded as
an asset and are subject to changes in value based upon changes in the general
level of interest rates. The Funds expect that forward commitments and
purchases of firm commitment or when-issued securities will not exceed 25% of
the value of their respective total assets absent unusual market conditions.
Because a Fund is required to set aside cash or liquid high grade debt
obligations to satisfy its purchase commitments, a Fund's liquidity and
ability to manage its portfolio might be affected during periods in which its
commitments exceed 25% of the value of its assets. The Funds do not intend to
engage in when-issued and forward commitment transactions for speculative
purposes but only in furtherance of their respective investment objectives.
LOANS OF PORTFOLIO SECURITIES
Each Fund may loan its portfolio securities to financial institutions such
as banks and broker-dealers in accordance with its investment limitations.
Loans will be made pursuant to agreements requiring that the loans be
continuously secured by collateral equal at all times in value to at least the
market value of the securities loaned. Such loans may involve risks of delay
in receiving additional collateral or in recovering the securities loaned or
even loss of rights in the collateral should the borrower of the securities
fail financially. However, loans will be made only to borrowers deemed by the
Funds' investment adviser to be of good standing and only when, in the
investment adviser's judgment, the income to be earned from the loans
justifies the attendant risks. While there is no limit on the amount of
securities which the Funds may loan, fees attributable to securities lending
activities are subject to certain limits under the Internal Revenue Code of
1986, as amended.
SECURITIES OF OTHER INVESTMENT COMPANIES
In connection with the management of their daily cash positions, the
Equity Fund, Fixed Income Fund and Maryland Fund may invest in securities
issued by other investment companies which invest in eligible quality, short-
term debt securities, whether taxable or tax-exempt, and which seek to
maintain a $1.00 net asset value per share, i.e., "money market" funds. The
Fixed Income Fund may also invest in asset-backed securities issued by issuers
that may be deemed to be investment companies within the meaning of the 1940
Act. Securities of other
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investment companies will be acquired within limits prescribed by the 1940
Act. Income derived by the Maryland Fund from the acquisition of shares of
other investment companies which invest in taxable instruments will be, when
paid by the Fund as dividends to its shareholders, subject to Federal income
taxes. As a shareholder of another investment company, a Fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in
addition to the advisory and other expenses each Fund bears directly in
connection with its own operations.
FOREIGN SECURITIES
The International Fund will, and the Equity and Fixed Income Funds may,
invest in foreign securities, and each Fund may invest in obligations of
foreign banks or foreign branches of U.S. banks. For a discussion of the risks
involved in investment in foreign securities, see "Risk Factors Regarding
Investment in Foreign Securities" above.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because the Equity, International and Fixed Income Funds buy and sell
securities denominated in currencies other than the U.S. dollar, and receive
interest, dividends and sale proceeds in currencies other than the U.S.
dollar, these Funds may from time to time enter into foreign currency exchange
transactions to convert to and from different foreign currencies and to
convert foreign currencies to and from the U.S. dollar. A Fund may enter into
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or use forward currency
contracts to purchase or sell foreign currencies.
A forward foreign currency contract is an obligation by a Fund to purchase
or sell a specific currency at a future date at a price set at the time of the
contract. In this respect, forward currency contracts are similar to foreign
currency futures contracts described below; however, unlike futures contracts,
which are traded on recognized commodities exchanges, forward currency
contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Also,
forward currency contracts usually involve delivery of the currency involved
instead of cash payment as in the case of futures contracts.
A Fund may use forward foreign currency exchange contracts in order to
protect against uncertainty in the level of future foreign exchange rates. The
use of such forward contracts is limited to hedging against movements in the
value of foreign currencies relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. The
purpose of transaction hedging is to "lock in" the U.S. dollar equivalent
price of such specific securities. Position hedging is the sale of foreign
currency with respect to portfolio security positions denominated or quoted in
that currency. The Funds will not speculate in foreign currency exchange
transactions. Transaction and position hedging will not be limited to an
overall percentage of the particular Fund's assets but will be employed as
necessary to correspond to particular transactions or positions. A Fund may
not hedge its currency positions to an extent greater than the aggregate
market value (at the time of entering into the forward contract) of the
securities held in its portfolio denominated, quoted in, or currently
convertible into that particular currency. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the
prices of a Fund's portfolio securities or in foreign exchange rates, or
prevent loss if the prices of these securities decline, but forward foreign
currency exchange contracts do allow a Fund to establish a rate of exchange
for a future point in time.
FUTURES CONTRACTS
The International Fund may also enter into interest rate futures
contracts, other types of financial futures contracts (such as foreign
currency futures contracts, which are similar to forward currency contracts
described above) and related futures options, as well as any index or foreign
market futures which are available in recognized exchanges or in other
established financial markets.
AMERICAN DEPOSITORY RECEIPTS (ADRS) AND EUROPEAN DEPOSITORY RECEIPTS (EDRS)
The Equity Fund may invest up to 25% of its assets in securities of
foreign issuers directly or in the form of ADRs or EDRs, or similar
instruments representing securities of foreign issuers. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying foreign securities. ADR prices are denominated in U.S. dollars
although the underlying security may be denominated in a foreign currency.
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EDRs are receipts issued by a European financial institution evidencing a
similar arrangement, and are generally designed for use in European securities
markets. ADRs and EDRs may be listed on a national securities exchange or may
be traded in the over-the-counter market. Investments in ADRs and EDRs involve
risks similar to those accompanying direct investment in foreign securities.
See "Risk Factors Regarding Investment in Foreign Securities" above.
OTHER INVESTMENT POLICIES AND TECHNIQUES - INTERNATIONAL EQUITY FUND
The International Fund may utilize from time to time the investment
techniques identified below. It is the International Fund's current intention
that no more than 5% of its net assets will be at risk in the use of any one
of such investment techniques, except that a different limitation applies to
writing foreign currency call options.
FOREIGN CURRENCY PUT OPTIONS. The International Fund may purchase foreign
currency put options on U.S. exchanges or U.S. over-the-counter markets. A put
option gives the International Fund, upon payment of a premium, the right to
sell a currency at the exercise price until the expiration of the option and
serves to insure against adverse currency price movements in the underlying
portfolio assets denominated in that currency.
FOREIGN CURRENCY CALL OPTIONS. A call option written by the International
Fund gives the purchaser, upon payment of a premium, the right to purchase
from the International Fund a currency at the exercise price until the
expiration of the option. The International Fund may write a call option on a
foreign currency only in conjunction with a purchase of a put option on that
currency. Such a strategy is designed to reduce the cost of downside currency
protection by limiting currency appreciation potential. The face value of such
writing may not exceed 90% of the value of the securities denominated in such
currency invested in by the International Fund to cover such call writing.
UNLISTED FOREIGN CURRENCY PUT AND CALL OPTIONS. A number of major
investment firms trade unlisted currency options which are more flexible than
exchange listed options with respect to strike price and maturity date. These
unlisted options generally are available on a wider range of currencies.
Unlisted foreign currency options are generally less liquid than listed
options and involve the credit risk associated with the individual issuer.
They will be deemed to be illiquid for purposes of the limitation on
investments in illiquid securities.
RIGHTS AND WARRANTS. The International Fund may invest in rights and
warrants to purchase securities.
EMERGENCY BORROWING. As a temporary measure for extraordinary or emergency
purposes, the International Fund may borrow money from banks on an unsecured
basis.
