<PAGE>
As filed with the Securities and Exchange Commission on July 31, 1996
Registration Nos. 33-27491
811-5782
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
-
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
-
-
Pre-Effective Amendment No. / /
-
-
Post-Effective Amendment No. 17 /X/
-
and
-
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
-
-
Amendment No. 18 /X/
-
---------------------------------
M.S.D. & T. Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
Two Hopkins Plaza
Baltimore, Maryland 21201
(Address of Principal Executive Offices)
Registrant's Telephone Number:
1-800-551-2145
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[x] 60 days after filing pursuant to paragraph (a)(i)
[_] on (date) pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has previously registered an indefinite number of securities
under the Securities Act of 1933 pursuant to Section (a)(1) of Rule 24f-2
under the Investment Company Act of 1940, as amended. Registrant's Rule
24f-2 Notice for the fiscal year ended May 31, 1996 was filed with the
Securities and Exchange Commission on July 29, 1996.
==============================================================================
This filing relates to Registrant's Prime Money Market, Government
Money Market, Tax-Exempt Money Market, Tax-Exempt Money Market (Trust), Value
Equity, International Equity, Intermediate Fixed Income and Maryland Tax-Exempt
Bond Funds. The Prospectus and Statement of Additional Information for
Registrant's International Bond Fund, which has not commenced operations, is
incorporated herein by reference.
<PAGE>
M.S.D. & T. FUNDS, INC.
Prime Money Market Fund
Government Money Market Fund
Tax-Exempt Money Market Fund
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 485(a)
under the Securities Act of 1933
Form N-1A Item Number Location
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Financial Highlights;
Performance Reporting
4. General Description of Registrant . . . Cover Page; Investment
Objectives, Policies and Risks;
Fundamental Limitations; Other
Information Concerning the
Company and Its Shares;
Miscellaneous
5. Management of the Fund . . . . . . . . . Management of the Company;
Investing in the Funds;
Shareholder Services
5A. Management's Discussion of Fund
Performance . . . . . . . . . . . . . . Not Applicable
6. Capital Stock and Investing in the Funds;
Other Securities . . . . . . . . . . . . Dividends and Distributions; Tax
Information; Other Information
Concerning the Company and Its
Shares; Shareholder Services;
Miscellaneous
7. Purchase of Securities Being Offered . . Investing in the Funds
8. Redemption or Repurchase . . . . . . . . Investing in the Funds
9. Pending Legal Proceedings . . . . . . . Not Applicable
<PAGE>
M.S.D. & T. FUNDS, INC.
Tax-Exempt Money Market Fund (Trust)
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 485(a)
under the Securities Act of 1933
Form N-1A Item Number Location
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Financial Highlights;
Performance Reporting
4. General Description of Registrant . . . Cover Page; Investment
Objective, Policies and Risks;
Fundamental Limitations; Other
Information Concerning the
Company and Its Shares;
Miscellaneous
5. Management of the Fund . . . . . . . . . Management of the Company; How
to Purchase and Redeem Shares
5A. Management's Discussion of Fund
Performance . . . . . . . . . . . . . . Not Applicable
6. Capital Stock and How to Purchase and
Redeem Other Securities . . . . . . . . Shares; Dividends and
Distributions; Tax Information;
Other Information Concerning the
Company and Its Shares;
Miscellaneous
7. Purchase of Securities Being Offered . . Pricing of Shares; How to
Purchase and Redeem Shares
8. Redemption or Repurchase . . . . . . . . How to Purchase and Redeem
Shares
9. Pending Legal Proceedings . . . . . . . Not Applicable
<PAGE>
M.S.D. & T. FUNDS, INC.
Institutional Shares
Value Equity Fund
International Equity Fund
Intermediate Fixed Income Fund
Maryland Tax-Exempt Bond Fund
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 485(a)
under the Securities Act of 1933
Form N-1A Item Number Location
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . Financial Highlights;
Performance Reporting
4. General Description of Registrant . . . Cover Page; Investment
Objectives, Policies and Risks;
Fundamental Limitations; Other
Information Concerning the
Company and Its Shares;
Miscellaneous
5. Management of the Fund . . . . . . . . . Management of the Company;
Investing in the Funds;
Shareholder Services
5A. Management's Discussion of Fund
Performance . . . . . . . . . . . . . . Not Applicable
6. Capital Stock and Other Securities . . . Investing in the Funds;
Dividends and Distributions;
Tax Information; Other
Information Concerning the
Company and its Shares;
Shareholder Services;
Miscellaneous
7. Purchase of Securities Being Offered . . Investing in the Funds
8. Redemption or Repurchase . . . . . . . . Investing in the Funds
9. Pending Legal Proceedings . . . . . . . Not Applicable
<PAGE>
M.S.D. & T. FUNDS, INC.
AFBA Five Star Shares
Value Equity Fund
Intermediate Fixed Income Fund
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 485(a)
under the Securities Act of 1933
Form N-1A Item Number Location
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
1. Cover Page . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . Fees & Expenses
3. Condensed Financial Information . . . . Financial Highlights; An
Explanation of Financial
Highlights; Performance
Reporting
4. General Description of Registrant . . . Cover Page; Investment
Objectives, Policies and
Risks; Description of the
Company and its Shares;
Miscellaneous
5. Management of the Fund . . . . . . . . . Fund Management; Shareholder
Information
5A. Management's Discussion of Fund
Performance . . . . . . . . . . . . . . Not Applicable
6. Capital Stock and Other Securities . . . Shareholder Information; Taxes;
Description of the Company and
Its Shares; Miscellaneous
7. Purchase of Securities Being Offered . . Shareholder Information
8. Redemption or Repurchase . . . . . . . Shareholder Information
9. Pending Legal Proceedings . . . . . . . Not Applicable
<PAGE>
M.S.D. & T. FUNDS, INC.
All Funds
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 485(a)
under the Securities Act of 1933
Form N-1A Item Number Location
- --------------------- --------
Part B Statement of Additional
- ------ -----------------------
Information Caption
-------------------
10. Cover Page . . . . . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . . . . . Table of Contents
12. General Information and History . . . . . M.S.D. & T Funds, Inc;
Management of the Company;
Additional Information
Concerning Shares
13. Investment Objectives and Policies . . . Investment Objectives and
Policies; Fundamental
Limitations
14. Management of the Fund . . . . . . . . . Management of the Company
15. Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . Additional Information
Concerning Shares; Miscellaneous
16. Investment Advisory and Other
Services . . . . . . . . . . . . . . . . Management of the Company
17. Brokerage Allocation and Other
Practices . . . . . . . . . . . . . . . . Investment Objectives and
Policies; Management of the
Company
18. Capital Stock and Other Securities . . . Additional Purchase and
Redemption Information; Net
Asset Value; Additional
Information Concerning Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . Additional Purchase and
Redemption Information; Net
Asset Value
20. Tax Status . . . . . . . . . . . . . . . Additional Information
Concerning Taxes
21. Underwriters . . . . . . . . . . . . . . Management of the Company
22. Calculation of Performance Data . . . . . Additional Performance
Information
23. Financial Statements . . . . . . . . . . Financial Statements
<PAGE>
Part C
- ------
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
M.S.D.&T.
FUNDS, INC.
. Prime Money Market Fund
. Government Money Market Fund
. Tax-Exempt Money Market Fund
, 1996
- -------------------------------
Prospectus
- -------------------------------
<PAGE>
M.S.D. & T. FUNDS, INC.
PROSPECTUS
FOR THE
PRIME MONEY MARKET FUND
GOVERNMENT MONEY MARKET FUND
TAX-EXEMPT MONEY MARKET FUND
, 1996
<TABLE>
- ------------------------------------------------------------------------------------------
<CAPTION>
M.S.D. & T. FUND GOAL FOR INVESTORS WHO WANT
- ------------------------------------------------------------------------------------------
<S> <C> <C>
PRIME MONEY MARKET High current income, liquidity A flexible and convenient way to
and stability of principal manage cash while earning money
through investments in short- market returns.
term money market instruments.
- ------------------------------------------------------------------------------------------
GOVERNMENT MONEY MARKET High current income, liquidity A way to earn money market
and stability of principal returns with the extra margin of
through investments in short- safety associated with U.S.
term U.S. Government obligations Government obligations.
and related repurchase
agreements.
- ------------------------------------------------------------------------------------------
TAX-EXEMPT MONEY MARKET High current income free of A way to earn tax-free money
federal income tax, with market returns.
liquidity and stability of
principal through investments in
short-term municipal
obligations.
- ------------------------------------------------------------------------------------------
</TABLE>
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. WHILE THE FUNDS WILL ATTEMPT TO MAINTAIN THEIR NET ASSET
VALUE AT $1.00 A SHARE, THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE
TO DO SO ON A CONTINUOUS BASIS. IN ADDITION, THE DIVIDENDS PAID BY A FUND WILL
GO UP AND DOWN. MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY SERVES AS INVESTMENT
ADVISER AND ADMINISTRATOR TO THE FUNDS, IS PAID FEES FOR ITS SERVICES, AND IS
NOT AFFILIATED WITH BISYS FUND SERVICES, THE FUNDS' DISTRIBUTOR.
This Prospectus relates to shares of the Prime Money Market, Government
Money Market and Tax-Exempt Money Market Funds (the "Funds") of M.S.D. & T.
Funds, Inc. (the "Company"), a no-load, open-end management investment
company. This Prospectus describes concisely the information about the Funds
that you should know before investing. Please read and keep it for future
reference. More information about the Funds is contained in a Statement of
Additional Information dated , 1996 that has been filed with the Securities
and Exchange Commission (the "SEC"). The Statement of Additional Information,
which can be obtained free of charge upon request by writing to the Company at
Two Hopkins Plaza, Baltimore, Maryland 21201 or by calling 1-800-551-2145, is
incorporated by reference into (considered a part of) 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVES, POLICIES AND RISKS.................................. 6
FUNDAMENTAL LIMITATIONS.................................................... 11
INVESTING IN THE FUNDS..................................................... 11
SHAREHOLDER SERVICES....................................................... 15
DIVIDENDS AND DISTRIBUTIONS................................................ 16
TAX INFORMATION............................................................ 17
MANAGEMENT OF THE COMPANY.................................................. 17
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES.................... 19
PERFORMANCE REPORTING...................................................... 19
MISCELLANEOUS.............................................................. 20
</TABLE>
IF YOU HAVE QUESTIONS
For current yield, purchase and redemption information, call 1-800-551-2145.
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a Fund.
Annual Fund Operating Expenses are paid out of a Fund's assets and include
fees for portfolio management, maintenance of shareholder accounts, general
Fund administration, accounting, custody and other services.
Below is information regarding the operating expenses for the Funds.
Examples based on this information are also provided.
<TABLE>
<CAPTION>
GOVERNMENT TAX-EXEMPT
PRIME MONEY MONEY MARKET MONEY MARKET
MARKET FUND FUND FUND
----------- ------------ ------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees (after fee waivers)/1/... .24% .23% .23%
Other Expenses (after fee waivers)
(includes administration, custody and
transfer agency, and miscellaneous other
charges)/1/............................. .19% .20% .20%
--- --- ---
Total Fund Operating Expenses (after fee
waivers)/1/............................. .43% .43% .43%
=== === ===
</TABLE>
- -------------------
/1/This expense information is provided to help you understand the various
costs and expenses that you would bear indirectly as a shareholder of one of
the Funds. The expense information reflects expenses the Funds incurred during
the fiscal year ended May 31, 1996. Without fee waivers by the investment
adviser and administrator, Management Fees, Other Expenses and Total Fund
Operating Expenses, stated as a percentage of average daily net assets, would
have been .25%, .23% and .48%, respectively, for the Prime Money Market Fund;
.25%, .23% and .48%, respectively, for the Government Money Market Fund; and
.25%, .26% and .51%, respectively, for the Tax-Exempt Money Market Fund.
The investment adviser and administrator may waive fees and/or reimburse
expenses of the Funds from time to time. These waivers and reimbursements are
voluntary and may be terminated at any time with respect to any Fund without
the consent of the Fund. You should note that any fees that are charged by the
investment adviser, its affiliates or any other institutions directly to their
customer accounts for services related to an investment in the Funds are in
addition to, and are not reflected in, the fees and expenses described above.
For more complete descriptions of the Funds' operating expenses, see
"Management of the Company" in this Prospectus.
EXAMPLE:
Assume a Fund's annual return is 5% and its expenses are the same as those
stated above. For every $1,000 you invest, here's how much you would pay in
total expenses if you closed your account after the number of years indicated:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Prime Money Market Fund......................... $ 4 $14 $24 $54
Government Money Market Fund.................... $ 4 $14 $24 $54
Tax-Exempt Money Market Fund.................... $ 4 $14 $24 $54
</TABLE>
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR
FUTURE INVESTMENT RETURNS OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights, which have been derived from the Funds'
financial statements, have been audited by Coopers & Lybrand L.L.P., the
Funds' independent accountants, whose unqualified report on the financial
statements containing such information for the five years in the period ended
May 31, 1996 is incorporated by reference into the Statement of Additional
Information. The Financial Highlights should be read along with the financial
statements and related notes, which are also incorporated by reference into
the Statement of Additional Information. Further information about the
performance of the Funds is available in the Company's Annual Report to
Shareholders for the fiscal year ended May 31, 1996. 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.
PRIME MONEY MARKET FUND
Financial Highlights for a share of the Prime Money Market Fund outstanding
throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR 7/21/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED TO
5/31/96 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91 5/31/90
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income.. 0.0532 0.0491 0.0296 0.0297 0.0467 0.0712 0.0706
-------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations............ 0.0532 0.0491 0.0296 0.0297 0.0467 0.0712 0.0706
-------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends to
Shareholders from Net
Investment Income..... (0.0532) (0.0491) (0.0296) (0.0297) (0.0467) (0.0712) (0.0706)
-------- -------- -------- -------- -------- -------- --------
Total Distributions.... (0.0532) (0.0491) (0.0296) (0.0297) (0.0467) (0.0712) (0.0706)
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total Return............ 5.45% 5.02% 3.00% 3.01% 4.77% 7.35% 8.49%/2/
Ratios/Supplemental Data
Net Assets, End of
Period ($000)......... 326,878 382,059 346,694 432,415 402,745 311,839 178,708
Ratio of Expenses to
Average Net
Assets/3/............. 0.43% 0.43% 0.38% 0.37% 0.35% 0.38% 0.38%/2/
Ratio of Net Investment
Income to Average Net
Assets................ 5.33% 4.92% 2.95% 2.96% 4.55% 6.96% 8.13%/2/
</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, 1996, May 31, 1995,
May 31, 1994, May 31, 1993, May 31, 1992 and May 31, 1991 and the period ended
May 31, 1990 would have been .48%, .48%, .47%, .43%, .42%, .45% and .46%
(annualized), respectively.
4
<PAGE>
GOVERNMENT MONEY MARKET FUND
Financial Highlights for a share of the Government Money Market Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR 7/21/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED TO
5/31/96 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91 5/31/90
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income.. 0.0526 0.0485 0.0294 0.0293 0.0465 0.0700 0.0696
-------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations............ 0.0526 0.0485 0.0294 0.0293 0.0465 0.0700 0.0696
-------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends to
Shareholders from Net
Investment Income..... (0.0526) (0.0485) (0.0294) (0.0293) (0.0465) (0.0700) (0.0696)
-------- -------- -------- -------- -------- -------- --------
Total Distributions.... (0.0526) (0.0485) (0.0294) (0.0293) (0.0465) (0.0700) (0.0696)
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total Return............ 5.39% 4.95% 2.98% 2.97% 4.75% 7.23% 8.37%
Ratios/Supplemental Data
Net Assets, End of
Period ($000)......... 264,725 263,752 273,790 255,637 293,450 333,121 293,422
Ratio of Expenses to
Average Net
Assets/3/............. 0.43% 0.43% 0.38% 0.37% 0.34% 0.37% 0.38%/2/
Ratio of Net Investment
Income to Average Net
Assets................ 5.27% 4.85% 2.94% 2.93% 4.64% 6.97% 8.04%/2/
</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, 1996, May 31, 1995,
May 31, 1994, May 31, 1993, May 31, 1992 and May 31, 1991 and the period ended
May 31, 1990 would have been .48%, .48%, .47%, .44%, .41%, .45% and .46%
(annualized), respectively.
TAX-EXEMPT MONEY MARKET FUND
Financial Highlights for a share of the Tax-Exempt Money Market Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR 7/21/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED TO
5/31/96 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91 5/31/90
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income.. 0.0321 0.0303 0.0202 0.0217 0.0346 0.0494 0.0483
Net Realized Gain on
Investments........... -- -- 0.0004 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations............ 0.0321 0.0303 0.0206 0.0217 0.0346 0.0494 0.0483
-------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends to
Shareholders from Net
Investment Income..... (0.0321) (0.0303) (0.0202) (0.0217) (0.0346) (0.0494) (0.0483)
Distributions to
Shareholders from Net
Capital Gains......... -- -- (0.0004) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total Distributions.... (0.0321) (0.0303) (0.0206) (0.0217) (0.0346) (0.0494) (0.0483)
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
Total Return............ 3.26% 3.08% 2.08% 2.19% 3.51% 5.05% 5.74%/2/
Ratios/Supplemental Data
Net Assets, End of
Period ($000)......... 50,137 69,100 82,222 81,838 76,687 67,328 65,101
Ratio of Expenses to
Average Net
Assets/3/............. 0.43% 0.43% 0.38% 0.37% 0.38% 0.38% 0.38%/2/
Ratio of Net Investment
Income to Average Net
Assets................ 3.22% 3.01% 2.02% 2.16% 3.42% 4.91% 5.58%/2/
</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, 1996, May 31, 1995,
May 31, 1994, May 31, 1993, May 31, 1992 and May 31, 1991 and the period
ending May 31, 1990 would have been .51%, .52%, .50%, .44%, .46%, .47% and
.48% (annualized), respectively.
5
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Funds' investment adviser (the "Adviser") uses a range of different
investments and investment techniques in seeking to achieve a Fund's
investment objective. All Funds do not use all of the investments and
investment techniques described below, which involve various risks, and which
are also described in the following sections. You should consider which Funds
best meet your investment goals. The Adviser will use its best efforts to
achieve a Fund's investment objective, although its achievement cannot be
assured. An investor should not consider an investment in any Fund to be a
complete investment program.
PRIME MONEY MARKET FUND
The investment objective of the Prime Money Market Fund is to seek as high
a level of current income as is consistent with liquidity and stability of
principal by investing in a portfolio of high-quality money market
instruments. The Fund may invest in a broad range of short-term, high quality,
U.S. dollar-denominated instruments, such as government, bank, commercial and
other obligations, that are available in the money markets. In particular, the
Fund may invest in:
. U.S. dollar-denominated obligations issued or supported by the
credit of U.S. or foreign banks or savings institutions with total
assets in excess of $1 billion (including obligations of foreign
branches of U.S. banks);
. obligations issued or guaranteed as to principal and interest by the
U.S. Government or by its agencies or instrumentalities;
. commercial paper rated at the time of purchase within the highest
rating category assigned by one or more unaffiliated nationally
recognized statistical rating organizations (each a "Rating Agency")
and corporate bonds rated at the time of purchase within one of the
two highest rating categories assigned by one or more Rating
Agencies;
. unrated commercial paper, corporate bonds and other instruments that
are of comparable quality as determined by the Adviser pursuant to
guidelines approved by the Company's Board of Directors.
. asset-backed securities rated at the time of purchase within the
highest rating category assigned by one or more Rating Agencies;
. obligations issued by state and local governmental bodies; and
. repurchase agreements relating to the above instruments.
GOVERNMENT MONEY MARKET FUND
The investment objective of the Government Money Market Fund is to seek as
high a level of current income as is consistent with liquidity and stability
of principal by investing in a portfolio of direct Treasury obligations, other
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements relating to such obligations.
TAX-EXEMPT MONEY MARKET FUND
The investment objective of the Tax-Exempt Money Market Fund is to seek as
high a level of current income exempt from Federal income tax as is consistent
with liquidity and stability of principal by investing substantially all of
its assets in a diversified portfolio of short-term obligations issued by or
on behalf of states, territories and possessions of the United States, the
District of Columbia and their political subdivisions, agencies,
instrumentalities and authorities ("municipal obligations") the interest on
which, in the opinion of counsel to the issuer or bond counsel, is exempt from
regular Federal income tax. The Fund seeks to achieve its investment objective
by investing primarily in:
. municipal notes, including variable rate demand notes, rated at the
time of purchase within the highest rating category assigned by one
or more Rating Agencies;
. tax-exempt commercial paper rated at the time of purchase within the
highest rating category assigned by one or more Rating Agencies;
6
<PAGE>
. municipal bonds rated at the time of purchase within one of the two
highest rating categories assigned by one or more Rating Agencies;
and
. unrated municipal notes, tax-exempt commercial paper, municipal
bonds and other instruments that are of comparable quality as
determined by the Adviser pursuant to guidelines approved by the
Company's Board of Directors.
As a matter of fundamental policy, during normal market conditions at
least 80% of the Tax-Exempt Money Market Fund's total assets will be invested
in municipal obligations the interest on which is exempt from regular Federal
income tax and is not treated as a specific tax preference under the Federal
alternative minimum tax for either individuals or corporations. Up to 20% of
the Fund's total assets may be invested in private activity bonds that are
subject to the Federal alternative minimum tax or taxable money market
instruments, although the Fund does not intend to invest in such instruments
on a regular basis. The Fund may hold uninvested cash reserves during
temporary defensive periods or if, in the opinion of the Adviser, suitable
municipal obligations are not available.
QUALITY, MATURITY AND DIVERSIFICATION
All securities acquired by the Funds will be determined at the time of
purchase by the Adviser, pursuant to guidelines approved by the Company's
Board of Directors, to present minimal credit risks and will be "Eligible
Securities" as defined by the SEC. Eligible Securities are (a) securities that
either (i) have short-term debt ratings at the time of purchase in the two
highest rating categories assigned by at least two Rating Agencies (or one
Rating Agency if the security is rated by only one Rating Agency), or (ii) are
comparable in priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated (including
securities of issuers that have long-term but not short-term ratings) but are
of comparable quality as determined in accordance with guidelines approved by
the Company's Board of Directors. In accordance with current SEC regulations,
each Fund intends to invest no more than 5% of its total assets in securities,
other than U.S. Government securities, that are rated at the time of purchase
within the second highest rating category assigned by one or more Rating
Agencies (including securities that are unrated but determined by the Adviser
to be of comparable quality), provided, however, that with respect to the Tax-
Exempt Money Market Fund this 5% limitation shall only apply to the purchase
of certain municipal obligations which are not backed by a municipal issuer.
See the Statement of Additional Information for a description of the Rating
Agencies' various rating categories.
Each Fund is managed so that the average dollar-weighted maturity of all
instruments held by it will not exceed 90 days. In no event will a Fund
purchase securities which mature more than 397 days from the date of purchase
(except for certain variable and floating rate instruments and securities
collateralizing repurchase agreements). Securities in which the Funds invest
may not earn as high a level of income as longer-term or lower quality
securities, which generally have greater market risk and more fluctuation in
market value.
Each Fund is classified as a diversified portfolio under the Investment
Company Act.
OTHER INVESTMENT POLICIES AND RELATED RISKS
BANK OBLIGATIONS
The Prime Money Market Fund and, to a limited extent, the Tax-Exempt Money
Market Fund may invest in debt obligations of U.S. and foreign banks
(including foreign branches of U.S. banks). Investments in the obligations of
foreign banks and foreign branches of U.S. banks involve different risks than
investments in the obligations of U.S. banks, including less stringent reserve
requirements and different accounting, auditing and recordkeeping
requirements. A Fund will invest in the obligations of foreign banks or
foreign branches of U.S. banks only when the Adviser deems the investment to
present minimal credit risks. The Prime Money Market Fund may also make
interest-bearing savings deposits in commercial and savings banks in amounts
not in excess of 5% of its total assets.
7
<PAGE>
CORPORATE OBLIGATIONS
The Prime Money Market Fund and, to a limited extent, the Tax-Exempt Money
Market Fund may invest in corporate debt obligations, primarily commercial
paper. Commercial paper is a short-term promissory note with a maturity
ranging from 1 to 270 days issued by a corporation. Corporate bonds purchased
by the Prime Money Market Fund will have remaining maturities of 397 days or
less.
U.S. GOVERNMENT OBLIGATIONS
The Government Money Market Fund may invest in direct U.S. Treasury
obligations. The Prime Money Market and Government Money Market Funds and, to
a limited extent, the Tax-Exempt Money Market Fund, may invest in securities
issued or guaranteed by the U.S. Government, as well as in obligations issued
or guaranteed by U.S. Government agencies and instrumentalities. Obligations
of certain agencies and instrumentalities, 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, are supported by
the issuer's right to borrow from the Treasury; others, such as the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the entity's obligations; still others, such
as the Student Loan Marketing Association, are backed solely by the issuer's
credit. There is no assurance that the U.S. Government would provide support
to a U.S. Government-sponsored entity were it not required to do so by law.
MUNICIPAL OBLIGATIONS
The Tax-Exempt Money Market Fund invests primarily in municipal
obligations. The Prime Money Market Fund may also invest from time to time in
municipal obligations. These securities may be advantageous for the Prime
Money Market Fund when, as a result of prevailing economic, regulatory or
other circumstances, the yield of such securities on a pre-tax basis is
comparable to that of other securities the Fund can purchase. Dividends paid
by the Prime Money Market Fund that come from interest on municipal
obligations will be taxable to shareholders.
The two main types of municipal obligations are "general obligation"
securities (which are secured by the issuer's full faith, credit and taxing
power) and "revenue" securities (which are payable only from revenues received
from the operation of a particular facility or other 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 draws on a reserve fund, the restoration of
which is not a legal requirement. Private activity bonds (which are a type of
obligation that, although exempt from regular Federal income tax, may be
subject to the Federal alternative minimum tax) are usually revenue securities
issued by or for public authorities to finance a privately operated facility.
In many cases, the Internal Revenue Service has not ruled on whether the
interest received on a municipal obligation is tax- exempt and, accordingly,
the purchase of such securities is based on the opinion of bond counsel or
counsel to the issuers of such instruments. The Company and the Adviser rely
on these opinions and do not intend to review the bases for them.
Municipal obligations purchased by a Fund in some cases may be insured as
to the timely payment of principal and interest. There is no guarantee,
however, that the insurer will meet its obligations in the event of a default
in payment by the issuer. In other cases, municipal obligations may be backed
by letters of credit or guarantees issued by domestic or foreign banks or
other financial institutions which are not subject to federal deposit
insurance. Adverse developments affecting the banking industry generally or a
particular bank or financial institution that has provided its credit or
guarantee with respect to a municipal obligation held by a Fund, including a
change in the credit quality of any such bank or financial institution, could
result in a loss to the Fund and adversely effect the value of its shares. As
described above under "Banking Obligations", foreign letters of credit and
guarantees involve certain risks in addition to those of domestic obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may purchase variable and floating rate instruments, which may
have a maturity in excess of 397 days but will, in any event, permit a Fund to
demand payment of the principal of the instrument at least once every 397 days
upon not more than 30 days' notice (unless the instrument is guaranteed by the
U.S.
8
<PAGE>
Government or an agency or instrumentality thereof). Such instruments may
include variable rate demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
There may be no active secondary market with respect to a particular variable
or floating rate instrument. Nevertheless, the periodic readjustments of their
interest rates tend to ensure that their value to a Fund will approximate
their par value. Variable and floating rate obligations that cannot be
disposed of promptly within seven business days and in the usual course of
business without taking a reduced price will be considered illiquid and
subject to the Funds' limitation on illiquid investments described below under
"Managing Liquidity".
ASSET-BACKED SECURITIES
The Prime Money Market Fund may purchase asset-backed securities which
have remaining maturities of 397 days or less. Asset-backed securities are
securities backed by installment sale contracts, credit card receivables or
other assets. 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. The prepayment rate is
primarily a function of current market rates and conditions. In periods of
rising interest rates, the rate of prepayment tends to increase. During
periods of falling interest rates, the reinvestment of prepayment proceeds by
the Fund will generally be at a lower rate than the rate on the prepaid
obligation. Prepayments may also result in some loss of the Fund's principal
investment if any premiums were paid. As a result of these yield
characteristics, some high-yielding asset-backed securities may have less
potential for growth in value than conventional bonds with comparable
maturities. These characteristics may result in a higher level of price
volatility for these assets under certain market conditions.
Asset-backed securities are subject to greater risk of default during
periods of economic downturn than conventional debt instruments and the holder
frequently has no recourse against the entity that originated the security. In
addition, 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 experiencing difficulty in valuing or liquidating such securities.
For these reasons, under certain circumstances, such instruments may be
considered illiquid securities subject to the Fund's 10% limitation on
illiquid investments.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
The Prime Money Market and Government Money Market Funds may buy portfolio
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 securities held subject to a repurchase agreement may have stated
maturities in excess of 397 days so long as the repurchase agreement itself
matures in less than 397 days. Repurchase agreements involve the risk that the
seller will fail to repurchase the securities as agreed. In that event, the
Fund will bear the risk of possible loss due to adverse market action or
delays in liquidating the underlying obligations. Repurchase agreements are
considered to be loans under the Investment Company Act.
Each Fund may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, a Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be used to meet
redemption requests without selling portfolio securities. Reverse repurchase
agreements involve the risk of counterparty default and possible loss of
collateral held by the counterparty. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
Each 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 a Fund to purchase or to sell
particular securities with payment and delivery taking place at a future date,
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. The Fund
will bear the risk, however, that the price or yield obtained in a transaction
may be less favorable than the price or yield available in the market when the
delivery takes place. When-issued and forward commitment transactions are not
expected to exceed 25% of the value of a Fund's total assets under normal
circumstances. Because a Fund is required to set aside cash or liquid high
grade debt obligations to satisfy these purchase commitments, a Fund's
liquidity and ability to manage its portfolio might be affected during periods
in which its commitments
9
<PAGE>
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.
STAND-BY COMMITMENTS
The Tax-Exempt Money Market Fund may acquire stand-by commitments under
which a dealer agrees to purchase certain municipal obligations at a Fund's
option at a price equal to their amortized cost value plus interest. These
commitments will be used only to assist in maintaining a Fund's liquidity and
not for trading purposes.
SECURITIES LENDING
The Prime Money Market and Government Money Market Funds may lend their
portfolio securities to broker-dealers and other institutions as a means of
earning additional income. Although securities loans will be fully
collateralized, such loans present risks of delay in receiving additional
collateral or in recovering the securities loaned or even a loss of rights in
the collateral if the borrower of the securities fails financially. However,
securities loans will be made only to parties the Adviser deems to be of good
standing and will only be made if the Adviser thinks the income to be earned
from the loans justifies the risks.
OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by other investment companies
which invest in eligible quality, short-term debt securities and which seek to
maintain a $1.00 net asset value per share, i.e., "money market" funds. Such
investments will be made by a Fund in connection with the management of its
daily cash position and will be subject to the requirements of applicable
securities laws. The Prime Money Market Fund may also invest in asset-backed
securities issued by issuers that may be deemed to be investment companies
within the meaning of the Investment Company Act. When a Fund invests in
another investment company, it pays a pro rata portion of the advisory and
other expenses of that company as a shareholder of that company. These
expenses are in addition to the Fund's own expenses.
MANAGING LIQUIDITY
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, as a matter of fundamental policy the Funds will not knowingly invest
more than 10% of the value of their respective net assets in illiquid
securities. Illiquid securities include repurchase agreements and time
deposits that do not permit a Fund to terminate them after seven days' notice,
restricted securities and other securities for which market quotations are not
readily available. Certain securities that might otherwise be considered
illiquid, however, such as some issues of commercial paper and variable rate
demand notes with maturities of nine months or less and securities for which
the Adviser has determined pursuant to guidelines adopted by the Company's
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 limitation. 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.
OTHER RISK CONSIDERATIONS
As with an investment in any mutual fund, an investment in the Funds
entail market and economic risks associated with investments generally.
However, there are certain specific risks of which you should be aware.
Although the Tax-Exempt Money Market 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. When the Fund's assets
are concentrated in obligations payable from revenues on similar projects or
in industrial development bonds, the Fund will be subject to the particular
risks (including legal and economic conditions) presented by such securities
to a greater extent than it would be if its assets were not so concentrated.
Furthermore, payment of municipal obligations held by the Fund relating to
certain projects may be secured by mortgages or deeds of trust. In the event
of a default, enforcement of a mortgage or deed of trust may be delayed and
the amount of the proceeds received may not be enough to pay the principal and
accrued interest on the defaulted municipal obligations.
10
<PAGE>
FUNDAMENTAL LIMITATIONS
Each Fund's investment objective discussed above is "fundamental", which
means that it may not be changed for a Fund without the approval of a majority
of that Fund's outstanding shares. Except as otherwise noted, each Fund's
investment policies discussed above are not fundamental and may be changed by
the Company's Board of Directors without shareholder approval. However, each
Fund also has in place certain "fundamental" limitations that also cannot be
changed for a Fund without the approval 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 Statement of Additional Information.
1. 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
total assets of each Fund can be invested without regard to the 5%
limitation.
2. 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, subject to certain exceptions.
3. A Fund may not borrow money except for temporary purposes in amounts
up to 10% of its total assets at the time of such borrowing. Whenever
borrowings exceed 5% of a Fund's total assets with respect to the Prime
Money Market and Government Money Market Funds or whenever any borrowings
are outstanding with respect to the Tax-Exempt Money Market Fund, the Fund
will not make any investments.
4. A Fund may not knowingly invest more than 10% of its net assets in
illiquid securities.
As a matter of non-fundamental policy and in accordance with current
regulations of the SEC, the Prime Money Market Fund and the Tax-Exempt Money
Market Fund each intends to subject its entire investment portfolio, other
than U.S. Government securities, to the 5% limitation described in Fundamental
Limitation No. 1 above. However, in accordance with such regulations, each
Fund may invest more than 5% (but no more than 25%) of its total assets in the
securities of a single issuer for a period of up to three business days,
provided the securities are rated at the time of purchase in the highest
rating category assigned by one or more Rating Agencies or are determined by
the Adviser to be of comparable quality. A Fund may not hold more than one
such investment at any one time.
If a percentage limitation is met at the time an investment is made, a
subsequent change in that percentage resulting from a change in value of a
Fund's portfolio securities does not mean that the limitation has been
violated.
In order to permit the sale of a Fund's shares (or a particular class of
shares) in certain states, the Company may agree to certain restrictions that
are stricter than the investment policies and limitations described above. If
the Company determines that any of these restrictions is no longer in a Fund's
best interests, it may revoke its agreement to abide by such restrictions by
no longer selling shares in the state involved.
INVESTING IN THE FUNDS
GETTING YOUR INVESTMENT STARTED
Investing in the Funds is quick and convenient. Shares of the Funds may be
purchased either through the account you maintain with certain financial
institutions or directly through the Company. Fund shares are distributed by
BISYS Fund Services (called the "Distributor"). The Distributor's principal
offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Customers of Mercantile-Safe Deposit and Trust Company and its affiliated
and correspondent banks and customers of affiliates of State Street Bank and
Trust Company (referred to as the "Banks") may purchase Fund shares through
their qualified accounts at such Banks and should contact the Banks directly
for appropriate purchase instructions. Should you wish to establish an account
directly through the Company, please refer to the purchase options described
under "Opening and Adding to Your Fund Account."
11
<PAGE>
Payments for Fund shares must be in U.S. dollars and should be drawn on a
U.S. bank. Please remember that the Company reserves the right to reject any
purchase order.
HOW TO BUY FUND SHARES
MINIMUM INVESTMENTS
The Company generally requires a $50,000 minimum initial investment.
Subsequent investments must be a minimum of $100. The minimum investment
requirements do not apply to purchases by Banks acting on behalf of their
customers and the Banks do not impose a minimum initial or subsequent
investment requirement for shares purchased on behalf of their customers. The
Company reserves the right to waive these minimums in other instances.
OPENING AND ADDING TO YOUR FUND ACCOUNT
Direct investments in the Funds may be made in a number of different ways,
as shown in the following chart. Simply choose the method that is most
convenient for you. Any questions you have may be answered by calling 1-800-
551-2145. As described above under "Getting Your Investment Started", you may
also purchase Fund shares through the Banks.
TO OPEN AN ACCOUNT
TO ADD TO AN ACCOUNT
BY MAIL . Complete a Purchase . Make your check payable to
Application and mail it the particular Fund in
along with a check payable which you are investing
to the particular Fund you and mail it to the address
want to invest in to: at left.
M.S.D. & T. Funds, Inc.,
P.O. Box 8515, Boston, MA
02266-8515.
. Please include your
account number on your
check.
To obtain a Purchase
Application, call 1-800-
551-2415
- -------------------------------------------------------------------------------
BY WIRE . Before wiring funds, . Instruct your bank to wire
please call 1-800-551-2145 Federal funds to: State
for complete wiring Street Bank and Trust
instructions. Company, Boston,
Massachusetts, Bank
Routing No. 011-0000-28,
. Promptly complete a M.S.D. & T. Deposit A/C
Purchase Application and No. 99046435.
forward it to M.S.D. & T.
Funds, Inc., P.O. Box
8515, Boston, MA 02266-
8515. . Be sure to include your
name and your Fund account
number.
. The wire should indicate
that you are making a
subsequent purchase as
opposed to opening a new
account.
Consult you bank for information on remitting funds by
wire and associated bank charges.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC
INVESTMENTS, EXCHANGES AND DIRECT REINVESTMENTS, TO INVEST
IN YOUR FUND ACCOUNT. PLEASE REFER TO THE SECTION ENTITLED
"SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- -------------------------------------------------------------------------------
EXPLANATION OF SALES PRICE
The public offering price for shares of a Fund is based upon net asset
value per share. A Fund will calculate its net asset value per share by adding
the value of the Fund's investments, cash and other assets, subtracting the
Fund's liabilities, and then dividing the result by the number of shares of
the Fund that are outstanding. This process is sometimes referred to as
"pricing" a Fund's shares.
12
<PAGE>
The assets of the Funds are valued at amortized cost, which generally
approximates market value. Although each Fund seeks to maintain its net asset
value per share at $1.00, there can be no assurance that the net asset value
per share will not vary. More information about valuation can be found in the
Fund's Statement of Additional Information, which you may request by calling
1-800-551-2145.
Net asset value is computed as of 11:00 a.m. Eastern Time and as of the
close of regular trading hours on the New York Stock Exchange (the "Exchange")
(currently 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' Adviser, transfer agent or custodian or the
Exchange is closed. The Funds currently observe the following holidays: 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.
Purchase orders will be accepted by State Street Bank and Trust Company,
the Funds' transfer agent (the "Transfer Agent"), only on a day when the
shares of a Fund are priced ("Business Day"). If you purchase shares of a Fund
through a Bank, the Bank is responsible for transmitting your purchase order
and required funds to the Transfer Agent on a timely basis.
If your purchase order for shares of a Fund is received by the Transfer
Agent on a Business Day before 11:00 a.m. Eastern Time, your Fund shares will
be purchased at the public offering price calculated at 11:00 a.m. provided
that the Fund's custodian receives payment in immediately available funds by
the close of regular trading hours on the Exchange that day. If your purchase
order for shares of a Fund is received by the Transfer Agent on a Business Day
after 11:00 a.m. Eastern Time but before the close of regular trading on the
Exchange that day, your Fund shares will be purchased at the public offering
price calculated at 11:00 a.m. Eastern Time on the following Business Day if
the Fund's custodian receives payment in immediately available funds by the
close of regular trading on the Exchange on the following Business Day. If the
procedures described above are not followed and if a Bank submitted the order,
the Bank will be notified that the order has not been accepted. If you
purchase shares of a Fund directly through the Company and if your purchase
order is accompanied by payment in any form other than immediately available
funds, your Fund shares will be purchased at the public offering price
calculated at 11:00 a.m. Eastern Time on the next Business Day after the
Business Day on which both the order and payment in immediately available
funds are received by the Transfer Agent. Payments for orders which are not
received or accepted will be returned after prompt inquiry.
On a Business Day when the Exchange closes early due to a partial holiday
or otherwise, the Company reserves the right to advance the times at which
purchase orders must be received in order to be processed on that Business
Day.
HOW TO SELL FUND SHARES
You can arrange to get money out of your Fund account by selling some or
all of your shares. This process is known as "redeeming" your shares. If you
purchased your shares through an account at a Bank, you may redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you have the ability to redeem shares
by any of the methods described below.
TO REDEEM SHARES
----------------
BY MAIL . Send a written request to M.S.D. & T. Funds,
Inc., P.O. Box 8515, Boston, MA 02266-8515.
. Your written request must:
--be signed by each account holder;
--state the number or dollar amount of shares
to be redeemed and identify the specific
Fund;
--include your account number.
. Signature guarantees are required
--for all redemption requests over $100,000;
13
<PAGE>
--for any redemption request where the
proceeds are to be sent to someone other
than the shareholder of record or to an
address other than the address of record.