ILLIQUID SECURITIES
The International Fund will not knowingly invest more than 15%, and the
Equity, Fixed Income and Maryland Funds will not knowingly invest more than
10%, of the value of their respective net assets in securities that are
considered illiquid, including restricted securities, unlisted foreign
currency options and other securities for which market quotations are not
readily available. Repurchase agreements and time deposits that do not provide
for payment to the Fund within seven days after notice and commercial paper
issued in reliance upon the exemption in Section 4(2) of the Securities Act of
1933 (the "1933 Act") are subject to this limit (unless such securities are
variable amount master demand notes with maturities of nine months or less or
unless the investment adviser has determined under the supervision and
direction of the Company's Board of Directors that an adequate trading market
exists for such securities or that market quotations are readily available).
Each Fund may purchase securities which are not registered under the 1933
Act but which can be sold to "qualified institutional buyers" in accordance
with Rule 144A under the 1933 Act. Any such security will not be considered
illiquid so long as it is determined by the Board of Directors or the Fund's
investment adviser, under the supervision and direction of the Board, that an
adequate trading market exists for that security. This investment practice
could have the effect of increasing the level of illiquidity in a Fund during
any period that qualified institutional buyers were no longer interested in
purchasing these restricted securities.
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RISK FACTORS REGARDING INVESTMENT IN MARYLAND MUNICIPAL OBLIGATIONS
The Maryland Fund's concentration in securities issued primarily by the
State of Maryland and its political subdivisions, agencies and
instrumentalities involves greater risks than a fund more broadly invested in
securities issued by many different states and municipalities.
Some of the significant financial considerations relating to the
investments of the Maryland Fund are summarized below. This information is
derived principally from official statements and preliminary official
statements released on or before March 23, 1995, relating to issues of
Maryland obligations and does not purport to be a complete description.
The State's total expenditures for the fiscal years ending June 30, 1992,
June 30, 1993 and June 30, 1994 were $11.585 billion, $11.786 billion and
$12.351 billion, respectively. As of March 23, 1995, it was estimated that
total expenditures for fiscal year 1995 would be $13.834 billion. The State's
General Fund, representing approximately 50%-60% of each year's total budget,
had a deficit on a budgetary basis of $56 million in fiscal year 1992, a
surplus of $11 million in fiscal year 1993 and a surplus of $60 million in
fiscal year 1994. The Governor of Maryland reduced fiscal year 1993
appropriations by approximately $56 million to offset the fiscal year 1992
deficit. The State Constitution mandates a balanced budget.
In April 1994, the General Assembly approved the $13.3 billion 1995 fiscal
year budget. The Budget includes $2.6 billion in aid to local governments
(reflecting a $102.4 million increase in funding over 1994 that provides for
substantial increases in education, health and police aid), and $104.8 million
in general fund deficiency appropriations for fiscal year 1994, of which $60.5
million is a legislatively mandated appropriation to the Revenue Stabilization
Account of the State Reserve Fund. The Revenue Stabilization Account was
established in 1986 to retain State revenues for future needs and to reduce
the need for future tax increases. When the 1995 Budget was enacted, it was
estimated that the general fund surplus on a budgetary basis at June 30, 1995,
would be approximately $9.6 million, excluding $60.5 million that was mandated
to be appropriated in the 1995 session of the General Assembly to the Revenue
Stabilization Account of the State Reserve Fund. As of March 23, 1995 it was
estimated that the general fund surplus on a budgetary basis at June 30, 1995,
would be $76.9 million.
In April 1995, the General Assembly approved the $14.4 billion 1996 fiscal
year budget. The Budget includes $2.8 billion in aid to local governments
(reflecting a $161 million increase over 1995 that provides for substantial
increases in education, health and police aid), and $131.1 million in general
fund deficiency appropriations for fiscal year 1995, of which $60 million is
an appropriation to the Revenue Stabilization Account of the State Reserve
Fund. As of September 20, 1995 it is estimated that the general fund surplus
on a budgetary basis at June 30, 1996 will be $34.3 million.
The public indebtedness of Maryland and its instrumentalities is divided
into three basic types. The State issues general obligation bonds for capital
improvements and for various State-sponsored projects. The Department of
Transportation of Maryland issues limited, special obligation bonds for
transportation purposes payable primarily from specific, fixed-rate excise
taxes and other revenues related mainly to highway use. Certain authorities
issue obligations payable solely from specific non-tax enterprise fund
revenues and for which the State has no liability and has given no moral
obligation assurance.
While the factors mentioned above indicate that Maryland and its
instrumentalities are addressing the effects of the economic recession and,
overall, are in satisfactory economic health, there can, of course, be no
assurance that this will continue or that particular Maryland Municipal
Obligations may not be adversely affected by changes in state or local
economic or political conditions.
OTHER CONSIDERATIONS
In seeking to achieve its investment objective, the Maryland Fund may
invest in Municipal Obligations that are private activity bonds the interest
on which is subject to the Federal alternative minimum tax. Investments in
such securities will not exceed 20% of the Maryland Fund's net assets when
added together with any taxable investments held by the Fund, except during
periods of unusual market conditions or when made for
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temporary defensive purposes. Moreover, although the Fund does not presently
intend to do so on a regular basis, it may invest 25% or more of its assets in
industrial development bonds issued before August 7, 1986 that are not subject
to the Federal alternative minimum tax, and in Municipal Obligations the
interest on which is paid solely from revenues of similar projects, if such
investment is deemed necessary or appropriate by the investment adviser. To
the extent that the Maryland Fund's assets are concentrated in Municipal
Obligations payable from revenues on similar projects, the Fund will be
subject to the peculiar risks presented by such projects to a greater extent
than it would be if the Fund's assets were not so concentrated. Furthermore,
payment of Municipal Obligations of certain projects may be secured by
mortgages or deeds of trust. In the event of a default, enforcement of the
mortgages or deeds of trust will be subject to statutory enforcement
procedures and limitations, including rights of redemption and limitations on
obtaining deficiency judgments. In the event of a foreclosure, collection of
the proceeds of the foreclosure may be delayed and the amount of proceeds from
the foreclosure may not be sufficient to pay the principal of and accrued
interest on the defaulted Municipal Obligations.
The Maryland Fund is classified as a non-diversified investment company
under the 1940 Act. Investment return on a non-diversified portfolio typically
is dependent upon the performance of a smaller number of securities relative
to the number held in a diversified portfolio. Consequently, the change in
value of any one security may affect the overall value of a non-diversified
portfolio more than it would a diversified portfolio, and thereby subject the
market-based net asset value per share of the non-diversified portfolio to
greater fluctuations. In addition, a non-diversified portfolio may be more
susceptible to economic, political and regulatory developments than a
diversified investment portfolio with a similar objective.
INVESTMENT LIMITATIONS
The following investment limitations may not be changed with respect to a
particular Fund without the affirmative vote of the holders of a majority of
its outstanding shares (as defined under "Miscellaneous"). See the Statement
of Additional Information for a description of other investment limitations
that may not be changed without a vote of shareholders.
No Fund may:
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities)
if, immediately after such purchase, more than 5% of the value of the
Fund's total assets would be invested in the securities of such issuer,
or, with respect to the Equity, Fixed Income and Maryland Funds, more than
10% of the issuer's outstanding voting securities would be owned by the
Fund, except that up to 25% of the value of the total assets of the Equity
Fund, International Fund and Fixed Income Fund may be invested without
regard to these limitations and up to 50% of the value of the Maryland
Fund's assets may be invested without regard to these limitations,
provided that no more than 25% of the value of the Fund's total assets are
invested in the securities of any one issuer. For purposes of this
limitation, a security is considered to be issued by the entity (or
entities) whose assets and revenues back the security. A guarantee of a
security will not be deemed to be a security issued by the guarantor when
the value of all securities issued and guaranteed by the guarantor, and
owned by the Fund, does not exceed 10% of the value of the Fund's total
assets.
2. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation
with respect to: obligations issued or guaranteed by the United States,
any state, territory or possession of the United States, the District of
Columbia, or any of their authorities, agencies, instrumentalities or
political subdivisions; and repurchase agreements secured by any such
obligations; (b) wholly-owned finance companies will be considered to be
in the industries of their parents if their activities are primarily
related to financing the activities of the parents; and (c) utilities will
be classified according to their services. (For example, gas, gas
transmission, electric and gas, and electric and telephone each will be
considered a separate industry.)
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3. Borrow money or issue senior securities, except that each Fund may
borrow from banks and enter into reverse repurchase agreements for
temporary purposes and then in amounts not in excess of 10% (5% in the
case of the International Fund) of the value of its total assets at the
time of such borrowing; or pledge any assets except in connection with any
such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% (5% in the case of the International Fund) of the
value of its total assets at the time of such borrowing. A Fund will not
purchase portfolio securities while borrowings (including reverse
repurchase agreements and borrowings from banks) in excess of 5% of such
Fund's total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Fund's investment practices described in the
Statement of Additional Information or in this Prospectus are not deemed
to be pledged for purposes of this limitation.
Although the foregoing investment limitations would permit the Funds
to invest in options, futures contracts and related options, the Equity,
Fixed Income and Maryland Funds do not currently intend to acquire such
instruments. Prior to making such investments, the Funds would add
appropriate disclosure concerning the Funds' investment in such
instruments to the Prospectus and Statement of Additional Information.
ADDITIONAL INFORMATION RELATING TO ALL FUNDS
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value of a
Fund's securities or total assets will not constitute a violation of the
limitation.
In order to permit the sale of Fund Shares in certain states, the Company
may make commitments more restrictive than the investment policies and
limitations described above. Should the Company determine that any such
commitment is no longer in its best interests, it will revoke the commitment
by terminating sales of its Shares to investors residing in the state
involved.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares of each Fund are sold on a continuous basis without a sales load by
the Company's distributor, BISYS Fund Services (formerly The Winsbury Company)
(the "Distributor"). The Distributor acts as agent for each Fund in the
distribution of its Shares and, in such capacity, has agreed to use
appropriate efforts to promote the Funds and to solicit orders for the
purchase of the Funds' Shares. The Distributor's principal offices are located
at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
PURCHASE OF SHARES - GENERAL
Shares of the Funds are sold to customers having qualified accounts with
the trust or banking departments of Mercantile-Safe Deposit and Trust Company
and its affiliated and correspondent banks or with affiliates of the transfer
agent for the Funds' Institutional Shares, State Street Bank and Trust Company
(the "Transfer Agent") (referred to herein individually as a "Bank" and
collectively as the "Banks"). Shares of the Funds also may be sold to
individual investors who purchase them directly from the Company without
maintaining qualified accounts with the Banks ("Direct Investors") by means of
the procedures described below under "Purchase and Redemption Procedures for
Direct Investors."
Shares are sold at the net asset value per Share next determined after
receipt of a purchase order by the Transfer Agent. Purchase orders for Shares
will be accepted by the Transfer Agent only on a day on which the Shares of a
Fund are priced ("Business Days"). See "Pricing of Shares."
The Banks will serve as shareholder of record for those customers
acquiring Shares of the Company through qualified accounts at the Banks. The
individual investors will serve as shareholder of record for the Direct
Investor accounts.
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Confirmations of purchases and redemptions will be sent to the shareholder
of record. The Company reserves the right to reject any purchase order.
PURCHASING SHARES THROUGH THE BANKS
The purchase of Shares by the Banks, acting on behalf of their customers,
is governed by procedures established by the Banks in connection with their
customer accounts. Information relating to specific purchase procedures is
available from the Banks. Shareholders purchasing Shares of the Funds may
include officers, directors, or employees of the Banks.
The Banks do not impose a minimum initial or subsequent investment
requirement for Shares purchased on behalf of their customers. If a customer
has agreed with a Bank to maintain a minimum cash balance in the account he or
she maintains with the Bank and the balance falls below the agreed minimum,
the customer may be obliged to redeem all or a part of the Shares held in his
or her account to the extent necessary to maintain the required minimum
balance.
REDEMPTION OF SHARES - GENERAL
Shares are redeemed at the net asset value per Share next determined after
receipt by the Transfer Agent of the redemption order. Redemption orders will
be accepted only on Business Days.
Redemption orders for Shares of a Fund which are received by the Transfer
Agent on a Business Day prior to the close of regular trading hours on the New
York Stock Exchange (the "Exchange") will be executed at the net asset value
determined on that day. Redemption orders received after the close of regular
trading hours on the Exchange or on a non-Business Day will be priced as of
the time the net asset value is next determined. Payment for such redemption
orders is normally wired in Federal funds or sent within five Business Days
after receipt of the redemption request. However, in all cases the Company
reserves the right to wire or send redemption proceeds within seven days after
receiving the redemption order if, in the judgment of the investment adviser,
an earlier payment could adversely affect the Company.
The Company may redeem Shares involuntarily if it appears appropriate to
do so in light of its responsibilities under the 1940 Act. The Company also
reserves the right, if conditions exist which make cash payments undesirable,
to honor any request for redemption or repurchase of a Fund's Shares by making
payment in whole or in part in readily marketable securities chosen by the
Company and valued in the same way as they would be valued for purposes of
computing the Fund's net asset value (a "redemption in-kind"). If payment is
made in securities, a shareholder may incur transaction costs in converting
the securities into cash. The Company has elected, however, to be governed by
Rule 18f-1 under the 1940 Act as a result of which the Company is obligated to
redeem Shares, with respect to any one shareholder during any 90-day period,
solely in cash up to the lesser of $250,000 or 1% of the net asset value of
the Fund at the beginning of the period.
REDEEMING SHARES THROUGH THE BANKS
A Bank customer may redeem all or part of his or her Shares in accordance
with procedures, instructions and limitations pertaining to his or her account
at the Bank. The Bank is responsible for transmitting redemption orders to the
Transfer Agent and crediting the customer's account with the redemption
proceeds on a timely basis. No charge for wiring redemption payments is
imposed by the Company, although the Banks may charge their customers'
accounts directly for redemption and other services. Information relating to
such procedures, services and charges, if any, is available from the Banks.
Absent instructions to the contrary, Bank customers for whose accounts
automatic purchases and redemptions will be made may receive monthly
confirmations of Share transactions from their Bank. Direct Investors may
redeem Shares through the procedures set forth below under "Purchase and
Redemption Procedures for Direct Investors."
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PURCHASE AND REDEMPTION PROCEDURES FOR DIRECT INVESTORS
PURCHASES
For purchases by Direct Investors, the Company generally requires a
$50,000 minimum initial investment. Subsequent investments must be a minimum
of $100. The Company reserves the right to waive these minimums. Further
information on the purchase and redemption procedures described below may be
obtained by calling (800) 551-2145.
Direct Investors may purchase Shares by means of any of the following
procedures:
BY MAIL. Direct Investors may purchase Shares by mail by sending a
purchase application, which may be obtained by calling (800) 551-2145,
together with a check payable to M.S.D. & T. Funds, Inc., to M.S.D. & T.
Funds, Inc., P.O. Box 8515, Boston, Massachusetts 02266-8515. The check must
be drawn on a bank located in the U.S., must be payable in U.S. dollars and
must indicate the specific Fund(s) and the amount to be invested in each.