- -------------------------------------------------------------------------------
BY WIRE . Call 1-800-551-2145. You will need to provide
(available only the account name, account number, name of
if you checked Fund and amount of redemption ($1,000 minimum
the appropriate per transaction)
box on the
Purchase
Application) . If you have already opened your account and
would like to have the wire redemption
feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 8515, Boston, MA
02266-8515. The request must be signed (and
signatures guaranteed) by each account owner.
. To change bank instructions, send a written
request to the above address. The request
must be signed (and signatures guaranteed) by
each account owner.
- -------------------------------------------------------------------------------
BY TELEPHONE . Call 1-800-551-2145. You will need to provide
(available only the account name, account number, name of
if you checked Fund and amount of redemption.
the appropriate
box on the . If you have already opened your account and
Purchase would like to add the telephone redemption
Application) feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 8515, Boston, MA
02266-8515. The request must be signed (and
signatures guaranteed) by each account owner.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
SYSTEMATIC WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER
TO SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.
- -------------------------------------------------------------------------------
EXPLANATION OF REDEMPTION PRICE
Redemption orders received in proper form by the Transfer Agent on a
Business Day are processed at their net asset value per share next determined
after such receipt. Redemption orders received on a Non-Business Day will be
priced as of the time the net asset value is next determined. On a Business
Day when the Exchange closes early due to a partial holiday or otherwise, the
Company reserves the right to advance the time at which redemption orders must
be received in order to be processed on that Business Day.
Payment for redemption orders which are received by the Transfer Agent
before 11:00 a.m. Eastern Time normally will be wired or sent to the
shareholder(s) of record on the same Business Day. Payment for redemption
orders which are received between 11:00 a.m. and the close of regular trading
on the Exchange (currently 4:00 p.m. Eastern Time) or on a Non-Business Day
normally will be wired or sent to the shareholder(s) of record on the next
Business Day. However, the Company reserves the right to wire or send
redemption proceeds within seven days after receiving the redemption order if
the Adviser believes that earlier payment would adversely affect the Company.
If you purchased your shares directly through the Company, your redemption
proceeds will be sent by check unless you otherwise direct the Company or the
Transfer Agent. The Automated Clearing House ("ACH") system may also be
utilized for payment of redemption proceeds. In unusual circumstances, the
Company may make payment in readily marketable portfolio securities at their
market value equal to the redemption price.
Banks are responsible for transmitting their customer's redemption orders
to the Transfer Agent and crediting their customers' accounts with redemption
proceeds on a timely basis. No charge is imposed by the Company for wiring
redemption proceeds, although the Banks may charge their customers' accounts
directly for redemption and other services. In addition, if a customer has
agreed with a Bank to maintain a minimum cash balance in his or her account
maintained with the Bank and the balance falls below that minimum, the
customer
14
<PAGE>
may be obliged to redeem some or all of the Fund shares held in the account in
order to maintain the required minimum balance.
The Company imposes no charge when you redeem shares.
OTHER PURCHASE AND REDEMPTION INFORMATION
Federal regulations require that you provide a certified taxpayer
identification number whenever you open or reopen an account
Shareholders who purchased Fund Shares directly through the Company should
note that if an account balance falls below $5,000 as a result of redemptions
and is not increased to at least $5,000 within 60 days after notice, the
account may be closed and the proceeds sent to the shareholder.
If you purchased shares by wire, you must file a Purchase Application with
the Transfer Agent before any of those shares can be redeemed. You should
contact your bank for information about sending and receiving funds by wire,
including any charges by your bank for these services. The Company may decide
at any time to change the minimum amount per transaction for redemption of
shares by wire or to no longer permit wire redemptions.
You may chose to initiate certain transactions by telephone. The Company
and its agents will not be responsible for any losses resulting from
unauthorized transactions when reasonable procedures to verify the identity of
the caller are followed. To the extent that the Company does not follow such
procedures, it and/or its agents may be responsible for any unauthorized
transactions.
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. It may be
difficult to reach the Company by telephone during periods of unusual market
activity. If this happens, you may redeem your shares by mail as described
above.
The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
its shares) for such periods as permitted under the Investment Company Act.
Certain redemption requests and other communications with the Company
require a signature guarantee. Signature guarantees are designed to protect
both you and the Company from fraud. To obtain a signature guarantee you
should visit a financial institution that participates in the Stock Transfer
Agency Redemption Program ("STAMP"). Guarantees must be signed by an
authorized person at one of these institutions and be accompanied by the words
"Signature Guaranteed". A notary public cannot provide a signature guarantee.
SHAREHOLDER SERVICES
The Company provides a variety of ways to make managing your investments
more convenient. Some of these options require you to request them on the
Purchase Application or you may request them after opening an account by
calling 1-800-551-2145. Except for Retirement Plans, these options are
available only to shareholders who purchase their Fund shares directly through
the Company.
RETIREMENT PLANS
Shares of the Prime Money Market and Government Money Market Funds 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 can be obtained from the Company. To
invest through any tax-sheltered retirement plans, please call the Company at
1-800-551-2145 for information and the required separate application. You
should consult with a tax adviser to determine whether a tax-sheltered
retirement plan is available and/or appropriate for you.
15
<PAGE>
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged for shares of another Fund or for
Institutional shares of one of the equity and bond portfolios offered by the
Company. You may exchange shares by mail at the address provided under "How To
Buy Shares--Opening and Adding to your Fund Account" or by telephone at 1-800-
551-2145. If you are opening a new account in a different Fund or portfolio by
exchange, the exchanged shares must be at least equal in value to the minimum
investment for the Fund or portfolio in which the account is being opened.
You should read the prospectus for the Fund or portfolio into which you are
exchanging. Exchanges will be processed only when the shares being offered can
legally be sold in your state. Exchanges may have tax consequences for you.
Consult your tax adviser for further information.
To elect the exchange privilege after you have opened a Fund account, or for
further information about the exchange privilege, call 1-800-551-2145. The
Company reserves the right to reject any exchange request. The Company may
modify or terminate the exchange privilege, but will not materially modify or
terminate it without giving shareholders 60 days' notice.
AUTOMATIC INVESTMENT PLAN
One easy way to pursue your financial goals is to invest money regularly.
The Company offers an Automatic Investment Plan --a convenient service that
lets you transfer money from your bank account into your Fund account
automatically on a regular basis. At your option, your bank account will be
debited in a particular amount ($100 minimum) that you have specified, and
Fund shares will automatically be purchased on the 15th day of each month or,
if that day is not a Business Day, on the preceding Business Day. Your bank
account must be maintained at a domestic financial institution that is an ACH
member. You will be responsible for any loss or expense to the Funds if an ACH
transfer is rejected. To select this option, or for more information, please
call 1-800-551-2145.
SYSTEMATIC WITHDRAWALS
The Company offers a convenient way of withdrawing money from your Fund
account. You may request regular monthly, quarterly, semi-annual or annual
withdrawals in any amount of $100 or more. The withdrawal will be made on the
last business day of the period you select and distributed in cash or
reinvested in Institutional shares of another Fund or portfolio offered by the
Company. To elect this option, or for more information, please call 1-800-551-
2145.
DIRECTED REINVESTMENTS
Generally, dividends and capital gains distribution are automatically
reinvested in Institutional shares of the Fund from which the distributions
are paid. You may elect, however, to have your dividends and capital gains
distributions automatically reinvested in Institutional shares of another Fund
or portfolio offered by the Company. To elect this option, or for more
information, please call 1-800-551-2145.
DIVIDENDS AND DISTRIBUTIONS
Shareholders receive dividends and net capital gain distributions. Dividends
for each Fund are derived from its net investment income and are declared
daily and paid monthly. A Fund realizes capital gains whenever it sells
securities for a higher price than it paid for them. Capital gains
distributions will be made at least annually.
Shares in each Fund begin earning dividends on the day a purchase order is
processed and continue earning dividends through and including the day before
the shares are redeemed. If you purchased your Fund shares through a Bank,
your dividends and distributions will be paid in cash and wired to your Bank.
If you purchased your shares directly from the Company, your dividends and
distributions will be automatically reinvested in additional shares of the
Fund on which the dividend was declared unless you notify the Company in
writing that you wish to receive dividends and distributions in cash.
16
<PAGE>
TAX INFORMATION
As with any investment, you should consider the tax implications of an
investment in the Funds. The following briefly summarizes some of the
important tax considerations generally affecting the Funds and their
shareholders. You should consult your tax adviser with specific reference to
you own tax situation, including the applicability of any state and local
taxes. You will be advised at least annually regarding the Federal tax
treatment of dividends and distributions paid to you.
FEDERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Fund
qualifies, it generally will be relieved of Federal income tax on amounts
distributed to shareholders, but shareholders, unless otherwise exempt, will
pay income or capital gains taxes on distributions (except distributions that
are "exempt interest dividends" or are treated as a return of capital),
regardless of whether the distributions are paid in cash or reinvested in
additional shares.
Distributions paid out of a Fund's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be
taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds the shares. All other distributions, to the extent
taxable, are taxed to shareholders as ordinary income.
The Tax-Exempt Money Market Fund intends to pay substantially all of its
dividends as "exempt interest dividends." However, taxpayers are required to
report the receipt of "exempt interest dividends" on their Federal income tax
returns, and in two circumstances such amounts, while exempt from regular
Federal income tax, are taxable to persons subject to alternative minimum and
environmental taxes. First, "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986 generally will constitute
an item of tax preference for corporate and non-corporate taxpayers in
determining alternative minimum and environmental tax liability. Second,
"exempt interest dividends" must be taken into account by corporate taxpayers
in determining certain adjustments for alternative minimum and environmental
tax purposes. Shareholders who are recipients of Social Security Act or
Railroad Retirement Act benefits should note that "exempt interest dividends"
will be taken into account in determining the taxability of their benefit
payments.
The Tax-Exempt Money Market Fund will determine annually the percentages of
its net investment income which are exempt from the regular Federal income
tax, which constitute an item of tax preference for Federal alternative
minimum tax purposes, and which are fully taxable. These percentages will
apply uniformly to all distributions declared from net investment income
during that year and may differ significantly from the actual percentages for
any particular day.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in those months will be deemed to
have been received by the shareholders on December 31 of such year, if the
dividends are paid during the following January.
This is not an exhaustive discussion of applicable tax consequences, and
investors may wish to contact their tax advisers concerning investments in the
Funds. Except as discussed below, dividends paid by each Fund may be taxable
to investors under state or local law as dividend income even though all or a
portion of the dividends may be derived from interest on obligations which, if
realized directly, would be exempt from such income taxes. In addition, future
legislative or administrative changes or court decisions may materially affect
the tax consequences of investing in a Fund. Shareholders who are non-resident
alien individuals, foreign trusts or estates, foreign corporations or foreign
partnerships may be subject to different U.S. Federal income tax treatment.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are managed under the general
supervision of the Company's Board of Directors. The Statement of Additional
Information contains information about the Board of Directors.
17
<PAGE>
The Company has also employed a number of professionals to provide
investment management and other important services to the Funds. Mercantile-
Safe Deposit and Trust Company ("Mercantile") serves as the Funds' investment
adviser and administrator and has its principal offices at Two Hopkins Plaza,
Baltimore, Maryland 21201. BISYS Fund Services, a wholly-owned subsidiary of
The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus, Ohio 43219-
3035, is the registered broker-dealer that sells the Funds' shares, and BISYS
Fund Services Ohio, Inc., also a wholly-owned subsidiary of The BISYS Group,
Inc. and located at the same address, provides fund accounting services to the
Funds. The Funds also have a custodian, The Fifth Third Bank, located at 38
Fountain Square Plaza, Cincinnati, Ohio 45263, and a transfer and dividend
disbursing agent, State Street Bank and Trust Company, located at Two Heritage
Drive, North Quincy, Massachusetts 02171.
INVESTMENT ADVISER
Mercantile manages each Fund's investment portfolio, including selecting
portfolio investments and making purchase and sale orders. 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. As of June 30,
1996, Mercantile had approximately $ 26 billion in assets under active
management.
ADMINISTRATOR
Mercantile also serves as the Funds' administrator and generally assists in
all aspects of their operation and administration, including maintaining the
Funds' offices, coordinating the preparation of reports to shareholders,
preparing filings with state securities commissions, coordinating federal and
state tax returns, and performing other administrative functions.
EXPENSES
The Funds incur certain expenses in order to support the services described
above, as well as other matters essential to the operation of the Funds.
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 calculated daily and paid monthly at the annual rate of .25% of
the average daily net assets of each Fund. For the fiscal year ended May 31,
1996, Mercantile received advisory fees, after fee waivers, at the effective
annual rates of .24% of the average daily net assets of the Prime Money Market
Fund, .23% of the average daily net assets of the Government Money Market
Fund, and .23% of the average daily net assets of the Tax-Exempt Money Market
Fund.
In its capacity as administrator, Mercantile is also entitled to an
administration fee, computed daily and paid monthly, at the annual rate of
.125% of the average daily net assets of each Fund.
The Funds also bear other operating expenses which are described in more
detail in the Statement of Additional Information.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements
by Mercantile and the Funds' other service providers, as well as by certain
mandatory expense limitations imposed by state securities regulators. The
amount of the fee waivers may be changed at any time at the sole discretion of
Mercantile with respect to advisory and administration fees, and by the Funds'
other service providers, with respect to all other fees. As to any amounts
voluntarily waived or reimbursed, the service providers retain the ability to
be reimbursed by a Fund for such amounts prior to fiscal year-end. Such
waivers and reimbursements would increase the return to investors when made
but would decrease the return if a Fund were required to reimburse a service
provider.
18
<PAGE>
OTHER INFORMATION CONCERNING 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". The
Company's Charter authorizes the Board of Directors to issue up to
10,000,000,000 full and fractional shares of capital stock ($.001 par value
per share) and to classify or reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Board of Directors has
authorized the issuance of one class of shares in each of the Prime Money
Market, Government Money Market and Tax-Exempt Money Market Funds. The Board
of Directors has also authorized the issuance of additional classes of shares
representing interests in other investment portfolios of the Company. For
information regarding these other portfolios, call 1-800-551-2145.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shares of all
portfolios of the Company vote together and not by portfolio or class, unless
otherwise required by law or permitted by the Board of Directors. The Company
does not currently intend to hold annual shareholder meetings unless it is
required to do so by the Investment Company Act or other applicable law.
As of July 24, 1996, Mercantile held of record, in a fiduciary or other
representative capacity for beneficial owners, substantially all of the shares
of each Fund. 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
Investment Company Act by reason of its record ownership of such shares.
PERFORMANCE REPORTING
Performance information provides you with a method of measuring and
monitoring your investments. This section will help you to understand the
various terms that are commonly used to describe a Fund's performance. You may
see references to these terms in newsletters, advertisements and shareholder
communications. These publications may also include comparisons of a Fund's
performance to the performance of various indices and investments for which
reliable performance data are available and to averages, performance rankings
or other information compiled by recognized mutual fund statistical services.
. Yield shows the rate of income a Fund earns on its investments as a
percentage of its share price. It is calculated by dividing the
Fund's net investment income for a 7-day period by the product of
the average daily number of shares entitled to receive dividends and
the Fund's net asset value per share at the end of the 7-day period.
The result is then annualized. This represents the amount you would
earn if you remained invested in a Fund for a year and the Fund
continued to have the same yield for the year.
. Effective Yield is calculated similarly to yield but, when
annualized, the income earned by an investment in a Fund is assumed
to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed
reinvestment.
. Tax-Equivalent Yield of the Tax-Exempt Money Market Fund shows the
level of taxable yield needed to produce an after-tax yield
equivalent to the Fund's tax-free yield. It is calculated by
increasing the Fund's yield by the amount necessary to reflect the
payment of Federal income taxes at a stated tax rate. The Fund's
tax-equivalent yield will always be higher than its yield.
Any fees charged by a Bank directly to your account in connection with an
investment in a Fund will not be included in the Fund's calculations of yield.
Performance quotations of a Fund represent its past performance, and you
should not consider them representative of future results. Since performance
will fluctuate, you cannot necessarily compare an investment in Fund shares
with bank deposits, savings accounts and similar investment alternatives which
often provide an agreed or guaranteed fixed yield for a stated period of time.
19
<PAGE>
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 or your Bank will send you a statement of your account quarterly
and a confirmation after every transaction that affects your share balance or
your account registration. A statement with tax information will be mailed to
you by January 31 of each year and filed with the Internal Revenue Service. At
least twice a year, you will receive financial statements in the form of
Annual and Semi-Annual Reports of the Funds.
If you have any questions concerning the Company or any of the Funds, please
call 1-800-551-2145.
----------------
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.
20
<PAGE>
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:
The Fifth Third Bank
Cincinnati, Ohio
TRANSFER AGENT:
State Street Bank and Trust Company
Boston, Massachusetts
DISTRIBUTOR:
BISYS Fund Services
Columbus, Ohio
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. THERE
CAN BE NO GUARANTEE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
<PAGE>
M.S.D.&T.
FUNDS, INC.
. Tax-Exempt Money Market Fund (Trust)
, 1996
Prospectus
<PAGE>
M.S.D. & T. FUNDS, INC.
Two Hopkins Plaza
Baltimore, MD 21201
For current yield, purchase and redemption information, call 1-800-551-2145.
M.S.D. & T. Funds, Inc. (the "Company") is a no-load, open-end,
professionally managed investment company offering in this Prospectus shares
in the TAX-EXEMPT MONEY MARKET FUND (TRUST) (the "Fund"), which is designed to
seek as high a level of current income exempt from Federal income tax as is
consistent with liquidity and stability of principal by investing
substantially all of its assets in high-quality municipal obligations, the
interest on which is exempt from regular Federal income tax. The Fund may hold
uninvested cash reserves pending investment, during temporary defensive
periods or when suitable tax-exempt obligations are unavailable.
Mercantile-Safe Deposit and Trust Company is the Fund's investment
adviser. Shares of the Fund are sold without a sales charge by BISYS Fund
Services, the Fund's distributor.
SHARES OF THE FUND 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 BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT, THE
FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. THERE CAN BE NO
ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
This Prospectus briefly sets forth information about the Fund 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 Fund, contained in a Statement of Additional Information
dated , 1996, 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 1-800-551-2145. 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.
, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 3
TAX-EXEMPT MONEY MARKET FUND (TRUST)....................................... 4
INVESTMENT OBJECTIVE, POLICIES AND RISKS................................... 5
FUNDAMENTAL LIMITATIONS.................................................... 8
HOW TO PURCHASE AND REDEEM SHARES.......................................... 8
PRICING OF SHARES.......................................................... 10
DIVIDENDS AND DISTRIBUTIONS................................................ 10
TAX INFORMATION............................................................ 11
MANAGEMENT OF THE COMPANY.................................................. 12
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES.................... 13
PERFORMANCE REPORTING...................................................... 13
MISCELLANEOUS.............................................................. 14
</TABLE>
2
<PAGE>
EXPENSE SUMMARY
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS
AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS
<TABLE>
<CAPTION>
TAX-EXEMPT
MONEY
MARKET FUND (TRUST)
-------------------
<S> <C>
Management Fees........................................... None
Other Expenses (after fee waivers) (includes
administration, custody and transfer agency, and
miscellaneous other charges)............................. .22%
----
Total Fund Operating Expenses (after fee waivers)......... .22%
====
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.................................................... $ 2
3 Years................................................... $ 7
5 Years................................................... $12
10 Years.................................................. $28
</TABLE>
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.
The purpose of this Expense Summary is to assist investors in
understanding the various costs and expenses that investors in the Fund will
bear indirectly as shareholders. The Expense Summary reflects expenses the
Tax-Exempt Money Market Fund (Trust) incurred during the fiscal year ended May
31, 1996. Absent fee waivers, Other Expenses and Total Fund Operating Expenses
for the fiscal year ended May 31, 1996 would have been .27% and .27%,
respectively, of the Fund's average daily net assets.
The investment adviser and administrator may waive fees and/or reimburse
expenses of the Fund from time to time. These waivers and reimbursements are
voluntary and may be terminated at any time without the consent of the Fund.
Any fees that are charged by the investment adviser, its affiliates or other
institutions directly to their customer accounts for services related to an
investment in the Fund are in addition to, and are not reflected in, the fees
and expenses described above.
For more complete descriptions of the Fund's operating expenses, see
"Management of the Company" in this Prospectus.
FINANCIAL HIGHLIGHTS
The following Financial Highlights, which have been derived from the
Fund's financial statements, have been audited by Coopers & Lybrand L.L.P.,
the Fund's independent accountants, whose unqualified report on the financial
statements containing such information for the five years in the period ended
May 31, 1996 is incorporated by reference into the Statement of Additional
Information. The Financial Highlights should be read in conjunction with the
financial statements and related notes, which are also incorporated by
reference into the Statement of Additional Information. Further information
about the performance of the Fund is available in the Company's Annual Report
to Shareholders for the fiscal year ended May 31, 1996. 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.
3
<PAGE>
TAX-EXEMPT MONEY MARKET FUND (TRUST)
Financial Highlights for a share of the Tax-Exempt Money Market Fund
(Trust) outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR 7/25/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED TO
5/31/96 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91 5/31/90
------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1 .00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- --------
Income From Investment
Operations:
Net Investment Income.. 0.0340 0.0320 0.0219 0.0238 0.0362 0.0512 0.0491
Net Realized Gain on
Investments........... -- -- 0.0003 -- -- -- --
------- ------- ------- ------- ------- ------- --------
Total From Investment
Operations........... 0.0340 0.0320 0.0222 0.0238 0.0362 0.0512 0.0491
------- ------- ------- ------- ------- ------- --------
Less Distributions:
Dividends to Sharehold-
ers from Net Invest-
ment Income........... (0.0340) (0.0320) (0.0219) (0.0238) (0.0362) (0.0512) (0.0491)
Distributions to Share-
holders from Net Capi-
tal Gains............. -- -- (0.0003) -- -- -- --
------- ------- ------- ------- ------- ------- --------
Total Distributions... (0.0340) (0.0320) (0.0222) (0.0238) (0.0362) (0.0512) (0.0491)
------- ------- ------- ------- ------- ------- --------
Net Asset Value, End of
Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1 .00
======= ======= ======= ======= ======= ======= ========
Total Return............ 3.45% 3.25% 2.24% 2.40% 3.68% 5.24% 5.92%/2/
Ratios/Supplemental Data
Net Assets, End of Pe-
riod ($000)........... 46,541 55,043 73,230 55,975 62,502 91,315 81,055
Ratio of Expenses to
Average Net As-
sets/3/............... 0.22% 0.22% 0.20% 0.20% 0.20% 0.20% 0.20%/2/
Ratio of Net Investment
Income to Average Net
Assets................ 3.40% 3.14% 2.19% 2.38% 3.63% 5.08% 5.76%/2/
</TABLE>
- -------------------
/1/ Commencement of operations.
/2/ Annualized.
/3/ Without the waiver of administration fees, the ratio of expenses to
average net assets for the years ended May 31, 1996, May 31, 1995, May 31,
1994, May 31, 1993, May 31, 1992 and May 31, 1991 and the period ended May 31,
1990 would have been .27%, .28%, .26%, .21%, .21%, .21% and .22% (annualized),
respectively.
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INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Fund's investment adviser (the "Adviser") uses a range of different
investments and investment techniques in seeking to achieve the Fund's
investment objective. These investments and investment techniques, which
involve various risks, are described in the following sections. The Adviser
will use its best efforts to achieve the Fund's investment objective, although
its achievement cannot be assured. An investor should not consider an
investment in the Fund to be a complete investment program.
GENERAL
The Fund's investment objective is to seek as high a level of current
income exempt from Federal income tax as is consistent with liquidity and
stability of principal by investing substantially all of its assets in a
diversified portfolio of short-term obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their political subdivisions, agencies, instrumentalities and
authorities the interest on which, in the opinion of counsel to the issuer or
bond counsel, is exempt from regular Federal income tax ("municipal
obligations"). The Fund seeks to achieve its investment objective by investing
primarily in:
. municipal notes, including variable rate demand notes, rated at the time
of purchase within the highest rating category assigned by one or more
unaffiliated nationally recognized statistical rating organizations
(each a "Rating Agency");
. tax-exempt commercial paper rated at the time of purchase within the
highest rating category assigned by one or more Rating Agencies;
. municipal bonds rated at the time of purchase within one of the two
highest rating categories assigned by one or more Rating Agencies; and
. unrated municipal notes, tax-exempt commercial paper, municipal bonds
and other instruments that are of comparable quality as determined by
the Adviser pursuant to guidelines approved by the Company's Board of
Directors.
As a matter of fundamental policy, during normal market conditions at
least 80% of the Fund's total assets will be invested in municipal obligations
the interest on which is exempt from regular Federal income tax and is not
treated as a specific tax preference under the Federal alternative minimum tax
for either individuals or corporations. Up to 20% of the Fund's total assets
may be invested in private activity bonds that are subject to the Federal
alternative minimum tax or taxable money market instruments, although the Fund
does not intend to invest in such instruments on a regular basis. The Fund may
hold uninvested cash reserves during temporary defensive periods or if, in the
opinion of the Adviser, suitable municipal obligations are not available.
QUALITY, MATURITY AND DIVERSIFICATION
All securities acquired by the Fund will be determined at the time of
purchase by the Adviser, pursuant to guidelines approved by the Company's
Board of Directors, to present minimal credit risks and will be "Eligible
Securities" as defined by the SEC. Eligible Securities are (a) securities that
either (i) have short-term debt ratings at the time of purchase in the two
highest rating categories assigned by at least two Rating Agencies (or one
Rating Agency if the security is rated by only one Rating Agency), or (ii) are
comparable in priority and security with an instrument issued by an issuer
which has such ratings, and (b) securities that are unrated (including
securities of issuers that have long-term but not short-term ratings) but are
of comparable quality as determined in accordance with guidelines approved by
the Company's Board of Directors. In accordance with current SEC regulations,
each Fund intends to invest no more than 5% of its total assets in securities,
other than U.S. Government securities, that are rated at the time of purchase
within the second highest rating category assigned by one or more Rating
Agencies (including securities that are unrated but determined by the Adviser
to be of comparable quality), provided, however, that this 5% limitation shall
only apply to the Fund's purchase of certain municipal obligations which are
not backed by a municipal issuer. See the Statement of Additional Information
for a description of the Rating Agencies' various rating categories.
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The Fund is managed so that the average dollar-weighted maturity of all
instruments held by it will not exceed 90 days. In no event will the Fund
purchase securities which mature more than 397 days from the date of purchase
(except for certain variable and floating rate instruments). Securities in
which the Fund invests may not earn as high a level of income as longer-term
or lower quality securities, which generally have greater market risk and more
fluctuation in market value.
The Fund is classified as a diversified portfolio under the Investment
Company Act.
OTHER INVESTMENT POLICIES AND RELATED RISKS
MUNICIPAL OBLIGATIONS
The Fund invests primarily in municipal obligations. The two main types of
municipal obligations are "general obligation" securities (which are secured
by the issuer's full faith, credit and taxing power) and "revenue" securities
(which are payable only from revenues received from the operation of a
particular facility or other 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 draws on a reserve fund, the restoration of which is not a
legal requirement. Private activity bonds (which are a type of obligation
that, although exempt from regular Federal income tax, may be subject to the
Federal alternative minimum tax) are usually revenue securities issued by or
for public authorities to finance a privately operated facility.
In many cases, the Internal Revenue Service has not ruled on whether the
interest received on a municipal obligation is tax-exempt and, accordingly,
the purchase of such securities is based on the opinion of bond counsel or
counsel to the issuers of such instruments. The Company and the Adviser rely
on these opinions and do not intend to review the bases for them.
Municipal obligations purchased by the Fund in some cases may be insured
as to the timely payment of principal and interest. There is no guarantee,
however, that the insurer will meet its obligations in the event of a default
in payment by the issuer. In other cases, municipal obligations may be backed
by letters of credit or guarantees issued by domestic or foreign banks or
other financial institutions which are not subject to federal deposit
insurance. Adverse developments affecting the banking industry generally or a
particular bank or financial institution that has provided its credit or
guarantee with respect to a municipal obligation held by the Fund, including a
change in the credit quality of any such bank or financial institution, could
result in a loss to the Fund and adversely effect the value of its shares.
Foreign letters of credit and guarantees involve certain risks in addition to
those of domestic obligations. The institutions issuing such foreign letters
of credit and guarantees may be subject, for example, to less stringent
reserve requirements and different accounting, auditing and recordkeeping
requirements.
VARIABLE AND FLOATING RATE INSTRUMENTS
The Fund may purchase variable and floating rate instruments, which may
have a maturity in excess of 397 days but will, in any event, permit a Fund to
demand payment of the principal of the instrument at least once every 397 days
upon not more than 30 days' notice (unless the instrument is guaranteed by the
U.S. Government or an agency or instrumentality thereof). Such instruments may
include variable rate demand notes that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
There may be no active secondary market with respect to a particular variable
or floating rate instrument. Nevertheless, the periodic readjustments of their
interest rates tend to ensure that their value to the Fund will approximate
their par value. Variable and floating rate obligations that cannot be
disposed of promptly within seven business days and in the usual course of
business without taking a reduced price will be considered illiquid and
subject to the Fund's limitation on illiquid investments described below under
"Managing Liquidity".
REVERSE REPURCHASE AGREEMENTS
The Fund may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, the Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be used to meet
redemption requests without selling portfolio securities. Reverse repurchase
agreements involve the risk of counterparty default and
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<PAGE>
possible loss of collateral held by the counterparty. Reverse repurchase
agreements are considered to be borrowings under the Investment Company Act.
WHEN-ISSUED PURCHASES
The Fund may purchase securities on a "when-issued" basis. These
transactions, which involve a commitment by the Fund to purchase particular
securities with payment and delivery taking place at a future date, permit the
Fund to lock in a price or yield on a security it intends to purchase,
regardless of future changes in interest rates. The Fund will bear the risk,
however, that the price or yield obtained in a transaction may be less
favorable than the price or yield available in the market when the delivery
takes place. When-issued transactions are not expected to exceed 25% of the
value of the Fund's total assets under normal circumstances. Because the Fund
is required to set aside cash or liquid high grade debt obligations to satisfy
these purchase commitments, the 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 Fund does not intend to engage in when-issued
transactions for speculative purposes.
STAND-BY COMMITMENTS
The Fund may acquire stand-by commitments under which a dealer agrees to
purchase certain municipal obligations at the Fund's option at a price equal
to their amortized cost value plus interest. These commitments will be used
only to assist in maintaining the Fund's liquidity and not for trading
purposes.
OTHER INVESTMENT COMPANIES
The Fund may invest in securities issued by other investment companies
which invest in eligible quality, short-term debt securities and which seek to
maintain a $1.00 net asset value per share, i.e., "money market" funds. Such
investments will be made by the Fund in connection with the management of its
daily cash position and will be subject to the requirements of applicable
securities laws. When the Fund invests in another investment company, it pays
a pro rata portion of the advisory and other expenses of that company as a
shareholder of that company. These expenses are in addition to the Fund's own
expenses.
MANAGING LIQUIDITY
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, as a matter of fundamental policy the Fund will not knowingly invest
more than 10% of the value of its net assets in illiquid securities. Illiquid
securities include restricted securities and other securities for which market
securities are not readily available.
OTHER RISK CONSIDERATIONS
As with an investment in any mutual fund, an investment in the Fund
entails market and economic risks associated with investments generally.
However, there are certain specific risks of which you should be aware.
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. When the Fund's assets are concentrated in
obligations payable from revenues on similar projects or in industrial
development bonds, the Fund will be subject to the particular risks (including
legal and economic conditions) presented by such securities to a greater
extent than it would be if its assets were not so concentrated. Furthermore,
payment of municipal obligations held by the Fund relating to certain projects
may be secured by mortgages or deeds of trust. In the event of a default,
enforcement of a mortgage or deed of trust may be delayed and the amount of
the proceeds received may not be enough to pay the principal and accrued
interest on the defaulted municipal obligations.
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<PAGE>
FUNDAMENTAL LIMITATIONS
The Fund's investment objective discussed above is "fundamental", which
means that it may not be changed without the approval of a majority of the
Fund's outstanding shares. Except as otherwise noted, the Fund's investment
policies discussed above are not fundamental and may be changed by the
Company's Board of Directors without shareholder approval. However, the Fund
also has in place certain "fundamental" limitations that also cannot be
changed without the approval of a majority of the Fund's outstanding shares.
Some of these fundamental limitations are summarized below, and all of the
Fund's fundamental limitations are set out in full in the Statement of
Additional Information.
1. The 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
total assets of the Fund can be invested without regard to the 5% limitation.
2. The 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,
subject to certain exceptions.
3. The Fund may not borrow money except for temporary purposes in amounts
up to 10% of its total assets at the time of such borrowing. Whenever any
borrowings are outstanding, the Fund will not make any investments.
4. The Fund may not knowingly invest more than 10% of its net assets in
illiquid securities.
As a matter of non-fundamental policy and in accordance with current
regulations of the SEC, the Fund intends to subject its entire investment
portfolio, other than U.S. Government securities, to the 5% limitation
described in Investment Limitation No. 1 above. However, in accordance with
such regulations, the Fund may invest more than 5% (but no more than 25%) of
its total assets in the securities of a single issuer for a period of up to
three business days, provided the securities are rated at the time of purchase
in the highest rating category assigned by one or more Rating Agencies or are
determined by the Adviser to be of comparable quality. The Fund may not hold
more than one such investment at any one time.
If a percentage limitation is met at the time an investment is made, a
subsequent change in that percentage resulting from a change in value of the
Fund's portfolio securities does not mean that the limitation has been
violated.
In order to permit the sale of the Fund's shares in certain states, the
Company may agree to certain restrictions that are stricter than the
investment policies and limitations described above. If the Company determines
that any of these restrictions is no longer in the Fund's best interests, it
may revoke its agreement to abide by such restrictions by no longer selling
shares in the state involved.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares of the Fund are sold on a continuous basis without a sales load by
the Company's distributor, BISYS Fund Services (the "Distributor"). The
Distributor acts as agent for the Fund in the distribution of its shares and,
in such capacity, has agreed to use appropriate efforts to promote the Fund
and to solicit orders for the purchase of the Fund's shares. The Distributor's
principal offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
PURCHASE OF SHARES
Shares of the Fund are sold only to qualifying trust accounts maintained
by Mercantile-Safe Deposit and Trust Company and its affiliated and
correspondent banks (referred to herein individually as a "Bank" and
collectively as the "Banks"). The Company's shares will normally be held of
record by the Banks. Shareholders purchasing shares of the Fund may also
include officers, directors, or employees of the Banks. Shares may be
purchased through procedures established by the Banks in connection with their
customer accounts, including
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<PAGE>
specialized procedures for the purchase or redemption of Fund shares, such as
pre-authorized or automatic purchase and redemption programs. The Company
imposes no minimum initial or subsequent investment, although the Banks have
established a $100 minimum initial and subsequent investment requirement for
shares purchased on behalf of their customers. The Company will send
confirmations of share purchases and redemptions to the Banks. Beneficial
ownership of the Company's shares will be recorded by the Banks and reflected
in the account statements they provide to their customers. Information
relating to specific purchase procedures is available from the Banks.
Shares are sold at the net asset value per share next determined after
receipt of a purchase order by the Fund's transfer agent, State Street Bank
and Trust Company (the "Transfer Agent"). Purchase orders for shares will be
accepted only on a day on which the Distributor, the Fund's custodian, The
Fifth Third Bank (the "Custodian"), the Transfer Agent and the purchasing Bank
are open for business ("Business Days"), and must be transmitted by telephone
to the Transfer Agent. Orders received before 11:00 A.M. Eastern Time will be
executed at 11:00 A.M. if the Custodian has received payment by the close of
regular trading hours (currently 4:00 P.M. Eastern Time) on the New York Stock
Exchange (the "Exchange"). Orders received after 11:00 A.M. but before the
close of regular trading hours on the Exchange will be executed at 11:00 A.M.
the following Business Day if the Custodian receives payment by the close of
regular trading hours on the Exchange on the following Business Day. Orders
received at other times, and orders for which payment has not been received by
the close of regular trading hours on the Exchange, will not be accepted and
notice thereof will be given promptly to the Bank that submitted the order.
Payments for orders which are not received or accepted will be returned after
prompt inquiry to the sending Bank. If a Bank accepts a purchase order from
its customer on a non-Business Day, the order will not be executed until it is
received and accepted on a Business Day in accordance with the foregoing
procedures.
On a Business Day when the Exchange closes early due to a partial holiday
or otherwise, the Company reserves the right to advance the times at which
purchase orders must be received in order to be processed on that Business
Day.
It is the Banks' responsibility to transmit their customers' orders for
the purchase of shares to the Transfer Agent and to wire the required funds in
payment on a timely basis to the Custodian. The Company reserves the right to
reject any purchase order.
Payment for Fund shares may be made only in Federal funds or other funds
immediately available to the Custodian.
REDEMPTION OF SHARES
A 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 a
Bank. The Banks are responsible for transmitting redemption orders to the
Transfer Agent and crediting their customers' accounts 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 services and charges, if any, is available from the Banks. Absent
instructions to the contrary, customers for whose accounts automatic purchases
and redemptions will be made may receive monthly confirmations of share
transactions from their Bank.
Redemption orders must be transmitted to the Transfer Agent by telephone
in the manner described under "Purchase of Shares." Shares are redeemed at the
net asset value per share next determined after receipt of the redemption
order.
Payment for redemption orders received before 11:00 A.M. Eastern Time on a
day that the Distributor, the Custodian, the Transfer Agent and the redeeming
Bank are open for business is normally made in Federal funds wired the same
Business Day to the Bank. Payment for redemption orders which are received
between 11:00 A.M. Eastern Time and the close of regular trading hours
(currently 4:00 p.m. Eastern Time) on the Exchange or on a non-Business Day is
normally wired to the Bank in Federal funds on the next Business Day. However,
in
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<PAGE>
both cases the Company reserves the right to wire 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.
On a Business Day when the Exchange closes early due to a partial holiday
or otherwise, the Company reserves the right to advance the times at which
redemption orders must be received in order to be processed on that Business
Day.
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 this
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.
The Company may also redeem shares involuntarily or make payment for
redemption in securities if it appears appropriate to do so in light of its
responsibilities under the 1940 Act. See the Statement of Additional
Information under "Additional Purchase and Redemption Information."
PRICING OF SHARES
The net asset value of the Fund is determined and its shares are priced as
of 11:00 A.M. Eastern Time and as of the close of regular trading hours
(currently 4:00 P.M. Eastern Time) each weekday, with the exception of those
holidays on which the Federal Reserve Bank of Cleveland, the Fund's investment
adviser or the New York Stock 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. Net asset value per share for purposes of pricing sales and
redemptions is calculated by dividing the value of all securities and other
assets belonging to the Fund, less its liabilities, by the number of the
Fund's outstanding shares.
The assets in the Fund are valued based upon the amortized cost method.
Although the Fund seeks to maintain its net asset value per share at $1.00,
there can be no assurance that the net asset value per share will not vary.
Further information about the Company's valuation policies is contained in the
Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund is declared daily and paid monthly
as a dividend to its shareholders. Shares in the 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 by wire transfer to the Banks within five
Business Days after the end of each calendar month. Shareholders may elect to
have their dividends reinvested in additional shares of the Fund at the net
asset value of such shares on the last Business Day of the month in which such
dividend is declared. Such election, or any revocation thereof, must be made
in writing to the shareholder's Bank and will become effective with respect to
dividends paid after its receipt. The crediting of any payment of dividends to
customers of the Banks or the reinvestment of such dividends will be in
accordance with the procedures governing their customer accounts. Reinvested
dividends receive the same tax treatment as those paid in cash.
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TAX INFORMATION
The 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 the Fund of liability for Federal income taxes to the
extent its earnings are distributed as required by the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that the 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 net of certain deductions for a taxable
year. In general, the Fund's investment company taxable income will be its
taxable income, including interest, 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 Fund intends to distribute as exempt-interest dividends substantially
all of its municipal obligations interest income net of certain deductions
each year. 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.") Exempt-interest
dividends generally will be exempt from state and local taxes as well.
However, in some situations, distributions of net income may be taxable to
investors under state or local law as dividend income even though a
substantial portion of such distributions may be derived from interest on tax-
exempt obligations which, if realized directly, would be exempt from such
income taxes.
If the 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 applicable
to 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 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 0.12% 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.
To the extent, if any, dividends paid by the Fund are derived from taxable
income (for example, from interest on certificates of deposit, commercial
paper or U.S. Government obligations), such dividends will be subject to
Federal income tax (whether such dividends are paid in cash or additional
shares) and may also be subject to state and local 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 the Fund on
December 31 of such year in the event such dividends are actually paid during
January of the following year.
Shareholders of the 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.