BY WIRE. Direct Investors may make initial or subsequent investments in
the Funds by wiring Federal funds. Your financial institution may charge a fee
for this service. If you are opening an account with a wire purchase, you must
call (800) 551-2145 for instructions prior to wiring funds. You also must
promptly complete a purchase application and forward it to the address
indicated on the application. Redemptions will not be paid until your
completed application has been received by the Transfer Agent. If you wish to
add to an existing account by wire purchase, you may wire Federal funds to:
State Street Bank and Trust Company
Boston, Massachusetts
Bank Routing No. 011-0000-28
M.S.D. & T. Deposit A/C No. 99046435
(Reference Fund/Shareholder Account Number)
(Reference Shareholder's Name)
AUTOMATIC INVESTMENT. The Company offers an Automatic Investment Plan
whereby Direct Investors may automatically purchase Shares on a regular,
monthly basis ($100 initial minimum/monthly additions). Under this Plan, the
Transfer Agent originates a request through the Automated Clearing House
("ACH") network to a Direct Investor's financial institution, which forwards
funds to the Transfer Agent to purchase Shares. The Automatic Investment Plan
may be established with any financial institution that participates in the ACH
funds transfer system. Direct Investors will be responsible for all losses and
expenses of the Funds as a result of an ACH transfer that is rejected.
DIRECTED REINVESTMENTS. Direct Investors' dividends and capital gains
distributions are automatically reinvested in Shares of the Fund from which
such distributions are paid. Direct Investors may elect to have their
dividends and capital gains distributions automatically reinvested in Shares
of another fund or funds of the Company. Systematic withdrawals from one Fund
and reinvestments in another fund also may be established. See "Systematic
Withdrawals," below. If you wish to elect these options, please contact the
Transfer Agent by calling (800) 551-2145.
BY EXCHANGE. Direct Investors may use the exchange privilege to exchange
Shares of one Fund for Shares of another fund of the Company. See "Exchange
Privilege," below.
REDEMPTIONS
Direct Investors may redeem or exchange Shares by means of any of the
following procedures:
BY MAIL. Direct Investors may redeem Shares in any number or dollar amount
by sending a written request to M.S.D. & T. Funds, Inc., P.O. Box 8515,
Boston, Massachusetts 02266-8515. The redemption request must state the number
of Shares or the dollar amount to be redeemed and identify the specific Fund.
If the redemption proceeds are to be sent to someone other than the
shareholder of record or to an address other than the address of record, each
signature must be guaranteed by a financial institution that is a participant
in the Stock Transfer
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Agency Medallion Program ("STAMP"). In addition, written requests for
redemptions exceeding $100,000 must be guaranteed by a financial institution
that participates in STAMP.
BY WIRE. Direct Investors may redeem Shares and direct that the proceeds
be sent by Federal wire transfer to a previously designated account. The
minimum amount that may be redeemed by this method is $1,000. The Company
reserves the right to change this minimum or to terminate the wire redemption
privilege at any time without notice. To change bank instructions, a written
request with signatures guaranteed by a financial institution that
participates in STAMP must be sent to M.S.D. & T. Funds, Inc., P.O. Box 8515,
Boston, Massachusetts 02266-8515.
SYSTEMATIC WITHDRAWALS. Direct Investors may elect to have a fixed sum
redeemed at regular intervals ($100 minimum amount per withdrawal) and
distributed in cash or reinvested in one or more of the other funds of the
Company. See "Directed Reinvestments."
EXCHANGE PRIVILEGE. The exchange privilege permits the exchange of Shares
of one Fund for Shares of another fund of the Company. If you wish to elect
this option after opening your account, please contact the Transfer Agent to
obtain the appropriate form by calling (800) 551-2145. Exchanges may have tax
consequences and will be processed only when the Shares being acquired can be
legally sold in the state of the Direct Investor's residence.
TELEPHONE PRIVILEGE. The telephone privilege permits Direct Investors to
redeem or exchange Shares by telephone. Direct Investors that notify the
Transfer Agent in writing of their election to redeem or exchange Shares by
telephone may do so by calling (800) 551-2145.
The Company and its service providers have adopted procedures in an effort
to establish reasonable safeguards against fraudulent telephone transactions.
The proceeds for redemption orders will be sent by check or by wire transfer.
All checks will be made payable to the shareholder of record and mailed only
to the shareholder's address of record. All wires will be sent to a previously
designated bank account. The address of record for redemption checks and bank
instructions for redemption by wire may be changed only by a written request
with signatures guaranteed by a financial institution that participates in
STAMP sent to M.S.D. & T. Funds, Inc., P.O. Box 8515, Boston, Massachusetts
02266-8515. The Transfer Agent also utilizes recorded lines for telephone
transactions. Neither the Company nor its service providers will be
responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. To the extent that the Company fails to
use procedures designed to provide assurance that the instructions are
genuine, it or its service providers may be liable for instructions that prove
to be fraudulent or unauthorized. In all other cases, Direct Investors will
bear the risk of loss.
The Company reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for redeeming Shares by
telephone may be modified or terminated by the Company at any time without
notice. During periods of substantial economic or market change, telephone
redemptions may be difficult to place, in which case redemption orders may be
placed by mail as described above.
MISCELLANEOUS REDEMPTION INFORMATION. The Company may require any
information reasonably necessary to ensure that a redemption has been duly
authorized. All redemption proceeds will be sent to Direct Investors by check
unless the Company or the Transfer Agent is directed otherwise. The ACH system
may be utilized for payment of redemption proceeds.
To relieve the Company of the cost of maintaining uneconomical accounts,
the Company reserves the right, after at least 60 days' written notice, to
redeem the Shares held by a Direct Investor in any Fund if at the time of any
redemption of Shares the net asset value of the remaining Shares held by the
Direct Investor in such Fund falls below $5,000.
EFFECTIVE TIME OF PURCHASES
A purchase order for Shares of a Fund received by the Transfer Agent on a
Business Day prior to the close of regular trading hours (currently 4:00 P.M.
(Eastern time)) on the Exchange will be priced at the net asset
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value determined on that day, provided that either: (a) the order is placed by
a Direct Investor and is accompanied by payment of the purchase price; or (b)
the order is placed by a Bank and the Fund's custodian (the "Custodian")
receives payment on the next Business Day in the form of Federal funds or
other immediately available funds. If a Direct Investor fails to place an
order in proper form with proper payment by such time, the order will be
processed at the next determined net asset value after both an order in proper
form and such payment have been received. If a Bank places an order and the
Custodian does not receive payment in the form of Federal funds or other
immediately available funds on the next Business Day, the order will not be
accepted and notice thereof will be given to the Bank that submitted the
order. Payments for orders which are not received or accepted will be returned
after prompt inquiry.
RETIREMENT PLANS
Shares of the Equity Fund, International Fund and Fixed Income Fund may be
purchased in connection with certain tax-sheltered retirement plans, including
individual retirement accounts. Shares may also be purchased in connection
with profit-sharing plans, section 401(k) plans, money purchase pension plans
and target benefit plans. Further information about how to participate in
these plans, the fees charged, the limits on contributions and the services
available to participants in such plans, which may include services described
above under "Purchase and Redemption Procedures for Direct Investors," can be
obtained from the Company. To invest through any of the tax-sheltered
retirement plans, including individual retirement accounts, please call the
Company at (800) 551-2145 for information and the required separate
application. To determine whether the benefits of a tax-sheltered retirement
plan are available and/or appropriate, a shareholder should consult with a tax
adviser.
PRICING OF SHARES
The net asset value of Institutional Shares of each Fund for the purpose
of pricing purchase and redemption orders is determined as of 4:00 P.M.