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The foregoing summarizes some of the important Federal tax considerations
generally affecting the Fund and its shareholders but is not intended as a
substitute for careful tax planning. Potential investors in the 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 ADMINISTRATOR
Mercantile-Safe Deposit and Trust Company ("Mercantile") serves as the
Fund's investment adviser. Mercantile is the lead bank of Mercantile
Bankshares Corporation, a multi-bank holding company organized in Maryland in
1969. Mercantile manages the Fund's portfolio and is responsible for all
purchases and sales of its portfolio securities. Mercantile is not entitled to
any compensation under its Advisory Agreement with respect to the Fund for the
services provided and expenses assumed thereunder. Mercantile has acted as
investment adviser to the Fund since its 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. As of June 30, 1996, Mercantile had approximately $26 billion in
assets under active management. Mercantile's principal business address is Two
Hopkins Plaza, Baltimore, Maryland 21201.
Mercantile also serves as the Fund's administrator and generally assists
in all aspects of its 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 the Fund.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company (the "Transfer Agent") serves as the
Fund's transfer and dividend disbursing agent. Communications to the Transfer
Agent should be directed to Two Heritage Drive, North Quincy, Massachusetts
02171. The Fifth Third Bank (the "Custodian"), located at 38 Fountain Square
Plaza, Cincinnati, Ohio 45263, serves as custodian of the Fund's assets.
EXPENSES
The Fund incurs expenses in order to support the services described above,
as well as other matters essential to the operation of the Funds. In addition
to the advisory and administration fees set forth above, the Fund also bears
other operating expenses which are described in more detail in the Statement
of Additional Information.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expenses
reimbursements by Mercantile and the Fund's other service providers, as well
as by certain mandatory expense limitations imposed by state securities
regulators. The amount of the fee waivers may be changed at any time at the
sole discretion of Mercantile with respect to administration fees, and by the
Fund's other service providers, with respect to all other fees. As to any
amounts voluntarily waived or reimbursed, the service providers retain the
ability to be reimbursed by the Fund for such amounts prior to fiscal year-
end. Such waivers and reimbursements would increase the return to investors
when made but would decrease the return if the Fund were required to reimburse
a service provider.
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OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES
The Company was incorporated in Maryland on March 7, 1989 as an "open-end
management investment company." The Company's Charter authorizes the Board of
Directors to issue up to 10,000,000,000 full and fractional shares of capital
stock ($.001 par value per share) and to classify or reclassify any unissued
shares into one or more classes of shares. Pursuant to such authorization, the
Board of Directors has authorized the issuance of one class of shares in the
Tax-Exempt Money Market Fund (Trust). The Board of Directors has also
authorized the issuance of additional classes of shares representing interests
in other investment portfolios of the Company. For more information regarding
these other portfolios, call 1-800-551-2145.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shares of all
portfolios of the Company vote together and not by portfolio or class, unless
otherwise required by law or permitted by the Board of Directors. The Company
does not currently intend to hold annual shareholder meetings unless it is
required to do so by the 1940 Act or other applicable law.
As of July 24, 1996, Mercantile held of record, in a fiduciary or other
representative capacity for beneficial owners, substantially all of the shares
of the Fund. 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 Fund within the meaning of the 1940
Act by reason of its record ownership of such shares.
PERFORMANCE REPORTING
From time to time the Fund may quote its "yield," "effective yield," "tax-
equivalent yield" and "monthly yield" in advertisements, sales literature or in
reports to shareholders. These yield figures are based on historical earnings
and are not intended to indicate future performance. The "yield" quoted in
advertisements refers to the income generated by an investment in the Fund over
a seven-day period identified in the advertisement. This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of the assumed reinvestment. The
"tax-equivalent yield" shows the level of taxable yield necessary to produce an
after-tax yield equivalent to the Fund's tax-free yield. This is calculated by
increasing the Fund's yield (calculated as above) by the amount necessary to
reflect the payment of Federal income tax at a stated tax rate. The tax-
equivalent yield will always be higher than the Fund's yield. The "monthly
yield" refers to income generated by an investment in the Fund over the
calendar month period identified in the advertisement. This income is then
"annualized." That is, the amount of income generated by the investment during
that month is assumed to be generated each month over a twelve-month period and
is shown as a percentage of the investment. In addition, the Fund may from time
to time quote yields relating to time periods other than those described above.
Such yields will be computed in a manner which is similar to those computations
described.
IT IS IMPORTANT TO NOTE THAT PERFORMANCE FIGURES ARE BASED ON HISTORICAL
EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The Fund's yields
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 will be affected
by portfolio quality, composition, maturity, market conditions and the level of
the Fund's operating expenses. 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. Fees paid by
shareholders to Banks for automatic investment or other cash management
services, if any, would reduce the Fund's effective yield from that stated.
13
<PAGE>
MISCELLANEOUS
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Company or the 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 the Fund or (b)
67% or more of the shares of the Company or the Fund present at a meeting if
more than 50% of the outstanding shares of the Company or the Fund are
represented at the meeting in person or by proxy.
Investors with inquiries regarding the Company or the Fund should call 1-
800-551-2145.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUND'S 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 FUND OR ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE COMPANY, THE FUND OR BY ITS DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
14
<PAGE>
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, Maryland
CUSTODIAN:
The Fifth Third Bank
Cincinnati, Ohio
TRANSFER AGENT:
State Street Bank and Trust Company
Boston, Massachusetts
DISTRIBUTOR:
BISYS Fund Services
Columbus, OH
In considering this investment please read this Prospectus carefully.
SHARES OF THE FUND 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
FUND INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THERE CAN
BE NO GUARANTEE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE
OF $1.00 PER SHARE.
<PAGE>
M.S.D.&T.
FUNDS, INC.
. Value Equity Fund
. International Equity Fund
. Intermediate Fixed Income Fund
. Maryland Tax-Exempt Bond Fund
Institutional Shares
, 1996
Prospectus
<PAGE>
M.S.D. & T. FUNDS, INC.
PROSPECTUS
FOR
INSTITUTIONAL SHARES
OF THE
VALUE EQUITY FUND
INTERNATIONAL EQUITY FUND
INTERMEDIATE FIXED INCOME FUND
AND MARYLAND TAX-EXEMPT BOND FUND
, 1996
<TABLE>
- ------------------------------------------------------------------------------------
<CAPTION>
M.S.D. & T.
FUND GOAL FOR INVESTORS WHO WANT
- ------------------------------------------------------------------------------------
<S> <C> <C>
VALUE EQUITY Long-term capital appreciation with Long-term capital appreciation
income as a secondary objective and are willing to accept the
through investments primarily in risks associated with
common and preferred stock and debt investments in equity
securities convertible into common securities.
stock.
- ------------------------------------------------------------------------------------
INTERNATIONAL Long-term growth of income and Long-term growth of capital and
EQUITY capital with reasonable risk through income and are willing to
investments primarily in equity accept the risks associated
securities of foreign issuers. with foreign investments.
- ------------------------------------------------------------------------------------
INTERMEDIATE High level of current income and Current income from corporate
FIXED INCOME protection of capital through and government securities and
investments primarily in corporate can accept fluctuations in
and government debt obligations. The price and yield.
Fund will generally have an average
weighted maturity of from three to
ten years.
- ------------------------------------------------------------------------------------
MARYLAND TAX- High tax-free income through Current income from an
EXEMPT BOND investments primarily in Maryland investment that is both free
municipal obligations. from Federal and Maryland state
and local income taxes.
- ------------------------------------------------------------------------------------
</TABLE>
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. IN ADDITION, THE DIVIDENDS PAID BY A FUND WILL GO UP AND DOWN.
MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY SERVES AS INVESTMENT ADVISER AND
ADMINISTRATOR TO THE FUNDS, IS PAID FEES FOR ITS SERVICES, AND IS NOT
AFFILIATED WITH BISYS FUND SERVICES, THE FUNDS' DISTRIBUTOR.
This Prospectus relates to Institutional shares (or "shares") of the Value
Equity, International Equity, Intermediate Fixed Income and Maryland Tax-
Exempt Bond Funds (the "Funds") of M.S.D. & T. Funds, Inc. (the "Company"), a
no-load, open-end management investment company. This Prospectus describes
concisely the information about the Funds that you should know before
investing. Please read and keep it for future reference. More information
about the Funds is contained in a Statement of Additional Information dated
, 1996 that has been filed with the Securities and Exchange Commission
("SEC"). The Statement of Additional Information, which can be obtained free
of charge upon request by writing to the Company at Two Hopkins Plaza,
Baltimore, Maryland 21201 or by calling 1-800-551-2145, is incorporated by
reference into (considered a part of) 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY............................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVES, POLICIES AND RISKS.................................. 7
FUNDAMENTAL LIMITATIONS.................................................... 16
INVESTING IN THE FUNDS..................................................... 17
SHAREHOLDER SERVICES....................................................... 21
DIVIDENDS AND DISTRIBUTIONS................................................ 22
TAX INFORMATION............................................................ 23
MANAGEMENT OF THE COMPANY.................................................. 25
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES.................... 26
PERFORMANCE REPORTING...................................................... 27
MISCELLANEOUS.............................................................. 28
</TABLE>
IF YOU HAVE QUESTIONS
For current yield, purchase and redemption information, call 1-800-551-2145.
2
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a Fund.
Annual Fund Operating Expenses are paid out of a Fund's assets and include
fees for portfolio management, maintenance of shareholder accounts, general
Fund administration, accounting, custody and other services.
Below is information regarding the operating expenses for the Funds'
Institutional shares. Examples based on this information are also provided.
<TABLE>
<CAPTION>
INTERNATIONAL INTERMEDIATE MARYLAND
VALUE EQUITY FIXED TAX-EXEMPT
EQUITY FUND FUND INCOME FUND BOND FUND
----------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees (after fee
waivers)/1/................. .44% .73% .25% .00%
Other Expenses (after fee
waivers) (includes adminis-
tration, custody and trans-
fer agency, and miscellane-
ous other charges)/1/....... .29% .32% .35% .51%
--- ---- --- ---
Total Fund Operating Expenses
(after fee waivers)/1/...... .73% 1.05% .60% .51%
=== ==== === ===
</TABLE>
- -------------------
/1/ This expense information is provided to help you understand the various
costs and expenses that you would bear indirectly as a shareholder of one of
the Funds. The expense information with respect to the Value Equity,
International Equity and Intermediate Fixed Income Funds reflects expenses the
Funds incurred during the fiscal year ended May 31, 1996 on their
Institutional shares. Without fee waivers by the investment adviser and
administrator, Management Fees, Other Expenses and Total Fund Operating
Expenses, stated as a percentage of average daily net assets, would have been
.60%, .29% and .89%, respectively, for Institutional shares of the Value
Equity Fund; .80%, .37% and 1.17%, respectively, for Institutional shares of
the International Equity Fund; and .35%, .37% and .72%, respectively, for
Institutional shares of the Intermediate Fixed Income Fund. The expense
information with respect to the Maryland Tax-Exempt Bond Fund is based on
expenses incurred by the Fund during the last fiscal year, restated to reflect
the expenses which the Fund expects to incur during the current fiscal year.
Without fee waivers by the investment adviser and administrator, Management
Fees, Other Expenses and Total Fund Operating Expenses would be .50%, .51% and
1.01%, respectively, for Institutional shares of the Maryland Tax-Exempt Bond
Fund.
The investment adviser and administrator may waive fees and/or reimburse
expenses of the Funds from time to time. These waivers and reimbursements are
voluntary and may be terminated at any time with respect to any Fund without
the consent of the Fund. You should note that any fees that are charged by the
investment adviser, its affiliates or any other institutions directly to their
customer accounts for services related to an investment in the Funds are in
addition to, and are not reflected in, the fees and expenses described above.
For more complete descriptions of the Funds' operating expenses, see
"Management of the Company" in this Prospectus.
EXAMPLE:
Assume a Fund's annual return is 5% and its expenses are the same as those
stated above. For every $1,000 you invest, here's how much you would pay in
total expenses if you closed your account after the number of years indicated:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Value Equity Fund............................... $ 7 $23 $41 $ 91
International Equity Fund....................... $11 $33 $58 $128
Intermediate Fixed Income Fund.................. $ 6 $19 $33 $ 75
Maryland Tax-Exempt Bond Fund................... $ 5 $16 $28 $ 65
</TABLE>
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST
OR FUTURE INVESTMENT RETURNS OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS
AND OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights, which have been derived from the Funds'
financial statements, have been audited by Coopers & Lybrand L.L.P., the
Funds' independent accountants, whose unqualified report on the financial
statements containing such information for the five years in the period ended
May 31, 1996 is incorporated by reference into the Statement of Additional
Information. The Financial Highlights should be read along with the financial
statements and related notes, which are also incorporated by reference into
the Statement of Additional Information. Further information about the
performance of the Funds is available in the Company's Annual Report to
Shareholders for the fiscal year ended May 31, 1996. 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.
VALUE EQUITY FUND
Financial Highlights for an Institutional share of the Value Equity Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR 2/28/91/1/
ENDED ENDED ENDED ENDED ENDED TO
5/31/96 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................. $ 13.42 $12.14 $12.39 $11.36 $10.69 $ 10.00
------- ------ ------ ------ ------ --------
Income From Investment Op-
erations:
Net Investment Income..... 0.33 0.35 0.29 0.29 0.33 0.09
Net Realized and
Unrealized Gain (Loss) on
Investments and
Foreign Currency......... 1.89 1.55 (0.18) 1.13 0.66 0.60
------- ------ ------ ------ ------ --------
Total From Investment Op-
erations................. 2.22 1.90 0.11 1.42 0.99 0.69
------- ------ ------ ------ ------ --------
Less Distributions:
Dividends to Shareholders
from Net Investment In-
come..................... (0.35) (0.34) (0.28) (0.30) (0.32) --
Distributions to Share-
holders from Net Capital
Gains.................... (0.71) (0.28) (0.08) (0.09) -- --
------- ------ ------ ------ ------ --------
Total Distributions....... (1.06) (0.62) (0.36) (0.39) (0.32) 0.00
------- ------ ------ ------ ------ --------
Net Asset Value, End of Pe-
riod...................... $ 14.58 $13.42 $12.14 $12.39 $11.36 $ 10.69
======= ====== ====== ====== ====== ========
Total Return............... 17.24% 16.22% 0.87% 12.87% 9.51% 6.90%
Ratios/Supplemental Data
Net Assets, End of Period
($000)................... 107,233 91,277 53,240 46,754 17,463 4,801
Ratio of Expenses to Aver-
age Net Assets/3/........ 0.73% 0.73% 0.68% 0.68% 0.68% 0.68%/2/
Ratio of Net Investment
Income to Average Net As-
sets..................... 2.38% 2.99% 2.41% 2.68% 3.05% 4.10%/2/
Portfolio turnover rate... 45.15% 33.26% 61.16% 11.99% 9.57% 1.98%
</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, 1996, May 31, 1995,
May 31, 1994, May 31, 1993 and May 31, 1992 and the period ended May 31, 1991
would have been .89%, .89%, .87%, .88%, .96% and 1.20% (annualized),
respectively.
4
<PAGE>
INTERNATIONAL EQUITY FUND
Financial Highlights for an Institutional share of the International Equity
Fund outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR 7/2/93/1/
ENDED ENDED TO
5/31/96 5/31/95 5/31/94
------- ------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................ $11.60 $11.81 $ 10.00
------ ------ --------
Income From Investment Operations:
Net Investment Income.............................. 0.09 0.03 0.08
Net Realized and Unrealized Gain (Loss) on Invest-
ments and Foreign Currency........................ 1.51 0.08 1.81
------ ------ --------
Total From Investment Operations................... 1.60 0.11 1.89
------ ------ --------
Less Distributions:
Dividends to Shareholders from Net Investment In-
come.............................................. (0.07) (0.04) (0.07)
Distributions to Shareholders from Net Capital
Gains............................................. (0.66) (0.28) (0.01)
------ ------ --------
Total Distributions................................ (0.73) (0.32) (0.08)
------ ------ --------
Net Asset Value, End of Period...................... $12.47 $11.60 $ 11.81
====== ====== ========
Total Return....................................... 14.27% 0.82% 18.98%
Ratios/Supplemental Data
Net Assets, End of Period ($000)................... 75,676 69,172 47,472
Ratio of Expenses to Average Net Assets/3/......... 1.05% 1.05% 1.00%/2/
Ratio of Net Investment Income to Average Net As-
sets.............................................. 0.78% 0.06% 0.82%/2/
Portfolio turnover rate............................. 53.58% 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, 1996 and May 31,
1995 and for the period ended May 31, 1994 would have been 1.17%, 1.16% and
1.20% (annualized), respectively.
INTERMEDIATE FIXED INCOME FUND
Financial Highlights for an Institutional share of the Intermediate Fixed
Income Fund outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR 3/14/91/1/
ENDED ENDED ENDED ENDED ENDED TO
5/31/96 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $10.43 $10.10 $10.55 $10.31 $ 9.97 $ 10.00
------ ------ ------ ------ ------ --------
Income From Investment Oper-
ations:
Net Investment Income...... 0.59 0.56 0.50 0.56 0.60 0.13
Net Realized and Unrealized
Gain (Loss) on Invest-
ments..................... (0.24) 0.33 (0.39) 0.24 0.34 (0.03)
------ ------ ------ ------ ------ --------
Total From Investment Oper-
ations.................... 0.35 0.89 0.11 0.80 0.94 0.10
------ ------ ------ ------ ------ --------
Less Distributions:
Dividends to Shareholders
from Net Investment In-
come...................... (0.59) (0.56) (0.50) (0.56) (0.60) (0.13)
Distributions to Sharehold-
ers from Net Capital
Gains..................... -- -- (0.06) -- -- --
------ ------ ------ ------ ------ --------
Total Distributions........ (0.59) (0.56) (0.56) (0.56) (0.60) (0.13)
------ ------ ------ ------ ------ --------
Net Asset Value, End of Pe-
riod....................... $10.19 $10.43 $10.10 $10.55 $10.31 $ 9.97
====== ====== ====== ====== ====== ========
Total Return................ 3.38% 9.13% 0.94% 7.94% 9.68% 4.78%/2/
Ratios/Supplemental Data
Net Assets, End of Period
($000).................... 44,102 44,652 35,008 28,078 17,549 1,298
Ratio of Expenses to Aver-
age Net Assets/3/......... 0.60% 0.60% 0.55% 0.55% 0.55% 0.55%/2/
Ratio of Net Investment In-
come to Average Net As-
sets...................... 5.66% 5.56% 4.75% 5.32% 5.76% 6.17%/2/
Portfolio turnover rate..... 52.79% 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, 1996, May 31, 1995,
May 31, 1994, May 31, 1993 and May 31, 1992 and the period ended May 31, 1991
would have been .72%, .70%, .66%, .64%, .72% and .97% (annualized),
respectively.
5
<PAGE>
MARYLAND TAX-EXEMPT BOND FUND
Financial Highlights for an Institutional share of the Maryland Tax-Exempt
Bond Fund outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR 6/2/92/1/
ENDED ENDED ENDED TO
5/31/96 5/31/95 5/31/94 5/31/93
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $10.40 $10.25 $10.55 $ 10.00
------ ------ ------ ---------
Income From Investment Operations:
Net Investment Income................... 0.49 0.49 0.50 0.48
Net Realized and Unrealized Gain (Loss)
on Investments......................... (0.20) 0.15 (0.28) 0.55
------ ------ ------ ---------
Total From Investment Operations........ 0.29 0.64 0.22 1.03
------ ------ ------ ---------
Less Distributions:
Dividends to Shareholders from Net In-
vestment Income........................ (0.49) (0.49) (0.50) (0.48)
Distributions to Shareholders from Net
Capital Gains.......................... -- -- (0.02) --
------ ------ ------ ---------
Total Distributions..................... (0.49) (0.49) (0.52) (0.48)
------ ------ ------ ---------
Net Asset Value, End of Period........... $10.20 $10.40 $10.25 $ 10.55
====== ====== ====== =========
Total Return............................. 2.84% 6.48% 1.99% 10.59%/2/
Ratios/Supplemental Data Net Assets, End
of Period ($000).........................10,186.. 12,360 20,008 15,707
Ratio of Expenses to Average Net As-
sets/3/................................ 0.62% 0.62% 0.55% 0.55%/2/
Ratio of Net Investment Income to Aver-
age Net Assets......................... 4.74% 4.83% 4.66% 4.78%/2/
Portfolio turnover rate................. 20.58% 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, 1996, May 31, 1995
and May 31, 1994 and the period ended May 31, 1993 would have been 1.04%,
.97%, .86% and .94% (annualized), respectively.
6
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Funds' investment adviser (the "Adviser") and, with respect to the
International Equity Fund, the Fund's sub-adviser (the "Sub-Adviser") use a
range of different investments and investment techniques in seeking to achieve
a Fund's investment objective. All Funds do not use all of the investments and
investment techniques described below, which involve various risks, and which
are also described in the following sections. You should consider which Funds
best meet your investment goals. The Adviser and Sub-Adviser will use their
best efforts to achieve a Fund's investment objective, although its
achievement cannot be assured. An investor should not consider an investment
in any Fund to be a complete investment program.
VALUE EQUITY FUND
The investment objective of the Value Equity Fund 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 obligations convertible into common stock that
the Adviser believes to be undervalued. The Fund seeks to purchase individual
stocks 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 are factors considered in
stock selection. Securities purchased by the Fund 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 Fund will invest at least
65% of its total assets in common stock, preferred stock and debt obligations
convertible into common stock. Although the Fund will invest primarily in
publicly-traded common stocks of companies incorporated in the United States,
the Fund may also invest up to 25% of its total assets in the securities of
foreign issuers, either directly or through American Depository Receipts
("ADRs"), European Depository Receipts ("EDRs") and Global Depository Receipts
("GDRs") as described under "Other Investment Policies and Related Risks."
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 Adviser has determined to be of comparable quality. See
the Appendix to the Statement of Additional Information for a description of
applicable debt security ratings.
The Fund may reduce the percentage of its equity investments and
temporarily invest its assets in fixed-income securities, including the types
of securities in which the Intermediate Fixed Income Fund may invest and high
quality short-term money market instruments, when, in the opinion of the
Adviser, a defensive position is warranted, or to meet anticipated redemption
requests.
INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is long-term
growth of capital and income consistent with reasonable risk. Current income
from dividends, interest and other sources is a secondary consideration for
the Fund. Under normal market and economic conditions, at least 65% of the
Fund's assets will be invested in the equity securities of issuers located in
at least three different foreign countries. Currently, the Fund is authorized
to invest in the securities of issuers located in Australia, Austria, Belgium,
Brazil, Canada, Chile, Denmark, Finland, France, Germany, Greece, Hong Kong,
Hungary, India, Indonesia, Ireland, Italy, Japan, Korea, Malaysia, Mexico, the
Netherlands, New Zealand, Norway, the Philippines, Portugal, Russia,
Singapore, Spain, South Africa, Sweden, Switzerland, Taiwan, Thailand, Turkey
and the United Kingdom. There are no limitations on the amount of the Fund's
assets which can be invested in securities of issuers in any one country,
provided, however, that under normal market and economic conditions, no more
than 10% of the Fund's net assets will be invested in the aggregate in the
securities of issuers located in countries with emerging economies or
securities markets. The Fund may also purchase the securities of issuers
located in the United States, although it has no present intention of doing
so.
7
<PAGE>
Foreign securities which the 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 Fund
will generally acquire stocks with relatively low ratios of market values to
earnings and to book values. The Fund may also invest in the securities of
foreign issuers in the form of ADRs, EDRs and GDRs as described under "Other
Investment Policies and Related Risks."
The Fund may hold assets in cash and short-term money market instruments
when the Adviser 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.
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 protection of capital.
The Fund invests substantially all of its assets in debt obligations, such as
bonds and debentures, of domestic and foreign corporations; obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities; debt
obligations of foreign, state and local governments and their political
subdivisions; asset-backed securities, including various collateralized
mortgage obligations and other mortgage-related securities with effective
maturities of ten years or less; and money market instruments. The Fund will
purchase only those securities 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 Adviser to be of comparable quality. If a security's rating
is reduced below the minimum rating that is permitted for the Fund, the
Adviser will consider whether the Fund should continue to hold that security.
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. Most obligations acquired by the Fund
will be issued by companies or governmental entities located within the United
States. Up to 25% of the Fund's total assets, however, may be invested in debt
obligations of foreign issuers. The Fund may also invest, without limitation,
in high quality short-term money market instruments for temporary defensive
purposes. The Adviser expects that under normal market conditions the Fund's
portfolio securities will have an average weighted maturity of three to ten
years.
MARYLAND TAX-EXEMPT BOND FUND
The investment objective of the Maryland Tax-Exempt Bond Fund 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
tax-exempt debt obligations issued by 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"), that are rated at the time of purchase
within one of the four highest rating categories assigned by a Rating Agency.
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. Obligations purchased by the Fund that have not
been assigned a rating will be determined by the Adviser to be of comparable
quality. 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. If a security's rating is reduced below the minimum rating that
is permitted for the Fund, the Adviser will consider whether the Fund should
continue to hold that security.
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. In
addition, 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 securities issued by the State of
Maryland and its municipalities, counties and other taxing districts, as well
as in other securities exempt from Maryland state and local taxes.
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The 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 municipal obligations are unavailable) or for temporary defensive
purposes in short-term taxable money market instruments, securities issued by
other investment companies which invest in taxable or tax-exempt money market
instruments, U.S. Government obligations, and other securities as described
below under "Other Investment Policies." Investments by the Fund in any such
taxable instruments 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. The 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.
Although the Fund has the flexibility to invest in municipal obligations
with short, medium or long maturities, the Adviser expects that under normal
conditions the Fund will invest primarily in obligations with medium and long
maturities.
OTHER INVESTMENT POLICIES AND RELATED RISKS
U.S. GOVERNMENT OBLIGATIONS AND MONEY MARKET INSTRUMENTS
The Equity Value, Intermediate Fixed Income and Maryland Tax-Exempt Bond
Funds may invest in securities issued or guaranteed by the U.S. Government, as
well as in obligations issued or guaranteed by U.S. Government agencies and
instrumentalities. Obligations of certain agencies and instrumentalities, 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, are supported by the issuer's right to borrow from the Treasury;
others, such as the Federal National Mortgage Association, are supported by
the discretionary authority of the U.S. Government to purchase the entity's
obligations; still others, such as the Student Loan Marketing Association, are
backed solely by the issuer's credit. There is no assurance that the U.S.
Government would provide support to a U.S. Government-sponsored entity were it
not required to do so by law.
Each Fund may from time to time invest in money market instruments,
including 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 issued or supported by U.S. or foreign banks that have total
assets of more than $1 billion at the time of purchase. The Equity Value,
Intermediate Fixed Income and Maryland Tax-Exempt Bond Funds may invest in
obligations of foreign banks or foreign branches of U.S. banks when the
Adviser determines that the instrument presents minimal credit risks.
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. Taxable commercial paper purchased by the Equity Value, Intermediate
Fixed Income and Maryland Tax-Exempt Bond Funds will be rated at the time of
purchase within the highest rating category assigned by a Rating Agency. In
addition, each of these Funds may acquire unrated commercial paper and
corporate bonds that are determined by the Adviser at the time of purchase to
be of comparable quality. Commercial paper may include variable and floating
rate instruments.
MUNICIPAL OBLIGATIONS
The Maryland Tax-Exempt Bond Fund invests primarily in municipal
obligations. The Intermediate Fixed Income Fund may also invest from time to
time in municipal obligations. These securities may be advantageous for the
Intermediate Fixed Income Fund when, as a result of prevailing economic,
regulatory or other circumstances, the yield of such securities on a pre-tax
basis is comparable to that of other securities the Fund can purchase.
Dividends paid by the Intermediate Fixed Income Fund that come from interest
on municipal obligations will be taxable to shareholders.
The two main types of municipal obligations are "general obligation"
securities (which are secured by the issuer's full faith, credit and taxing
power) and "revenue" securities (which are payable only from revenues received
from the operation of a particular facility or other 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 draws on a reserve fund, the restoration of
which is not a legal requirement. Private activity bonds (which are a type of
obligation that, although exempt from regular Federal income tax,
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may be subject to the Federal alternative minimum tax) are usually revenue
securities issued by or for public authorities to finance a privately operated
facility.
Within the principal classifications described above there are a variety
of categories, including certificates of participation and custodial receipts
which may be purchased by the Maryland Tax-Exempt Bond Fund. Certificates of
participation represent undivided proportional interests in lease payments by
a governmental or non-profit agency. The lease payments and other rights under
the lease provide for and secure the payments on the certificates. Certain
lease obligations may include "non-appropriation" clauses, which provide that
the entity has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. Participation in
such leases present the risk that an entity will not appropriate funds for
lease payments. For this and other reasons, certificates of participation are
generally 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 Fund's
10% limitation on investments in illiquid securities described below under
"Managing Liquidity."
Custodial receipts evidence 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 Tax-Exempt Bond Fund may also make privately arranged loans
to municipal borrowers. Generally such loans are unrated, in which case they
will be determined by the Fund's Adviser to be of comparable quality at the
time of purchase to rated instruments that may be acquired by the Fund. Such
loans may be secured or unsecured and may have limited marketability or may be
marketable only by virtue of a provision requiring repayment following demand
by the lender. To the extent these securities are illiquid, they will be
subject to the Fund's 10% limitation on investments in illiquid securities.
In many cases, the Internal Revenue Service has not ruled on whether the
interest received on a municipal obligation is tax-exempt and, accordingly,
the purchase of such securities is based on the opinion of bond counsel or
counsel to the issuers of such instruments. The Company and the Adviser rely
on these opinions and do not intend to review the bases for them.
Municipal obligations purchased by the Intermediate Fixed Income and
Maryland Tax-Exempt Bond Funds in some cases may be insured as to the timely
payment of principal and interest. There is no guarantee, however, that the
insurer will meet its obligations in the event of a default in payment by the
issuer. In other cases, municipal obligations may be backed by letters of
credit or guarantees issued by domestic or foreign banks or other financial
institutions which are not subject to federal deposit insurance. Adverse
developments affecting the banking industry generally or a particular bank or
financial institution that has provided its credit or guarantee with respect
to a municipal obligation held by a Fund could have an adverse effect on a
Fund's portfolio and the value of its shares. As described below under
"Foreign Securities", foreign letters of credit and guarantees involve certain
risks in addition to those of domestic obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may purchase variable and floating rate instruments. Because of
the absence of a market in which to resell a variable or floating rate
instrument, a Fund might have trouble selling an instrument should the issuer
default or during periods when the Fund is not permitted by agreement to
demand payment of the instrument, and for this and other reasons a loss could
occur with respect to the instrument.
ASSET-BACKED SECURITIES
The Intermediate Fixed Income Fund may purchase asset-backed securities,
which are securities backed by installment sale contracts, credit card
receivables or other assets. 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. The
prepayment rate is primarily a function of current market rates and
conditions. In periods of rising interest rates, the rate of prepayment tends
to increase. During periods of falling interest rates, the reinvestment of
prepayment
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proceeds by the Fund will generally be at a lower rate than the rate on the
prepaid obligation. Prepayments may also result in some loss of the Fund's
principal investment if any premiums were paid. As a result of these yield
characteristics, some high-yielding asset-backed securities may have less
potential for growth in value than conventional bonds with comparable
maturities. These characteristics may result in a higher level of price
volatility for these assets under certain market conditions.
Asset-backed securities are subject to greater risk of default during
periods of economic downturn than conventional debt instruments and the holder
frequently has no recourse against the entity that originated the security. In
addition, 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 experiencing difficulty in valuing or liquidating such securities.
For these reasons, under certain circumstances, such instruments may be
considered illiquid securities subject to the Fund's 10% limitation on
illiquid investments described below under "Managing Liquidity."
MORTGAGE-RELATED SECURITIES
The Intermediate Fixed Income Fund may invest in mortgage-backed
securities issued or guaranteed by U.S. Government agencies and private
issuers. They may include collateralized mortgage obligations ("CMOs") and
U.S. Government stripped mortgage-backed securities ("SMBS").
CMOs are a type of bond issued by non-governmental entities which provide
the holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. Issuers of CMOs frequently
elect to be taxed as a pass-through entity known as a real estate mortgage
investment conduit or REMIC. CMOs are issued in multiple classes, each with a
specified fixed or floating interest rate and a final distribution date.
SMBS represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only")
on mortgage-backed certificates issued by a U.S. Government agency and
representing interests in pools of mortgage loans. 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.
Mortgage-related securities involve risks similar to those described above
under "Asset-Backed Securities", including prepayment risks. In addition, SMBS
may exhibit greater price volatility and interest rate risk than other types
of mortgage-related securities because of the manner in which their principal
and interest are returned to investors.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Each Fund may buy portfolio securities subject to the seller's agreement
to repurchase them at an agreed upon date and price. These transactions are
known as repurchase agreements. Repurchase agreements involve the risk that
the seller will fail to repurchase the securities as agreed. In that event,
the Fund will bear the risk of possible loss due to adverse market action or
delays in liquidating the underlying obligations. Repurchase agreements are
considered to be loans under the Investment Company Act.
Each Fund may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, a Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be used to meet
redemption requests without selling portfolio securities. Reverse repurchase
agreements involve the risk of counterparty default and possible loss of
collateral held by the counterparty. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
The Intermediate Fixed Income and Maryland Tax-Exempt Bond Funds 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 a Fund to purchase or to sell particular securities with
payment and delivery taking place at a future date, 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. The Fund will bear the risk, however, that
the price or yield
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obtained in a transaction may be less favorable than the price or yield
available in the market when the delivery takes place. When-issued and forward
commitment transactions are not expected to exceed 25% of the value of a
Fund's total assets under normal circumstances. Because a Fund is required to
set aside cash or liquid high grade debt obligations to satisfy these 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.
STAND-BY COMMITMENTS
The Intermediate Fixed Income and Maryland Tax-Exempt Bond Funds may
acquire stand-by commitments under which a dealer agrees to purchase certain
municipal obligations at a Fund's option at a price equal to their amortized
cost value plus interest. These commitments will be used only to assist in
maintaining a Fund's liquidity and not for trading purposes.
SECURITIES LENDING
Each Fund may lend its portfolio securities to broker-dealers and other
institutions as a means of earning additional income. Although securities
loans will be fully collateralized, such loans present risks of delay in
receiving additional collateral or in recovering the securities loaned or even
a loss of rights in the collateral if the borrower of the securities fails
financially. However, securities loans will be made only to parties the
Adviser deems to be of good standing and will only be made if the Adviser
thinks the income to be earned from the loans justifies the risks.
OTHER INVESTMENT COMPANIES
The Equity Value, Intermediate Fixed Income and Maryland Tax-Exempt Bond
Funds 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. Such investments will be made by a Fund in
connection with the management of its daily cash position and will be subject
to the requirements of applicable securities laws. The Intermediate 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 Investment
Company Act. When a Fund invests in another investment company, it pays a pro
rata portion of the advisory and other expenses of that company as a
shareholder of that company. These expenses are in addition to the Fund's own
expenses.
FOREIGN SECURITIES
There are risks and costs involved in investing in securities of foreign
issuers (including foreign governments), which are in addition to the usual
risks inherent in U.S. investments. Investments in foreign securities may
involve higher costs than investments in U.S. securities, including higher
transaction costs as well as the imposition of additional taxes by foreign
governments. In addition, foreign investments may involve risks associated
with the level of currency exchange rates, less complete financial information
about the issuer, less market liquidity and political instability. Future
political and economic developments, the possible imposition of withholding
taxes on interest income, the possible seizure or nationalization of foreign
holdings, the possible difficulty in taking appropriate legal action in a
foreign court, the possible establishment of exchange controls or the adoption
of other governmental restrictions might adversely affect the payment of
principal and interest on foreign obligations. Additionally, foreign banks and
foreign branches of domestic banks may be subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.
Although the International Equity Fund will invest primarily in securities
denominated in foreign currencies, the Fund values its securities and other
assets in U.S. dollars. As a result, the net asset value of the Fund's shares
will fluctuate with the U.S. dollar exchange rates, as well as with price
changes of the Fund's securities in the various local markets and currencies.
Thus, an increase in the value of the U.S. dollar compared to the currencies
in which the Fund makes it investments could reduce the effect of increases
and magnify the effect of decreases in the prices of the Fund's securities in
their local markets. Conversely, a decrease in the value of the U.S. dollar
will have the opposite effect of magnifying the effect of increases and
reducing the effect of decreases in the prices of the Fund's securities in
their local markets. In addition to favorable and unfavorable currency
exchange-rate developments, the Fund is subject to the possible imposition of
exchange control regulations or freezes on convertibility of currency.
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Certain of the risks associated with investments in foreign securities are
heightened with respect to investments in developing countries and fledgling
democracies. The risks of expropriation, nationalism and social, political and
economic instability are greater in those countries than in more developed
capital markets.
AMERICAN, EUROPEAN AND GLOBAL DEPOSITORY RECEIPTS
The International Equity Fund may invest up to 100% of its total assets,
and the Value Equity Fund may invest up to 25% of its total assets, in ADRs,
EDRs, GDRs and similar securities. ADRs typically are issued by a U.S. bank or
trust company and evidence ownership of underlying securities issued by a
foreign issuer. EDRs, which are sometimes referred to as Continental
Depository Receipts, are receipts issued in Europe typically by non-U.S. banks
or trust companies and foreign branches of U.S. banks that evidence ownership
of underlying foreign or U.S. securities. GDRs are depository receipts
structured like global debt issues to facilitate trading on an international
basis. These instruments may not be denominated in the same currency as the
securities they represent. Investments in ADRs, EDRs and GDRs involve risks
similar to those accompanying direct investments in foreign securities.
FOREIGN CURRENCY EXCHANGE CONTRACTS
The Value Equity, International Equity and Intermediate Fixed Income Funds
may from time to time use foreign currency exchange contracts to hedge against
investments in the value of foreign currencies (including the European
Currency Unit) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A forward
foreign currency exchange contract involves an obligation to purchase or sell
a specified currency at a future date at a price set at the time of the
contract. Foreign currency exchange contracts do not eliminate fluctuations in
the values of portfolio securities but rather allow a Fund to establish a rate
of exchange for a future point in time.
FUTURES CONTRACTS
The International Equity 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 foreign 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.
OTHER INVESTMENT POLICIES AND TECHNIQUES OF THE INTERNATIONAL EQUITY FUND
From time to time the International Equity Fund may use 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 Equity Fund may purchase
foreign currency put options on U.S. exchanges or U.S. over-the-counter
markets. A put option gives the 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
Equity Fund gives the purchaser, upon payment of a premium, the right to
purchase from the Fund a currency at the exercise price until the expiration
of the option. The 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 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.
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RIGHTS AND WARRANTS. The International Equity Fund may invest in rights
and warrants to purchase securities.
EMERGENCY BORROWING. As a temporary measure for extraordinary or emergency
purposes, the International Equity Fund may borrow money from banks on an
unsecured basis.
MANAGING LIQUIDITY
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, the International Equity Fund will not knowingly invest more than
15%, and the Value Equity, Intermediate Fixed Income and Maryland Tax-Exempt
Bond Funds will not knowingly invest more than 10%, of the value of their
respective net assets in illiquid securities. Illiquid securities include
repurchase agreements and time deposits that do not permit a Fund to terminate
them after seven days' notice, restricted securities, unlisted foreign
currency options and other securities for which market quotations are not
readily available. Certain securities that might otherwise be considered
illiquid, however, such as some issues of commercial paper and variable amount
master demand notes with maturities of nine months or less and securities for
which the Adviser (Sub-Adviser in the case of the International Equity Fund)
has determined pursuant to guidelines adopted by the Company's 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 limitation. 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.
RISK FACTORS REGARDING INVESTMENT IN MARYLAND MUNICIPAL OBLIGATIONS
The Maryland Tax-Exempt Bond 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 Tax-Exempt Bond Fund are summarized below. This
information is derived principally from official statements and preliminary
official statements released on or before June 5, 1996, relating to issues of
Maryland obligations and does not purport to be a complete description.
The State's total expenditures for the fiscal year ending June 30, 1993,
June 30, 1994, and June 30, 1995 were $11.786 billion, $12.351 billion, and
$13.528 billion, respectively. As of June 5, 1996, it was estimated that total
expenditures for fiscal year 1996 would be $14.627 billion. The State's
General Fund, representing approximately 50%-60% of each year's total
operating budget, had a surplus on a budgetary basis of $10.5 million in
fiscal year 1993, a surplus of $60 million in fiscal year 1994, and a surplus
of $132.5 million in fiscal year 1996. The State Constitution mandates a
balanced budget.
In April 1995, the General Assembly approved the $14.4 billion 1996 fiscal
year budget. The Budget included $2.8 billion in aid to local governments
(reflecting a $161 million increase in funding over 1995 that provided for
substantial increases in education, health and police aid), and $134 million
in general fund deficiency appropriations for fiscal year 1995, of which $60
million was 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 1996 Budget was enacted, it was estimated that the general fund
surplus on a budgetary basis at June 30, 1996 would be approximately $7.8
million. As of June 5, 1996, it was estimated to be $3.1 million. At its
December 12, 1995 meeting and at its March 11, 1996 meeting, the Board of
Revenue Estimates lowered the estimate of fiscal year 1996 general fund
revenues by an aggregate of $148 million. The State has effected a plan to
address these changes that principally includes: (1) additional reversions for
Medicaid and Nonpublic Special Education Placements of $22 million; (2)
reduction of current general fund appropriations of $26 million; (3) transfer
from the Revenue Stabilization Account of $78 million; and (4) use of
unanticipated fiscal year 1995
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surplus of $26 million. It is anticipated that the balance of the Revenue
Stabilization Account after the transfer at June 30, 1996, will be $439
million.
In April 1996, the General Assembly approved the $14.64 billion 1997
fiscal year budget. The Budget includes $2.9 billion in aid to local
governments (reflecting a $121.5 million increase over fiscal year 1996 that
provides for increases in education, health and police aid), and $13.2 million
in general fund deficiency appropriations for fiscal year 1996. Legislation
enacted by the 1996 General Assembly reorganized the State's personnel system
and reformed the welfare and Medicaid programs; estimated fiscal year 1997
savings of $20 million ($10.6 million general funds) are incorporated into the
fiscal year 1997 Budget. Based on the 1997 Budget, it is estimated that the
general fund surplus on a budgetary basis at June 30, 1997, will be
approximately $0.8 million. It is also estimated that the balance in the
Revenue Stabilization Account of the State Reserve Fund at June 30, 1997, will
be $465 million.
The public indebtedness of Maryland and its instrumentalities is divided
into three basic types. The State issues general obligation bonds, to the
payment of which State ad valorem taxes are exclusively pledged, 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. The State and certain of its agencies also have entered
into a variety of lease purchase agreements to finance the acquisition of
capital assets. The lease agreements specify that payments thereunder are
subject to annual appropriation by the General Assembly.
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.
RISK FACTORS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
Each Fund may purchase certain "derivative" instruments as described above
under various headings. 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, futures contracts,
options, forward foreign currency contracts, participation certificates,
custodial receipts, 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 Adviser (Sub-Adviser in the case of an International Equity Fund) will
evaluate the risks presented by the derivative instruments purchased by a
Fund, and will determine, in connection with its day-to-day management of the
Fund, how they will be used in furtherance of the Fund's investment objective.
It is possible, however, that the Adviser's or Sub-Adviser's evaluations will
prove to be inaccurate or incomplete and, even when accurate and complete, it
is possible that a Fund will, because of the risks discussed above, incur loss
as a result of its investments in derivative instruments.
15
<PAGE>
OTHER RISK CONSIDERATIONS
As with an investment in any mutual fund, an investment in the Funds
entails market and economic risks associated with investments generally.
However, there are certain specific risks of which you should be aware.
Generally, the market value of fixed income securities in the Funds can be
expected to vary inversely to changes in prevailing interest rates. You should
recognize that in periods of declining interest rates the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and in periods of rising interest rates the market value will
tend to decrease. You should also recognize that in periods of declining
interest rates, the yields of investment portfolios comprised primarily of
fixed income securities will tend to be higher than prevailing market rates
and, in periods of rising interest rates, yields will tend to be somewhat
lower. The Maryland Tax-Exempt Bond Fund may purchase zero-coupon bonds (i.e.,
discount debt obligations that do not make periodic interest payments). Zero-
coupon bonds are subject to greater market fluctuations from changing interest
rates than debt obligations of comparable maturities which make current
distributions of interest. Debt securities with longer maturities, which tend
to produce higher yields, are subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities.
Changes in the financial strength of an issuer or changes in the ratings of
any particular security may also affect the value of these investments.
Fluctuations in the market value of fixed income securities subsequent to
their acquisition will not affect cash income from such securities but will be
reflected in a Fund's net asset value.
The Maryland Tax-Exempt Bond 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 be subject to the
Fund's 20% limitation on taxable investments. Although the Maryland Tax-Exempt
Bond 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. When the Fund's assets are concentrated in obligations
payable from revenues on similar projects or in industrial development bonds,
the Fund will be subject to the particular risks (including legal and economic
conditions) presented by such securities to a greater extent than it would be
if its assets were not so concentrated. Furthermore, payment of municipal
obligations held by the Fund relating to certain projects may be secured by
mortgages or deeds of trust. In the event of a default, enforcement of a
mortgage or deed of trust may be delayed and the amount of the proceeds
received may not be enough to pay the principal and accrued interest on the
defaulted municipal obligations.
While the other Funds are classified as "diversified", the Maryland Tax-
Exempt Bond Fund is classified as a "non-diversified" portfolio. The
investment return on a non-diversified portfolio is typically dependent upon
the performance of a smaller number of securities than a diversified portfolio
and the change in value of any one security may have a greater impact on the
value of a non-diversified portfolio. A non-diversified portfolio may
therefore be subject to greater fluctuations in net asset value. 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.
PORTFOLIO TURNOVER
A Fund may sell a portfolio security soon after it is purchased if the
Adviser (Sub-Adviser in the case of the International Equity Fund) believes
that a sale is consistent with the Fund's investment objective. A high rate of
portfolio turnover involves correspondingly greater brokerage commission
expenses, tax consequences (including the possible realization of additional
taxable capital gains and income) and other transaction costs, which must be
borne directly by the Fund involved and ultimately by its shareholders.
FUNDAMENTAL LIMITATIONS
Each Fund's investment objective discussed above is "fundamental", which
means that it may not be changed for a Fund without the approval of a majority
of that Fund's outstanding shares. Each Fund's investment policies discussed
above are not fundamental and may be changed by the Company's Board of
Directors without shareholder approval. However, each Fund also has in place
certain "fundamental" limitations that also cannot
16
<PAGE>
be changed for a Fund without the approval 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 Statement of Additional Information.
1. 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
50% of the Maryland Tax-Exempt Bond Fund's total assets, and up to 25% of
the total assets of each other Fund, can be invested without regard to the
5% limitation.
2. 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, subject to certain exceptions.
3. A Fund may not borrow money except for temporary purposes in
amounts up to 10% (5% in the case of the International Equity Fund) 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 met at the time an investment is made, a
subsequent change in that percentage resulting from a change in value of a
Fund's portfolio securities does not mean that the limitation has been
violated.
In order to permit the sale of a Fund's shares (or a particular class of
shares) in certain states, the Company may agree to certain restrictions that
are stricter than the investment policies and limitations described above. If
the Company determines that any of these restrictions is no longer in a Fund's
best interests, it may revoke its agreement to abide by such restrictions by
no longer selling shares in the state involved.
INVESTING IN THE FUNDS
GETTING YOUR INVESTMENT STARTED
Investing in the Funds is quick and convenient. Shares of the Funds may be
purchased either through the account you maintain with certain financial
institutions or directly through the Company. Fund shares are distributed by
BISYS Fund Services (called the "Distributor"). The Distributor's principal
offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Customers of Mercantile-Safe Deposit and Trust Company and its affiliated
and correspondent banks and customers of affiliates of State Street Bank and
Trust Company (referred to as the "Banks") may purchase Fund shares through
their qualified accounts at such Banks and should contact the Banks directly
for appropriate purchase instructions. Should you wish to establish an account
directly through the Company, please refer to the purchase options described
under "Opening and Adding to Your Fund Account."
Payments for Fund shares must be in U.S. dollars and should be drawn on a
U.S. bank. Please remember that the Company reserves the right to reject any
purchase order.
HOW TO BUY FUND SHARES
MINIMUM INVESTMENTS
The Company generally requires a $50,000 minimum initial investment.
Subsequent investments must be a minimum of $100. The minimum investment
requirements do not apply to purchases by Banks acting on behalf of their
customers and the Banks do not impose a minimum initial or subsequent
investment requirement for shares purchased on behalf of their customers. The
Company reserves the right to waive these minimums in other instances.
OPENING AND ADDING TO YOUR FUND ACCOUNT
Direct investments in the Funds may be made in a number of different ways,
as shown in the following chart. Simply choose the method that is most
convenient for you. Any questions you have may be answered by
17
<PAGE>
calling 1-800-551-2145. As described above under "Getting Your Investment
Started", you may also purchase Fund shares through the Banks.
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
BY MAIL . Complete a Purchase . Make your check payable to
Application and mail it the particular Fund in
along with a check payable which you are investing
to the particular Fund you and mail it to the address
want to invest in to: at left.
M.S.D. & T. Funds, Inc.,
P.O. Box 8515, Boston, MA
02266-8515.
. Please include your
account number on your
check.
To obtain a Purchase
Application, call 1-800-
551-2415
- -------------------------------------------------------------------------------
BY WIRE . Before wiring funds, . Instruct your bank to wire
please call 1-800-551-2145 Federal funds to: State
for complete wiring Street Bank and Trust
instructions. Company, Boston,
Massachusetts, Bank
Routing No. 011-0000-28,
M.S.D. & T. Deposit A/C
No. 99046435.
. Promptly complete a
Purchase Application and
forward it to M.S.D. & T.
Funds, Inc., P.O. Box
8515, Boston, MA 02266-
8515.
. Be sure to include your
name and your Fund account
number.
. The wire should indicate
that you are making a
subsequent purchase as
opposed to opening a new
account.
Consult you bank for information on remitting funds by
wire and associated bank charges.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC
INVESTMENTS, EXCHANGES AND DIRECT REINVESTMENTS, TO INVEST
IN YOUR FUND ACCOUNT. PLEASE REFER TO THE SECTION ENTITLED
"SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- -------------------------------------------------------------------------------
EXPLANATION OF SALES PRICE
The public offering price for each class of shares of a Fund is based upon
net asset value per share. A class of shares of a Fund will calculate its net
asset value per share by adding the value of a Fund's investments, cash and
other assets attributable to a class, subtracting the Fund's liabilities
attributable to that class, and then dividing the result by the number of
shares in that class that are outstanding. This process is sometimes referred
to as "pricing" a Fund's shares.
The assets of the Funds are valued at market value or, if market quotes
cannot be readily obtained, fair value is used as determined by the Company's
Board of Directors. Debt securities held by the Funds that have sixty days or
less until they mature are valued at amortized cost, which generally
approximates market value. More information about valuation can be found in
the Fund's Statement of Additional Information, which you may request by
calling 1-800-551-2145.
Net asset value is computed as of the close of regular trading hours on
the New York Stock Exchange (the "Exchange") (currently 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'
Adviser, transfer agent or custodian or the Exchange is closed. The Funds
currently observe the following holidays: 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.
18
<PAGE>
Shares of the Funds are sold at the public offering price per share next
computed after receipt of a purchase order by State Street Bank and Trust
Company, the transfer agent for the Funds' Institutional shares (the "Transfer
Agent"). Purchase orders will be accepted by the Transfer Agent only on a day
on which the shares of a Fund are priced ("Business Day").
If you purchase shares of a Fund through a Bank, the Bank is responsible
for transmitting your purchase order and required funds to the Transfer Agent
on a timely basis. If the Transfer Agent receives your purchase order from a
Bank on a Business Day prior to the close of regular trading (currently 4:00
P.M. Eastern Time) on the Exchange, your Fund shares will be purchased at the
public offering price calculated at the close of regular trading on that day
provided that the Fund's custodian receives payment on the next Business Day
in immediately available funds. If such payment is not received on the next
Business Day, the Bank which submitted the order will be notified that the
order has not been accepted.
If you purchase shares of a Fund directly through the Company and if your
purchase order, in proper form and accompanied by payment, is received by the
Transfer Agent on a Business Day prior to the close of regular trading on the
Exchange, your Fund shares will be purchased at the public offering price
calculated at the close of regular trading on that day. Otherwise, your Fund
shares will be purchased at the public offering price next calculated after
the Transfer Agent receives your purchase order in proper form with the
required payment.
On a Business Day when the Exchange closes early due to a partial holiday
or otherwise, the Company reserves the right to advance the times at which
purchase orders must be received in order to be processed on that Business
Day.
HOW TO SELL FUND SHARES
You can arrange to get money out of your Fund account by selling some or
all of your shares. This process is known as "redeeming" your shares. If you
purchased your shares through an account at a Bank, you may redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you have the ability to redeem shares
by any of the methods described below.
TO REDEEM SHARES
BY MAIL . Send a written request to M.S.D. & T. Funds,
Inc., P.O. Box 8515, Boston, MA 02266-8515.
. Your written request must:
--be signed by each account holder;
--state the number or dollar amount of shares
to be redeemed and identify the specific
Fund;
--include your account number.
. Signature guarantees are required
--for all redemption requests over $100,000;
--for any redemption request where the
proceeds are to be sent to someone other
than the shareholder of record or to an
address other than the address of record.
- -------------------------------------------------------------------------------
BY WIRE . Call 1-800-551-2145. You will need to provide
(available only the account name, account number, name of
if you checked Fund and amount of redemption ($1,000 minimum
the appropriate per transaction)
box on the
Purchase
Application)
. If you have already opened your account and
would like to have the wire redemption
feature, send a written request to:
M.S.D. & T. Funds, Inc., P.O. Box 8515,
Boston, MA 02266-8515. The request must be
signed (and signatures guaranteed) by each
account owner.
19
<PAGE>
. To change bank instructions, send a written
request to the above address. The request
must be signed (and signatures guaranteed) by
each account owner.
- -------------------------------------------------------------------------------
BY TELEPHONE . Call 1-800-551-2145. You will need to provide
(available only the account name, account number, name of
if you checked Fund and amount of redemption.
the appropriate
box on the
Purchase
Application)
. If you have already opened your account and
would like to add the telephone redemption
feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 8515, Boston, MA
02266-8515. The request must be signed (and
signatures guaranteed) by each account owner.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND
SYSTEMATIC WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER
TO SECTION ENTITLED "SHAREHOLDER SERVICES" FOR MORE
INFORMATION.
- -------------------------------------------------------------------------------
EXPLANATION OF REDEMPTION PRICE
Redemption orders received in proper form by the Transfer Agent on a
Business Day are processed at their net asset value per share next determined
after such receipt. Redemption orders received on a Non-Business Day will be
priced as of the time the net asset value is next determined. On a Business
Day when the Exchange closes early due to a partial holiday or otherwise, the
Company reserves the right to advance the time at which redemption orders must
be received in order to be processed on that Business Day.
Redemption proceeds generally will be wired or sent to the shareholder(s)
of record within five Business Days after receipt of the redemption order.
However, the Company reserves the right to wire or send redemption proceeds
within seven days after receiving the redemption order if the Adviser believes
that earlier payment would adversely affect the Company. If you purchased your
shares directly through the Company, your redemption proceeds will be sent by
check unless you otherwise direct the Company or the Transfer Agent. The
Automated Clearing House ("ACH") system may also be utilized for payment of
redemption proceeds. In unusual circumstances, the Company may make payment in
readily marketable portfolio securities at their market value equal to the
redemption price.
Banks are responsible for transmitting their customer's redemption orders
to the Transfer Agent and crediting their customers' accounts with redemption
proceeds on a timely basis. No charge is imposed by the Company for wiring
redemption proceeds, although the Banks may charge their customers' accounts
directly for redemption and other services. In addition, if a customer has
agreed with a Bank to maintain a minimum cash balance in his or her account
maintained with the Bank and the balance falls below that minimum, the
customer may be obliged to redeem some or all of the Fund shares held in the
account in order to maintain the required minimum balance.
The Company imposes no charge when you redeem shares. The value of the
shares you redeem may be more or less than your cost, depending on a Fund's
current net asset value.
OTHER PURCHASE AND REDEMPTION INFORMATION
Federal regulations require that you provide a certified taxpayer
identification number whenever you open or reopen an account.
Shareholders who purchased Fund Shares directly through the Company should
note that if an account balance falls below $5,000 as a result of redemptions
and is not increased to at least $5,000 within 60 days after notice, the
account may be closed and the proceeds sent to the shareholder.
20
<PAGE>
If you purchased shares by wire, you must file a Purchase Application with
the Transfer Agent before any of those shares can be redeemed. you should
contact your bank for information about sending and receiving funds by wire,
including any charges by your bank for these services. The Company may decide
at any time to change the minimum amount per transaction for redemption of
shares by wire or to no longer permit wire redemptions.
You may chose to initiate certain transactions by telephone. The Company
and its agents will not be responsible for any losses resulting from
unauthorized transactions when reasonable procedures to verify the identity of
the caller are followed. To the extent that the Company does not follow such
procedures, it and/or its agents may be responsible for any unauthorized
transactions.
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. It may be
difficult to reach the Company by telephone during periods of unusual market
activity. If this happens, you may redeem your shares by mail as described
above.
The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
its shares) for such periods as permitted under the Investment Company Act.
Certain redemption requests and other communications with the Company
require a signature guarantee. Signature guarantees are designed to protect
both you and the Company from fraud. To obtain a signature guarantee you
should visit a financial institution that participates in the Stock Transfer
Agency Redemption Program ("STAMP"). Guarantees must be signed by an
authorized person at one of these institutions and be accompanied by the words
"Signature Guaranteed". A notary public cannot provide a signature guarantee.
SHAREHOLDER SERVICES
The Company provides a variety of ways to make managing your investments
more convenient. Some of these options require you to request them on the
Purchase Application or you may request them after opening an account by
calling 1-800-551-2145. Except for Retirement Plans, these options are
available only to shareholders who purchase their Fund shares directly through
the Company.
RETIREMENT PLANS
Shares of the Value Equity, International Equity and Intermediate Fixed
Income Funds 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 can be obtained from
the Company. To invest through any tax-sheltered retirement plans, please call
the Company at 1-800-551-2145 for information and the required separate
application. You should consult with a tax adviser to determine whether a tax-
sheltered retirement plan is available and/or appropriate for you.
EXCHANGE PRIVILEGE
Institutional shares of a Fund may be exchanged for Institutional shares
of another Fund or investment portfolio offered by the Company. You may
exchange shares by mail at the address provided under "How To Buy Shares--
Opening and Adding to your Fund Account" or by telephone at 1-800-551-2145. If
you are opening a new account in a different Fund or portfolio by exchange,
the exchanged shares must be at least equal in value to the minimum investment
for the Fund or portfolio in which the account is being opened.
You should read the prospectus for the Fund or portfolio into which you
are exchanging. Exchanges will be processed only when the shares being offered
can legally be sold in your state. Exchanges may have tax consequences for
you. Consult your tax adviser for further information.
21
<PAGE>
To elect the exchange privilege after you have opened a Fund account, or
for further information about the exchange privilege, call 1-800-551-2145. The
Company reserves the right to reject any exchange request. The Company may
modify or terminate the exchange privilege, but will not materially modify or
terminate it without giving shareholders 60 days' notice.
AUTOMATIC INVESTMENT PLAN
One easy way to pursue your financial goals is to invest money regularly.
The Company offers an Automatic Investment Plan--a convenient service that
lets you transfer money from your bank account into your Fund account
automatically on a regular basis. At your option, your bank account will be
debited in a particular amount ($100 minimum) that you have specified, and
Fund shares will automatically be purchased on the 15th day of each month or,
if that day is not a Business Day, on the preceding Business Day. Your bank
account must be maintained at a domestic financial institution that is an ACH
member. You will be responsible for any loss or expense to the Funds if an ACH
transfer is rejected. To select this option, or for more information, please
call 1-800-551-2145.
The Automatic Investment Plan is one means by which investors may use
"Dollar Cost Averaging" in making investments. Dollar Cost Averaging can be
useful in investing in portfolios such as the Funds whose price per share
fluctuates. Instead of trying to time market performance, a fixed dollar
amount is invested in Fund shares at predetermined intervals. This may help
investors to reduce their average cost per share because the agreed upon fixed
investment amount allows more shares to be purchased during periods of lower
share prices and fewer shares during periods of higher prices. In order to be
effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that shares bought using
Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while investors may find Dollar
Cost Averaging to be beneficial, it will not prevent a loss if an investor
ultimately redeems his or her shares at a price which is lower than their
purchase price.
SYSTEMATIC WITHDRAWALS
The Company offers a convenient way of withdrawing money from your Fund
account. You may request regular monthly, quarterly, semi-annual or annual
withdrawals in any amount of $100 or more. The withdrawal will be made on the
last business day of the period you select and distributed in cash or
reinvested in Institutional shares of another Fund or portfolio offered by the
Company. To elect this option, or for more information, please call 1-800-551-
2145.
DIRECTED REINVESTMENTS
Generally, dividends and capital gains distribution are automatically
reinvested in Institutional shares of the Fund from which the distributions
are paid. You may elect, however, to have your dividends and capital gains
distributions automatically reinvested in Institutional shares of another Fund
or portfolio offered by the Company. To elect this option, or for more
information, please call 1-800-551-2145.
DIVIDENDS AND DISTRIBUTIONS
Shareholders receive dividends and net capital gain distributions.
Dividends for each Fund are derived from its net investment income. A Fund
realizes capital gains whenever it sells securities for a higher price than it
paid for them.
Shares in each Fund begin earning dividends on the day a purchase order is
processed and continue earning dividends through and including the day before
the shares are redeemed. If you purchased your Fund shares through a Bank,
your dividends and distributions will be paid in cash and wired to your Bank.
If you purchased your shares directly from the Company, your dividends and
distributions will be automatically reinvested in additional shares of the
Fund on which the dividend was declared unless you notify the Company in
writing that you wish to receive dividends and distributions in cash.
22
<PAGE>
DISTRIBUTION SCHEDULE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUND DIVIDENDS CAPITAL GAINS
- ---- --------- -------------
<S> <C> <C>
Value Equity Declared and paid quarterly. Declared and paid annually.
International Equity Declared and paid semi-annually. Declared and paid annually.
Intermediate Fixed Income and Declared daily and paid monthly Declared and paid annually.
Maryland Tax-Exempt Bond
</TABLE>
- -------------------------------------------------------------------------------
TAX INFORMATION
As with any investment, you should consider the tax implications of an
investment in the Funds. The following briefly summarizes some of the
important tax considerations generally affecting the Funds and their
shareholders. You should consult your tax adviser with specific reference to
you own tax situation, including the applicability of any state and local
taxes. You will be advised at least annually regarding the Federal tax
treatment of dividends and distributions paid to you.
FEDERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Fund
qualifies, it generally will be relieved of Federal income tax on amounts
distributed to shareholders, but shareholders, unless otherwise exempt, will
pay income or capital gains taxes on distributions (except distributions that
are "exempt interest dividends" or are treated as a return of capital),
regardless of whether the distributions are paid in cash or reinvested in
additional shares.
Distributions paid out of a Fund's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be
taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds the shares. All other distributions, to the extent
taxable, are taxed to shareholders as ordinary income.
Dividends paid by the Value Equity and International Equity Funds will be
eligible for the dividends received deduction allowed to certain corporations
only to the extent of the total qualifying dividends received by a Fund from
domestic corporations for a taxable year. Corporate shareholders will have to
take into account the entire amount of any dividend received in making certain
adjustments for Federal alternative minimum and environmental tax purposes.
The dividends received deduction is not available for capital gain dividends.
The Maryland Tax-Exempt Bond Fund intends to pay substantially all of its
dividends as "exempt interest dividends." However, taxpayers are required to
report the receipt of "exempt interest dividends" on their Federal income tax
returns, and in two circumstances such amounts, while exempt from regular
Federal income tax, are taxable to persons subject to alternative minimum and
environmental taxes. First, "exempt interest dividends" derived from certain
private activity bonds issued after August 7, 1986 generally will constitute
an item of tax preference for corporate and non-corporate taxpayers in
determining alternative minimum and environmental tax liability. Second,
"exempt interest dividends" must be taken into account by corporate taxpayers
in determining certain adjustments for alternative minimum and environmental
tax purposes. Shareholders who are recipients of Social Security Act or
Railroad Retirement Act benefits should note that "exempt interest dividends"
will be taken into account in determining the taxability of their benefit
payments.
The Maryland Tax-Exempt Bond Fund will determine annually the percentages
of its net investment income which are exempt from the regular Federal income
tax, which constitute an item of tax preference for Federal alternative
minimum tax purposes, and which are fully taxable. These percentages will
apply uniformly to all distributions declared from net investment income
during that year and may differ significantly from the actual percentages for
any particular day.
23
<PAGE>
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in those months will be deemed to
have been received by the shareholders on December 31 of such year, if the
dividends are paid during the following January.
An investor considering buying shares on or just before a dividend record
date should be aware that the amount of the forthcoming dividend payment,
although in effect a return of capital, will be taxable.
A taxable gain or loss may be realized by a shareholder upon the
redemption or transfer of shares depending upon their tax basis and their
price at the time of redemption or transfer.
Any loss upon the sale or exchange of shares held for six months or less
will be disallowed for Federal income tax purposes to the extent of any exempt
interest dividends received by the shareholder.
Dividends and certain interest income earned by a Fund from foreign
securities may be subject to foreign withholding taxes or other taxes. So long
as more than 50% of the value of a Fund's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, the 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. The International Equity Fund
intends to make this election. As a result, the amount of such foreign taxes
paid by the 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 a proportionate amount of
such taxes against a shareholders's U.S. Federal income tax liabilities, or
(b) if a shareholder itemizes deductions, to deduct such proportionate amounts
from U.S. Federal taxable income, should the shareholder so choose.
This is not an exhaustive discussion of applicable tax consequences, and
investors may wish to contact their tax advisers concerning investments in the
Funds. Except as discussed below, dividends paid by each Fund may be taxable
to investors under state or local law as dividend income even though all or a
portion of the dividends may be derived from interest on obligations which, if
realized directly, would be exempt from such income taxes. In addition, future
legislative or administrative changes or court decisions may materially affect
the tax consequences of investing in a Fund. Shareholders who are non-resident
alien individuals, foreign trusts or estates, foreign corporations or foreign
partnerships may be subject to different U.S. Federal income tax treatment.
MARYLAND STATE TAXES
Shareholders of the Maryland Tax-Exempt Bond Fund who are individuals,
corporations, estates or trusts and subject to Maryland state and local taxes
will not be subject to such taxes on dividends paid by the Fund to the extent
they qualify as exempt-interest dividends of a regulated investment company
under Section 852 (b)(5) of the Code and are attributable to any of the
following:
. interest on tax-exempt obligations issued by the State of Maryland
or its political subdivisions and authorities;
. interest on obligations issued by the U.S. Government and its
agencies, instrumentalities, authorities and possessions or
territories;
. gain realized by the Fund on the sale or exchange of the tax-exempt
obligations issued by the State of Maryland or its political
subdivision, agencies, instrumentalities and authorities;
. gain realized by the Fund on the sale or exchange of obligations
issued by the U.S. Government and its agencies, instrumentalities
and authorities.
Distributions attributable to sources other than those described above
will not be exempt from Maryland State and local taxes.
The State of 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 item. Accordingly, subject to a
24
<PAGE>
threshold amount, 50% of any of the distributions of the Maryland Tax-Exempt
Bond Fund attributable to such private activity bonds will not be exempt from
Maryland state and local income taxes.
MANAGEMENT OF THE COMPANY
The business affairs of the Company are managed under the general
supervision of the Company's Board of Directors. The Statement of Additional
Information contains information about the Board of Directors.
The Company has also employed a number of professionals to provide
investment management and other important services to the Funds. Mercantile-
Safe Deposit and Trust Company ("Mercantile") serves as the Funds' investment
adviser and administrator and has its principal offices at Two Hopkins Plaza,
Baltimore, Maryland 21201. CastleInternational Asset Management Limited
("CastleInternational") acts as sub-adviser for the International Equity Fund
and is located at 7 Castle Street, Edinburgh, Scotland EH3 3AM. BISYS Fund
Services, a wholly-owned subsidiary of The BISYS Group, Inc., located at 3435
Stelzer Road, Columbus, Ohio 43219-3035, is the registered broker-dealer that
sells the Funds' shares, and BISYS Fund Services Ohio, Inc., also a wholly-
owned subsidiary of The BISYS Group, Inc. and located at the same address,
provides fund accounting services to the Funds. The Funds also have
custodians, The Fifth Third Bank, located at 38 Fountain Square Plaza,
Cincinnati, Ohio 45263, for the Value Equity, Intermediate Fixed Income and
Maryland Tax-Exempt Bond Funds, and State Street Bank and Trust Company,
located at Two Heritage Drive, North Quincy, Massachusetts 02171, for the
International Equity Fund. State Street Bank and Trust Company also serves as
transfer and dividend disbursing agent for Institutional shares of the Funds.
INVESTMENT ADVISER AND SUB-ADVISER
Mercantile manages the investment portfolios of the Value Equity
Intermediate Fixed Income and Maryland Tax-Exempt Bond Funds, including
selecting portfolio investments and making purchase and sale orders.
CastleInternational manages the investment portfolio of the International
Equity Fund in accordance with the investment requirements and policies
established by Mercantile.
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. As of June 30, 1996, Mercantile had approximately $26 billion in
assets under active management.
CastleInternational, which is a wholly-owned subsidiary of PNC Holding
Corp., is a newly-formed investment advisory firm with approximately $1.6
billion in internationally-invested assets under management at June 30, 1996.
A Fund's portfolio manager is primarily responsible for the day-to-day
management of a Fund's investments. Brian B. Topping has been sole portfolio
manager of the Value Equity Fund since April 1996 and had co-managed the Fund
since December 1995. Mr. Topping, Vice Chairman of the Board and Chief
Investment Officer of Mercantile, has managed endorsement, employee benefit
and foundation portfolios since joining Mercantile in 1976. Mark G. McGlone,
Vice President of Mercantile, has managed the Intermediate Fixed Income Fund
since June 1992. During the past sixteen years, Mr. McGlone has managed
institutional fixed income portfolios at Mercantile, including pension plans,
endowment and self-insurance funds. 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 one person is primarily
responsible for making recommendations to that committee. The organizational
arrangements of CastleInternational require that all investment decisions with
respect to the International Equity Fund be made by CastleInternational
Investment Group, chaired by its Investment Director, and no one person is
primarily responsible for making recommendations to that Group.
25
<PAGE>
ADMINISTRATOR
Mercantile also serves as the Funds' administrator and generally assists
in all aspects of their operation and administration, including maintaining
the Funds' offices, coordinating the preparation of reports to shareholders,
preparing filings with state securities commissions, coordinating federal and
state tax returns, and performing other administrative functions.
EXPENSES
The Funds incur certain expenses in order to support the services
described above, as well as other matters essential to the operation of the
Funds. 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 calculated daily and paid monthly at the annual rates of .60% of
the average daily net assets of the Value Equity Fund, .80% of the average
daily net assets of the International Equity Fund, .35% of the average daily
net assets of the Intermediate Fixed Income Fund and .50% of the average daily
net assets of the Maryland Tax-Exempt Bond Fund. Mercantile has agreed to pay
CastleInternational a sub-advisory fee, computed daily and paid quarterly, at
the annual rate of .45% of the International Equity Fund's average daily net
assets. The fees paid by Mercantile to CastleInternational for the
International Equity Fund come out of Mercantile's advisory fee and are not an
additional expense of the Fund.
For the fiscal year ended May 31, 1996, Mercantile received advisory fees,
after fee waivers, at the effective annual rates of .44% of the average daily
net assets of the Value Equity Fund, .73% of the average daily net assets of
the International Equity Fund, .25% of the average daily net assets of the
Intermediate Fixed Income Fund, and .15% of the average daily net assets of
the Maryland Tax-Exempt Bond Fund. For the same period, Mercantile paid sub-
advisory fees at the effective annual rate of .43% of the International Equity
Fund's average daily net assets to CastleInternational (and the Fund's
predecessor sub-adviser).
In its capacity as administrator, Mercantile is also entitled to an
administration fee, computed daily and paid monthly, at the annual rate of
.125% of the average daily net assets of each Fund.
The Funds also bear other operating expenses which are described in more
detail in the Statement of Additional Information.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense
reimbursements by Mercantile and the Funds' other service providers, as well
as by certain mandatory expense limitations imposed by state securities
regulators. The amount of the fee waivers may be changed at any time at the
sole discretion of Mercantile with respect to advisory and administration
fees, and by the Funds' other service providers, with respect to all other
fees. As to any amounts voluntarily waived or reimbursed, the service
providers retain the ability to be reimbursed by a Fund for such amounts prior
to fiscal year-end. Such waivers and reimbursements would increase the return
to investors when made but would decrease the return if a Fund were required
to reimburse a service provider.
OTHER INFORMATION CONCERNING 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". The
Company's charter authorizes the Board of Directors to issue up to
10,000,000,000 full and fractional shares of capital stock ($.001 par value
per share) and to classify or reclassify any unissued shares into one or more
classes of shares. Pursuant to this authority, the Board of Directors has
authorized the issuance of two classes of shares in each of the Value Equity
and Intermediate Fixed Income Funds and one class of shares in each of the
International Equity and Maryland Tax-Exempt Bond Funds.
26
<PAGE>
The Board of Directors has also authorized the issuance of additional classes
of shares representing interests in other investment portfolios of the
Company. For information regarding these other portfolios and share classes,
call 1-800-551-2145.
Institutional shares of the Funds are described in this Prospectus. The
Value Equity and Intermediate Fixed Income Funds also offer AFBA Five Star
shares, which currently are offered exclusively to members of the Armed Forces
Benefit Association. Shares of each class in the Value Equity and Intermediate
Fixed Income Funds bear their pro rata portion of all operating expenses
incurred by those Funds, except certain miscellaneous "class expenses" (i.e.
transfer agency fees, printing and registration fees). In addition, AFBA Five
Star shares bear the expense of all payments under the Service Plan as
described in the prospectus for such shares. Payments under the Service Plan
may not exceed .25% (on an annual basis) of the average daily net asset value
of the outstanding AFBA Five Star shares. Because of these Plan payments and
other class expenses, the performance of a Fund's Institutional shares is
expected to be higher than the performance of its AFBA Five Star Shares. For
further information about AFBA Five Star shares of the Value Equity and
Intermediate Fixed Income Funds, call 1-800-782-4797.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shares of all
portfolios of the Company vote together and not by portfolio or class, unless
otherwise required by law or permitted by the Board of Directors. The Company
does not currently intend to hold annual shareholder meetings unless it is
required to do so by the Investment Company Act or other applicable law.
As of July 24, 1996, 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 Investment Company
Act by reason of its record ownership of such shares.
PERFORMANCE REPORTING
Performance information provides you with a method of measuring and
monitoring your investments. This section will help you to understand the
various terms that are commonly used to describe a Fund's performance. You may
see references to these terms in newsletters, advertisements and shareholder
communications. These publications may also include comparisons of a Fund's
performance to the performance of various indices and investments for which
reliable performance data are available and to averages, performance rankings
or other information compiled by recognized mutual fund statistical services.
The performance for Institutional shares of a Fund is calculated separately
from the performance of the Fund's AFBA Five Star shares.
.Aggregate total return reflects the total percentage change in the
value of an investment in a Fund over a specified measuring period.
.Average annual total return represents the average annual percentage
change in the value of an investment in a Fund over a specified
measuring period. It is calculated by taking the aggregate total
return for the measuring period and determining what constant annual
return would have produced the same aggregate return. Average annual
returns for more than one year tend to smooth out variations in a
Fund's return and are not the same as actual annual results.
Both methods of calculating total return assume that you have
reinvested dividends and distributions made by a Fund during the
period in Fund shares.
.Yield shows the rate of income a Fund earns on its investments as a
percentage of its share price. It is calculated by dividing the
Fund's net investment income for a 30-day period by the product of
the average daily number of shares entitled to receive dividends and
the Fund's net asset value per share at the end of the 30-day
period. The result is then annualized. This represents the amount
you would earn if you remained invested in a Fund for a year and the
Fund continued to have the same yield for the year. Yield does not
include changes in net asset value.
27
<PAGE>
.Tax-Equivalent Yield of the Maryland Tax-Exempt Bond Fund shows the
level of taxable yield needed to produce an after-tax yield
equivalent to the Fund's tax-free yield. It is calculated by
increasing the Fund's yield by the amount necessary to reflect the
payment of Federal and Maryland income taxes at a stated tax rate.
The Fund's tax-equivalent yield will always be higher than its
yield.
Any fees charged by a Bank directly to your account in connection with an
investment in a Fund will not be included in the Fund's calculations of yield
and/or total return.
Performance quotations of a Fund represent its past performance, and you
should not consider them representative of future results. The investment
return and principal value of an investment in a Fund will fluctuate so that
your shares, when redeemed, may be worth more or less than their original
cost. Since performance will fluctuate, you cannot necessarily compare an
investment in Fund shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed
yield for a stated period of time.
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 or your Bank will send you a statement of your account
quarterly and a confirmation after every transaction that affects your share
balance or your account registration. A statement with tax information will be
mailed to you by January 31 of each year and filed with the Internal Revenue
Service. At least twice a year, you will receive financial statements in the
form of Annual and Semi-Annual Reports of the Funds.
If you have any questions concerning the Company or any of the Funds,
please call 1-800-551-2145.
----------------
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.
28
<PAGE>
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
Baltimore, Maryland
SUB-ADVISER FOR THE INTERNATIONAL EQUITY FUND:
CastleInternational Asset Management Limited
Edinburgh, Scotland
CUSTODIAN FOR THE VALUE EQUITY, FIXED INCOME AND MARYLAND TAX-EXEMPT BOND
FUNDS:
The Fifth Third Bank
Cincinnati, Ohio
CUSTODIAN FOR THE INTERNATIONAL EQUITY FUND AND TRANSFER AGENT:
State Street Bank and Trust Company
Boston, Massachusetts
DISTRIBUTOR:
BISYS Fund Services
Columbus, Ohio
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.
<PAGE>
AFBA FIVE STAR SHARES
ARMED FORCES BENEFIT SERVICES, INC.
909 N. WASHINGTON STREET
ALEXANDRIA, VA 22314
800-782-4797
, 1996
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 ("SEC") 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. IN ADDITION, DIVIDENDS PAID BY A FUND
WILL GO UP OR DOWN.
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 Page
- ----------------------------------------------------------------------------
<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................................. 8
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............................................................ 18
Exchanging Shares........................................................... 18
Additional Redemption and Exchange Information.............................. 19
Pricing of Shares........................................................... 20
Dividends and Distributions................................................. 21
Tax Information............................................................. 21
Statements and Reports...................................................... 22
Description of the Company and its Shares................................... 22
Fund Management............................................................. 23
Performance Reporting....................................................... 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............................................ None None
Exchange Fees.............................................. None None
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (net of waivers)(1)........................ .44% .25%
12b-1 Fees................................................. None None
Other Expenses (net of waivers and reimbursements)(1)...... .54% .65%
Total Fund Operating Expenses (net of waivers and reim-
bursements)(1)............................................ .98% .90%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) 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 fund operating expenses) as a
shareholder of one of the Funds. The operating expenses are based on
expenses incurred by each Fund during the last fiscal year, restated to
reflect the fees and expenses which each Fund expects to incur during the
current fiscal year in its 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, 1997 in order to assist the Funds in maintaining competitive expense
ratios. A portion of the shareholder servicing fees payable under the
Company's Service Plan for AFBA Five Star Shares also is expected to be
voluntarily waived and/or reimbursed. Absent these waivers and reimbursements,
Management Fees, Other Expenses and Total Fund Operating Expenses would be
.60%, .55% and 1.15%, respectively, of the average daily net asset value of
AFBA Five Star Shares of the Value Equity Fund, and .35%, .71% and 1.06%,
respectively, of the average daily net asset value of AFBA Five Star Shares of
the Intermediate Fixed Income Fund.
For more complete descriptions of the Funds' operating expenses, see "Fund
Management" in this prospectus.
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
- -------------------------------------------------------------------------------
<S> <C> <C>
1 Year...................................................... $ 10 $ 9
3 Years..................................................... $ 31 $ 29
5 Years..................................................... $ 54 $ 50
10 Years.................................................... $120 $111
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</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.
FINANCIAL HIGHLIGHTS
The Value Equity Fund and Intermediate Fixed Income Fund, investment
portfolios of M.S.D.& T. Funds, Inc. (the "Company"), commenced operations on
February 28, 1991 and March 14, 1991, respectively, each with a single class
of shares known as Institutional Shares. On December 1, 1995, each Fund began
offering a second class of shares known as AFBA Five Star Shares. See
"Description of the Company and Its Shares" below for a description of certain
differences between Institutional Shares and AFBA Five Star Shares, including
differences in expenses.
The table below sets forth certain information concerning the investment
results of the AFBA Five Star Shares of the Funds for the period indicated.