(Eastern time) each weekday, with the exception of those holidays on which the
Federal Reserve Bank of Cleveland, the purchasing Bank (if applicable), the
Funds' investment adviser, transfer agent or custodian or the Exchange is
closed, which currently include New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Thanksgiving Day, and Christmas Day and, with respect to the
International Equity Fund, with the exception of those holidays on which the
Fund's sub-adviser is closed, which currently include New Year's Day, Good
Friday, Easter Monday, May Day Bank Holiday, Christmas Day, Boxing Day and
certain other bank holidays recognized by the sub-adviser. Net asset value per
Share is calculated by dividing the value of all securities and other assets
belonging to a Fund and allocable to its Shares, less the liabilities
allocable to its Shares, by the number of the Fund's outstanding Shares.
The net asset value per Share of each Fund will fluctuate as the value of
the investment portfolio of the respective Fund changes. Generally, the
investments of each of the Funds are valued at market value or, in the absence
of a market value with respect to any portfolio securities, at fair value as
determined by or under the direction of the Company's Board of Directors.
Because of the separate shareholder servicing and other operating expenses
that may be paid in differing amounts with respect to the Institutional Shares
and AFBA Five Star Shares, the net asset value of the Equity Fund's
Institutional Shares will generally be higher than that of such Fund's AFBA
Five Star Shares. Further information regarding the Company's valuation
policies is contained in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Equity Fund is declared and paid
quarterly as a dividend to its shareholders. Dividends from net investment
income of the International Fund are declared and paid semiannually to its
shareholders. The net investment income of the Fixed Income Fund and the
Maryland Fund is declared daily and paid monthly as a dividend to the
shareholders of those Funds. Distributions of any long-term capital gains
earned by a Fund will be made at least annually. Distributions of any short-
term capital gains earned by a Fund will be distributed no less frequently
than annually at the discretion of the Board of Directors.
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Shares in each Fund begin earning dividends on the day the purchase order
is executed and continue earning dividends through and including the day
before the redemption order for the Shares is executed. Dividends are paid to
Bank customers by wire transfer to the Banks. Dividends payable to Direct
Investors are automatically reinvested in additional Shares of a Fund at the
net asset value of such Shares on the ex dividend date with respect to the
Equity and International Funds and at the net asset value of such shares on
the last business day of the month in which such dividend is declared with
respect to the Fixed Income and Maryland Funds. See "Purchase and Redemption
Procedures for Direct Investors--Directed Reinvestments." Reinvested dividends
receive the same tax treatment as those paid in cash. However, a Direct
Investor may elect, upon written notification to the Transfer Agent, to have
dividends paid in cash, in which case a check will be sent to the Direct
Investor within five Business Days after the end of the month, quarter or
semi-annual period to which the dividends relate.
TAXES
VALUE EQUITY FUND, INTERNATIONAL EQUITY FUND AND INTERMEDIATE FIXED INCOME
FUND
GENERAL
Each Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), so long as such
qualification is in the best interest of the Fund's shareholders. Such
qualification relieves a Fund of liability for Federal income taxes to the
extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its exempt-interest income (if any) net of
certain deductions for such year. In general, a Fund's investment company
taxable income will be its taxable income, including interest, dividends, and
short-term capital gains, subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year.
The Equity Fund, International Fund and Fixed Income Fund intend to
distribute as dividends substantially all of their respective investment
company taxable income and net exempt-interest income (if any) each year. Such
dividends will be taxable as ordinary income to each Fund's shareholders who
are not currently exempt from Federal income taxes, regardless of whether a
distribution is received in cash or reinvested in additional Shares. (Federal
income taxes for distributions to an individual retirement account or to
qualified retirement plans are deferred under the Code.)
It is anticipated that none of the distributions made by the Fixed Income
Fund or International Fund will be eligible for the dividends received
deduction allowed to corporations under the Code. In the case of the Equity
Fund, such ordinary income distributions will qualify for the dividends
received deduction for corporations to the extent of the total qualifying
dividends received by that Fund from domestic corporations for the taxable
year.
Substantially all of the net long-term capital gains realized by the
Equity Fund, International Fund or Fixed Income Fund, if any, will be
distributed at least annually to the shareholders of such Funds. The Funds
will generally have no tax liability with respect to such gains and the
distributions will be taxable as long-term gains to shareholders who are not
currently exempt from Federal income taxes, regardless of how long the
shareholders have held the Shares and whether such gains are received in cash
or reinvested in additional Shares.
If you are considering buying Shares of a Fund on or just before the
record date of a dividend, you should be aware that the amount of the
forthcoming dividend payment, although in effect a return of capital, may be
taxable to you.
A taxable gain or loss may be realized by an investor in the Equity Fund,
International Fund or Fixed Income Fund upon his or her redemption of such
Shares depending upon the tax basis of the Shares and their price at the time
of redemption.
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Income or gain from investments in foreign securities may be subject to
foreign withholding or other taxes.
It is expected that dividends and certain interest income earned by the
International Fund from foreign securities will be subject to foreign
withholding taxes or other taxes. So long as more than 50% of the value of the
International Fund's total assets at the close of any taxable year consists of
stock or debt securities of foreign corporations, the International Fund may
elect, for U.S. Federal income tax purposes, to treat certain foreign taxes
paid by it, including generally any withholding taxes and other foreign income
taxes, as paid by its shareholders. If the International Fund so elects, the
amount of such foreign taxes paid by the International Fund will be included
in its shareholders' income pro rata (in addition to taxable distributions
actually received by them), and each shareholder will be entitled either (a)
to credit his or her proportionate amount of such taxes against his or her
U.S. Federal income tax liabilities, or (b) if he or she itemizes his or her
deductions, to deduct such proportionate amounts from his or her U.S. income.
ADDITIONAL INFORMATION ON TAXES
Dividends declared in October, November or December of any year which are
payable to shareholders of record on a specified date in such months will be
deemed to have been received by the shareholders and paid by a Fund on
December 31 of such year in the event such dividends are actually paid during
January of the following year.
Shareholders of each Fund will be advised at least annually as to the
Federal income tax consequences of distributions made to them each year.
The Company may be subject to state or local taxes in jurisdictions in
which the Company may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Company
and its shareholders under such laws may differ from treatment under Federal
income tax laws. Shareholders should consult their own tax advisers concerning
these matters.
The foregoing summarizes some of the important Federal tax considerations
generally affecting the Equity Fund, International Fund and Fixed Income Fund
and their shareholders but is not intended as a substitute for careful tax
planning. Potential investors in the Equity Fund, International Fund and Fixed
Income Fund should consult their tax advisers with specific reference to their
own tax situation. In addition, this discussion is based on tax laws and
regulations in effect on the date of this Prospectus and which are subject to
change by legislative or administrative action.
MARYLAND TAX-EXEMPT BOND FUND
FEDERAL TAXES
The Maryland Fund intends to qualify as a "regulated investment company"
under the Code, so long as such qualification is in the best interest of the
Fund's shareholders. Such qualification relieves the Maryland Fund of
liability for Federal income taxes to the extent its earnings are distributed
in accordance with the Code. Qualification as a regulated investment company
under the Code for a taxable year requires, among other things, that the
Maryland Fund distribute to its shareholders an amount equal to at least the
sum of 90% of its tax-exempt interest income (if any) net of certain
deductions and 90% of its investment company taxable income (if any) for such
year.
Dividends derived from tax-exempt interest income ("exempt-interest
dividends") may be treated by shareholders as items of interest excludable
from their gross income under Section 103(a) of the Code unless, under the
circumstances applicable to the particular shareholder, the exclusion would be
disallowed. (See the Statement of Additional Information under "Additional
Information Concerning Taxes.") An exempt-interest dividend is any dividend or
part thereof (other than a capital gain dividend) paid by the Maryland Fund
and designated as an exempt-interest dividend in a written notice mailed to
shareholders not later than sixty days after the close of the Fund's taxable
year which does not exceed in its aggregate the net Municipal Obligations
interest received by the Fund (as adjusted, if necessary) for the taxable
year.