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 incorporated by
reference into the Statement of Additional Information. The financial data
included in the table should be read in conjunction with the financial
statements and related notes which are also incorporated by reference into the
Statement of Additional Information. Further information about the performance
of the Funds is available in the Company's Annual Report to Shareholders for
the fiscal year ended May 31, 1996. 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>
FINANCIAL HIGHLIGHTS FOR AN AFBA FIVE STAR SHARE OUTSTANDING THROUGHOUT THE
PERIOD INDICATED:
<TABLE>
<CAPTION>
INTERMEDIATE
VALUE EQUITY FIXED INCOME
FUND FUND
------------ ------------
12/1/95/1/ 12/1/95/1/
TO TO
5/31/96 5/31/96
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period................. $13.61 $10.61
------ ------
Income From Investment Operations:
Net Investment Income............................... 0.14 0.28
Net Realized and Unrealized Gain (Loss) on Invest-
ments.............................................. 0.91 (0.41)
------ ------
Total From Investment Operations................... 1.05 (0.13)
------ ------
Less Distributions:
Dividends to Shareholders from Net Investment In-
come............................................... (0.10) (0.28)
Distributions to Shareholders from Net Capital
Gains.............................................. -- --
------ ------
Total Distributions................................ (0.10) (0.28)
------ ------
Net Asset Value, End of Period....................... $14.56 $10.20
====== ======
Total Return......................................... 7.72% (1.23)%
Ratios/Supplemental Data
Net Assets, End of Period ($000)..................... 330 346
Ratio of Expenses to Average Net Assets/2/,/3/....... 0.98% 0.90%
Ratio of Net Investment Income to Average Net Assets. 2.36% 5.50%
Portfolio Turnover Rate.............................. 45.15% 52.79%
</TABLE>
- --------
/1/Initial offering date.
/2/Annualized.
/3/Without the waiver of advisory fees and administration fees, the ratio of
expenses to average net assets for the period ended May 31, 1996 would have
been 1.15% (annualized) for the Value Equity Fund and 1.06% (annualized) for
the Intermediate Fixed Income Fund.
5
<PAGE>
- --------------------------------------------------------------------------------
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 Mercantile-Safe Deposit and Trust Company, the Funds' investment
adviser (the "Adviser") 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 "Fundamental 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 common
stock, preferred stock and debt obligations convertible into common stock that
the Adviser believes to be undervalued.
The Fund seeks to purchase individual stocks 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 are factors considered in stock selection. Securities purchased by
the Fund 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 Fund will invest at least
65% of its total assets in common stock, preferred stock and debt obligationS
convertible into common stock. Although the Fund will invest primarily in
publicly-traded common stocks of U.S. corporations, it may also invest up to
25% of its total assets in the securities of foreign issuers, either directly
or through American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and Global Depository Receipts ("GDRs") as described under "Other
Investment Policies and Related Risks."
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 Adviser has determined to be of comparable quality. See
the SAI Appendix for a description of applicable debt security ratings.
7
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The Fund may 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 protection of capital.
The Fund invests substantially all of its assets in:
-- domestic and foreign corporate debt obligations
-- obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
-- debt obligations of foreign, state and local governments and their
political sub-divisions
-- asset-backed securities
-- collateralized mortgage obligations and other mortgage-related
securities with effective maturities of ten years or less
-- money market instruments.
The Fund will purchase only those securities that are rated at the time of
purchase within the three highest ratings assigned by a Rating Agency or, if
unrated, are determined by the Adviser to be of comparable quality. If a
security's rating is reduced below the minimum rating that is permitted for
the Fund, the Adviser will consider whether the Fund should continue to hold
that security.
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.
Most obligations acquired by the Fund will be issued by companies or
governmental entities located in the U.S. Up to 25% of the Fund's total
assets, however, may be invested in the debt obligations of foreign issuers.
The Fund may also invest, without limitation, in high quality short-term money
market instruments for temporary defensive purposes.
The Adviser expects that under normal market conditions the Fund's portfolio
securities will have an average weighted maturity of three to ten years.
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, as well as in obligations issued or guaranteed by U.S. Government
agencies and instrumentalities. Obligations of certain agencies and
instrumentalities, such as the Government National Mortgage Association, are
backed by the U.S. Treasury; others, such as those of the Export-Import Bank,
are supported by the issuer's right to borrow from the U.S. Treasury; others,
including those issued by the Federal National
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<PAGE>
Mortgage Association, are backed by the U.S. Government's discretionary
ability to purchase the agency's obligations; and still others, such as those
issued by the Student Loan Marketing Association, are backed solely by the
issuer's credit. 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.
MUNICIPAL OBLIGATIONS
The Intermediate Fixed Income Fund may invest from time to time in municipal
obligations. These securities may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the yield of such
securities on a pre-tax basis is comparable to that of other securities the
Fund can purchase. Dividends paid by the Fund that came from interest on
municipal obligations will be taxable to shareholders.
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 (which are a type of obligation that, although exempt from
regular Federal income tax, may be subject to the Federal alternative maximum
tax) are usually revenue securities issued by or for public authorities to
finance a privately operated facility.
Stand-By Commitments
The Intermediate Fixed Income Fund may acquire "stand-by commitments" under
which a dealer agrees to purchase certain municipal obligations at the Fund's
option at a price equal to their amortized cost value plus interest. 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 that have total assets of more than $1
billion at the time of purchase. The Funds may invest in the obligations of
foreign banks and foreign branches of U.S. banks when the Adviser determines
that the instrument presents minimal credit risks. 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. In addition, each
Fund may acquire unrated commercial paper and corporate bonds that are
determined by the Adviser at the time of purchase to be of comparable quality.
Commercial paper may include variable and floating rate instruments.
Variable and Floating Rate Instruments
Each Fund may purchase variable and floating rate instruments. Because of
the absence of a market in which to resell a variable or floating rate
instrument, a Fund might have trouble selling an instrument should the issuer
default or during periods when the Fund is not permitted by agreement to
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<PAGE>
demand payment of the instrument, and for this and other reasons a loss could
occur with respect to the instrument.
ASSET-BACKED SECURITIES
The Intermediate Fixed Income Fund may invest in asset-backed securities,
which are securities backed by installment sale contracts, credit card
receivables or other assets. 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. The
prepayment rate is primarily a function of current market rates and
conditions. In periods of rising interest rates, the rate of prepayment tends
to increase. During periods of falling interest rates, the reinvestment of
prepayment proceeds by the Fund will generally be at a lower rate than the
rate on the prepaid obligation. Prepayments may also result in some loss of
the Fund's principal investment if any premiums were paid. As a result of
these yield characteristics, some high-yielding asset-backed securities may
have less potential for growth in value than conventional bonds with
comparable maturities. These characteristics may result in a higher level of
price volatility for these assets under certain market conditions.
Asset-backed securities are subject to greater risk of default during
periods of economic downturn than conventional debt instruments and the holder
frequently has no recourse against the entity that originated the security.
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 Fund's 10% limitation on
illiquid investments described below under "Managing Liquidity."
MORTGAGE-RELATED SECURITIES
The Intermediate Fixed Income Fund may invest in mortgage-backed securities
issued or guaranteed by U.S. Government agencies and private issuers. They may
include collateralized mortgage obligations ("CMOs") and U.S. Government
stripped mortgage-backed securities ("SMBS").
CMOs are a type of bond issued by non-governmental entities which provide
the holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. Issuers of CMOs frequently
elect to be taxed as a pass-through entity known as a real estate mortgage
investment conduit or REMIC. CMOs are issued in multiple classes, each with a
specified fixed or floating interest rate and a final distribution date.
SMBS represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only")
on mortgage-backed certificates issued by a U.S. Government agency and
representing interests in pools of mortgage loans. 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.
Mortgage-related securities involve risks similar to those described above
under "Asset-Backed Securities", including prepayment risks. In addition, SMBS
may exhibit greater price volatility and interest rate risk than other types
of mortgage-related securities because of the manner in which their principal
and interest are returned to investors.
REPURCHASE AGREEMENTS
Each Fund may buy portfolio securities subject to the seller's agreement to
repurchase them at an agreed upon date and price. These transactions are known
as repurchase agreements. Repurchase agreements involve the risk that the
seller will fail to
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repurchase the securities as agreed. In that event, the Fund will bear the
risk of possible loss due to adverse market action or delays in liquidating
the underlying obligations. Repurchase agreements are considered to be loans
under the Investment Company Act of 1940 (the "1940 Act").
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, a Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be made to meet
redemption requests without selling portfolio securities. Reverse repurchase
agreements involve the risk of counterparty default and possible loss of
collateral held by the counterparty. Reverse repurchase agreements are
considered to be borrowings under 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, 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.
The Fund will bear the risk, however, that the price or yield obtained in a
transaction may be less favorable than the price or yield available in the
market when the 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. Because the Fund is required to set aside
cash or liquid high grade debt obligations to satisfy these purchase
commitments, the 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. These transactions will not be entered into for speculative
purposes but only in furtherance of the Fund's investment objective.
SECURITIES LENDING
Each Fund may lend its portfolio securities to broker-dealers and other
institutions as a means of earning additional income. Although securities
loans will be full collateralized, such loans present 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, securities loans will be made only to parties the
Adviser deems to be of good standing and will only be made if the Adviser
thinks the income to be earned from the loans justifies the risks.
OTHER INVESTMENT COMPANIES
Each 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". Such investments will be made by a Fund in
connection with the management of its daily cash position and will be subject
to the requirements of applicable securities laws. The Intermediate 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.
When a Fund invests in another investment company, it pays a pro rata portion
of the advisory and other expenses of that company as a shareholder of the
company. These expenses are in addition to the Fund's own expenses.
FOREIGN SECURITIES
There are risks and costs involved in investing in securities of foreign
issuers (including foreign governments), which are in addition to the usual
risks inherent in U.S. investments.
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Investments in foreign securities may involve higher costs than investments
in U.S. securities, including --higher transaction costs as well as the
imposition of additional taxes by foreign governments. In addition, foreign
investments may involve risks associated with the level of currency exchange
rates, less complete financial information about the issuer, --less market
liquidity and political instability. Future political and economic
developments, the --possible imposition of withholding taxes on interest
income, the --possible seizure or nationalization of foreign holdings, the
possible difficulty in taking appropriate legal action in a foreign court, the
possible establishment of exchange controls or the adoption of other
governmental restrictions might adversely affect the payment of principal and
interest on foreign obligations.
Foreign banks and foreign branches of domestic banks may be subject to less
stringent reserve requirements, and to different accounting, auditing and
recordkeeping requirements.
Certain of the risks associated with investments in foreign securities are
heightened with respect to investments in developing countries and fledgling
democracies. The risks of expropriation, nationalism and social, political and
economic instability are greater in those countries than in more developed
capital markets.
AMERICAN, EUROPEAN AND GLOBAL DEPOSITORY RECEIPTS
The Value Equity Fund may invest up to 25% of its total assets in ADRs,
EDRs, GDRs and similar securities. ADRs typically are issued by a U.S. bank or
trust company and evidence ownership of underlying securities issued by a
foreign issuer. EDRs, which are sometimes referred to as Continental
Depository Receipts, are receipts issued in Europe typically by non-U.S. banks
or trust companies and foreign branches of U.S. banks that evidence ownership
of underlying foreign or U.S. securities. GDRs are depository receipts
structured like global debt issues to facilitate trading on an international
basis. These instruments may not be denominated in the same currency as the
securities they represent. Investments in ADRs, EDRs and GDRs involve risks
similar to those accompanying direct investments in foreign securities.
FOREIGN CURRENCY EXCHANGE CONTRACTS
The Funds may from time to time use foreign currency exchange contracts to
hedge against investments in the value of foreign currencies (including the
European Currency Unit) relative to the U.S. dollar in connection with
specific portfolio transactions or with respect to portfolio positions. A
forward foreign currency exchange contract involves an obligation to purchase
or sell a specified currency at a future date at a price set at the time of
the contract. Foreign currency exchange contracts do not eliminate
fluctuations in the values of portfolio securities but rather allow a Fund to
establish a rate of exchange for a future point in time.
MANAGING LIQUIDITY
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
not permit a Fund to terminate them after seven days' notice, restricted
securities and other securities for which market quotations are not readily
available. Certain securities that might otherwise be considered illiquid,
however, such as variable amount master demand notes with maturities of nine
months or less and securities for which the Adviser has determined, pursuant
to guidelines adopted by the Company's Board of Directors, that a liquid
trading market exists
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(including certain securities that may be purchased by institutional investors
under SEC Rule 144A) are not subject to this limitation. 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.
RISK FACTORS ASSOCIATED WITH DERIVATIVE INSTRUMENTS
Each Fund may purchase certain "derivative" instruments as described above
under various headings. 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 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 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.
OTHER RISK CONSIDERATIONS
As with an investment in any mutual fund, an investment in the Funds entail
market and economic risks associated with investments generally. However,
there are certain specific risks of which you should be aware.
Generally, the market value of fixed income securities in the Funds can be
expected to vary inversely to changes in prevailing interest rates. You should
recognize that in periods of declining interest rates the market value of
investment portfolios comprised primarily of fixed income securities will tend
to increase, and in periods of rising interest rates the market value will
tend to decrease. You should also recognize that in periods of declining
interest rates, the yields of investment portfolios comprised primarily of
fixed income securities will tend to be higher than prevailing market rates
and, in periods of rising interest rates, yields will tend to be somewhat
lower. Debt securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater capital appreciation and
depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also affect the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will
not affect cash income from such securities but will be reflected in a Fund's
net asset value.
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PORTFOLIO TURNOVER
A Fund may sell a portfolio security soon after it is purchased if the
Adviser believes that a sale is consistent with the Fund's investment
objective. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses, tax consequences (including the possible
realization of additional taxable capital gains and income) and other
transaction costs, which must be borne directly by the Fund involved and
ultimately by its shareholders.
FUNDAMENTAL 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, 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.
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, subject to certain exceptions.
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 an investment is made, a
subsequent change in that percentage resulting from a change in value of a
Fund's portfolio securities does not mean that the limitation has been
violated.
In order to permit the sale of a Fund's shares (or a particular class of
shares) in certain states, the Company may agree to certain restrictions that
are stricter than the investment policies and limitations described above. If
the Company determines that any of these restrictions is no longer in a Fund's
best interests, it may revoke its agreement to abide by such restrictions by
no longer selling shares in the state involved.
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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>
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* The Funds reserve the right to waive these minimums.
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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.
- --------------------------------------------------------------------------------
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
OP10
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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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 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.
- --------------------------------------------------------------------------------
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 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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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.
The Automatic Investment Plan is one means by which investors may use
"Dollar Cost Averaging" in making investments. Dollar Cost Averaging can be
useful in investing in portfolios such as the Funds whose price per share
fluctuates. Instead of trying to time market performance, a fixed dollar
amount is invested in Fund shares at predetermined intervals. This may help
investors to reduce their average cost per share because the agreed upon fixed
investment amount allows more shares to be purchased during periods of lower
share prices and fewer shares during periods of higher prices. In order to be
effective, Dollar Cost Averaging should usually be followed on a sustained,
consistent basis. Investors should be aware, however, that shares bought using
Dollar Cost Averaging are made without regard to their price on the day of
investment or to market trends. In addition, while investors may find Dollar
Cost Averaging to be beneficial, it will not prevent a loss if an investor
ultimately redeems his or her shares at a price which is lower than their
purchase price.
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 initiating
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.
On a Business Day when the NYSE closes early due to a partial holiday or
otherwise, the Company reserves the right to advance the times at which
purchase orders must be received in order to be processed on that Business
Day.
MISCELLANEOUS PURCHASE INFORMATION
You must provide a social security number or other certified taxpayer
identification number when opening or reopening an account. Purchase
17
<PAGE>
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.
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.
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 the close of regular trading hours on the
NYSE (currently 4:00 P.M. Eastern Time) will be effective on the next business
day.
EXCHANGING SHARES
The minimum value of shares being exchanged is $100. 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 the close of regular working
hours on the NYSE (currently 4:00 P.M. Eastern Time) will not be processed
until the next Business Day.
18
<PAGE>
- --------------------------------------------------------------------------------
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
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 agents will not be responsible for any losses resulting
from unauthorized telephone transactions when reasonable procedures to verify
the identity of the caller are followed. To the extent that the Company does
not follow such procedures it and/or its agents may be responsible for any
unauthorized transactions.
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
19
<PAGE>
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.
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.
On a Business Day when the NYSE closes early due to a partial holiday or
otherwise, the Company reserves the right to advance the time at which
redemption orders must be received in order to be processed on that Business
Day.
PAYMENT OF REDEMPTION PROCEEDS
Payment for redemption orders is normally made within five 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.
In unusual circumstances, the Company may make payment in readily marketable
portfolio securities at their market value equal to the redemption price.
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.
If an account balance falls below $1,000 as a result of redemptions and is
not increased to at least $1,000 within 60 days after notice, the account may
be closed and the proceeds sent to the shareholder.
The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
its shares) for such periods as permitted under the 1940 Act.
- --------------------------------------------------------------------------------
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.
20
<PAGE>
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.
The net asset value per share is determined as of the close of regular
trading hours (currently 4:00 P.M. Eastern Time) on the NYSE on each weekday
with the exception of those holidays on which the Federal Reserve Bank of
Cleveland, AFBSI, the Funds' Adviser, Transfer Agent, Custodian or the NYSE is
closed, which currently include New Year's Day (observed), Martin Luther King,
Jr. Day, Presidents' Day, Memorial Day, Independence Day (observed), Labor
Day, Columbus Day, Veterans' Day, Thanksgiving Day, and Christmas Day
(observed).
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Shareholders receive dividends and net capital gain distributions.
Dividends, which are derived from a Fund's net investment income, are declared
and paid quarterly with respect to the Value Equity Fund and are declared
daily and paid monthly with respect to the Intermediate Fixed Income Fund. A
Fund realizes capital gains whenever it sells securities for a higher price
that it paid for them.
Shares in each Fund begin earning dividends on the day a purchase order is
processed and continue earning dividends through and including the day before
the shares are redeemed. Dividends and distributions will be automatically
reinvested in additional AFBA Five Star Shares of the Fund in which the
dividend was declared. Please call Shareholder Services at 800-782-4797 if you
wish to receive dividends and distributions in cash.
- --------------------------------------------------------------------------------
TAX INFORMATION
- --------------------------------------------------------------------------------
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If a Fund
qualifies, it generally will be relieved of Federal income tax on amounts
distributed to shareholders, but shareholders, unless otherwise exempt, will
pay income or capital gains taxes on distributions (except distributions that
are treated as a return of capital), regardless of whether the distributions
are paid in cash or reinvested in additional shares.
Distributions paid out of a Fund's "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, will be
taxed to shareholders as long-term capital gain, regardless of the length of
time a shareholder holds the shares. All other distributions, to the extent
taxable, are taxed to shareholders as ordinary income.
Dividends paid by the Value Equity Fund will be eligible for the dividends
received deduction allowed to certain corporations only to the extent of the
total qualifying dividends received by the Fund from domestic corporations for
a taxable year. Corporate shareholders will have to take into account the
entire amount of any dividend received in making certain adjustments for
Federal alternative minimum and environmental tax purposes. The dividends
received deduction is not available for capital gain dividends.
Dividends declared in October, November or December of any year payable to
shareholders of record on a specified date in those months will be deemed to
have been received by the shareholders on December 31 of such year, if the
dividends are paid during the following January.
An investor considering buying shares on or just before a dividend record
date should be aware that the amount of the forthcoming dividend payment,
although in effect a return of capital, will be taxable.
21
<PAGE>
A taxable gain or loss may be realized by a shareholder upon the redemption
or transfer of shares depending upon their tax basis and their price at the
time of redemption, or transfer.
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 Charter authorizes the Board of Directors to classify
any unissued shares into one or more classes of shares. The Board has
authorized the issuance of shares in each of two classes 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 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 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 class in a Fund
bear their pro rata portion of all operating expenses incurred by the Fund,
except certain miscellaneous "class expenses" (i.e., transfer agency fees,
printing and registration fees). In addition, AFBA Five Star Shares bear the
expense of all payments under the Company's Service Plan discussed below.
Differences in the expenses paid by the respective classes will affect their
performance.
Shareholders are entitled to one vote for each full share held and a
proportionate fractional vote for each fractional share held. Shares of all of
the Company's portfolios vote together and not by portfolio or class, unless
otherwise required by law or
22
<PAGE>
permitted by the Board of Directors. The Company does not currently intend to
hold annual shareholder meetings unless it is required to do so by the 1940
Act or other applicable law.
As of July 24, 1996, the Adviser held of record, in a fiduciary or other
representative capacity for beneficial owners, substantially all of the shares
of the Company. The Adviser does not, however, have any economic interest in
such shares which are held solely for the benefit of its customers. The
Adviser 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.
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. As of
June 30, 1996, Mercantile had approximately $26 billion in assets under active
management. 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.
Brian B. Topping has been sole portfolio manager of the Value Equity Fund
since April 1996 and had co-managed the Fund since December 1995. Mr. Topping,
Vice Chairman of the Board and Chief Investment Officer of Mercantile, has
managed endowment, employee benefit and foundation portfolios since joining
Mercantile in 1976.
Mark G. McGlone, Vice-President of Mercantile, has managed the Intermediate
Fixed Income Fund since June 1992. During the past sixteen years Mr. McGlone
has managed institutional
23
<PAGE>
fixed income portfolios at Mercantile, including pension plans, endowment
funds and self-insurance funds.
ADMINISTRATOR
Mercantile also serves as the Funds' administrator. In this capacity,
Mercantile generally assists in all aspects of the Funds' operation and
administration, including maintaining the Funds' offices, coordinating the
preparation of reports to shareholders, preparing filings with state
securities commissions, coordinating federal and state tax returns, and
performing other administrative functions.
DISTRIBUTOR
Shares of each Fund are sold on a continuous basis without a sales load by
the Company's Distributor, BISYS Fund Services. The Distributor's principal
offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
TRANSFER AGENT & FUND ACCOUNTANT
BISYS Fund Services Ohio Inc., ("BISYS Ohio") 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 administer the
distribution of any dividends or distributions declared by the Funds with
respect to AFBA Five Star Shares. BISYS Ohio also provides full fund
accounting services including the computation of each Fund's net asset value,
net income and realized capital gains.
BISYS Ohio'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 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. For the fiscal year
ended May 31, 1996, Mercantile received advisory fees, after fee waivers, at
the effective annual rates 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.
The Funds also bear other operating expenses which are described in more
detail in the Statement of Additional Information.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expenses reimbursements
by Mercantile and the Funds' other service providers, as well as by certain
mandatory expense limitations imposed by state securities regulators. The
amount of the fee waivers may be changed at any time at the sole
24
<PAGE>
discretion of Mercantile with respect to advisory and administration fees, and
by the Funds' other service providers, with respect to all other fees. As to
any amounts voluntarily waived or reimbursed, the service providers retain the
ability to be reimbursed by a Fund for such amounts prior to fiscal year-end.
Such waivers and reimbursements would increase the return to investors when
made but would decrease the return if a Fund were required to reimburse a
service provider.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
Performance information provides you with a method of measuring and
monitoring your investments. This section will help you to understand the
various terms that are commonly used to describe a Fund's performance. You may
see references to these terms in newsletters, advertisements and shareholder
communications. These publications may also include comparisons of a Fund's
performance to the performance of various indices and investments for which
reliable performance data are available and to averages, performance rankings
or other information compiled by recognized mutual fund statistical services.
The performance of AFBA Five Star Shares of a Fund is calculated separately
from the performance of the Funds' Institutional shares.
. Aggregate total return reflects the total percentage change in the value of
an investment in a Fund over a specified measuring period.
. Average annual total return represents the average annual percentage change
in the value of an investment in a Fund over a specified measuring period.
It is calculated by taking the aggregate total return for the measuring
period and determining what constant annual return would have produced the
same aggregate return. Average annual returns for more than one year tend to
smooth out variations in a Fund's return and are not the same as actual
annual results.
Both methods of calculating total return assume that you have reinvested
dividends and distributions made by a Fund during the period in Fund shares.
. Yield shows the rate of income a fund earns on its investments as a
percentage of its share price. It is calculated by dividing the Fund's net
investment income for a 30-day period by theproduct of the average daily
number of shares entitled to receive dividends and the Fund's net asset
value per share at the end of the 30-day period. The result is then
annualized. This represents the amount you would earn if you remained
invested in a fund for a year and the Fund continued to have the same yield
for the year. Yield does not include changes in net asset value.
Performance quotations of a Fund represent its past performance, and you
should not consider them representative of future results. The investment
return and principal value of an investment in a fund will fluctuate so that
your shares, when redeemed, may be worth more or less than their original
cost. Since performance will fluctuate, you cannot necessarily compare an
investment in fund shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed
yield for a stated period of time.
25
<PAGE>
- --------------------------------------------------------------------------------
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.
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.
26
<PAGE>
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, Maryland
CUSTODIAN:
The Fifth Third Bank
Cincinnati, Ohio
TRANSFER AGENT:
BISYS Fund Services Ohio, Inc.
Columbus, Ohio
DISTRIBUTOR:
BISYS Fund Services
Columbus, Ohio
In considering this investment please read this Prospectus carefully.
AFBA INDUSTRIAL BANK IS A WHOLLY-OWNED SUBSIDIARY OF ARMED FORCES BENEFIT
SERVICES, INC. AND IS NOT AFFILIATED WITH AEGON USA, MERCANTILE-SAFE DEPOSIT
AND TRUST COMPANY, BISYS FUND SERVICES, THE FIFTH THIRD BANK OR STATE STREET
BANK AND TRUST COMPANY.
[LOGO OF AFBA FIVE STAR SHARES APPEARS HERE]
M.S.D.&T. Funds, Inc.
- ------------------
PROSPECTUS
- ------------------
[LOGO OF STAR APPEARS HERE] Value Equity Fund
[LOGO OF STAR APPEARS HERE] Intermediate Fixed Income Fund
, 1996
<PAGE>
M.S.D. & T. FUNDS, INC.
Statement of Additional Information
for the
Prime Money Market Fund
Government Money Market Fund
Tax-Exempt Money Market Fund
Tax-Exempt Money Market Fund (Trust)
and
Institutional Shares of the
Value Equity Fund
International Equity Fund
Intermediate Fixed Income Fund
Maryland Tax-Exempt Bond Fund
____________, 1996
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
------
<S> <C>
Investment Objectives and Policies................................... 3
Fundamental Limitations.............................................. 22
Additional Purchase and Redemption Information....................... 25
Net Asset Value...................................................... 26
Additional Information Concerning Taxes.............................. 28
Management of the Company............................................ 33
Independent Accountants.............................................. 41
Counsel.............................................................. 41
Additional Information Concerning Shares............................. 41
Additional Performance Information................................... 44
Miscellaneous........................................................ 53
Financial Statements................................................. 53
Appendix............................................................. A-1
</TABLE>
This Statement of Additional Information is meant to be read in
conjunction with M.S.D. & T. Funds, Inc.'s Prospectuses dated ____________,
1996 for the Prime Money Market Fund, Government Money Market Fund and Tax-
Exempt Money Market Fund, for the Tax-Exempt Money Market Fund (Trust), and for
Institutional Shares of the Value Equity Fund, International Equity Fund,
Intermediate Fixed Income Fund and Maryland Tax-Exempt Bond Fund. This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectuses. Because this Statement of Additional Information is not
itself a prospectus, no investment in shares of any Fund should be made solely
upon the information contained herein. Copies of the Prospectuses may be
obtained by calling 1-800-551-2145 or
1
<PAGE>
by writing M.S.D. & T. Funds, Inc., c/o BISYS Fund Services, 3435 Stelzer Road,
Columbus, OH 43219-3035. Capitalized terms used but not defined herein have the
same meanings as in the Prospectuses.
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. While
the Prime Money Market, Government Money Market, Tax-Exempt Money Market and
Tax-Exempt Money Market (Trust) Funds will attempt to maintain their net asset
value at $1.00 a share, there can be no assurance that the Funds will be able to
do so on a continuous basis. In addition, the dividends paid by a Fund will go
up and down. Mercantile-Safe Deposit and Trust Company serves as investment
adviser and administrator to the Funds, is paid fees for its services, and is
not affiliated with BISYS Fund Services, the Funds' distributor.
2
<PAGE>
M.S.D. & T FUNDS, INC.
---------------------
M.S.D. & T. Funds, Inc. (the "Company") is a Maryland corporation
which commenced operations on July 21, 1989 as a no-load, open-end,
professionally managed investment company. The Company currently offers shares
in four short-term money market portfolios (the Prime Money Market Fund,
Government Money Market Fund, Tax-Exempt Money Market Fund and Tax-Exempt Money
Market Fund (Trust), also referred to herein as the "Money Market Funds"); two
equity portfolios (the Value Equity Fund or the "Equity Fund" and the
International Equity Fund or the "International Fund"); and two bond portfolios
(the Intermediate Fixed Income Fund or the "Fixed Income Fund" and the Maryland
Tax-Exempt Bond Fund or the "Maryland Fund"). These portfolios may also be
referred to herein individually as a "Fund" and collectively as the "Funds." The
Equity Fund, International Fund, Fixed Income Fund and Maryland Fund may at
times be referred to herein as the "Non-Money Market Funds." This Statement of
Additional Information relates to shares of the Money Market Funds and to
Institutional Shares of the Non-Money Market Funds. The Equity Fund and Fixed
Income Fund also offer a second class of shares known as AFBA Five Star Shares.
INVESTMENT OBJECTIVES AND POLICIES
- ----------------------------------
The investment objective of each Fund is described in the Prospectus
for that Fund. The following information supplements the description of the
Funds' investment objectives and policies as set forth in the Prospectuses.
Portfolio Transactions and Turnover
- -----------------------------------
Subject to the general supervision and approval of the Company's Board
of Directors, Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for each Fund other
than the International Fund. CastleInternational Asset Management Limited
("CastleInternational" or the "Sub-Adviser") is responsible for, makes decisions
with respect to, and places orders for all purchases and sales of portfolio
securities for the International Fund in accordance with the investment policies
and requirements established by the Adviser.
Portfolio securities for the Money Market Funds are generally
purchased and sold either directly from the issuer or from dealers who
specialize in money market instruments. Such purchases are usually effected as
principal transactions and
3
<PAGE>
therefore do not involve the payment of brokerage commissions. No brokerage
commissions were paid with respect to the Money Market Funds during the fiscal
years ended May 31, 1994, May 31, 1995 and May 31, 1996.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed. During the fiscal years ended May 31, 1994, May 31, 1995 and May 31,
1996, brokerage commissions of $91,097, $99,041 and $131,775, respectively, were
paid by the Equity Fund and brokerage commissions of $218,123, $183,242 and
$205,568, respectively, were paid by the International Fund. During such
periods no brokerage commissions were paid to any affiliated person of the Fund.
Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Adviser (or Sub-Adviser in the
case of the International Fund), where possible, will deal directly with dealers
who make a market in the securities involved except in those circumstances in
which better prices and execution are available elsewhere.
Securities purchased and sold by the Fixed Income and Maryland Funds
are generally traded on a net basis (i.e., without commission) through dealers,
or otherwise involve transactions directly with the issuer of an instrument. The
cost of securities purchased from underwriters includes an underwriting
commission or concession, and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. No brokerage
commissions were paid with respect to the Fixed Income Fund or Maryland Fund
during the fiscal years ended May 31, 1994, May 31, 1995 and May 31, 1996.
The Tax-Exempt Money Market Fund, Tax-Exempt Money Market Fund (Trust)
(the "Tax-Exempt Money Market Funds"), Equity Fund, International Fund, Fixed
Income Fund and Maryland Fund may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. A Fund will engage in this practice, however, only when the
Adviser (or Sub-Adviser in the case of the International Fund), in its sole
discretion, believes such practice to be otherwise in the Fund's interests.
4
<PAGE>
In making portfolio investments, the Adviser (or Sub-Adviser in the
case of the International Fund) seeks to obtain the best net price and the most
favorable execution of orders. The Adviser (or Sub-Adviser) may, in its
discretion, effect transactions in portfolio securities with dealers who provide
research advice or other services to the Funds or the Adviser (or Sub-Adviser).
The Adviser (or Sub-Adviser) is authorized to pay a broker or dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for any Fund which is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if the Adviser (or Sub-Adviser) determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's (or Sub-Adviser's) overall
responsibilities to the particular Fund and to the Company. Such brokerage and
research services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received (if any) is in addition
to, and not in lieu of, services required to be performed by the Adviser (or
Sub-Adviser in the case of the International Fund) and does not reduce the
advisory fees payable by the Funds or the sub-advisory fees payable by the
Adviser. The Board of Directors will periodically review the commissions paid by
the Funds to consider whether the commissions paid over representative periods
of time appear to be reasonable in relation to the benefits inuring to the
Funds. It is possible that certain of the supplementary research or other
services received will primarily benefit one or more other investment companies
or other accounts for which investment discretion is exercised. Conversely, a
Fund may be the primary beneficiary of the research or services received as a
result of portfolio transactions effected for such other account or investment
company.
With respect to the Money Market Funds, the Adviser may seek to obtain
an undertaking from issuers of commercial paper or dealers selling commercial
paper to consider the repurchase of such securities from the Money Market Funds
prior to their maturity at their original cost plus interest (interest may
sometimes be adjusted to reflect the actual maturity of the securities) if it
believes that the Funds' anticipated need for liquidity makes such action
desirable. Certain dealers (but not
5
<PAGE>
issuers) have charged, and may in the future charge, a higher price for
commercial paper where they undertake to repurchase it prior to maturity. The
payment of a higher price in order to obtain such an undertaking reduces the
yield which might otherwise be received by the Funds on the commercial paper.
The Adviser may pay a higher price for commercial paper where it secures such an
undertaking if the Adviser believes that the prepayment privilege is desirable
to assure the Funds' liquidity and such an undertaking cannot otherwise be
obtained.
Investment decisions for the Funds are made independently from those
for other accounts advised or managed by the Adviser (or Sub-Adviser in the case
of the International Fund). Such other accounts may also invest in the same
securities as the Funds. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and such other accounts, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which the Adviser (or Sub-Adviser) believes to be
equitable to the Fund and such other accounts. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtainable or sold for the Fund. To the extent
permitted by law, the Adviser (or Sub-Adviser) may aggregate the securities to
be sold or purchased for the Funds with those to be sold or purchased for such
other accounts in order to obtain the best execution.
The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with the Adviser, Sub-Adviser, BISYS Fund Services
("BISYS") or any affiliated person (as such term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) of any of them, except to the
extent permitted by the 1940 Act or the Securities and Exchange Commission (the
"SEC"). Under certain circumstances, the Funds may be at a disadvantage because
of these limitations in comparison with other investment companies which have
similar investment objectives but are not subject to such limitations.
The Funds may from time to time purchase securities issued by the
Company's regular broker/dealers. At the close of the Company's most recent
fiscal year, no such securities were held.
The ratings assigned by each unaffiliated nationally recognized
statistical rating agency (each a "Rating Agency") represent their opinions as
to the quality of debt securities. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and debt
securities with
6
<PAGE>
the same maturity, interest rate and rating may have different yields while debt
securities of the same maturity and interest rate with different ratings may
have the same yield. Subsequent to its purchase by a Fund, a rated security may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Board of Directors or the Adviser (or Sub-Adviser
in the case of the International Fund), when authorized, will consider such an
event in determining whether the Fund should continue to hold the security in
accordance with the interests of the Fund and applicable regulations of the
SEC.
The portfolio turnover rate for each Fund is calculated by dividing
the lesser of purchases or sales of portfolio securities for the reporting
period by the monthly average value of the portfolio securities owned during the
reporting period. The calculation excludes all securities, including options,
whose maturities or expiration dates at the time of acquisition are one year or
less.
The Money Market Funds do not intend to seek profits through short-
term trading. The Money Market Funds' annual portfolio turnover rates will be
relatively high but portfolio turnover is not expected to have a material effect
on their net income. The Money Market Funds' portfolio turnover rates are
expected to be zero for regulatory reporting purposes.
Under certain market conditions, the Non-Money Market Funds may
experience high portfolio turnover rates as a result of their investment
strategies. Portfolio investments may be sold for a variety of reasons, such as
a more favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments. Higher portfolio turnover
rates can result in corresponding increases in brokerage commissions and other
transaction costs which must be borne by the Fund involved and ultimately by its
shareholders.
Portfolio turnover rates for the Non-Money Market Funds may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the Funds to receive favorable tax treatment. Portfolio turnover will not
be a limiting factor in making portfolio decisions for the Non-Money Market
Funds, and each of those Funds may engage in short-term trading to achieve its
investment objective.
7
<PAGE>
Additional Information on Investment Policies
- ---------------------------------------------
Government Obligations
----------------------
Examples of the types of U.S. Government obligations that may be
acquired by each Fund (except the International Fund) include, in addition to
U.S. Treasury bonds, notes, and bills, the obligations of the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage Association,
Federal National Mortgage Association, Federal Financing Bank, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Federal Farm Credit
Banks, Maritime Administration, Tennessee Valley Authority, Washington D.C.
Armory Board, International Bank for Reconstruction and Development (the "World
Bank"), and Resolution Trust Corporation.
Certain U.S. Government obligations held by the Money Market Funds may
have remaining maturities exceeding 397 days if such securities provide for
adjustments in their interest rates not less frequently than every 397 days and
the adjustments are sufficient to cause the securities to have market values,
after adjustment, which approximate their par value.
Variable and Floating Rate Instruments
--------------------------------------
With respect to the variable and floating rate instruments described
in the Prospectuses for each Fund, the Adviser (or Sub-Adviser in the case of
the International Fund) will consider the earning power, cash flows, and other
liquidity ratios of the issuers and guarantors of such obligations and, if the
obligation is subject to a demand feature, will monitor their financial ability
to meet payment on demand. In determining average weighted portfolio maturity, a
variable rate instrument will usually be deemed to have a maturity equal to the
longer of the period remaining to the next
8
<PAGE>
interest rate adjustment or the time the Fund can recover payment of principal
as specified in the instrument. A floating rate instrument will usually be
deemed to have a maturity equal to the date on which the principal amount must
be paid, or the date on which the redemption payment must be made, in the case
of an instrument called for redemption. A floating rate instrument that is
subject to a demand feature will usually be deemed to have a maturity equal to
the period remaining until the principal amount can be recovered through demand.
An instrument that is issued or guaranteed by the U.S. Government or any agency
thereof which has a variable rate of interest readjusted no less frequently than
every 397 days will generally be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate or earlier
maturity.
Variable and floating rate demand instruments acquired by the Tax-
Exempt Money Market and Maryland Funds may include participations in municipal
obligations purchased from and owned by financial institutions, primarily banks.
Participation interests provide the Fund with a specified undivided interest (up
to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the participation interest
from the institution upon a specified number of days' notice, not to exceed
thirty days. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank that the Adviser has determined meets the
prescribed quality standards for the Fund involved. The bank typically retains
fees out of the interest paid on the obligation for servicing the obligation,
providing the letter of credit, and issuing the repurchase commitment.
Bank Obligations
----------------
With respect to the investment policies of each Fund (other than the
Government Money Market Fund) relating to bank obligations, the assets of a bank
or savings institution will be deemed to include the assets of its domestic and
foreign branches. The Funds' investments in the obligations of foreign banks
and foreign branches of U.S. banks may subject the Funds to investment risks
that are different in some respects from those of investments in obligations of
U.S. domestic issuers. Such risks include future political and economic
developments, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations. In addition, foreign banks and foreign
branches of U.S. banks may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting and
9
<PAGE>
recordkeeping standards than those applicable to U.S. banks. The Funds will
acquire securities issued by foreign banks and foreign branches of U.S. banks
only when the Adviser believes that the risks associated with such instruments
are minimal.
Municipal Obligations
---------------------
Municipal obligations which may be acquired by the Prime Money Market,
Tax-Exempt Money Market, Fixed Income, and Maryland Funds include debt
obligations issued by governmental entities to obtain funds for various public
purposes, including the construction of a wide range of public facilities, the
refunding of outstanding obligations, the payment of general operating expenses
and the extension of loans to public institutions and facilities.
The two principal classifications of municipal obligations consist of
"general obligation" and "revenue" issues. The Funds may also hold "moral
obligation" issues, which are typically issued by special purpose authorities.
There are, of course, variations in the quality of municipal obligations, both
within a particular classification and between classifications, and the yields
on municipal obligations depend upon a variety of factors, including market
conditions generally and the municipal bond market in particular, the financial
condition of the issuer, the size of a particular offering, the maturity of the
obligation, and the rating of the issue.
Municipal obligations acquired by the Funds may include general
obligation notes, tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax-exempt commercial paper, construction loan notes, and
other forms of short-term tax-exempt loans. Such instruments are issued in
anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues. In addition, the Funds may invest in bonds and other types of
longer-term tax-exempt instruments provided that, in the case of the Prime Money
Market and Tax-Exempt Money Market Funds, they have remaining maturities of 397
days or less at the time of purchase.
Certain types of municipal obligations (private activity bonds) have
been or are issued to obtain funds to provide privately operated housing
facilities, pollution control facilities, convention or trade show
10
<PAGE>
facilities, mass transit, airport, port or parking facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Private activity bonds are also issued to privately held or publicly owned
corporations in the financing of commercial or industrial facilities. State and
local governments are authorized in most states to issue private activity bonds
for such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. The Tax-Exempt Money
Market Funds will not invest in such bonds where the payment of principal and
interest are the responsibility of a company (including predecessors) with less
than three years of continuous operation.