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Dividends derived from investment company taxable income will be taxable
as ordinary income to the Maryland Fund's shareholders who are not currently
exempt from Federal income taxes, regardless of whether a distribution is
received in cash or reinvested in additional Shares. (Federal income taxes for
distributions to an individual retirement account or to qualified retirement
plans are deferred under the Code.) In general, the Maryland Fund's investment
company taxable income will be its taxable income, including interest and
short-term capital gains, subject to certain adjustments and excluding the
excess of any net long-term capital gain for the taxable year over the net
short-term capital loss, if any, for such year. It is anticipated that no part
of any distribution made by the Maryland Fund will be eligible for the
dividends received deduction allowed to corporations under the Code.
Substantially all of the net long-term capital gains realized by the
Maryland Fund, if any, will be distributed at least annually to the
shareholders. The Maryland Fund will generally have no tax liability with
respect to such gains and the distributions will be taxable as long-term gains
to shareholders who are not currently exempt from Federal income taxes,
regardless of how long the shareholders have held the Shares and whether such
gains are received in cash or reinvested in additional Shares.
Dividends declared in October, November or December of any year which are
payable to shareholders of record on a specified date in such months will be
deemed for Federal tax purposes to have been received by the shareholders and
paid by the Maryland Fund on December 31 of such year in the event such
dividends are actually paid during January of the following year.
If you are considering buying Shares of the Maryland Fund on or just
before the record date of a dividend, you should be aware that the amount of
the forthcoming dividend payment, although in effect a return of capital, may
be taxable to you.
A taxable gain or loss may be realized by an investor upon his or her
redemption of Shares depending upon the tax basis of such Shares and their
price at the time of redemption.
If the Maryland Fund should hold certain private activity bonds issued
after August 7, 1986, shareholders must include, as an item of tax preference,
the portion of dividends paid by the Fund that is attributable to interest on
such bonds in their Federal alternative minimum taxable income for purposes of
determining liability (if any) for the 26% alternative minimum tax for
individuals (28% for adjusted alternative minimum taxable income in excess of
$175,000) and the 20% alternative minimum tax and the environmental tax
applicable to corporations. In addition, corporate shareholders will need to
take into account all exempt-interest dividends paid by the Maryland Fund in
determining certain adjustments for the Federal alternative minimum tax and
the environmental tax. The environmental tax applicable to corporations is
imposed at the rate of .12% on the excess of the corporation's modified
Federal alternative minimum taxable income over $2,000,000. Shareholders
receiving Social Security benefits should note that all exempt-interest
dividends will be taken into account in determining the taxability of such
benefits.
STATE TAXES
Holders of Maryland Fund Shares who are individuals, corporations, estates
or trusts and who are subject to Maryland state and local income taxes will
not be subject to such taxes on Maryland Fund dividends to the extent that
such dividends qualify as exempt-interest dividends of a regulated investment
company under Section 852(b)(5) of the Code and which are attributable to
interest on tax-exempt obligations of the State of Maryland or its political
subdivisions or authorities, or interest on obligations issued by the United
States Government and its agencies, instrumentalities, authorities, and
possessions or territories or gain realized by the Fund from the sale or
exchange of tax-exempt obligations issued by the State of Maryland or its
political subdivisions, agencies, instrumentalities and authorities or
obligations issued by the United States Government and its agencies,
instrumentalities or authorities.
To the extent that distributions of the Maryland Fund are attributable to
sources other than those described in the preceding sentences (such as
interest received by the Maryland Fund on obligations issued by states other
than Maryland, gain realized by the Maryland Fund from the sale or exchange of
a bond issued by states other than Maryland or by a possession or territory of
the United States or income earned on repurchase contracts),
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such distributions will not be exempt from Maryland state and local income
taxes. Gains realized by a holder of Maryland Fund Shares upon a redemption or
exchange of Maryland Fund Shares will be subject to Maryland state and local
income taxes.
Maryland presently includes in taxable net income items of tax preference
as defined in the Code. Interest paid on certain private activity bonds
constitutes a tax preference. Accordingly, subject to a threshold amount, 50%
of any of the distributions of the Maryland Fund attributable to such private
activity bonds will not be exempt from Maryland state and local income taxes.
ADDITIONAL INFORMATION ON TAXES
Interest on indebtedness incurred by a shareholder to purchase or carry
Maryland Fund Shares generally is not deductible for Federal income tax
purposes. Such interest on indebtedness generally also is not deductible for
Maryland state and local income tax purposes.
Shareholders of the Maryland Fund will be advised at least annually as to
the Federal income tax consequences of distributions made to them each year.
The foregoing summarizes some of the important tax considerations
generally affecting the Maryland Fund and its shareholders but is not intended
as a substitute for careful tax planning. Potential investors in the Maryland
Fund should consult their tax advisers with specific reference to their own
tax situation. In addition, this discussion is based on tax laws and
regulations in effect on the date of this Prospectus and which are subject to
change by legislative or administrative action.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The business and affairs of the Company are managed under the direction of
the Company's Board of Directors. The Statement of Additional Information
contains the name of each Director and other background information.
INVESTMENT ADVISER AND SUB-ADVISER
Mercantile-Safe Deposit and Trust Company ("Mercantile") serves as the
Funds' investment adviser. Mercantile is the lead bank of Mercantile
Bankshares Corporation, a multi-bank holding company organized in Maryland in
1969. Mercantile has acted as investment adviser to the Funds since their
commencement of operations. In addition, Mercantile and its predecessors have
been in the business of managing the investments of fiduciary and other
accounts in the Baltimore area since 1864. Mercantile's principal business
address is Two Hopkins Plaza, Baltimore, Maryland 21201.
Mercantile manages the Funds' portfolios and is responsible for all
purchases and sales of their portfolio securities. The Portfolio Managers
primarily responsible for the management of the investment selections of the
portfolios of the Equity Fund and Fixed Income Fund, together with information
on their principal business occupations during the past five years, are shown
below. The organizational arrangements of Mercantile require that all
investment decisions with respect to the Maryland Tax-Exempt Bond Fund be made
by a committee, and no person is primarily responsible for making
recommendations to that committee.
David L. Donabedian, Vice President of Mercantile, has managed the
Equity Fund since 1992. During the past five years, Mr. Donabedian has
been a portfolio manager and economic analyst at Mercantile. Portfolios
under his management include employee benefit and endowment trust funds in
addition to the Equity Fund. Prior to joining Mercantile, Mr. Donabedian
was employed by Lehman Brothers.
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Mark G. McGlone, Vice President of Mercantile, has managed the Fixed
Income Fund since June, 1992. During the past six years, Mr. McGlone has
managed institutional fixed income portfolios at Mercantile. Portfolios
under his management include pension plans, endowment funds and self-
insurance funds in addition to the Fixed Income Fund.
For the advisory services provided to each Fund and expenses assumed by
it, Mercantile is entitled to receive fees, computed daily and payable
monthly, at the annual rates of .60% of the average daily net assets of the
Equity Fund, .80% of the average daily net assets of the International Fund,
.35% of the average daily net assets of the Fixed Income Fund and .50% of the
average daily net assets of the Maryland Fund. Mercantile may from time to
time voluntarily waive all or a portion of its advisory fees in order to
assist a Fund in maintaining a competitive expense ratio. After waivers, for
the fiscal year ended May 31, 1995, the Equity Fund paid Mercantile a fee at
an effective rate of .44% of such Fund's average daily net assets; the
International Fund paid Mercantile a fee at an effective rate of .74% (of
which an effective rate of .42% was paid to Dunedin Fund Managers Ltd as sub-
advisor,) of such Fund's average daily net assets; the Fixed Income Fund paid
Mercantile a fee at an effective rate of .25% of such Fund's average daily net
assets; and the Maryland Fund paid Mercantile a fee at an effective rate of
.20% of such Fund's average daily net assets.