The payment of principal and interest on most securities purchased by
a Fund will depend upon the ability of the issuers to meet their obligations.
The District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities, and authorities and each multi-state agency of
which a state is a member, as well as the Commonwealth of Puerto Rico, Guam, and
the Virgin Islands, is a separate "issuer" as that term is used in the
Prospectuses and this Statement of Additional Information. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by Federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on, and principal of, its municipal obligations may be
materially adversely affected by litigation or other conditions.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations. For example, under Federal tax legislation
enacted in 1986, interest on certain private activity bonds must be included in
an investor's Federal alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference (see
"Additional Information Concerning Taxes"). Moreover, with respect to Maryland
municipal obligations, the Maryland Fund cannot predict which legislation, if
any, may be proposed in the Maryland legislature concerning the Maryland
11
<PAGE>
income tax status of interest on such obligations, or which proposals, if any,
might be enacted. Such proposals, while pending or if enacted, might materially
and adversely affect the availability of municipal obligations generally, or
Maryland municipal obligations specifically, for investment by a Fund and the
liquidity and value of a Fund's portfolio. In such an event, the Company would
reevaluate the investment objectives and policies of such Funds.
Stand-By Commitments
--------------------
The Tax-Exempt Money Market, Fixed Income, and Maryland Funds may
acquire "stand-by commitments" with respect to municipal obligations held in
their portfolios. Under a stand-by commitment, a dealer or bank agrees to
purchase from a Fund, at the Fund's option, specified municipal obligations at a
specified price. Stand-by commitments may be exercisable by the Fund involved at
any time before the maturity of the underlying municipal obligations, and may be
sold, transferred or assigned only with the instruments involved.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held by the particular Fund will not
exceed 1/2 of 1% of the value of such Fund's total assets calculated immediately
after each stand-by commitment is acquired.
The Funds intend to enter into stand-by commitments only with banks,
brokers or dealers which, in the Adviser's opinion, present minimal credit
risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims, and other relevant financial information. Each
Fund's reliance upon the credit of these banks, brokers and dealers will be
secured by the value of the underlying municipal obligations that are subject to
the commitment.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed
12
<PAGE>
maturity of the underlying municipal obligations. Stand-by commitments acquired
by a Fund would be valued at zero in determining net asset value. Where a Fund
paid any consideration directly or indirectly for a stand-by commitment, its
cost would be reflected as unrealized depreciation for the period during which
the commitment was held by the Fund.
Convertible Securities
----------------------
Convertible securities which may be purchased by the Equity and
International Funds entitle the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the securities mature or are
redeemed, converted or exchanged. Prior to conversion, convertible securities
have characteristics similar to ordinary debt securities in that they normally
provide a stable stream of income with generally higher yields than those of
common stock of the same or similar issuers. Convertible securities rank senior
to common stock in a corporation's capital structure and therefore generally
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
In selecting convertible securities, the Adviser (or the Sub-Adviser)
will consider, among other factors, the creditworthiness of the issuers of the
securities; the interest or dividend income generated by the securities; the
potential for capital appreciation of the securities and the underlying common
stocks; the prices of the securities relative to other comparable securities and
to the underlying common stocks; whether the securities are entitled to the
benefits of sinking funds or other protective conditions; diversification of a
Fund's portfolio as to issuers; and the ratings of the securities. Since credit
rating agencies may fail to timely change the credit ratings of securities to
reflect subsequent events, the Adviser (or Sub-Adviser) will consider whether
such issuers will have sufficient cash flow and profits to meet required
principal and interest payments.
Asset-Backed Securities
-----------------------
Asset-backed securities 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. Asset-backed securities are generally issued as pass
through certificates, which represent undivided fractional ownership interests
in the underlying pool of assets, or as debt instruments, which are also known
as collateralized obligations, and are generally issued as the debt of a special
purpose entity
13
<PAGE>
organized solely for the purpose of owning such assets and issuing such debt.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. Payments of principal and interest
may be guaranteed up to certain amounts and for a certain time period by a
letter of credit issued by a financial institution unaffiliated with the
entities issuing the securities.
The estimated life of an asset-backed security varies with the
prepayment experience of the underlying debt instruments. The rate of such
prepayments, and hence the life of the asset-backed security, will be primarily
a function of current market interest rates, although other economic and
demographic factors may be involved.
Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
Mortgage-Related Securities
---------------------------
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as
to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-related securities issued
14
<PAGE>
by the Federal National Mortgage Association ("FNMA") include FNMA guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are
solely the obligations of the FNMA, are not backed by or entitled to the full
faith and credit of the United States and are supported by the right of the
issuer to borrow from the Treasury. FNMA is a government-sponsored organization
owned entirely by private shareholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie
Macs are not guaranteed by the United States or by any Federal Home Loan Bank
and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by the FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC
may remit the amount due on account of its guarantee of ultimate payment of
principal at any time after default on an underlying mortgage, but in no event
later than one year after it becomes payable.
Although certain mortgage-related securities are guaranteed by a third
party or are otherwise similarly secured as described above, 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.
Repurchase Agreements
---------------------
As described in their Prospectuses, each Fund (other than the Tax-
Exempt Money Market Funds) may enter into repurchase agreements. The repurchase
price under repurchase agreements generally is equal to the price paid by a Fund
plus interest negotiated on the basis of current short-term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
15
<PAGE>
Funds' Custodian or registered in the name of the Fund involved on the Federal
Reserve/Treasury book-entry system. 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 Adviser (or Sub-Adviser in the case of the International Fund)
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 Adviser (or Sub-Adviser) will
continue to monitor the creditworthiness of the seller. Repurchase agreements
are considered to be loans by the Funds under the 1940 Act.
Reverse Repurchase Agreements
-----------------------------
Whenever a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account liquid assets such as cash, high quality
debt obligations or other liquid securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that such value is maintained. 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 by the Fund under the 1940 Act.
When-Issued Purchases and Forward Commitments
---------------------------------------------
As stated in their Prospectuses, each Fund (other than the Equity and
International Funds) may purchase securities on a firm commitment or "when-
issued" basis and each Fund (other than the Tax-Exempt Money Market (Trust),
Equity and International Funds) may enter into a "forward commitment" to
purchase or sell securities. When a Fund agrees to purchase securities on a
when-issued basis or enters into a forward commitment to purchase securities,
the Custodian will set aside cash or liquid portfolio securities equal to the
amount of the commitment in a separate account. Normally, the Custodian will set
aside portfolio securities to satisfy a purchase commitment, and in such a case
a Fund may be required subsequently to place additional assets in the separate
account in order to ensure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when
16
<PAGE>
it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash. Because a Fund's liquidity and ability to manage its
portfolio might be affected when it sets aside cash or portfolio securities to
cover such purchase commitments, the Funds expect that their commitments to
purchase securities on a when-issued or forward commitment basis will not exceed
25% of the value of their assets. In the case of a forward commitment to sell
portfolio securities, the Custodian will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding.
A Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
securities. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund involved
may realize a capital gain or loss.
When a Fund engages in when-issued or forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining a Fund's net asset value
starting on the day the Fund agrees to purchase the securities. A Fund does not
earn interest on the securities it has committed to purchase until they are paid
for and delivered on the settlement date. When a Fund makes a forward commitment
to sell securities it owns, the proceeds to be received upon settlement are
included in such Fund's assets, and fluctuations in the value of the underlying
securities are not reflected in such Fund's net asset value as long as the
commitment remains in effect.
Other Investment Companies
--------------------------
In accordance with their respective investment objectives and
policies, the Funds may invest in securities issued by other investment
companies within the limits prescribed by the 1940 Act. Each Fund currently
intends to limit its investments so that, as determined immediately after a
securities
17
<PAGE>
purchase is made: (a) not more than 5% of the value of its total assets will be
invested in the securities of any one investment company; (b) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group; and (C) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Fund or by the
Company as a whole. 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 that a Fund bears in connection
with its own operations.
Lending Portfolio Securities
-----------------------------
When the Prime Money Market, Government Money Market, Equity,
International, Fixed Income and Maryland Funds lend their securities, they
continue to receive interest or dividends on the securities loaned and also earn
income on the loans. Any cash collateral received by a Fund in connection with
such loans will be invested in short-term money market obligations. Although
voting rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted if a material event affecting the investment occurs.
Loans will be made only to borrowers deemed by the Adviser (or Sub-Adviser in
the case of the International Fund) to be of good standing and only when, in the
Adviser's (or Sub-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.
Foreign Currency Exchange Contracts
-----------------------------------
The Equity, International and Fixed Income Funds are authorized to
enter into forward foreign currency exchange contracts. 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 but rather allow
the Fund involved to establish a rate of exchange for a future point in time.
The Equity, International and Fixed Income Funds may enter into forward foreign
currency exchange contracts when deemed advisable by the Adviser (or Sub-Adviser
in the case of the International Fund) under two circumstances.
First, when entering into a contract for the purchase or sale of a
security, a Fund may enter into a forward foreign
18
<PAGE>
currency exchange contract for the amount of the purchase or sale price to
protect against variations in the value of the foreign currency relative to the
U.S. dollar or other foreign currency between the date the security is purchased
or sold and the date on which payment is made or received. This is sometimes
referred to as "transaction hedging".
Second, when the Adviser (or Sub-Adviser) anticipates that a
particular foreign currency may decline substantially relative to the U.S.
dollar or other leading currencies, in order to reduce risk, a Fund may enter
into a forward contract to sell, for a fixed amount, the amount of foreign
currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency. This is sometimes referred to as "positing
hedging". The Funds do not intend to enter into forward contracts for position
hedging purposes on a regular or continuing basis.
None of the Funds will enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate such Fund to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in that currency.
While forward contracts may offer protection from losses resulting from declines
in the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. In addition,
the Funds will incur costs in connection with forward foreign currency exchange
contracts and conversions of foreign currencies and U.S. dollars.
A Fund's custodian will place in a separate account cash or liquid
securities in an amount equal to the value of such Fund's assets that could be
required to consummate forward contracts entered into under the second
circumstance, as set forth above. For the purpose of determining the adequacy of
the securities in the account, the deposited securities will be valued at market
or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund.
At the maturity of a forward contract, a Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
19
<PAGE>
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. If the Fund engages in
an offsetting transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline between the date
the Fund enters into a forward contract for the sale of a foreign currency and
the date it enters into an offsetting contract for the purchase of the foreign
currency, it will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. For a discussion of the Federal tax treatment
of forward contracts, see "Additional Information Concerning Taxes -Value
Equity, International and Intermediate Fixed Income Funds."
Foreign Currency Put and Call 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. In conjunction with the purchase of a put option,
the Fund may write a call option, which gives the purchaser, upon payment of a
premium, the right to purchase from the Fund a currency at the exercise price
until the expiration of the option. Exchange listed options markets in the
United States include seven major currencies, and trading may be thin and
illiquid. The seven major currencies are Australian dollars, British pounds,
Canadian dollars, German marks, French francs, Japanese yen and Swiss francs.
20
<PAGE>
Futures Contracts
-----------------
The International Fund may invest in futures contracts (interest rate,
foreign currency and other types of financial futures contracts). Futures
contracts will not be entered into for speculative purposes, but to hedge risks
associated with the International Fund's securities investments. Positions in
futures contracts may be closed out only on an exchange which provides a
secondary market for such futures. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract at any
specific time. Thus, it may not be possible to close a futures position. In the
event of adverse price movements, the International Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the International Fund has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the International Fund may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the International Fund's ability to effectively hedge.
Successful use of futures by the International Fund is also subject to
the Sub-Adviser's ability to correctly predict movements in the direction of the
market. For example, if the International Fund has hedged against the
possibility of a decline in the market adversely affecting securities held by it
and securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because it
will have approximately equal offsetting losses in its futures positions. In
addition, in some situations, if the International Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The International Fund may have to sell
securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were
21
<PAGE>
closed out. Thus, a purchase or sale of a futures contract may result in losses
in excess of the amount invested in the contract.
Utilization of futures transactions by the International Fund involves
the risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
Rights and Warrants
-------------------
The International Fund may participate in rights offerings and may
purchase warrants, which are privileges issued by corporations enabling the
owner to subscribe to and purchase a specified number of shares of the
corporation at a specified price during a specified period of time. Subscription
rights normally have a short life to expiration. The purchase of rights and
warrants involves the risk that the purchaser could lose the purchase value of
the right or warrant if the right to subscribe to additional shares is not
exercised prior to the warrant's expiration. Also, the purchase of rights and
warrants involves the risk that the effective price paid for the right or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price, such as when there is no
movement in the level of the underlying security.
22
<PAGE>
FUNDAMENTAL LIMITATIONS
- -----------------------
Each Fund is subject to the following fundamental limitations, which may be
changed with respect to a particular Fund only by a vote of the holders of a
majority of such Fund's outstanding shares (as defined under "Miscellaneous").
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
each Fund other than the International Fund, more than 10% of the issuer's
outstanding voting securities would be owned by the Fund, except that (i) up to
25% of the value of the total assets of each Fund other than the Maryland Fund
may be invested without regard to these limitations, and (ii) up to 50% of the
value of the Maryland Fund's total assets may be invested without regard to
these limitations, provided that no more than 25% of the Maryland Fund's total
assets are invested in the securities of any one issuer. For purposes of these
limitations, 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 a 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
(i) 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; (ii) with
respect to the Money Market Funds only, obligations issued by domestic branches
of U.S. banks; and (iii) 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
23
<PAGE>
their services (for example, gas, gas transmission, electric and gas, and
electric and telephone each will be considered a separate industry).
3. Borrow money, 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% 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 (other than the Tax-Exempt Money Market Funds)
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. The Tax-Exempt Money Market Funds will not
purchase portfolio securities while any borrowings (including reverse repurchase
agreements and borrowings from banks) are outstanding. Securities held by a Non-
Money Market Fund in escrow or separate accounts in connection with the Fund's
investment practices are not deemed to be pledged for purposes of this
limitation.
4. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate, the Tax-Exempt Money Market,
Fixed Income, and Maryland Funds may invest in municipal obligations secured by
real estate or interests therein, the Equity, International, Fixed Income and
Maryland Funds may purchase securities which are secured by real estate or
interests therein, and the Fixed Income Fund may invest in mortgage-related
securities, including collateralized mortgage obligations and mortgage-backed
securities which are issued or guaranteed by the United States, its agencies or
its instrumentalities.
5. Act as an underwriter of securities, except to the extent that the
purchase of obligations directly from the issuer thereof in accordance with the
Fund's investment objective, policies, and limitations may be deemed to be
underwriting.
6. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except that the Tax-Exempt Money Market, Fixed Income and
Maryland Funds may purchase put options on municipal obligations; the Equity,
International, Fixed Income and Maryland Funds may engage in transactions in
options on securities, securities indices, futures contracts and options on
futures contracts; and the International and Maryland Funds may write call and
put options and purchase put and call options.
7. Purchase securities of companies for the purpose of exercising
control.
24
<PAGE>
8. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that (a) this investment limitation shall not
apply to the Equity, International, Fixed Income and Maryland Funds'
transactions in options, futures contracts and related options, if any, and (b)
the Equity, International, Fixed Income and Maryland Funds may obtain short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities.
9. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or mineral exploration or development programs, except that each Fund
may, to the extent appropriate to its investment objective, purchase publicly
traded securities of companies engaging in whole or in part in such activities,
and the Equity, International, Fixed Income and Maryland Funds may enter into
futures contracts and related options.
10. Make loans, except that (i) each Fund may purchase and hold debt
instruments in accordance with its investment objective and policies; (ii) the
Prime Money Market, Government Money Market, Equity, International, Fixed Income
and Maryland Funds may enter into repurchase agreements with respect to
portfolio securities; (iii) each Fund may lend portfolio securities against
collateral consisting of cash or securities which is consistent with the Fund's
permitted investments and is equal at all times to at least 100% of the value of
the securities loaned; and (iv) the Maryland Fund may invest in privately
arranged loans in accordance with its investment objective and policies.
In addition, no Money Market Fund may:
--------------------------------------
11. Knowingly invest more than 10% of the value of its net assets in
securities that are illiquid because of restrictions on transferability or
other reasons.
As a matter of non-fundamental policy and in accordance with current
regulations of the SEC, the Prime Money Market Fund, Tax-Exempt Money Market
Fund and Tax-Exempt Money Market Fund (Trust) each intends to subject its entire
investment portfolio, other than U.S. Government securities, to the 5%
limitation described in Fundamental Limitation No. 1 above. However, in
accordance with such regulations, each Fund may invest more than 5% (but no more
than 25%) of its total assets in the securities of a single issuer for a period
of up to three business days, provided the securities are rated at the time of
purchase in the highest rating category assigned by one or more Rating Agencies
or are determined by the Adviser to be of comparable quality. A Fund may not
hold more than one such investment at any one time.
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<PAGE>
Although the foregoing investment limitations would permit the Equity,
International, Fixed Income and Maryland Funds to invest in options, futures
contracts and related options, as specified above, the Equity, Fixed Income and
Maryland Funds do not currently intend to engage in such transactions. Prior to
engaging in such transactions, such Funds would add appropriate disclosure
concerning the Funds' investment in such instruments to the relevant
Prospectuses and this Statement of Additional Information.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Information on how to purchase and redeem a Fund's shares is included
in the Funds' Prospectuses. Shares of each Fund are sold on a continuous basis
by BISYS, which has agreed to use appropriate efforts to promote the Company and
to solicit orders for the purchase of such shares.
If any portion of the 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 shares purchased by money order or wire payment. During the period
prior to the time the shares are redeemed, dividends on such shares will accrue
and be payable.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Funds may
also suspend or postpone the recordation of the transfer of their shares upon
the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses, the
Company may redeem shares involuntarily to reimburse the Funds for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Prospectuses from time to time.
The Company 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
26
<PAGE>
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.
NET ASSET VALUE
- ---------------
All Funds
The net asset value per share of a particular class of shares of a
Fund is calculated separately by dividing the total value of the assets
belonging to the Fund allocable to such class of shares, less the liabilities
allocable to such class of shares, by the number of outstanding shares of such
class. Because Institutional Shares do not bear the separate shareholder
servicing and other operating expenses that may be paid in differing amounts
with respect to AFBA Five Star Shares and described in the prospectus relating
to such shares, the net asset value of the Equity Fund's Institutional Shares
will generally be higher than that of its AFBA Five Star Shares. "Assets
belonging to" a Fund consist of the consideration received upon the issuance of
shares of the particular Fund together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale of such investments, any funds or payments derived from any reinvestment of
such proceeds, and a portion of any general assets of the Company not belonging
to a particular investment portfolio. Assets belonging to a particular Fund are
reduced by the direct liabilities of that Fund and by a share of the general
liabilities of the Company allocated daily in proportion to the relative net
asset values of all of the Funds at the time of allocation. Subject to the
provisions of the Company's Articles of Incorporation, determinations by the
Board of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets, with respect to a particular Fund or class of
shares thereof are conclusive.
Money Market Funds - Use of Amortized Cost Method
- -------------------------------------------------
The Company uses the amortized cost method of valuation to value each
Money Market Fund's portfolio securities, pursuant to which an instrument is
initially valued at cost and thereafter
27
<PAGE>
assumes a constant amortization of any discount or premium until maturity of the
instrument, regardless of the impact of fluctuating interest rates on the market
value of the instrument. This method may result in periods during which value,
as determined by amortized cost, is higher or lower than the price a Money
Market Fund would receive if it sold the instrument. The market value of
portfolio securities held by a Money Market Fund can be expected to vary
inversely with changes in prevailing interest rates.
In connection with its use of amortized cost valuation, the Company
limits the dollar-weighted average maturity of each Money Market Fund's
portfolio to not more than 90 days and does not purchase any instrument with a
remaining maturity of more than 397 days (with certain exceptions). The Board of
Directors has also established procedures that are intended to stabilize the net
asset value per share of each Money Market Fund for purposes of sales and
redemptions at $1.00. These procedures include the determination, at such
intervals as the Directors deem appropriate, of the extent, if any, to which the
net asset value per share of each Money Market Fund, calculated by using
available market quotations, deviates from $1.00 per share. In the event such
deviation exceeds 1/2 of 1%, the Board will promptly consider what action, if
any, should be initiated. If the Board believes that the extent of any deviation
from a $1.00 amortized cost price per share may result in material dilution or
other unfair results to new or existing investors, it will take such steps as it
considers appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include selling
portfolio instruments prior to maturity; shortening the average portfolio
maturity; withholding or reducing dividends; redeeming shares in kind; reducing
the number of outstanding shares without monetary consideration; or utilizing a
net asset value per share determined by using available market quotations.
Non-Money Market Funds
- ----------------------
As stated in their Prospectuses, the Equity and International Funds'
investments shall be 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. A security that is
primarily traded on a domestic securities exchange (including securities traded
through the National Market System) is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the closing values of such securities on their respective
exchanges, provided that if such securities are not traded on the valuation
date, they will be valued at the preceding closing values and provided further,
that when an
28
<PAGE>
occurrence subsequent to the time of valuation is likely to have changed the
value, then the fair value of those securities will be determined through
consideration of other factors by or under the direction of the Company's Board
of Directors. Over-the-counter securities and securities listed or traded on
foreign exchanges with operations similar to the U.S. over-the-counter market
are valued at the mean of the most recent available quoted bid and asked prices
in the over-the-counter market.
As stated in their Prospectuses, the Fixed Income and Maryland Funds'
investments shall be 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. Portfolio securities
for which market quotations are readily available (other than securities with
remaining maturities of 60 days or less) are valued at the mean of the most
recent bid and asked prices.
For each Non-Money Market Fund, market or fair value may be determined
on the basis of valuations provided by one or more recognized pricing services
approved by the Board of Directors, which may rely on matrix pricing systems,
electronic data processing techniques, and/or quoted bid and asked prices
provided by investment dealers. Short-term investments that mature in 60 days or
less are valued at amortized cost unless the Board of Directors determines that
this does not constitute fair value.
ADDITIONAL INFORMATION CONCERNING TAXES
- ---------------------------------------
The following summarizes certain additional considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectuses are not intended as a substitute for careful tax planning.
Investors are advised to consult their tax advisers with specific reference to
their own tax situations.
Tax-Exempt Money Market Fund, Tax-Exempt Money Market Fund (Trust), and Maryland
Tax-Exempt Bond Fund
For purposes of this discussion regarding additional information
concerning taxes, the Tax-Exempt Money Market Fund, Tax-Exempt Money Market Fund
(Trust), and Maryland Tax-Exempt Bond Fund may be collectively referred to as
the "Tax-Exempt Funds."
As described above and in their Prospectuses, the Tax-Exempt Money
Market Funds are designed to provide investors with
29
<PAGE>
current income exempt from regular Federal income tax, and the Maryland Fund is
designed to provide investors with income exempt from regular Federal income tax
and Maryland state and local income tax. These Funds are not intended to
constitute a balanced investment program and are not designed for investors
seeking capital appreciation. The Tax-Exempt Money Market Funds are not designed
for investors seeking maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Funds may not be suitable for tax-exempt institutions,
or for retirement plans qualified under Section 401 of the Code, H.R. 10 plans
and individual retirement accounts since such plans and accounts are generally
tax-exempt and, therefore, not only would not gain any additional benefit from
the Funds' dividends being tax-exempt, but such dividends would be ultimately
taxable to the beneficiaries when distributed to them. In addition, the Funds
may not be appropriate investments for entities which are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person who regularly uses a part of such facilities in his trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities or who occupies more than 5% of the usable area
of such facilities or for whom such facilities or a part thereof were
specifically constructed, reconstructed or acquired. "Related persons" include
certain related natural persons, affiliated corporations, a partnership and its
partners and an S Corporation and its shareholders.
The percentage of total dividends paid by a Tax-Exempt Fund with
respect to any taxable year which qualify as Federal exempt-interest dividends
will be the same for all shareholders receiving dividends for such year. In
order for a Tax-Exempt Fund to pay exempt-interest dividends for any taxable
year, at the close of each taxable quarter at least 50% of the aggregate value
of such Fund's portfolio must consist of exempt-interest obligations. After the
close of the taxable year, each Tax-Exempt Fund will notify shareholders of the
portion of the dividends paid by the Fund which constitutes an exempt-interest
dividend with respect to such taxable year. However, the aggregate amount of
dividends so designated cannot exceed the excess of the amount of interest
exempt from tax under Section 103 of the Code received by the Fund for the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code.
Interest on indebtedness incurred by a shareholder to purchase or
carry shares of a Tax-Exempt Fund generally is not deductible for Federal income
tax purposes. If a shareholder holds shares of a Tax-Exempt Fund for six months
or less, any loss on the sale of those shares will be disallowed to the extent
30
<PAGE>
of the amount of exempt-interest dividends received with respect to the shares.
The Treasury Department, however, is authorized to issue regulations reducing
the six months holding requirement to a period of not less than the greater of
31 days or the period between regular dividend distributions where the
investment company regularly distributes at least 90% of its net tax-exempt
interest. No such regulations had been issued as of the date of this Statement
of Additional Information.
Income itself exempt from Federal income taxation will be considered
in addition to adjusted gross income when determining whether Social Security
payments received by a shareholder are subject to Federal income taxation.
Each Tax-Exempt Fund intends to distribute to shareholders any taxable
income earned by it, which will be taxable to shareholders as ordinary income
(whether paid in cash or additional shares).
Value Equity, International and Intermediate Fixed Income Funds
- ---------------------------------------------------------------
With respect to the Value Equity, International and Intermediate Fixed
Income Funds, some investments may be subject to special rules which govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (1) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (2) the accruing of
certain trade receivables and payables; and (3) the entering into or acquisition
of any forward contract, futures contract, option and similar financial
instrument, if such instrument is not subject to the mark-to-market rules under
the Code. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency
rules.
With respect to transactions covered by the special rules, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A Fund
may elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts that are capital assets in the hands
of the Fund and which are not part of a straddle ("Capital Asset Election"). The
Treasury Department has issued regulations under which certain transactions with
respect to which a Fund has not made the Capital Asset Election and that are
part of a "section 988 hedging transaction" (as defined in the Code and Treasury
regulations) will be integrated and treated as a single transaction or otherwise
treated
31
<PAGE>
consistently for purposes of the Code. "Section 988 hedging transactions" are
not subject to the mark-to-market or loss deferral rules under the Code. It is
anticipated that some of the non-U.S. dollar-denominated investments that the
Funds may make (such as non-U.S. dollar-denominated debt securities and
obligations and certain preferred stocks) and some of the foreign currency
contracts the Fund may enter into will be subject to the special currency rules
described above. Gain or loss attributable to the foreign currency component of
transactions engaged in by a Fund which are not subject to the special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated as capital gain or loss and will not be segregated from the gain
or loss on the underlying transaction.
In addition, certain foreign currency contracts held by the Equity
Fund, International Fund or Fixed Income Fund at the close of such Funds'
taxable year will be treated for Federal income tax purposes as sold for their
full market value on the last business day of such year, a process known as
"mark-to-market." If a Fund makes the Capital Asset Election with respect to
such contracts, 40% of any gain or loss resulting from such constructive sale
will be treated as short-term capital gain or loss and 60% of such gain or loss
will be treated as long-term capital gain or loss without regard to the length
of time the Fund holds the contract (the "40-60 rule"). Otherwise, such gain or
loss will be ordinary in nature. The amount of any gain or loss actually
realized by the Fund in a subsequent sale or other disposition of those
contracts will be adjusted to reflect any gain or loss taken into account by the
Fund in a prior year as a result of the constructive sale of the contracts. To
receive such Federal income tax treatment, a foreign currency contract must meet
the following conditions: (1) the contract must require delivery of a foreign
currency of a type in which regulated futures contracts are traded or upon which
the settlement value of the contract depends; (2) the contract must be entered
into at arm's length at a price determined by reference to the price in the
interbank market; and (3) the contract must be traded in the interbank market.
The Treasury Department has broad authority to issue regulations under these
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information, the Treasury has not issued any such
regulations. Forward foreign currency contracts may also result in the creation
of one or more straddles for Federal income tax purposes, in which case certain
loss deferral, short sales, and wash sales rules and requirements to capitalize
interest and carrying charges may apply.
All Funds
- ---------
Net realized long-term capital gains, if any, will be distributed to
shareholders at least annually. (Generally,
32
<PAGE>
however, the Money Market Funds do not expect to realize long-term capital
gains.) The Funds will generally have no tax liability with respect to such
gains and the distributions (whether paid in cash or additional shares) will be
taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held Fund shares. Such distributions will be designated as
capital gain dividends in a written notice mailed by the Company to shareholders
not later than 60 days after the close of the Company's taxable year.
Shareholders should note that, upon the sale of Fund shares, if the shareholder
has not held such shares for more than six months, any loss on the sale of those
shares will be treated as long-term capital loss to the extent of the capital
gain dividends received with respect to the shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains will
be taxable at a maximum rate of 28%. For corporations, long-term capital gains
and ordinary income are both taxable at a maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income with respect to each calendar year to avoid liability for this excise
tax.
Each Fund is treated as a separate entity under the Code. During the
most recent taxable year, each Fund qualified as a "regulated investment
company." Although each Fund expects to qualify as a regulated investment
company in subsequent years and to be relieved of all or substantially all
Federal income taxes, and in the case of the Maryland Fund, Maryland state and
local income taxes, depending upon the extent of the Company's activities in
states and localities in which its offices are maintained, in which its agents
or independent contractors are located or in which it is otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Funds and their shareholders under such laws may
differ from their
33
<PAGE>
treatment under Federal income tax laws. Shareholders are advised to consult
their tax advisers concerning the application of state and local taxes.
If for any taxable year a Fund does not qualify for the special
Federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to Federal income tax at regular corporate rates
without any deduction for distributions to its shareholders. In such event,
dividend distributions (whether or not derived from interest on municipal
obligations in the case of the Tax-Exempt Funds) would be taxable as ordinary
income to shareholders to the extent of the Fund's current and accumulated
earnings and profits, and would be eligible for the dividends received deduction
allowed to corporations under the Code.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to backup withholding when required to do so or that they
are "exempt recipients."
MANAGEMENT OF THE COMPANY
- -------------------------
Directors and Officers
- ----------------------
The Directors and officers of the Company, their addresses, principal
occupations during the past five years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
LESLIE B. DISHAROON* Chairman of the Retired; Director, Baltimore
2 Chittenden Lane Board and President Gas & Electric Company;
Owings Mills, MD 21117 Director, Travelers Inc.
Age: 64 (diversified financial
services); Director, GRC
International, Inc.
(technology based services
and products); Director,
Aegon USA, Inc. (holding
company-insurance).
DECATUR H. MILLER* Director and Retired; Partner and former
36 South Charles Street Treasurer Chairman of the law firm of
Suite 1100 Piper & Marbury, Baltimore,
Baltimore, MD 21201 Maryland until 1995.
Age: 64
JOHN R. MURPHY Director President and Chief Executive
1145 17/th/ Street, N.W. Officer, National Geographic
Washington, D.C. 20036 Society; Chairman, The
Age: 62 Baltimore Sun, 1989-1992,
and Publisher prior thereto;
Director, Monarch Avalon
Inc. until 1994.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
GEORGE R. PACKARD, III Director Visiting President,
The Johns Hopkins University International University of Japan, 1994
1619 Massachusetts to date; Former Dean, School of
Avenue, N.W. Advanced International Studies at The
Washington, DC 20036 Johns Hopkins University; Director,
Age: 64 Amdahl Corporation (computer
equipment); Director, Offitbank
(private bank); Director, GRC
International, Inc. (technology based
services and products).
J. STEVENSON PECK Director Retired; Director, Crown
Signet Bank/Maryland Central Petroleum Corporation until
7 St. Paul Street 1993; Director, U.S.F. & G.
P.O. Box 1077 Corporation, Inc. (insurance) until
Baltimore, MD 21203 1990; Director, United States Fidelity
Age: 73 and Guaranty Corporation (a subsidiary
of U.S.F. & G. Corporation, Inc.)
(insurance) until 1990.
W. BRUCE McCONNEL, III Secretary Partner of the law firm of
PNB Building Drinker Biddle & Reath, Philadelphia,
1345 Chestnut Street Pennsylvania.
Philadelphia, PA 19107-3496
Age: 53
</TABLE>
___________________
* Messrs. Disharoon and Miller are considered by the Company to be
"interested persons" of the Company as defined in the Investment Company
Act of 1940.
_________________________
Each Director receives an annual fee of $3,500 plus $1,625 for each
Board meeting attended and reimbursement of expenses incurred as a Director. For
the fiscal year ended May 31, 1996, the Company paid or accrued for the account
of its directors as a group, for services in all capacities, a total of $54,875.
Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives legal fees
as counsel to the Company. As of the date of this Statement of Additional
Information, the Directors and officers of the Company, as a group, owned less
than 1% of the outstanding shares of each Fund.
The following chart provides certain information about the fees
received by the Company's Directors for their services as members of the Board
of Directors and committees thereof for the fiscal year ended May 31, 1996:
35
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
TOTAL
PENSION OF ESTIMATED COMPENSATION
RETIREMENT ANNUAL FROM THE
AGGREGATE BENEFITS BENEFITS COMPANY AND
COMPENSATION ACCRUED AS PART UPON FUND COMPLEX
FROM THE OF COMPANY RETIREMENT PAID TO
NAME OF PERSON/POSITION COMPANY EXPENSES DIRECTORS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leslie B. Disharoon $11,625 N/A N/A $11,625
Chairman of the Board of
Directors and President
- ----------------------------------------------------------------------------------------------------
Decatur H. Miller $10,000 N/A N/A $10,000
Director and Treasurer
- ----------------------------------------------------------------------------------------------------
John R. Murphy $10,000 N/A N/A $10,000
Director
- ----------------------------------------------------------------------------------------------------
George R. Packard, III $11,625 N/A N/A $11,625
Director
- ----------------------------------------------------------------------------------------------------
J. Stevenson Peck $11,625 N/A N/A $11,625
Director
====================================================================================================
</TABLE>
* The "Fund Complex" consists solely of the Company.
Advisory and Sub-Advisory Services
----------------------------------
Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") serves as investment adviser to the Funds pursuant to five
Advisory Agreements, one with respect to the Tax-Exempt Money Market Fund
(Trust) dated July 21, 1989, one with respect to the other Money Market
Funds dated July 21, 1989, one with respect to the Equity and Fixed Income
Funds dated November 13, 1990, one with respect to the Maryland Fund dated
February 3, 1992 and one with respect to the International Fund dated June
29, 1993. CastleInternational Asset Management Limited (the "Sub-Adviser"
or "CastleInternational") provides sub-advisory services with respect to
the International Fund pursuant to a Sub-Advisory Agreement dated March 19,
1996. Each of the Adviser and Sub-Adviser has agreed to pay all expenses
incurred by it in connection with its activities. For advisory services
provided by it, the Adviser is entitled to receive a fee from the Prime
Money Market, Government Money Market, Tax-Exempt Money Market, Equity,
International, Fixed Income and Maryland Funds, computed daily and payable
monthly, based on the average net assets of each of those Funds. For sub-
advisory services provided by it, the Sub-Adviser is entitled to receive a
fee from the Adviser based on the International Fund's average daily net
assets. (See "Management of the Company -- Expenses" or "Management of
36
<PAGE>
the Company--Investment Adviser and Administrator" in the Prospectuses
relating to those Funds for the fee schedule.) The Adviser does not receive
a fee for advisory services provided with respect to the Tax-Exempt Money
Market Fund (Trust).
For the fiscal years ended May 31, 1996, May 31, 1995 and May 31,
1994, the Company paid advisory fees, net of waivers, of $861,899, $835,935
and $765,913, respectively, with respect to the Prime Money Market Fund;
$685,707, $640,607 and $571,387 , respectively, with respect to the
Government Money Market Fund; and $155,912, $176,537 and $169,139 ,
respectively, with respect to the Tax-Exempt Money Market Fund; and the
Adviser voluntarily waived fees of $35,912, $34,831 and $191,478 ,
respectively, with respect to the Prime Money Market Fund; $59,627, $55,705
and $142,847 , respectively, with respect to the Government Money Market
Fund; and $13,558, $15,351 and $42,285 , respectively, with respect to the
Tax-Exempt Money Market Fund. In addition, for the fiscal years ended May
31, 1996, May 31, 1995 and May 31, 1994, the Company paid advisory fees,
net of waivers, of $441,361, $341,466 and $203,838 , respectively, with
respect to the Equity Fund and the Adviser voluntarily waived fees of
$159,038, $125,433 and $97,606 , respectively. For the fiscal years ended
May 31, 1996 and May 31, 1995 and for the period July 2, 1993 (commencement
of operations) to May 31, 1994, the Company paid advisory fees, net of
waivers, of $535,892, $454,894 and $184,928, respectively, with respect to
the International Fund and the Adviser voluntarily waived fees of $49,092,
$36,622 and $42,014, respectively. For the fiscal years ended May 31, 1996,
May 31, 1995 and May 31, 1994, the Company paid advisory fees, net of
waivers, of $108,093, $103,066 and $83,966 , respectively, with respect to
the Fixed Income Fund, and the Adviser voluntarily waived fees of $43,278,
$40,103 and $33,587 , respectively. For the fiscal years ended May 31,
1996, May 31, 1995 and May 31, 1994 , the Company paid advisory fees, net
of waivers, of $17,211, $33,254 and $50,494 , respectively, with respect to
the Maryland Fund and the Adviser voluntarily waived fees of $40,159,
$49,927 and $50,494 , respectively, with respect to the Maryland Fund. For
the fiscal years ended May 31, 1996 and May 31, 1995 and for the period
July 2, 1993 (commencement of operations) through May 31, 1994, the Adviser
paid the Sub-Adviser (including the predecessor sub-adviser for periods
prior to March 19, 1996) sub-advisory fees, net of waivers, of $312,682,
$235,012 and $107,998, respectively, and the Sub-Adviser (including the
predecessor sub-adviser for periods prior to March 19, 1996) waived sub-
advisory fees of $16,372, $15,337 and $19,657, respectively.
37
<PAGE>
Under the Advisory Agreements, the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Company in
connection with the performance of such Agreements, and the Company has agreed
to indemnify the Adviser against any claims or other liabilities arising out of
any such error of judgment or mistake or loss. The Adviser shall remain liable,
however, for any loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of the Adviser in the performance of its duties or from
its reckless disregard of its obligations and duties under the Advisory
Agreements.
Unless sooner terminated, the Advisory and Sub-Advisory Agreements
will continue in effect through July 20, 1997. Each Advisory or Sub-Advisory
Agreement will continue from year to year after its anticipated termination date
if such continuance is approved at least annually by the Company's Board of
Directors or by the affirmative vote of a majority of the outstanding shares of
each Fund, provided that in either event such Agreement's continuance also is
approved by a majority of the Company's Directors who are not parties to such
Agreement, or "interested persons" (as defined in the 1940 Act) of any such
party, by votes cast in person at a meeting called for the purpose of voting on
such approval. Each Advisory or Sub-Advisory Agreement may be terminated by the
Company or the Adviser (or the Sub-Adviser in the case of the Sub-Advisory
Agreement) on 60 days written notice, and will terminate immediately in the
event of its assignment. Upon termination of the Advisory Agreements, the
Company would be required, at the request of the Adviser, to change its name to
a name not including "M.S.D. & T." or "Mercantile-Safe Deposit and Trust
Company."
Administrator
- -------------
Mercantile serves as the Company's administrator pursuant to an
Administration Agreement dated as of May 28, 1993 (the "Administration
Agreement"). Mercantile has agreed to maintain office facilities for the
Company, furnish the Company with statistical and research data, clerical and
certain other services required by the Company, and to assist in updating the
Company's Registration Statement for filing with the SEC.
The Administration Agreement provides that Mercantile shall not be
liable for acts or omissions which do not constitute willful misfeasance, bad
faith or gross negligence on the part of Mercantile, or reckless disregard by
Mercantile of its duties under the Administration Agreement.
38
<PAGE>
Custodians and Transfer Agent
- -----------------------------
The Fifth Third Bank ("Fifth Third") serves as custodian of the Money
Market, Equity , Fixed Income and Maryland Funds' assets and State Street Bank
and Trust Company ("State Street") serves as custodian of the International
Fund's assets pursuant to separate Custody Agreements, under which each
custodian has agreed, among other things, to (i) maintain a separate account in
the name of each Fund, (ii) hold and disburse portfolio securities on account of
each Fund, (iii) collect and receive all income and other payments and
distributions on account of each Fund's portfolio investments and (iv) make
periodic reports to the Company concerning each Fund's operations. Each
custodian is authorized to select one or more banks or trust companies to serve
as sub-custodian on behalf of the Funds, provided that the custodian shall
remain liable for the performance of all of its duties under its respective
Custody Agreement and will hold the Fund or Funds harmless from losses caused by
the negligence or willful misconduct any bank or trust company serving as sub-
custodian.