The Advisory Agreement authorizes Mercantile to engage a sub-adviser to
assist it in the performance of its services. Pursuant to such authorization,
Mercantile has appointed Dunedin Fund Managers Ltd (the "Sub-Adviser") with
principal offices at Dunedin House, 25 Ravelston Terrace, Edinburgh, Scotland
EH4 3EX, as the Sub-Adviser to the International Fund.
The Sub-Adviser is controlled by the Bank of Scotland which indirectly
owns 50.5% of the outstanding voting stock of the Sub-Adviser. The Sub-Adviser
and its predecessors date back 119 years to 1873. The Sub-Adviser manages
approximately $7 billion in globally-invested assets.
Under its Sub-Advisory Agreement with Mercantile, the Sub-Adviser
determines which securities and other investments will be purchased, retained
or sold for the International Fund; places orders for the International Fund;
manages the International Fund's overall cash position; and provides
Mercantile with foreign broker research and a quarterly review of
international economic and investment developments. The organizational
arrangements of the Sub-Adviser require that all investment decisions be made
by the Sub-Adviser's investment group, chaired by the investment director, and
no person is primarily responsible for making recommendations to that group.
Mercantile, among other things, assists and consults with the Sub-Adviser in
connection with the Fund's continuous investment program; approves lists of
foreign countries recommended by the Sub-Adviser for investment; and reports
to the Board of Directors on the performance and investment procedures of the
Sub-Adviser.
For the services provided and the expenses assumed pursuant to the sub-
advisory agreement, the Sub-Adviser is entitled to receive a fee from
Mercantile, computed daily and paid quarterly, at the annual rate of .45% of
the Fund's average daily net assets. The Sub-Adviser may from time to time
voluntarily waive all or a portion of its Sub-advisory fees in order to assist
a Fund in maintaining a competitive expense ratio.
ADMINISTRATOR
Mercantile also serves as the Funds' administrator and generally assists
in all aspects of their operation and administration. For its services
provided and expenses assumed as administrator, Mercantile is entitled to
receive administration fees, computed daily and paid monthly, at the annual
rate of .125% of the average daily net assets of each Fund.
BANKING LAWS
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956, as amended, or
any affiliate thereof from sponsoring, organizing, or controlling a
registered, open-end investment company continuously engaged in the issuance
of its shares, and prohibit banks generally from issuing, underwriting,
selling, or distributing securities such as Shares of the Funds. Such banking
laws and regulations do not prohibit such a bank holding company or affiliate
or banks generally from acting as
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investment adviser, administrator, transfer agent or custodian to such an
investment company or from purchasing shares of such a company for and upon
the order of customers. Mercantile believes it may perform the services
contemplated by the advisory agreement and administration agreement with
respect to the Funds as described in such agreements and this Prospectus
without violation of applicable banking laws or regulations. However, there
are no controlling judicial precedents, and future changes in legal
requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present and future
requirements, could prevent Mercantile from continuing to perform services for
the Company. If Mercantile were prohibited from providing investment advisory
and/or administration services to the Company, the Board of Directors would
consider selecting another qualified firm. Any new advisory agreement would be
subject to shareholder approval.
If current restrictions preventing a bank or its affiliates from legally
sponsoring, organizing, controlling, or distributing shares of an investment
company were relaxed, Mercantile, or an affiliate of Mercantile, would
consider the possibility of offering to perform additional services for the
Funds. Legislation modifying such restrictions has been proposed in past
sessions of Congress. It is not possible to predict whether or in what form
such legislation might be enacted or the terms upon which Mercantile, or such
an affiliate, might offer to provide such services.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street") serves as the
transfer and dividend disbursing agent for Institutional Shares of the Funds.
State Street also serves as custodian of the International Fund's assets.
Communications to State Street should be directed to Two Heritage Drive, North
Quincy, Massachusetts 02171. Fifth Third Bank, located at 38 Fountain Square
Plaza, Cincinnati, Ohio 45263, serves as custodian of the assets of the Equity
Fund, Fixed Income Fund and Maryland Fund.
EXPENSES OF THE COMPANY
Except as noted below, Mercantile bears all expenses in connection with
the performance of its advisory and administrative services. The Company bears
its own expenses incurred in its operations, including: organizational costs;
taxes; interest; fees (including fees paid to its directors and officers); SEC
fees; state securities qualification fees; costs of preparing and printing
prospectuses for regulatory purposes and for distribution to existing
shareholders; advisory fees; administration fees and expenses; charges of the
custodians and Transfer Agent; certain insurance premiums; outside auditing
and legal expenses; fees of independent pricing services; costs of
shareholders' reports and shareholder meetings; fees of industry organizations
such as the Investment Company Institute; and any extraordinary expenses. The
Company also pays for brokerage fees and commissions, if any, in connection
with the purchase of its portfolio securities.
DESCRIPTION OF THE COMPANY AND ITS SHARES
The Company was incorporated in Maryland on March 7, 1989. The Company's
Articles of Incorporation authorize the Board of Directors to issue up to
10,000,000,000 full and fractional shares of capital stock. The Company's
Articles of Incorporation further authorize the Board of Directors to classify
or reclassify any unissued shares into any number of additional classes of
shares and to classify or reclassify any class of shares into one or more
series of shares. This Prospectus describes only the investment objectives and
policies, operations, contracts and other matters relating to the
"Institutional Shares" of the Value Equity, Intermediate Fixed Income,
Maryland Tax-Exempt Bond and International Equity Funds. The Company also
offers shares in its Prime Money Market, Government Money Market, Tax-Exempt
Money Market and Tax-Exempt Money Market (Trust) Funds. Investors may obtain
separate prospectuses describing the shares of the Company's other funds by
contacting the Company at (800) 551-2145. The Company plans to offer "AFBA
Five Star Shares" in its Value Equity and Intermediate Fixed Income Funds,
although no AFBA Five Star Shares have been sold as of the date of this
Prospectus.
Each share of the Company has a par value of $.001 per share, represents
an equal proportionate interest in the related Fund with other shares of the
same class outstanding, and is entitled to such dividends and
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distributions out of the income earned on the assets belonging to such Fund
(except as described above under "Dividends and Distributions") as are
declared in the discretion of the Company's Board of Directors. When issued
for payment as described in this Prospectus, Shares of the Funds will be fully
paid and non-assessable.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each class
or series entitled to vote on a matter will vote in the aggregate and not by
class or series, except as otherwise expressly required by law or when the
Board of Directors determines that the matter to be voted on affects only the
interests of the shareholders of a particular class or series. The Statement
of Additional Information gives examples of situations in which the law
requires voting by class or series. Voting rights are not cumulative and the
holders of more than 50% of the aggregate shares of the Company may therefore
elect all of the directors. Holders of Institutional Shares and AFBA Five Star
Shares will have equal voting rights, except that only holders of AFBA Five
Star Shares will be entitled to vote on matters submitted to a vote of
shareholders relating to shareholder servicing fees payable with respect to
such shares.
The Company will not hold shareholder meetings for a Fund unless it is
required to do so by the 1940 Act or other applicable law. Special meetings
may be called for a specific Fund or Funds for purposes such as electing or
removing directors, changing fundamental policies, or approving certain
contracts.
As of September 14, 1995, Mercantile held of record, in a fiduciary or
other representative capacity for beneficial owners, substantially all of the
shares of the International Equity and Maryland Tax-Exempt Bond Funds.
Mercantile does not, however, have any economic interest in such shares which
are held solely for the benefit of its customers. Mercantile may be deemed to
be a controlling person of the Funds within the meaning of the 1940 Act by
reason of its record ownership of such shares.
Holders of AFBA Five Star Shares of the Value Equity and Intermediate
Fixed Income Funds will bear the expense of fees payable under such Funds'
Servicing Agreement, as further described in the prospectus relating to the
AFBA Five Star Shares. Institutional Shares of the Funds bear no shareholder
servicing fees. As a result of the difference in shareholder servicing fees
and other operating expenses that may be paid in differing amounts, the net
yield of the Funds' Institutional Shares will generally be higher than that of
the AFBA Five Star Shares. Standardized yield quotations will be computed
separately.
PERFORMANCE INFORMATION
From time to time, in advertisements, sales literature or in reports to
shareholders, the performance of the Funds may be quoted and compared to that
of other mutual funds with similar investment objectives and to stock, bond or
other relevant indices or to rankings prepared by independent services or
other financial or industry publications that monitor the performance of
mutual funds. For example, the performance of the Funds may be compared to
data prepared by Lipper Analytical Services, Inc., a widely recognized
independent service which monitors the performance of mutual funds. The
performance of the International Fund may also be compared to the Europe,
Australia, and Far East Index, an unmanaged standard foreign securities index
monitored by Capital International, S.A.
Performance data as reported in national financial publications including
but not limited to Money Magazine, Forbes, Barron's, The Wall Street Journal
and The New York Times, or in publications of a local or regional nature, may
also be used in comparing the performance of the Fund.
VALUE EQUITY, INTERNATIONAL EQUITY AND INTERMEDIATE FIXED INCOME FUNDS
YIELD. From time to time the Equity, International and Fixed Income Funds
may quote their "30-day yields" in advertisements or in communications to
shareholders. The yield of each Fund refers to the income generated by an
investment in such Fund over a 30-day period (which period will be stated in
the advertisement). This income is then "annualized." That is, the amount of
income generated by the investment during the 30-day period is assumed to be
earned and reinvested at a constant rate and compounded semi-annually. The
annualized income is then shown as a percentage of the investment.
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TOTAL RETURN. From time to time the Equity, International and Fixed Income
Funds may advertise their "average annual total return" over various periods
of time. Such total return figures show the average percentage change in value
of an investment in the Fund from the beginning date of the measuring period
to the end of the measuring period. These figures reflect changes in the price
of the Fund's Shares and assume that any income dividends and/or capital gain
distributions made by the Fund during the period were reinvested in Shares of
the Fund. Figures will be given for recent one-, five- and ten-year periods
(if applicable), and may be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
it is important to note that the relevant Fund's average annual total return
for any one year in the period might have been greater or less than the
average for the entire period. The Equity Fund, International Fund and Fixed
Income Fund may also use "aggregate total return" figures for various periods
representing the cumulative change in value of an investment in the Fund for a
specific period (again reflecting changes in the Fund's Share prices and
assuming reinvestment of dividends and distributions). Total return figures
may be shown by means of schedules, charts or graphs and may indicate sub-
totals of the various components of total return (i.e., change in value of
initial investment, income dividends and capital gain distributions).
MARYLAND TAX-EXEMPT BOND FUND
From time to time the Maryland Fund may quote its yield, tax-equivalent
yield, and total return data in advertisements or in communications to
shareholders. The yield refers to the income generated by an investment in the
Fund over a 30-day period (which period will be stated in the advertisement).
This income is then "annualized." That is, the amount of income generated by
the investment during the 30-day period is assumed to be earned and reinvested
at a constant rate and compounded semi-annually. The annualized income is then
shown as a percentage of the investment. The Fund's tax-equivalent yield,
which shows the level of taxable yield necessary to produce an after-tax
equivalent to the Fund's tax-free yield, may also be quoted from time to time.
This is done by increasing the Fund's yield (calculated as above) by the
amount necessary to reflect the payment of Federal income taxes and Maryland
income tax at stated rates. The tax-equivalent yield will always be higher
than the Fund's yield. In addition, from time to time the Fund may quote yield
data relating to time periods other than the 30-day period described above.
Such other yield data will be computed in a manner which is similar to the
above-described computations.
The total return of Shares in the Fund may be calculated on an "average
annual total return" basis, and may also be calculated on an "aggregate total
return" basis, over various periods of time. Average annual total return
reflects the average percentage change in value of an investment in the Fund
from the beginning date of the measuring period to the end of the measuring
period. This method of calculating total return also reflects changes in the
price of the Fund's Shares and assumes that any dividends and capital gain
distributions made by the Fund during the period were reinvested in Shares of
the Fund. Figures may be given for recent one-, five- and ten-year periods (if
applicable), and may be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year basis). When
considering average total return figures for periods longer than one year, it
is important to note that the Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period. Aggregate total return figures reflect the total percentage change in
value of an investment in the Fund for a specific period (again reflecting
changes in the Fund's Share prices and assuming reinvestment of dividends and
distributions). Total return figures may be shown by means of schedules,
charts or graphs and may indicate sub-totals of the various components of
total return (i.e., change in value of initial investment, income dividends
and capital gain distributions).
ALL FUNDS
IT IS IMPORTANT TO NOTE THAT PERFORMANCE FIGURES, WHICH ARE BASED ON
HISTORICAL EARNINGS, WILL FLUCTUATE AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. In addition, the investment return and principal value of an
investment in each Fund will fluctuate so that an investor's Shares, when
redeemed, may be worth more or less than their original cost. A Fund's
performance data may not provide a basis for comparison with bank deposits and
other investments which provide a fixed yield for a stated period of time.
Yield and total return data should be considered in light of the risks
associated with each Fund's portfolio composition, quality, maturity,
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operating expenses and market conditions. Any fees charged by the Banks
directly to their customer accounts in connection with investments in Shares
of a Fund will not be included in the Fund's calculations of yield or total
return. The Statement of Additional Information describes the method used to
determine each Fund's performance. Shareholders may direct inquiries regarding
a Fund's current yield or total return figures to the Distributor.
MISCELLANEOUS
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Company or a particular Fund means, with respect to
the approval of an investment advisory agreement or a change in an investment
objective or fundamental investment policy, the affirmative vote of the lesser
of (a) 50% or more of the outstanding shares of the Company or such Fund or
(b) 67% or more of the shares of the Company or such Fund present at a meeting
if more than 50% of the outstanding shares of the Company or such Fund are
represented at the meeting in person or by proxy.
The Company's Annual Report contains additional performance information on
the Funds and is available to shareholders upon request without charge by
writing to the Company at the address on the first page of this Prospectus.
Investors with inquiries regarding the Company or any of its Funds should
call (800) 551-2145.
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SERVICE PROVIDERS:
Management and support services are provided to M.S.D. & T. Funds, Inc. by
several organizations. A complete discussion of service providers and their
respective fees is provided in this Prospectus.
INVESTMENT ADVISER AND ADMINISTRATOR:
[LOGO OF MERCANTILE-SAFE DEPOSIT & TRUST COMPANY APPEARS HERE]
Baltimore, MD
CUSTODIAN FOR THE VALUE EQUITY, FIXED INCOME AND MARYLAND TAX-EXEMPT BOND
FUNDS:
Fifth Third Bank
Cincinnati, OH
CUSTODIAN FOR THE INTERNATIONAL EQUITY FUND AND TRANSFER AGENT:
State Street Bank and Trust Company
Boston, MA
DISTRIBUTOR:
BISYS Fund Services
(formerly The Winsbury Company)
Columbus, OH
In considering this investment please read this Prospectus carefully.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