State Street also serves as transfer agent and dividend disbursing
agent for shares of the Money Market Funds and for Institutional Shares of the
Non-Money Market Funds (as used in this paragraph, collectively "shares"). Under
its Transfer Agency Agreement, State Street has agreed, among other things, to
(i) receive purchase orders and redemption requests for shares of the Funds;
(ii) issue and redeem shares of the Funds; (iii) effect transfers of shares of
the Funds; (iv) prepare and transmit payments for dividends and distributions
declared by the Funds; (v) maintain records of account for the Funds and
shareholders and advise each as to the foregoing; (vi) record the issuance of
shares of each Fund and maintain a record of and provide the Fund on a regular
basis with the total number of shares of each Fund which are authorized, issued
and outstanding; (vii) perform the customary services of a transfer agent, a
dividend disbursing agent and custodian of certain retirement plans and, as
relevant, agent in connection with accumulation, open account or similar plans;
and (viii) provide a system enabling the Funds to monitor the total number of
shares sold in each State.
39
<PAGE>
Distributor and Fund Accountant
- -------------------------------
Shares of the Funds are distributed continuously and without a sales
load by BISYS (the "Distributor"). The Distributor has agreed to use appropriate
efforts to solicit orders for the purchase of shares. No compensation is payable
by the Funds to the Distributor for distribution services provided.
Unless otherwise terminated, the Distribution Agreement will remain in effect
until July 20, 1997, and thereafter will continue automatically with respect
to each Fund from year to year if approved at least annually by the Company's
Board of Directors, or by the vote of a majority of the outstanding voting
securities of the Fund, and by the vote of a majority of the Directors of the
Company who are not parties to the Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement will terminate in the event of its
assignment, as defined in the 1940 Act.
BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an affiliate of the
Distributor, provides full fund accounting services for the Company, including
the computation of each Fund's net asset value, net income and realized capital
gains, if any. BISYS Ohio also serves as transfer agent and dividend
40
<PAGE>
disbursing agent for AFBA Five Star Shares of the Value Equity and Intermediate
Fixed Income Funds.
Compensation of Administrator, Custodians, Transfer Agent and Fund Accountant
- -----------------------------------------------------------------------------
Mercantile, the custodians and BISYS Ohio are entitled to receive fees
based on the aggregate average daily net assets per Fund of the Company. As
compensation for transfer agency services provided, State Street is entitled to
receive an annual fee based on the number of Funds of the Company, plus a
transaction charge for certain transactions and out-of-pocket expenses, and
additional fees as compensation for sub-accounting services provided. Different
transfer agency fees are payable with respect to the Institutional and AFBA Five
Star Shares.
For the fiscal years ended May 31, 1996, May 31, 1995 and May 31,
1994, the Company paid fees, net of waivers, of $885,838, $826,819 and $777,877,
respectively, to Mercantile for administrative services provided to the Funds;
during such periods Mercantile voluntarily waived fees of $370,441, $371,322 and
$412,030, respectively.
Banking Laws
- ------------
The Glass-Steagall Act, among other things, prohibits banks from
engaging to any extent in the business of underwriting securities, although
national and state-chartered banks generally are permitted to purchase and sell
securities upon the order and for the account of their customers. In 1971, the
United States Supreme Court held in Investment Company Institute v. Camp that
the Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
41
<PAGE>
The Adviser believes, with respect to its activities as required by
the Advisory and Administration Agreements and as contemplated by the
Prospectuses and this Statement of Additional Information, and the Sub-Adviser
believe, with respect to its activities as required by the Sub-Advisory
Agreement and as contemplated by the Prospectus for the International Fund and
this Statement of Additional Information, that, if the question were properly
presented, a court should hold that the Adviser or Sub-Adviser, as the case may
be, may each perform such activities without violation of the Glass-Steagall Act
or other applicable banking laws or regulations. It should be noted, however,
that there have been no cases deciding whether banks may perform services
comparable to those performed by the Adviser and Sub-Adviser and that future
changes in either federal or state statutes and regulations relating to
permissible activities of banks or trust companies and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
the Adviser and Sub-Adviser from continuing to perform such services for the
Funds. If the Adviser or Sub-Adviser were prohibited from continuing to perform
advisory/administration and sub-advisory services for the Funds, it is expected
that the Board of Directors would recommend that the Funds affected enter into
new agreements or would consider the possible termination of such Funds. Any new
advisory or sub-advisory agreement would be subject to shareholder approval.
If current restrictions under the Glass-Steagall Act preventing a bank
from sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the Funds expect that the Adviser, or an
affiliate of the Adviser, would consider the possibility of offering to perform
additional services for the Funds. Legislation modifying such restrictions has
been introduced in past sessions of Congress. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which the Adviser or such an affiliate, might offer to provide such
services.
Expenses
- --------
Except as noted below, the Adviser bears all expenses in connection
with the performance of its advisory and administrative services and the Sub-
Adviser bears all expenses in connection with the performance of its sub-
advisory services. The Company bears its owns 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, transfer agent and
fund accountant; certain insurance premiums;
42
<PAGE>
outside auditing and legal expenses; fees of independent pricing services; costs
of shareholders' reports and shareholder meeting; 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.
INDEPENDENT ACCOUNTANTS
- -----------------------
Coopers & Lybrand L.L.P., 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103, serve as independent accountants for the Company. The
financial statements which are incorporated by reference into this Statement of
Additional Information have been audited by Coopers & Lybrand L.L.P., whose
report thereon is also incorporated by reference into this Statement of
Additional Information, and have been incorporated by reference herein in
reliance on the report of such accountants given upon their authority as experts
in accounting and auditing.
COUNSEL
- -------
Drinker Biddle & Reath, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107-3496, serve as counsel to the
Company and will pass upon certain legal matters on behalf of the Company.
ADDITIONAL INFORMATION CONCERNING 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, $.001 par value
per share. The Company's Articles of Incorporation further authorize the Board
of Directors to classify and reclassify any unissued shares into any number of
additional classes of shares . Of these authorized shares, 700,000,000 shares
are classified as Class A Common Stock representing shares of the Prime Money
Market Fund, 700,000,000 shares are classified as Class B Common Stock
representing shares of the Government Money Market Fund, 600,000,000 shares are
classified as Class C Common Stock representing shares of the Tax-Exempt Money
Market Fund, 600,000,000 shares are classified as Class D Common Stock
representing shares of the Tax-Exempt Money Market Fund (Trust), 500,000,000
shares are classified as Class E Common Stock representing Institutional Shares
of the Value Equity Fund and 500,000,000 shares are classified as Class E Common
Stock -Special Series 1 representing AFBA Five Star Shares of the Value Equity
Fund, 500,000,000 shares are classified as Class F Common Stock representing
Institutional Shares of the Intermediate Fixed
43
<PAGE>
Income Fund and 500,000,000 shares are classified as Class F Common Stock -
Special Series 1 representing AFBA Five Star Shares of the Intermediate Fixed
Income Fund, 400,000,000 shares are classified as Class G Common Stock
representing Institutional Shares of the Maryland Tax-Exempt Bond Fund and
400,000,000 shares are classified as Class H Common Stock representing
Institutional Shares of the International Equity Fund. The Company has also
authorized the issuance of 400,000,000 shares of Class I Common Stock
representing Institutional Shares of the International Bond Portfolio, which is
described in a separate Prospectus and Statement of Additional Information. As
of the date of this Statement of Additional Information, the International Bond
Fund had not commenced operations. AFBA Five Star Shares differ from
Institutional Shares in that AFBA Five Star Shares bear separate shareholder
servicing fees payable under the servicing agreement described in the Prospectus
relating to such shares and other operating expenses that may be paid in
differing amounts with respect to such shares. As a result of the difference in
expenses, the net yield of a Fund's Institutional Shares will generally be
higher than that of its AFBA Five Star Shares.
In the event of a liquidation or dissolution of the Company or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative net asset values of the
Company's respective investment portfolios, of any general assets not belonging
to any particular portfolio which are available for distribution. Shareholders
of a Fund are entitled to participate equally in the net distributable assets of
the particular Fund involved on liquidation, based on the number of shares of
the Fund that are held by each shareholder.
Shareholders of the Funds, as well as those of any other investment
portfolio offered by the Company in the future, will vote in the aggregate and
not by portfolio or class on all matters, except as otherwise required by law or
when the Board of Directors determines that the matter to be voted upon affects
only the interests of the shareholders of a particular portfolio or class. Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Company shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each Fund
affected by the matter. A Fund is affected by a matter unless it is clear that
the interests of each Fund in the matter are substantially identical or that the
matter does not affect any interest of the Fund. Under the Rule, the approval of
an
44
<PAGE>
investment advisory agreement or any change in a fundamental investment
objective or investment policy would be effectively acted upon with respect to a
Fund only if approved by a majority of the outstanding shares of such Fund.
However, the Rule also provides that the ratification of the appointment of
independent public accountants, the approval of principal underwriting
contracts, and the election of directors may be effectively acted upon by
shareholders of all Funds voting together in the aggregate without regard to
particular Funds.
Notwithstanding any provision of Maryland law requiring a greater vote
of shares of the Company's Common Stock (or of any class voting as a class) in
connection with any corporate action, unless otherwise provided by law (for
example by Rule 18f-2 discussed above) or by the Company's Articles of
Incorporation, the Company may take or authorize such action upon the favorable
vote of the holders of more than 50% of all of the outstanding shares of Common
Stock voting without regard to class (or portfolio). The Company's Bylaws enable
shareholders to call for a meeting to vote on the removal of one or more
directors; the affirmative vote of a majority of the Company's outstanding
shares is required to remove a director. Meetings of the Company's shareholders
shall be called by the Board of Directors upon the written request of
shareholders owning at least 10% of the outstanding shares entitled to vote.
The Company's Articles of Incorporation authorize the Board of
Directors, without shareholder approval (unless otherwise required by applicable
law), to: (a) sell and convey a Fund's assets to another management investment
company for consideration which may include securities issued by the purchaser
and, in connection therewith, to cause all outstanding shares of such Fund to be
redeemed at a price equal to their net asset value which may be paid in cash or
by distribution of the securities or other consideration received from the sale
and conveyance; (b) sell and convert a Fund's assets into money and, in
connection therewith, to cause all outstanding shares of such Fund to be
redeemed at their net asset value; or (C) combine a Fund's assets with the
assets belonging to one or more other Funds if the Board of Directors reasonably
determines that such combination will not have a material adverse effect on the
shareholders of any Fund participating in such combination and, in connection
therewith, to cause all outstanding shares of any such Fund to be redeemed or
converted into shares of another Fund at their net asset value. The exercise of
such authority may be subject to certain restrictions under the 1940 Act.
45
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
- ----------------------------------
Money Market Funds
- ------------------
The "yield" and "effective yield" of each Money Market Fund described
in the Prospectuses relating to those Funds are calculated according to formulas
prescribed by the SEC. The standardized seven-day yield for each Money Market
Fund is computed separately by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the particular
Fund involved having a balance of one share at the beginning of the period,
dividing the net change in account value by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by (365/7). The net change in the value of an account in
a Fund includes the value of additional shares purchased with dividends from the
original share, and dividends declared on both the original share and any such
additional shares and all fees, other than nonrecurring account sales charges,
that are charged to all shareholder accounts in proportion to the length of the
base period and the Fund's average account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The effective annualized yield for each Fund is computed by
compounding a particular Fund's unannualized base period return (calculated as
above) by adding 1 to the base period return, raising the sum to a power equal
to 365 divided by 7, and subtracting one from the result. For those
shareholders who pay Banks a fee for automatic investment or other cash
management services, the Funds' effective yields will be lower than for
shareholders who do not. For the seven-day period ended May 31, 1996, the
yield for each of the Money Market Funds' portfolios was as follows: Prime
Money Market Fund, 4.92%; Government Money Market Fund, 4.94%; Tax-Exempt Money
Market Fund, 3.09%; Tax-Exempt Money Market Fund (Trust), 3.35%. For the seven-
day period ended May 31, 1995, the effective yield for each of the Money Market
Funds' portfolios was as follows: Prime Money Market Fund, 5.04%; Government
Money Market Fund, 5.06%; Tax-Exempt Money Market Fund, 3.14%; and Tax-Exempt
Money Market Fund (Trust), 3.41%.
In addition, the Tax-Exempt Money Market Funds may quote their
standardized "tax-equivalent yield," which is computed by: (a) dividing the
portion of a Tax-Exempt Money Market Fund's yield (as calculated above) that is
exempt from Federal income tax by one minus a stated Federal income tax rate;
and (b) adding the figure resulting from (a) above to that portion, if any, of
the Fund's yield that is not exempt from Federal income tax. For the seven-day
period ended May 31, 1996, the tax-equivalent yields for the Tax-Exempt Money
Market
46
<PAGE>
Fund and the Tax-Exempt Money Market Fund (Trust) were 5.12% and 5.55%,
respectively (assuming a Federal income tax rate of 39.6%).
The "monthly yield" of each Money Market Fund described in the
Prospectuses relating to those Funds is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account in the particular Fund involved having a balance of one share at the
beginning of the period, dividing the net change in the account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by (365/number of days in
the month). The annualized effective monthly yield for each Fund is computed by
compounding a particular Fund's unannualized monthly base period return
(calculated as just described) by adding 1 to the base period return, raising
the sum to a power equal to 365 divided by the number of days in the month, and
subtracting one from the result.
The Money Market Funds may from time to time quote yields relating to
time periods other than those described above and in the Prospectuses relating
to the Money Market Funds. Such yields will be computed in a manner which is
similar to those computations described.
A Money Market Fund's quoted yield is not indicative of future yields
and will depend upon factors such as portfolio maturity, its expenses and the
types of instruments it holds.
Non-Money Market Funds
- ----------------------
Yield Calculations. From time to time the Non-Money Market Funds may
------------------
quote their yields in advertisements, sales literature or in reports to
shareholders. The yield for each class of shares of a Fund is calculated
separately by dividing the net investment income per share (as described below)
earned by a class during a 30-day period by its net asset value per share on the
last day of the period and annualizing the result on a semi-annual basis by
adding one to the quotient, raising the sum to the power of six, subtracting one
from the result and then doubling the difference. A Fund's net investment income
per share earned during the period with respect to a particular class is based
on the average daily number of shares outstanding in the class during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period attributable to the class, net
of reimbursements. This calculation can be expressed as follows:
47
<PAGE>
a-b
Yield = 2 [(----- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = net asset value per share on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30-day period, or, with respect to obligations
purchased during the 30-day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30-day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations. The Maryland Fund calculates interest earned on tax-
exempt obligations issued without original issue discount and having a current
market discount by using the coupon rate of interest instead of the yield to
maturity. In the case of tax-exempt obligations that are issued with original
issue discount, where the discount based on the current market value exceeds the
then-remaining portion of original issue discount, the yield to maturity is the
imputed rate based on the original issue discount calculation. Conversely, where
the discount based on the current market value is less than the remaining
portion of the original issue discount, the yield to maturity is based on the
market value.
48
<PAGE>
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), (a) gain or loss attributable
to actual monthly pay downs is accounted for as an increase or decrease to
interest income during the period; and (b) a Fund may elect either (i) to
amortize the discount and premium on the remaining security, based on the cost
of the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize discount or premium on
the remaining security.
Undeclared earned income may be subtracted from the net asset value
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
The Maryland Fund's "tax-equivalent" yield for a particular share
class is computed by: (a) dividing the portion of the Fund's yield for a
particular class that is exempt from both Federal and Maryland state income
taxes by one minus a stated combined Federal and Maryland state income tax rate;
(b) dividing the portion of the Fund's yield for a particular class that is
exempt from Federal income tax only by one minus a stated Federal income tax
rate, and (C) adding the figures resulting from (a) and (b) above to that
portion, if any, of such yield that is not exempt from Federal income tax.
For the 30-day period ended May 31, 1996, the yield for Institutional
Shares of the Equity Fund was 1.96%; for Institutional Shares of the Fixed
Income Fund was 6.01%; and for Institutional Shares of the Maryland Fund was
4.94% and the tax equivalent yield was 8.18 %.
Total Return Calculations. The Non-Money Market Funds compute their
-------------------------
average annual total returns separately for their separate share classes by
determining the average annual compounded rates of return during specified
periods that equate the initial amount invested in a particular share class to
the ending redeemable value of such investment in the class. This is done by
dividing the ending redeemable value of a hypothetical $1,000 initial payment by
$1,000 and raising the quotient to a power equal to one divided by the number of
years (or fractional portion thereof) covered by the computation and subtracting
one from the result. This calculation can be expressed as follows:
49
<PAGE>
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of
years.
The Non-Money Market Funds compute their aggregate total returns
separately for their separate share classes by determining the aggregate rates
of return during specified periods that likewise equate the initial amount
invested in a particular share class to the ending redeemable value of such
investment in the class. The formula for calculating aggregate total return is
as follows:
ERV
T = [(-----) - 1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
Based on the foregoing calculations, the average annual total returns
for Institutional Shares of the Equity Fund and Fixed Income Fund for the twelve
months ended May 31, 1996 were 17.24% and 3.38%, respectively, for the five
years ended May 31, 1996 were 11.18% and 6.16%; respectively, and for the period
from the commencement of operations through May 31, 1996 were 12.02% and 6.09%,
respectively. The average annual total returns for Institutional Shares of the
Maryland Fund for the twelve months ended May 31, 1996 and for the period from
the
50
<PAGE>
commencement of operations through May 31, 1996 were 2.84% and 5.42%,
respectively. The average annual total returns for Institutional Shares of the
International Fund for the twelve months ended May 31, 1996 and for the period
from the commencement of operations through May 31, 1996 were 14.27% and 11.42%,
respectively. The aggregate total returns for Institutional Shares of the Equity
Fund and Fixed Income Fund for the one-year period ended May 31, 1996 were
17.24% and 3.38%, respectively, for the five-year period ended May 31, 1996 were
69.88% and 34.82%, respectively, and for the period from the commencement of
operations to May 31, 1996 were 81.61% and 36.17%, respectively. The aggregate
total return for Institutional Shares of the Maryland Fund for the one-year
period ended May 31, 1996 was 2.84% and for the period from commencement of
operations to May 31, 1996 was 23.47%. The aggregate total return for
Institutional Shares of the International Fund for the one-year period ended May
31, 1996 was 14.27% and for the period from commencement of operations to May
31, 1996 was 37.07%.
Since performance will fluctuate, performance data for the Funds
cannot necessarily be used to compare an investment in the Funds' shares with
bank deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
Hypothetical Performance Information
- ------------------------------------
In addition to providing performance information that demonstrates the
actual yield or return of a particular Fund over a particular period of time,
the Tax-Exempt Money Market Funds or the Maryland Fund may provide certain other
information demonstrating hypothetical yields or returns. For example, the table
below illustrates the approximate yield that a taxable investment must earn at
various income brackets to produce after-tax yields equivalent to those of tax-
exempt investments yielding from 4.00% to 6.50%. The yields below are for
illustration purposes only and are not intended to represent current or future
yields for the Tax-Exempt Money Market Funds or the Maryland Fund, which may be
higher or lower than those shown. A Fund's yield will fluctuate as market
conditions change. For investors in a low tax bracket, investing in a tax-exempt
investment may not be beneficial if a higher yield after taxes could be received
from a taxable investment. Investors should be aware that tax brackets may
change over time and they should consult their own tax adviser with specific
reference to their own tax situation.
51
<PAGE>
For the Tax-Exempt Money Market Funds:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Federal
Marginal
Taxable Income Tax Tax-Exempt Yields
Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- ------------------------------------------------------------------------------------------------
Single Return Joint Return Equivalent Taxable Yields
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,000 $ 0-$ 40,100 15% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 24,001-$ 58,150 $ 40,101-$ 96,900 28% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 58,151-$121,300 $ 96,901-$147,700 31% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$ 121,301-$263,750 $147,701-$263,750 36% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
Over $263,750 Over $263,750 39.6% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
- ------------------------------------------------------------------------------------------------
</TABLE>
The tax-exempt yields used here are hypothetical and no assurance can be made
that the Funds will obtain any particular yields. A Fund's yield fluctuates as
market conditions change. The tax brackets and related yield calculations are
based on the 1996 Federal marginal tax rates indicated in the table. The table
does not reflect the phase out of personal exemptions and itemized deductions
which will apply to certain higher income taxpayers.
- --------------------------------------------------------------------------------
52
<PAGE>
For the Maryland Fund:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Combined
Federal
and
Maryland
Marginal
Taxable Income Tax Tax-Exempt Yields
Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- ------------------------------------------------------------------------------------------------
Single Return Joint Return Equivalent Taxable Yields
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,000-$ 24,000 $ 3,000-$ 40,100 21.38% 5.09% 5.72% 6.36% 6.99% 7.63% 8.27%
$ 24,001-$ 58,150 $ 40,101-$ 96,900 33.4% 6.01% 6.76% 7.51% 8.26% 9.01% 9.76%
$ 58,151-$121,300 $ 96,901-$147,700 36.18% 6.27% 7.05% 7.84% 8.62% 9.40% 10.18%
$121,301-$263,750 $147,701-$263,750 40.76% 6.75% 7.60% 8.44% 9.28% 10.13% 10.97%
Over $263,750 Over $263,750 44.04% 7.15% 8.04% 8.93% 9.83% 10.72% 11.62%
-----------------------------------------------------------------------------------------------
</TABLE>
The tax-exempt yields used here are hypothetical and no assurance can the made
that the Fund will obtain any particular yield. A fund's yield fluctuates as
market conditions change. The tax brackets and related yield calculations are
based on the 1996 Federal marginal tax rates, and assume a Federal tax benefit
for state and local taxes. For 1996, the Maryland state tax rate is 5% . The
Maryland county tax is assumed to be at least one-half the state rate which is
applicable in all counties except Worcester County and Maryland and Federal
taxable income are assumed to be the same. The table does not reflect the phase
out of personal exemptions and itemized deductions which will apply to certain
higher income taxpayers.
- --------------------------------------------------------------------------------
Distribution Rates
------------------
The Fixed Income Fund and Maryland Fund may also quote from time to
time distribution rates in reports to shareholders and in sales
literature. The distribution rate for a specified period is calculated by
annualizing the daily distributions of
53
<PAGE>
net investment income and dividing this amount by the daily ending net asset
value, and then adding all the daily numbers and dividing by the number of days
in the specified period. Distribution rates do not reflect realized and
unrealized capital gains and losses. The distribution rate for Institutional
Shares of the Fixed Income Fund for the month ended May 31, 1996 was 5.77%. The
distribution rate for Institutional Shares of the Maryland Fund for the month
ended May 31, 1996 was 4.77%.
Performance Comparisons
- -----------------------
From time to time, in advertisements or in reports to shareholders, a
Fund's yield or total return may be quoted and compared to that of other mutual
funds with similar investment objectives and to stock or other relevant indices.
For example, a Money Market Fund's yield may be compared to the Donoghue's Money
Fund Average, which is an average compiled by Donoghue's MONEY FUND REPORT(R), a
widely recognized independent publication that monitors the performance of money
market funds, or to the average yields reported by the Bank Rate Monitor from
money market deposit accounts offered by the 50 leading banks and thrift
institutions in the top five standard metropolitan statistical areas. The total
return and yield of the Non-Money Market Funds may be compared to the Consumer
Price Index, the Equity Fund may be compared to the Standard & Poor's 500 Index,
an index of unmanaged groups of common stocks, or the Dow Jones Industrial
Average, a recognized unmanaged index of common stocks of 30 industrial
companies listed on the New York Stock Exchange, and the Fixed Income and
Maryland Funds may be compared to the Salomon Brothers Broad Investment Grade
Index or the Shearson Lehman Government Corporate Bond Index. In addition, total
return and yield data as reported in national financial publications such as
Money Magazine, Forbes, Barron's, The Wall Street Journal, and The New York
Times, or in publications of a local or regional nature, may be used in
comparing the performance of a Fund. The total return and yield of a Fund may
also be compared to data prepared by Lipper Analytical Services, Inc.
From time to time, the Company may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more of the
Funds within the Company; (5) descriptions of investment strategies for one or
more of such
54
<PAGE>
Funds; (6) descriptions or comparisons of various savings and investment
products (including but not limited to insured bank products, annuities,
qualified retirement plans and individual stocks and bonds) which may or may not
include the Funds; (7) comparisons of investment products (including the Funds)
with relevant market or industry indices or other appropriate benchmarks; and
(8) discussions of Fund rankings or ratings by recognized rating organizations.
The Company may also include calculations, such as hypothetical compounding
examples, which describe hypothetical investment results in such communications.
Such performance examples will be based on an express set of assumptions and are
not indicative of the performance of any of the Funds.
Information concerning the current yield and performance of the Funds
may be obtained by calling 1-800-551-2145.
MISCELLANEOUS
- -------------
As used in this Statement of Additional Information and in the
Prospectuses, a "majority of the outstanding shares" of a Fund means, with
respect to the approval of an investment advisory agreement or change in an
investment objective or fundamental investment policy, the lesser of (1) 67% of
the shares of the particular Fund represented at a meeting at which the holders
of more than 50% of the outstanding shares of such Fund are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such Fund.
As of July 24, 1996, Mercantile-Safe Deposit and Trust Company, MSDT
Funds, Attn: Income Collection Department, P.O. Box 1101, Baltimore, Maryland
21203, owned of record substantially all of the shares of the Prime Money Market
Fund, Government Money Market Fund, Tax-Exempt Money Market Fund, Tax-Exempt
Money Market Fund (Trust), International Equity Fund and Maryland Tax-Exempt
Bond Fund. Mercantile-Safe Deposit and Trust Company ("Mercantile") is a wholly-
owned subsidiary of Mercantile Bankshares Corporation and is a Maryland trust
company. The Company believes that substantially all of the shares held of
record by Mercantile were beneficially owned by its customers.
As of July 24, 1996, the name, address and percentage ownership
of each person, in addition to Mercantile, that beneficially owned 5% or more of
the outstanding shares of the company was as follows:
Prime Money Market Fund - The Johns Hopkins Hospital, 600 North Wolfe
Street, Baltimore, MD 21287 (7.45%); Government Money Market
Fund - Mr. James G. Robinson, 10 East Lee Street, Suite 2705,
Baltimore, MD 21202 (10.10%); Tax-Exempt Money Market Fund - Mr. Fred
Hittman, 3211 Keyser Road, Baltimore, MD 21208 (7.24%); Tax-Exempt
Money Market Fund (Trust) - Mr. Frank D. Brown, Mt. Ararat Farms, Port
Deposit, MD 21904 (9.12%); Intermediate Fixed Income Fund - National
Asbestos Workers Medical Fund, c/o Simone Rockstroh, Carday
Associates, Inc., 8401 Corporate Drive, Landover, MD 20785 (5.74%);
Maryland Tax-Exempt Bond Fund - Mr. Kenneth H. Roberts, 6287 Firethorn
Drive, Clarksville, MD 21029 (14.8%); Mr. Charles C. Fenwick, Sr.,
Belmont Farms, 3302 Belmont Road, Glyndon, MD 21071 (5.83%); and Mr.
John L. Sprague, P.O. Box 362, Port Tobacco, MD 20677 (5.04%).
55
<PAGE>
FINANCIAL STATEMENTS
- --------------------
The audited financial statements and related report of Coopers &
Lybrand, L.L.P, independent accountants, contained in the Funds' annual report
to shareholders for the fiscal year ended May 31, 1996 (the "Annual Report") are
hereby incorporated herein by reference. No other parts of the Annual Report are
incorporated by reference. Copies of the Annual Report may be obtained by
calling 1-800-551-2145 or by writing M.S.D. & T. Funds, Inc., c/o BISYS Fund
Services, 3435 Stelzer Road, Columbus, Ohio 43219-3035.
56
<PAGE>
APPENDIX
--------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-
A-1
<PAGE>
term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and
A-3
<PAGE>
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit feature
are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
A-6
<PAGE>
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (C) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
A-7
<PAGE>
(P)... - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE>
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
A-9
<PAGE>
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB"
A-10
<PAGE>
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
A-11
<PAGE>
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
M.S.D. & T. FUNDS, INC.
Statement of Additional Information
for the
AFBA Five Star Shares
of the
Value Equity Fund
Intermediate Fixed Income Fund
____________, 1996
TABLE OF CONTENTS
-----------------
Page
------
INVESTMENT OBJECTIVES AND POLICIES...................................... 2
FUNDAMENTAL LIMITATIONS................................................. 17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.......................... 20
NET ASSET VALUE......................................................... 21
ADDITIONAL INFORMATION CONCERNING TAXES................................. 22
MANAGEMENT OF THE COMPANY............................................... 26
INDEPENDENT ACCOUNTANTS................................................. 33
COUNSEL................................................................. 33
ADDITIONAL INFORMATION CONCERNING SHARES................................ 34
ADDITIONAL PERFORMANCE INFORMATION...................................... 36
MISCELLANEOUS........................................................... 40
FINANCIAL STATEMENTS.................................................... 40
APPENDIX A-1
This Statement of Additional Information is meant to be read in
conjunction with M.S.D. & T. Funds, Inc.'s Prospectus dated ____________, 1996
for AFBA Five Star Shares of the Value Equity Fund and Intermediate Fixed Income
Fund. This Statement of Additional Information is incorporated by reference in
its entirety into the Prospectus. Because this Statement of Additional
Information is not itself a prospectus, no investment in AFBA Five Star Shares
of either Fund should be made solely upon the information contained herein.
Copies of the Prospectus for AFBA Five Star Shares of the Funds may be obtained
by calling 1-800-782-4797 or by writing Armed Forces Benefit Services, Inc.
("AFBSI") at 909 N. Washington Street, Alexandria, Virginia 22314. Capitalized
terms used but not defined herein have the same meanings as in the Prospectus.
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. Investment in the Funds involves investment risks, including possible
loss of principal. In addition, the dividends paid by a Fund will go up and
down.
1
<PAGE>
M.S.D. & T. FUNDS, INC.
-----------------------
M.S.D. & T. Funds, Inc. (the "Company") is a Maryland corporation
which commenced operations on July 21, 1989 as a no-load, open-end,
professionally managed investment company. The Company currently offers AFBA
Five Star Shares in an equity portfolio (the Value Equity Fund or the "Equity
Fund") and a bond portfolio (the Intermediate Fixed Income Fund or the "Fixed
Income Fund"). These portfolios may also be referred to herein individually as
a "Fund" and collectively as the "Funds." The investment objective of each Fund
is described in the Prospectus for the Funds.
The Company offers a second class of shares in each of the Funds,
known as Institutional Shares, as well as shares in other investment portfolios,
which are described in separate Prospectuses and a separate Statement of
Additional Information. For information concerning these other shares call the
Company at 1-800-551-2145 or write to the Company, c/o BISYS Fund Services, 3435
Stelzer Road, Columbus, Ohio 43219-3035.
INVESTMENT OBJECTIVES AND POLICIES
- ----------------------------------
The investment objective of each Fund is described in the Prospectus.
The following information supplements the description of the Funds' investment
objectives and policies as set forth in the Prospectus.
Portfolio Transactions and Turnover
- -----------------------------------
Subject to the general supervision and approval of the Company's Board
of Directors, Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for the Funds.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed. During the fiscal years ended May 31, 1994, May 31, 1995 and May 31,
1996, brokerage commissions of $91,097, $99,041 and $131,775, respectively,
were paid by the Equity Fund. During such periods no brokerage commissions
were paid to any affiliated person of the Fund.
Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-
2
<PAGE>
the-counter transactions, the Adviser, where possible, will deal directly with
dealers who make a market in the securities involved except in those
circumstances in which better prices and execution are available elsewhere.
Securities purchased and sold by the Fixed Income Fund are generally
traded on a net basis (i.e., without commission) through dealers, or otherwise
involve transactions directly with the issuer of an instrument. The cost of
securities purchased from underwriters includes an underwriting commission or
concession, and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. No brokerage commissions were
paid with respect to the Fixed Income Fund during the fiscal years ended May
31, 1994, May 31, 1995 and May 31, 1996.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
A Fund will engage in this practice, however, only when the Adviser, in its sole
discretion, believes such practice to be otherwise in the Fund's interests.
In making portfolio investments, the Adviser seeks to obtain the best
net price and the most favorable execution of orders. The Adviser may, in its
discretion, effect transactions in portfolio securities with dealers who provide
research advice or other services to the Funds or the Adviser. The Adviser is
authorized to pay a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for any Fund which
is in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if the Adviser determines in good faith
that such commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in terms of
either that particular transaction or the Adviser's overall responsibilities to
the particular Fund and to the Company. Such brokerage and research services
might consist of reports and statistics relating to specific companies or
industries, general summaries of groups of stocks or bonds and their comparative
earnings and yields, or broad overviews of the stock, bond and government
securities markets and the economy.
Supplementary research information so received (if any) is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Funds. The Board of Directors
will periodically review the commissions paid by the Funds to consider whether
the commissions paid over representative periods of time appear to be reasonable
in relation to the benefits inuring to the Funds. It
3
<PAGE>
is possible that certain of the supplementary research or other services
received will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised. Conversely, a Fund may
be the primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.
Investment decisions for the Funds are made independently from those
for other accounts advised or managed by the Adviser. Such other accounts may
also invest in the same securities as the Funds. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Fund and
such other accounts, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner which the Adviser believes to be
equitable to the Fund and such other accounts. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtainable or sold for the Fund. To the extent
permitted by law, the Adviser may aggregate the securities to be sold or
purchased for the Funds with those to be sold or purchased for such other
accounts in order to obtain the best execution.
The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with the Adviser, BISYS Fund Services ("BISYS") or any
affiliated person (as such term is defined in the Investment Company Act of 1940
as amended (the "1940 Act")) of any of them, except to the extent permitted by
the 1940 Act or the Securities and Exchange Commission (the "SEC"). Under
certain circumstances, the Funds may be at a disadvantage because of these
limitations in comparison with other investment companies which have similar
investment objectives but are not subject to such limitations.
The Funds may from time to time purchase securities issued by the
Company's regular broker/dealers. At the close of the Company's most recent
fiscal year, no such securities were held.
The ratings assigned by each unaffiliated nationally recognized
statistical rating agency (each a "Rating Agency") represent their opinions as
to the quality of debt securities. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and debt
securities with the same maturity, interest rate and rating may have different
yields while debt securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by a
Fund, a rated security may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Fund. The Board of Directors or
the Adviser,
4
<PAGE>
when authorized, will consider such an event in determining whether the Fund
should continue to hold the security in accordance with the interests of the
Fund and applicable regulations of the SEC.
The portfolio turnover rate for each Fund is calculated by dividing
the lesser of purchases or sales of portfolio securities for the reporting
period by the monthly average value of the portfolio securities owned during the
reporting period. The calculation excludes all securities, including options,
whose maturities or expiration dates at the time of acquisition are one year or
less.
Under certain market conditions, the Funds may experience high
portfolio turnover rates as a result of their investment strategies. Portfolio
investments may be sold for a variety of reasons, such as a more favorable
investment opportunity or other circumstances bearing on the desirability of
continuing to hold such investments. Higher portfolio turnover rates can result
in corresponding increases in brokerage commissions and other transaction costs
which must be borne by the Fund involved and ultimately by its shareholders.
Portfolio turnover rates for the Funds may vary greatly from year to
year as well as within a particular year, and may be affected by cash
requirements for redemption of shares and by requirements which enable the Funds
to receive favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions for the Funds, and each Fund may engage
in short-term trading to achieve its investment objective.
Additional Information on Investment Policies
- ---------------------------------------------
Government Obligations
----------------------
Examples of the types of U.S. Government obligations that may be
acquired by the Funds include, in addition to U.S. Treasury bonds, notes, and
bills, the obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, Federal Financing Bank, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal Farm Credit Banks, Maritime Administration,
Tennessee Valley Authority, Washington D.C. Armory Board, International Bank for
Reconstruction and Development (the "World Bank"), and Resolution Trust
Corporation.
5
<PAGE>
Variable and Floating Rate Instruments
--------------------------------------
With respect to variable and floating rate instruments described in
the Prospectus, the Adviser will consider the earning power, cash flows, and
other liquidity ratios of the issuers and guarantors of such obligations and, if
the obligation is subject to a demand feature, will monitor their financial
ability to meet payment on demand. In determining average weighted portfolio
maturity, a variable rate instrument will usually be deemed to have a maturity
equal to the longer of the period remaining to the next interest rate adjustment
or the time a Fund can recover payment of principal as specified in the
instrument. A floating rate instrument will usually be deemed to have a maturity
equal to the date on which the principal amount must be paid, or the date on
which the redemption payment must be made, in the case of an instrument called
for redemption. A floating rate instrument that is subject to a demand feature
will usually be deemed to have a maturity equal to the period remaining until
the principal amount can be recovered through demand. An instrument that is
issued or guaranteed by the U.S. Government or any agency thereof which has a
variable rate of interest readjusted no less frequently than every 397 days will
generally be deemed to have a maturity equal to the period remaining until the
next readjustment of the interest rate or earlier maturity.
Bank Obligations
----------------
With respect to the Funds' investment policies relating to bank
obligations, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. The Funds' investments
in the obligations of foreign banks and foreign branches of U.S. banks may
subject the Funds to investment risks that are different in some respects from
those of investments in obligations of U.S. domestic issuers. Such risks
include future political and economic developments, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign banks and foreign branches of U.S. banks may be subject to
less stringent reserve requirements and to different accounting, auditing,
reporting and recordkeeping standards than those applicable to domestic branches
of U.S. banks. The Funds will acquire securities issued by foreign banks and
foreign branches of U.S. banks only when the Adviser believes that the risks
associated with such instruments are minimal.
6
<PAGE>
Municipal Obligations
---------------------
Municipal obligations which may be acquired by the Fixed Income Fund
include debt obligations issued by governmental entities to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the payment of general
operating expenses and the extension of loans to public institutions and
facilities.
The two principal classifications of municipal obligations consist
of "general obligation" and "revenue" issues. The Fund may also hold "moral
obligation" issues, which are typically issued by special purpose authorities.
There are, of course, variations in the quality of municipal obligations, both
within a particular classification and between classifications, and the yields
on municipal obligations depend upon a variety of factors, including market
conditions generally and the municipal bond market in particular, the financial
condition of the issuer, the size of a particular offering, the maturity of
the obligation, and the rating of the issue.
Municipal obligations acquired by the Fund may include general
obligation notes, tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax-exempt commercial paper, construction loan notes, and
other forms of short-term tax-exempt loans. Such instruments are issued in
anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues. In addition, the Fund may invest in bonds and other types of
longer-term tax-exempt instruments.
Certain types of municipal obligations (private activity bonds) have
been or are issued to obtain funds to provide privately operated housing
facilities, pollution control facilities, convention or trade show facilities,
mass transit, airport, port or parking facilities and certain local facilities
for water supply, gas, electricity or sewage or solid waste disposal. Private
activity bonds are also issued to privately held or publicly owned corporations
in the financing of commercial or industrial facilities. State and local
governments are authorized in most states to issue private activity bonds for
such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations are not payable
from the unrestricted revenues of the issuer but rather from the general
revenues of the corporate user of such facilities. Consequently, the credit
quality of private activity bonds is usually directly related to the credit
standing of the user of the facility.
7
<PAGE>
The payment of principal and interest on most securities purchased by
a Fund will depend upon the ability of the issuers to meet their obligations.
The District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities, and authorities and each multi-state agency of
which a state is a member, as well as the Commonwealth of Puerto Rico, Guam, and
the Virgin Islands, is a separate "issuer" as that term is used in the
Prospectus and this Statement of Additional Information. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
An issuer's obligations under its municipal obligations are subject
to the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by Federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on, and principal of, its municipal obligations may be
materially adversely affected by litigation or other conditions.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations. For example, under Federal tax legislation
enacted in 1986, interest on certain private activity bonds must be included in
an investor's Federal alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference (see
"Additional Information Concerning Taxes"). Such proposals, while pending or if
enacted, might materially and adversely affect the availability of municipal
obligations for investment by the Fund and the liquidity and value of the Fund's
portfolio. In such an event, the Company would reevaluate the investment
objective and policies of the Fund.
In many cases, the Internal Revenue Service has not ruled on whether
the interest received on a municipal obligation is tax-exempt and, accordingly,
the purchase of such securities is based on the opinion of bond counsel or
counsel to the issuers of such instruments. The Company and the Adviser rely on
these opinions and do not intend to review the bases for them.
Municipal obligations purchased by the Fund in some cases may be
insured as to the timely payment of principal and interest. There is no
guarantee, however, that the insurer will meet its obligations in the event of a
default in payment by the issuer. In other cases, municipal obligations may be
backed by
8
<PAGE>
letters of credit or guarantees issued by domestic or foreign banks or other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or guarantee with
respect to a municipal obligation held by the Fund could have an adverse effect
on the Fund's portfolio and the value of its shares. As described above under
"Bank Obligations", foreign letters of credit and guarantees involve certain
risks in addition to those of domestic obligations.
Stand-By Commitments
--------------------
The Fixed Income Fund may acquire "stand-by commitments" with respect
to municipal obligations held in its portfolio. Under a stand-by commitment, a
dealer or bank agrees to purchase from the Fund, at the Fund's option, specified
municipal obligations at a specified price. Stand-by commitments may be
exercisable by the Fund at any time before the maturity of the underlying
municipal obligations, and may be sold, transferred or assigned only with the
instruments involved.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held by the Fund will not exceed 1/2
of 1% of the value of the Fund's total assets calculated immediately after each
stand-by commitment is acquired.
The Fund intends to enter into stand-by commitments only with banks,
brokers or dealers which, in the Adviser's opinion, present minimal credit
risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims, and other relevant financial information. The
Fund's reliance upon the credit of these banks, brokers and dealers will be
secured by the value of the underlying municipal obligations that are subject to
the commitment.
The Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying municipal obligations. Stand-
by commitments acquired by the Fund would be valued at zero in determining net
asset value. Where the Fund paid any
9
<PAGE>
consideration directly or indirectly for a stand-by commitment, its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
Convertible Securities
----------------------
Convertible securities which may be purchased by the Equity Fund
entitle the holder to receive interest paid or accrued on debt or the dividend
paid on preferred stock until the securities mature or are redeemed, converted
or exchanged. Prior to conversion, convertible securities have characteristics
similar to ordinary debt securities in that they normally provide a stable
stream of income with generally higher yields than those of common stock of the
same or similar issuers. Convertible securities rank senior to common stock in
a corporation's capital structure and therefore generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
In selecting convertible securities, the Adviser will consider, among
other factors, the creditworthiness of the issuers of the securities; the
interest or dividend income generated by the securities; the potential for
capital appreciation of the securities and the underlying common stocks; the
prices of the securities relative to other comparable securities and to the
underlying common stocks; whether the securities are entitled to the benefits of
sinking funds or other protective conditions; diversification of the Fund's
portfolio as to issuers; and the ratings of the securities. Since credit rating
agencies may fail to timely change the credit ratings of securities to reflect
subsequent events, the Adviser will consider whether such issuers will have
sufficient cash flow and profits to meet required principal and interest
payments.
Asset-Backed Securities
-----------------------
Asset-backed securities 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. Asset-backed securities are generally issued as pass
through certificates, which represent undivided fractional ownership interests
in the underlying pool of assets, or as debt instruments, which are also known
as collateralized obligations, and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. Payments of
principal and interest may be guaranteed up to certain amounts and for a certain
time period by
10
<PAGE>
a letter of credit issued by a financial institution unaffiliated with the
entities issuing the securities.
The estimated life of an asset-backed security varies with the
prepayment experience of the underlying debt instruments. The rate of such
prepayments, and hence the life of the asset-backed security, will be primarily
a function of current market interest rates, although other economic and
demographic factors may be involved.
Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
Mortgage-Related Securities
---------------------------
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities
guaranteed by the Government National Mortgage Association ("GNMA") include GNMA
Mortgage Pass-Through Certificates (also known as "Ginnie Maes") which are
guaranteed as to the timely payment of principal and interest by GNMA and such
guarantee is backed by the full faith and credit of the United States. GNMA is
a wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under its
guarantee. Mortgage-related securities issued by the Federal National Mortgage
Association ("FNMA") include FNMA guaranteed Mortgage Pass-Through Certificates
(also known as "Fannie Maes") which are solely the obligations of the FNMA, are
not backed by or entitled to the full faith and credit of the United States and
are supported by the right of the issuer to
11
<PAGE>
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private shareholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie
Macs are not guaranteed by the United States or by any Federal Home Loan Bank
and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by the FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal,
FHLMC may remit the amount due on account of its guarantee of ultimate payment
of principal at any time after default on an underlying mortgage, but in no
event later than one year after it becomes payable.
Although certain mortgage-related securities are guaranteed by a third
party or are otherwise similarly secured as described above, 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.
Repurchase Agreements
---------------------
As described in their Prospectus, the Funds may enter into repurchase
agreements. The repurchase price under repurchase agreements generally is equal
to the price paid by a Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Securities subject to repurchase
---
agreements will be held by the Funds' Custodian or registered in the name of the
Fund involved on the Federal Reserve/Treasury book-entry system. 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
12
<PAGE>
disposition of the underlying obligations. The 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 Adviser will continue to monitor the
creditworthiness of the seller. Repurchase agreements are considered to be
loans by the Funds under the 1940 Act.
Reverse Repurchase Agreements
-----------------------------
Whenever a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account liquid assets such as cash, high quality
debt obligations or other liquid securities having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that such value is maintained. 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 by the Fund under the 1940 Act.
When-Issued Purchases and Forward Commitments
---------------------------------------------
As stated in the Prospectus, the Fixed Income Fund may purchase
securities on a firm commitment or "when-issued" basis or enter into a "forward
commitment" to purchase or sell securities. When the Fund agrees to purchase
securities on a when-issued basis or enters into a forward commitment to
purchase securities, the Custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the Custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. Because the Fund's liquidity and ability to manage its
portfolio might be affected when it sets aside cash or portfolio securities to
cover such purchase commitments, the Fund expects that its commitments to
purchase securities on a when-issued or forward commitment basis will not
exceed 25% of the value of its assets. In the case of a forward commitment to
sell portfolio securities, the Custodian will hold the portfolio securities
themselves in a segregated account while the commitment is outstanding.
The Fund will make commitments to purchase securities on a when-
issued basis or to purchase or sell securities on a
13
<PAGE>
forward commitment basis only with the intention of completing the transaction
and actually purchasing or selling securities. If deemed advisable as a matter
of investment strategy, however, the Fund may dispose of or renegotiate a
commitment after it is entered into, and may sell securities it has committed to
purchase before those securities are delivered to the Fund on the settlement
date. In these cases the Fund may realize a capital gain or loss.
When the Fund engages in when-issued or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining the Fund's net asset value
starting on the day the Fund agrees to purchase the securities. The Fund does
not earn interest on the securities it has committed to purchase until they are
paid for and delivered on the settlement date. When the Fund makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets, and fluctuations in the value of
the underlying securities are not reflected in the Fund's net asset value as
long as the commitment remains in effect.
Other Investment Companies
--------------------------
In accordance with their respective investment objectives and
policies, the Funds may invest in securities issued by other investment
companies within the limits prescribed by the 1940 Act. Each Fund currently
intends to limit its investments so that, as determined immediately after a
securities purchase is made: (a) not more than 5% of the value of its total
assets will be invested in the securities of any one investment company; (b) not
more than 10% of the value of its total assets will be invested in the aggregate
in securities of investment companies as a group; and (c) not more than 3% of
the outstanding voting stock of any one investment company will be owned by the
Fund or by the Company as a whole. 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 that a Fund
bears in connection with its own operations.
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<PAGE>
Lending of Portfolio Securities
-------------------------------
When the Funds lend their securities, they continue to receive
interest or dividends on the securities loaned and also earn income on the
loans. Any cash collateral received by a Fund in connection with such loans will
be invested in short-term money market obligations. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted if a material event affecting the investment occurs. Loans will be made
only to borrowers deemed by the Adviser to be of good standing and only when, in
the 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.
Foreign Currency Exchange Contracts
-------------------------------------
Each Fund is authorized to enter into forward foreign currency
exchange contracts. 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 the Fund involved to
establish a rate of exchange for a future point in time. The Funds may enter
into forward foreign currency exchange contracts when deemed advisable by the
Adviser under two circumstances.
First, when entering into a contract for the purchase or sale of a
security, a Fund may enter into a forward foreign currency exchange contract for
the amount of the purchase or sale price to protect against variations in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency between the date the security is purchased or sold and the date on
which payment is made or received. This is sometimes referred to as
"transaction hedging".
Second, when the Adviser anticipates that a particular foreign
currency may decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, a Fund may enter into a forward contract
to sell, for a fixed amount, the amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. This is sometimes referred to as "position hedging". The Funds do
not intend to enter into forward contracts for position hedging purposes on a
regular or continuing basis.
15
<PAGE>
Neither Fund will enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate such Fund to deliver an amount of foreign currency in excess of the
aggregate market value (at the time of entering into the forward contract) of
its portfolio securities or other assets denominated, quoted in, or currently
convertible into that particular currency. While forward contracts may offer
protection from losses resulting from declines in the value of a particular
foreign currency, they also limit potential gains which might result from
increases in the value of such currency. In addition, the Funds will incur
costs in connection with forward foreign currency exchange contracts and
conversions of foreign currencies and U.S. dollars.
A Fund's custodian will place in a separate account cash or liquid
securities in an amount equal to the value of such Fund's assets that could be
required to consummate forward contracts entered into under the second
circumstance, as set forth above. For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund.
At the maturity of a forward contract, a Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. If the Fund engages in
an offsetting transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices
16
<PAGE>
decline between the date the Fund enters into a forward contract for the sale of
a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, it will realize a gain to the extent the price
of the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Fund will suffer a loss
to the extent the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell. For a discussion of the Federal
tax treatment of forward contracts, see "Additional Information Concerning
Taxes".
FUNDAMENTAL LIMITATIONS
- -----------------------
Each Fund is subject to the following fundamental limitations, which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous").
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 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 a Fund may be invested
without regard to these limitations. For purposes of these limitations, 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 a 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
(i) 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 (ii)
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.)
17
<PAGE>
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% 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% 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 Prospectus or in this Statement of Additional Information are not deemed to
be pledged for purposes of this limitation.
4. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate, the Fixed Income Fund may
invest in municipal obligations secured by real estate or interests therein,
each Fund may purchase securities which are secured by real estate or interests
therein, and the Fixed Income Fund may invest in mortgage-related securities,
including collateralized mortgage obligations and mortgage-backed securities
which are issued or guaranteed by the United States, its agencies or its
instrumentalities.
5. Act as an underwriter of securities, except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Fund's investment objective, policies, and limitations may be deemed to be
underwriting.
6. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except that the Fixed Income Fund may purchase put
options on municipal obligations; and each Fund may engage in transactions in
options on securities, securities indices, futures contracts and options on
futures contracts.
7. Purchase securities of companies for the purpose of exercising
control.
8. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that (a) this investment limitation shall not
apply to the Funds' transactions in options, futures contracts and related
options, if any, and (b) the Funds may obtain short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities.
9. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or mineral exploration or development programs, except that each Fund
may, to the extent
18
<PAGE>
appropriate to its investment objective, purchase publicly traded securities of
companies engaging in whole or in part in such activities, and each Fund may
enter into futures contracts and related options.
7. Make loans, except that (i) each Fund may purchase and hold debt
instruments in accordance with its investment objective and policies; (ii) the
Funds may enter into repurchase agreements with respect to portfolio securities;
and (iii) each Fund may lend portfolio securities against collateral consisting
of cash or securities which is consistent with the Fund's permitted investments
and is equal at all times to at least 100% of the value of the securities
loaned.
Although the foregoing investment limitations would permit the Funds
to invest in options, futures contracts and related options, as specified above,
the Funds do not currently intend to engage in such transactions. Prior to
engaging in such transactions, the Funds would add appropriate disclosure
concerning the Funds' investment in such instruments to the Prospectus and this
Statement of Additional Information.
In order to permit the sale of AFBA Five Star Shares of the Funds in
the State of California, the Company has agreed to the following additional non-
fundamental restrictions with respect to the Funds:
1. The Company will comply with the expense limitations set forth in
Rule 260.140.84(a), Title 10, California Administrative Code; and
2. The Company's Investment Adviser will (i) waive its advisory fees
with respect to investments made by each Fund of its cash reserves on a
temporary basis in shares of other open-end investment companies and (ii) only
invest in shares of open-end investment companies that charge no sales
commission.
In order to permit the sale of AFBA Five Star Shares of the Funds in
the State of Texas, the Company has agreed to the following additional non-
fundamental restrictions with respect to the Funds:
1. Neither Fund will invest in warrants in an amount that would
exceed 5% of net assets, of which not more than 2% will be warrants not listed
on the New York Stock Exchange;
2. Neither Fund will invest in oil, gas or mineral leases; and
3. Neither Fund will invest in real estate limited partnerships.
19
<PAGE>
In order to permit the sale of AFBA Five Star Shares of the Funds in
the State of Missouri, the Company has agreed to the following additional non-
fundamental restrictions with respect to the Funds:
1. Neither Fund will hold debt obligations which have been
downgraded from the three highest ratings assigned by a Rating Agency subsequent
to their purchase by the Fund in amounts in excess of 5% of net assets.
In order to permit the sale of AFBA Five Star Shares of the Funds in
the State of Ohio, the Company has agreed to the following additional non-
fundamental restrictions with respect to the Funds:
1. Neither Fund will purchase or retain the securities of any issuer
if the officers, directors or trustees of the Company, its advisors, or managers
owning beneficially more than one-half of one percent of the securities of an
issuer together own beneficially more than five percent of the securities of
such issuer;
2. Neither Fund will invest in the securities of other investment
companies, except by purchase in the open market where no commission or profit
to a sponsor or dealer results from the purchase other than the customary broker
commissions, or except when the purchase is part of a plan of merger,
consolidation, reorganization or acquisition;
3. Neither Fund will invest more than fifteen percent of its
total assets in the securities of issuers which together with any predecessors
(including sponsors of asset-backed pools of securities) have a record of less
than three years continuous operation or securities of issuers which are
restricted as to disposition; and
4. Neither Fund will make any permitted borrowings except for
emergency or extraordinary purposes.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
- ----------------------------------------------
Information on how to purchase and redeem a Fund's shares is included
in the Funds' Prospectus. Shares of each Fund are sold on a continuous basis by
BISYS, which has agreed to use appropriate efforts to promote the Company and to
solicit orders for the purchase of such shares. AFBA Five Star Shares are sold
exclusively through AEGON USA Securities, Inc. as selling dealer for BISYS.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for
20
<PAGE>
any period during which the New York Stock Exchange is closed, other than
customary weekend and holiday closings, or during which trading on said Exchange
is restricted, or during which (as determined by the SEC by rule or regulation)
an emergency exists as a result of which disposal or valuation of portfolio
securities is not reasonably practicable, or for such other periods as the SEC
may permit. (The Funds may also suspend or postpone the recordation of the
transfer of their shares upon the occurrence of any of the foregoing
conditions.)
In addition to the situations described in the Prospectus, the Company
may redeem shares involuntarily to reimburse the Funds for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any charge relating to a transaction effected
for the benefit of a shareholder which is applicable to Fund shares as provided
in the Prospectus from time to time.
The Company 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.
NET ASSET VALUE
- ---------------
The net asset value per share of a particular class of shares of
a Fund is calculated separately by dividing the total value of the assets
belonging to the particular Fund allocable to such class of shares, less the
liabilities allocable to such class, by the number of outstanding shares of such
class. Because the AFBA Five Star Shares bear different transfer agency fees and
separate shareholder servicing fees, the net asset value of the Equity Fund's
AFBA Five Star Shares will generally be lower than that of such Fund's
Institutional Shares. "Assets belonging to" a Fund consist of the consideration
received upon the issuance of shares of the particular Fund together with all
income, earnings, profits, and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any
general
21
<PAGE>
assets of the Company not belonging to a particular investment portfolio.
Assets belonging to a particular Fund are reduced by the direct liabilities of
that Fund and by a share of the general liabilities of the Company allocated
daily in proportion to the relative net asset values of all of the Funds at the
time of allocation. Subject to the provisions of the Company's Articles of
Incorporation, determinations by the Board of Directors as to the direct and
allocable liabilities, and the allocable portion of any general assets, with
respect to a particular Fund or class of shares thereof are conclusive.
As stated in the Prospectus, the Equity Fund's investments shall be
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. A security that is primarily traded on a
domestic securities exchange (including securities traded through the National
Market System) is valued at the last sale price on that exchange or, if there
were no sales during the day, at the current quoted bid price. Portfolio
securities that are primarily traded on foreign exchanges are generally valued
at the closing values of such securities on their respective exchanges, provided
that if such securities are not traded on the valuation date, they will be
valued at the preceding closing values and provided further, that when an
occurrence subsequent to the time of valuation is likely to have changed the
value, then the fair value of those securities will be determined through
consideration of other factors by or under the direction of the Company's Board
of Directors. Over-the-counter securities and securities listed or traded on
foreign exchanges with operations similar to the U.S. over-the-counter market
are valued at the mean of the most recent available quoted bid and asked prices
in the over-the-counter market.
As stated in the Prospectus, the Fixed Income Fund's investments
shall be 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. Portfolio securities for which
market quotations are readily available (other than securities with remaining
maturities of 60 days or less) are valued at the mean of the most recent bid and
asked prices.
Market or fair value may be determined on the basis of valuations
provided by one or more recognized pricing services approved by the Board of
Directors, which may rely on matrix pricing systems, electronic data processing
techniques, and/or quoted bid and asked prices provided by investment dealers.
Short-term investments that mature in 60 days or less are valued at amortized
cost unless the Board of Directors determines that this does not constitute fair
value.
22
<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
---------------------------------------
The following summarizes certain additional considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for careful tax planning.
Investors are advised to consult their tax advisers with specific reference to
their own tax situations.
Some investments may be subject to special rules which govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (1) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (2) the accruing of
certain trade receivables and payables; and (3) the entering into or acquisition
of any forward contract, futures contract, option and similar financial
instrument, if such instrument is not subject to the mark-to-market rules under
the Code. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency
rules.
With respect to transactions covered by the special rules, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A Fund
may elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts that are capital assets in the hands
of the Fund and which are not part of a straddle ("Capital Asset Election").
The Treasury Department has issued regulations under which certain transactions
with respect to which a Fund has not made the Capital Asset Election and that
are part of a "section 988 hedging transaction" (as defined in the Code and
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. It is anticipated that some of the non-U.S. dollar-denominated
investments that the Funds may make (such as non-U.S. dollar-denominated debt
securities and obligations and certain preferred stocks) and some of the foreign
currency contracts the Fund may enter into will be subject to the special
currency rules described above. Gain or loss attributable to the foreign
currency component of transactions engaged in by a Fund which are not subject to
the special currency rules (such as foreign equity investments other than
certain preferred stocks) will be treated as capital gain or loss
23
<PAGE>
and will not be segregated from the gain or loss on the underlying transaction.
In addition, certain foreign currency contracts held by the Funds at
the close of such Funds' taxable year will be treated for Federal income tax
purposes as sold for their full market value on the last business day of such
year, a process known as "mark-to-market." If a Fund makes the Capital Asset
Election with respect to such contracts, 40% of any gain or loss resulting from
such constructive sale will be treated as short-term capital gain or loss and
60% of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time the Fund holds the contract (the "40-60
rule"). Otherwise, such gain or loss will be ordinary in nature. The amount of
any gain or loss actually realized by the Fund in a subsequent sale or other
disposition of those contracts will be adjusted to reflect any gain or loss
taken into account by the Fund in a prior year as a result of the constructive
sale of the contracts. To receive such Federal income tax treatment, a foreign
currency contract must meet the following conditions: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under these provisions respecting foreign currency contracts.
As of the date of this Statement of Additional Information, the Treasury has not
issued any such regulations. Forward foreign currency contracts also may result
in the creation of one or more straddles for Federal income tax purposes, in
which case certain loss deferral, short sales, and wash sales rules and
requirements to capitalize interest and carrying charges may apply.
Net realized long-term capital gains, if any, will be distributed to
shareholders at least annually. The Funds will generally have no tax liability
with respect to such gains and the distributions (whether paid in cash or
additional shares) will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares. Such distributions
will be designated as capital gain dividends in a written notice mailed by the
Company to shareholders not later than 60 days after the close of the Company's
taxable year. Shareholders should note that, upon the sale of Fund shares, if
the shareholder has not held such shares for more than six months, any loss on
the sale of those shares will be treated as long-term capital loss to the extent
of the capital gain dividends received with respect to the shares.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized
24
<PAGE>
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. An
individual's long-term capital gains will be taxable at a maximum rate of 28%.
For corporations, long-term capital gains and ordinary income are both taxable
at a maximum nominal rate of 35%.
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to currently distribute specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). Each Fund intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income with respect to each calendar year to avoid liability for this excise
tax.
Each Fund is treated as a separate entity under the Code. During the
most recent taxable year, each Fund qualified as a "regulated investment
company." Although each Fund expects to qualify as a regulated investment
company in subsequent years and to be relieved of all or substantially all
Federal income taxes, depending upon the extent of the Company's activities in
states and localities in which its offices are maintained, in which its agents
or independent contractors are located or in which it is otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Funds and their shareholders under such laws may
differ from their treatment under Federal income tax laws. Shareholders are
advised to consult their tax advisers concerning the application of state and
local taxes.
If for any taxable year a Fund does not qualify for the special
Federal income tax treatment afforded regulated investment companies, all of
its taxable income will be subject to Federal income tax at regular corporate
rates without any deduction for distributions to its shareholders. In such
event, dividend distributions would be taxable as ordinary income to
shareholders to the extent of the Fund's current and accumulated earnings and
profits, and would be eligible for the dividends received deduction allowed to
corporations under the Code.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to backup withholding when required to do so or that they
are "exempt recipients."
25
<PAGE>
MANAGEMENT OF THE COMPANY
- -------------------------
Directors and Officers
- ----------------------
The Directors and officers of the Company, their addresses, principal
occupations during the past five years, and other affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ------------------------------ -------------- --------------------------------
<S> <C> <C>
LESLIE B. DISHAROON* Chairman of Retired; Director, Baltimore
2 Chittenden Lane the Board and Gas & Electric Company;
Owings Mills, MD 21117 President Director, Travelers Inc.
Age: 64 (diversified financial
- ------------------------------ services); Director, GRC
International, Inc. (technology
based services and products);
Director, Aegon USA, Inc.
(holding company-insurance)
DECATUR H. MILLER* Director and Retired; Partner and former
36 South Charles Street Treasurer Chairman of the law firm of
Suite 1100 Piper & Marbury, Baltimore,
Baltimore, MD 21201 Maryland until 1995.
Age: 64
- ------------------------------
JOHN R. MURPHY Director President and Chief,
1145 17th Street, N.W. Executive Officer, National
Washington, D.C. 20036 Geographic Society; Chairman,
Age: 62 The Baltimore Sun, 1989-1992,
- ------------------------------ and Publisher prior thereto;
Director, Monarch Avalon Inc.
until 1994.
----------------------------
GEORGE R. PACKARD, III Director Visiting President,
--------------------------------
The Johns Hopkins University International University of
1619 Massachusetts Japan, 1994 to date; Former
Avenue, N.W. Dean, School of Advanced
Washington, DC 20036 International Studies at The
Age: 64 Johns Hopkins University;
Director, Amdahl Corporation
(computer equipment); Director,
Offitbank (private bank);
Director, GRC International,
Inc. (technology based services
and products).
---------------------------
J. STEVENSON PECK Director Retired; Director, Crown
Signet Bank/Maryland Central Petroleum Corporation;
7 St. Paul Street Director, U.S.F. & G.
P.O. Box 1077 Corporation, Inc. (insurance)
Baltimore, MD 21203 until 1990; Director, United
Age: 73 States Fidelity and Guaranty
- ------------------------------ Corporation (a subsidiary
of
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ---------------- ------------- -----------------------
<S> <C> <C>
U.S.F. & G. Corporation, Inc.)
(insurance) until 1990.
W. BRUCE McCONNEL, III Secretary Partner of the law firm of
PNB Building Drinker Biddle & Reath,
1345 Chestnut Street Philadelphia, Pennsylvania.
Philadelphia, PA 19107-3496
Age: 53
- ------------------------------
</TABLE>
- -------------------
* Messrs. Disharoon and Miller are considered by the Company to be "interested
persons" of the Company as defined in the Investment Company Act of 1940.
-------------------------
Each Director receives an annual fee of $3,500 plus $1,625 for each
Board meeting attended and reimbursement of expenses incurred as a Director.
For the fiscal year ended May 31, 1996 the Company paid or accrued for the
account of its directors as a group, for services in all capacities, a total of
$54,875. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receives
legal fees as counsel to the Company. As of the date of this Statement of
Additional Information, the Directors and officers of the Company, as a group,
owned less than 1% of the outstanding shares of each Fund.
The following chart provides certain information about the fees
received by the Company's Directors for their services as members of the Board
of Directors and committees thereof for the fiscal year ended May 31, 1996:
27
<PAGE>
<TABLE>
<CAPTION>
TOTAL
PENSION OF COMPENSATION
RETIREMENT ESTIMATED FROM THE
AGGREGATE BENEFITS ANNUAL COMPANY AND
COMPENSATION ACCRUED AS PART BENEFITS FUND COMPLEX*
FROM THE OF COMPANY UPON PAID TO
NAME OF PERSON/POSITION COMPANY EXPENSES RETIREMENT DIRECTORS
<S> <C> <C> <C> <C>
Leslie B. Disharoon $11,625 N/A N/A $11,625
Chairman of the Board of
Directors and President
--------------------------------------------------------------------------------------
Decatur H. Miller $10,000 N/A N/A $10,000
Director and Treasurer
- ---------------------------------------------------------------------------------------
John R. Murphy $10,000 N/A N/A $10,000
Director
- ---------------------------------------------------------------------------------------
George R. Packard, III $11,625 N/A N/A $11,625
Director
- ---------------------------------------------------------------------------------------
J. Stevenson Peck $11,625 N/A N/A $11,625
Director
=======================================================================================
</TABLE>
* The "Fund Complex" consists solely of the Company.
Advisory and Sub-Advisory Services
----------------------------------
Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") serves as investment adviser to the Funds pursuant to an
Advisory Agreement dated as of November 13, 1990 (the "Advisory
Agreement"). The Adviser has agreed to pay all expenses incurred by it in
connection with its activities. For advisory services provided by it, the
Adviser is entitled to receive a fee from the Equity and Fixed Income
Funds, computed daily and payable monthly, based on the average net assets
of each of those Funds. (See "Fund Management -- Expenses" in the
Prospectus for the fee schedule.)
For the fiscal years ended May 31, 1996, May 31, 1995 and May 31,
1994, the Company paid advisory fees, net of waivers, of $441,361, $341,466
and $203,837, respectively, with respect to the Equity Fund and the Adviser
voluntarily waived fees of $159,038, $125,433 and $97,606 , respectively.
For the fiscal years ended May 31, 1996, May 31, 1995 and May 31, 1994, the
Company paid advisory fees, net of waivers, of $108,093, $103,066 and
$83,967 , respectively, with respect to the Fixed Income Fund, and the
Adviser voluntarily waived fees of $43,278, $40,103 and $33,587 ,
respectively.
Under the Advisory Agreement, the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Company
in connection with the performance
-28-
<PAGE>
of such Agreement, and the Company has agreed to indemnify the Adviser against
any claims or other liabilities arising out of any such error of judgment or
mistake or loss. The Adviser shall remain liable, however, for any loss
resulting from willful misfeasance, bad faith, or gross negligence on the part
of the Adviser in the performance of its duties or from its reckless disregard
of its obligations and duties under the Advisory Agreement.
Unless sooner terminated, the Advisory Agreement will continue in
effect through July 20, 1997. The Advisory Agreement will continue from year
to year after its anticipated termination date if such continuance is approved
at least annually by the Company's Board of Directors or by the affirmative vote
of a majority of the outstanding shares of each Fund, provided that in either
event such Agreement's continuance also is approved by a majority of the
Company's Directors who are not parties to such Agreement, or "interested
persons" (as defined in the 1940 Act) of any such party, by votes cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated by the Company or the Adviser on 60 days written
notice, and will terminate immediately in the event of its assignment. Upon
termination of the Advisory Agreement, the Company would be required, at the
request of the Adviser, to change its name to a name not including "M.S.D. & T."
or "Mercantile-Safe Deposit and Trust Company."
Administrator
- -------------
Mercantile serves as the Company's administrator pursuant to an
Administration Agreement dated as of May 28, 1993 (the "Administration
Agreement"). Mercantile has agreed to maintain office facilities for the
Company, furnish the Company with statistical and research data, clerical and
certain other services required by the Company, and to assist in updating the
Company's Registration Statement for filing with the SEC.
The Administration Agreement provides that Mercantile shall not be
liable for acts or omissions which do not constitute willful misfeasance, bad
faith or gross negligence on the part of Mercantile, or reckless disregard by
Mercantile of its duties under the Administration Agreement.
Custodian, Transfer Agent and Fund Accountant
- ---------------------------------------------
The Fifth Third Bank ("Fifth Third") serves as custodian of the Funds'
assets pursuant to a Custody Agreement, under which Fifth Third has agreed,
among other things, to (i) maintain a separate account in the name of each Fund,
(ii) hold and disburse portfolio securities on account of each Fund, (iii)
collect and receive all income and other payments and distributions on account
of each Fund's portfolio investments and
-29-
<PAGE>
(iv) make periodic reports to the Company concerning each Fund's operations.
Fifth Third is authorized to select one or more banks or trust companies to
serve as sub-custodian on behalf of the Funds, provided that Fifth Third shall
remain liable for the performance of all of its duties under the Custody
Agreement and will hold the Fund or Funds harmless from losses caused by the
negligence or willful misconduct any bank or trust company serving as sub-
custodian.
BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an affiliate of
BISYS, serves as the transfer agent and dividend disbursing agent for AFBA Five
Star Shares of the Funds. Under its Transfer Agency Agreement, BISYS Ohio has
agreed, among other things, to (i) receive purchase orders and redemption
requests for AFBA Five Star Shares of the Funds; (ii) issue and redeem AFBA Five
Star Shares of the Funds; (iii) effect transfers of AFBA Five Star Shares of
the Funds; (iv) prepare and transmit payments for dividends and distributions
declared by the Funds with respect to AFBA Five Star Shares; (v) maintain
records of account for the Funds and shareholders and advise each as to the
foregoing; (vi) record the issuance of AFBA Five Star Shares of each Fund and
maintain a record of and provide the Fund on a regular basis with the total
number of AFBA Five Star Shares of each Fund which are authorized, issued and
outstanding; (vii) perform the customary services of a transfer agent and a
dividend disbursing agent and, as relevant, agent in connection with
accumulation, open account or similar plans; and (viii) provide a system
enabling the Funds to monitor the total number of AFBA Five Star Shares sold in
each State.
BISYS Ohio also provides full fund accounting services for the
Company, including the computation of each Fund's net asset value, net income
and realized capital gains, if any.
Distributor
- -----------
Shares of the Funds are distributed continuously and without a sales
load by Winsbury (the "Distributor"). The Distributor has agreed to use
appropriate efforts to solicit orders for the purchase of shares. No
compensation is payable by the Funds to the Distributor for distribution
services provided.
Unless otherwise terminated, the Distribution Agreement will
remain in effect until July 20, 1997, and thereafter will continue
automatically with respect to each Fund from year to year if approved at least
annually by the Company's Board of Directors, or by the vote of a majority of
the outstanding voting securities of the Fund, and by the vote of a majority of
the Directors of the Company who are not parties to the Agreement or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such
-30-
<PAGE>
approval. The Distribution Agreement will terminate in the event of its
assignment, as defined in the 1940 Act.
Compensation of Administrator, Custodian, Transfer Agent and Fund Accountant
- ----------------------------------------------------------------------------
Mercantile, Fifth Third and BISYS Ohio (for fund accounting services)
are entitled to receive fees based on the aggregate average daily net assets per
Fund of the Company. BISYS Ohio currently receives no fee for providing
transfer agency services to AFBA Five Star Shares of the Fund.
For the fiscal years ended May 31, 1996, May 31, 1995 and May 31,
1994, the Company paid fees, net of waivers, $171,571 of $148,403 and $101,963,
respectively, to Mercantile for administrative services provided to the Funds;
during such periods Mercantile voluntarily waived fees of $7,573, $0 and $2,821,
respectively.
Banking Laws
- ------------
The Glass-Steagall Act, among other things, prohibits banks from
engaging to any extent in the business of underwriting securities, although
national and state-chartered banks generally are permitted to purchase and sell
securities upon the order and for the account of their customers. In 1971, the
United States Supreme Court held in Investment Company Institute v. Camp that
the Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
The Adviser believes, with respect to its activities as required by
the Advisory and Administration Agreements and as contemplated by the Prospectus
and this Statement of Additional Information, that, if the question were
properly presented, a court should hold that the Adviser may perform such
activities without violation of the Glass-Steagall Act or other applicable
-31-
<PAGE>
banking laws or regulations. It should be noted, however, that there have been
no cases deciding whether banks may perform services comparable to those
performed by the Adviser and that future changes in either federal or state
statutes and regulations relating to permissible activities of banks or trust
companies and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent the Adviser from continuing to perform such services
for the Funds. If the Adviser were prohibited from continuing to perform
advisory and administration services for the Funds, it is expected that the
Board of Directors would recommend that the Funds affected enter into new
agreements or would consider the possible termination of such Funds. Any new
advisory agreement would be subject to shareholder approval.
If current restrictions under the Glass-Steagall Act preventing a bank
from sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the Funds expect that the Adviser, or an
affiliate of the Adviser, would consider the possibility of offering to perform
additional services for the Funds. Legislation modifying such restrictions has
been introduced in past sessions of Congress. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which the Adviser or such an affiliate, might offer to provide such
services.
Service Organization
- --------------------
As stated in the Prospectus, 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. Under the Servicing Agreement, the Company will pay AFBSI up to
.25% (on an annualized basis) of the average daily net asset value of the AFBA
Five Star Shares of the Funds. Support services provided by AFBSI may include:
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 AFBA Five
Star Shares beneficially owned by customers or the information necessary for
subaccounting. AFBA may appoint one or more agents in the performance of its
obligations under the Servicing Agreement.
The Company's arrangement under the Servicing Agreement is governed by
a Service Plan, which has been adopted by the Board of Directors. In accordance
with the Plan, the Board of Directors reviews, at least quarterly, a written
report of the amounts expended in connection with the Company's Servicing
Agreement and the purposes for which the expenditures were made. In addition,
the Company's Servicing Agreement must be approved
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<PAGE>
annually by a majority of the Directors, including a majority of the Directors
who are not "interested persons" of the Company as defined in the 1940 Act and
have no direct or indirect financial interest in such arrangements (the
"Disinterested Directors").
The Board of Directors believes that there is a reasonable likelihood
that the arrangement with AFBSI will benefit each Fund and its shareholders.
Any material amendment to the arrangement with AFBSI under the Servicing
Agreement must be approved by a majority of the Board of Directors (including a
majority of the Disinterested Directors).
For the period December 1, 1995 (date of initial public offering of
AFBA Five Star Shares) through May 31, 1996, no payments were made under the
Servicing Agreement.
Expenses
- --------
Except as noted below, the Adviser bears all expenses in connection
with the performance of its advisory and administrative services. The Company
bears its owns 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, transfer agent and fund accountant; certain insurance premiums;
outside auditing and legal expenses; fees of independent pricing services; costs
of shareholders' reports and shareholder meeting; 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.
INDEPENDENT ACCOUNTANTS
- -----------------------
Coopers & Lybrand L.L.P., 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103, serve as independent accountants for the Company. The
financial statements which are incorporated by reference into this Statement
of Additional Information have been audited by Coopers & Lybrand L.L.P., whose
report thereon is also incorporated by reference into this Statement of
Additional Information, and have been incorporated by reference herein in
reliance on the report of such accountants given upon their authority as experts
in accounting and auditing.
COUNSEL
- -------
Drinker Biddle & Reath, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107-
-33-
<PAGE>
3496, serve as counsel to the Company and will pass upon certain legal matters
on behalf of the Company.
ADDITIONAL INFORMATION CONCERNING 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, $.001 par value
per share. The Company's Articles of Incorporation further authorize the Board
of Directors to classify and reclassify any unissued shares into any number of
additional classes of shares. Pursuant to such authority, the Board of
Directors has authorized the issuance of two classes of shares (Institutional
Shares, Class E Common Stock; AFBA Five Star Shares, Class E Common Stock-
Special Series 1) representing interests in its Value Equity Fund; and two
classes of shares (Institutional Shares, Class F Common Stock; AFBA Five Star
Shares, Class F Common Stock-Special Series 1) representing interests in its
Intermediate Fixed Income Fund. The Board of Directors has also authorized the
issuance of Class A, B, C, D, G, H and I Common Stock representing interests in
6 other separate investment portfolios. The AFBA Five Star Shares differ from
the Institutional Shares in that the AFBA Five Star Shares bear the servicing
fees payable under the Servicing Agreement described under "Management of the
Company - Service Organization" and other operating expenses that may be made
in differing amounts with respect to such Shares. As a result of the difference
in fees, the net yield of a Fund's AFBA Five Star Shares will generally be lower
than that of the Institutional Shares. Performance quotations will be computed
separately for each class of shares.
In the event of a liquidation or dissolution of the Company or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative net asset values of the
Company's respective investment portfolios, of any general assets not belonging
to any particular portfolio which are available for distribution. Shareholders
of a Fund are entitled to participate equally in the net distributable assets of
the particular Fund involved on liquidation, based on the number of shares of
the Fund that are held by each shareholder.
Shareholders of the Funds, as well as those of any other investment
portfolio offered by the Company in the future, will vote in the aggregate and
not by portfolio or class on all matters, except as otherwise required by law
or when the Board of Directors determines that the matter to be voted upon
affects only the interests of the shareholders of a particular portfolio or
class. Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting
-34-
<PAGE>
securities of an investment company such as the Company shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding shares of each Fund affected by the matter. A Fund is affected
by a matter unless it is clear that the interests of each Fund in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under the Rule, the approval of an investment advisory agreement or any
change in an investment objective or a fundamental investment policy would be
effectively acted upon with respect to a Fund only if approved by a majority of
the outstanding shares of such Fund. However, the Rule also provides that the
ratification of the appointment of independent public accountants, the approval
of principal underwriting contracts, and the election of directors may be
effectively acted upon by shareholders of all Funds voting together in the
aggregate without regard to particular Funds. It is contemplated that only
holders of AFBA Five Star Shares of a Fund will be entitled to vote on matters
submitted to a vote of shareholders pertaining to the Fund's shareholder
servicing arrangements with AFBSI.
Notwithstanding any provision of Maryland law requiring a greater vote
of shares of the Company's Common Stock (or of any class voting as a class) in
connection with any corporate action, unless otherwise provided by law (for
example by Rule 18f-2 discussed above) or by the Company's Articles of
Incorporation, the Company may take or authorize such action upon the favorable
vote of the holders of more than 50% of all of the outstanding shares of Common
Stock voting without regard to class (or portfolio). The Company's Bylaws
enable shareholders to call for a meeting to vote on the removal of one or more
directors; the affirmative vote of a majority of the Company's outstanding
shares is required to remove a director. Meetings of the Company's shareholders
shall be called by the Board of Directors upon the written request of
shareholders owning at least 10% of the outstanding shares entitled to vote.
The Company's Articles of Incorporation authorize the Board of
Directors, without shareholder approval (unless otherwise required by applicable
law), to: (a) sell and convey a Fund's assets to another management investment
company for consideration which may include securities issued by the purchaser
and, in connection therewith, to cause all outstanding shares of such Fund to be
redeemed at a price equal to their net asset value which may be paid in cash or
by distribution of the securities or other consideration received from the sale
and conveyance; (b) sell and convert a Fund's assets into money and, in
connection therewith, to cause all outstanding shares of such Fund to be
redeemed at their net asset value; or (c) combine a Fund's assets with the
assets belonging to one or more other Funds if the Board of Directors reasonably
determines that such combination will not have a material adverse effect on the
shareholders of any Fund participating in such combination and,
-35-
<PAGE>
in connection therewith, to cause all outstanding shares of any such Fund to be
redeemed or converted into shares of another Fund at their net asset value. The
exercise of such authority may be subject to certain restrictions under the 1940
Act.
ADDITIONAL PERFORMANCE INFORMATION
- ----------------------------------
Yield Calculations. From time to time the Funds may quote their
------------------
yields in advertisements, sales literature or in reports to shareholders. The
yield for each class of shares of a Fund is calculated separately by dividing
the net investment income per share (as described below) earned by a class
during a 30-day period by its net asset value per share on the last day of the
period and annualizing the result on a semi-annual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. A Fund's net investment income per share
earned during the period with respect to a particular class is based on the
average daily number of shares outstanding in the class during the period
entitled to receive dividends and includes dividends and interest earned during
the period attributable to that class minus expenses accrued for the period
attributable to the class, net of reimbursements. This calculation can be
expressed as follows:
a-b
Yield = 2 [(----- + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = net asset value per share on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30-day period, or, with respect to obligations
-36-
<PAGE>
purchased during the 30-day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30-day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), (a) gain or loss attributable
to actual monthly pay downs is accounted for as an increase or decrease to
interest income during the period; and (b) a Fund may elect either (i) to
amortize the discount and premium on the remaining security, based on the cost
of the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize discount or premium on
the remaining security.
Undeclared earned income may be subtracted from the net asset value
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
For the 30-day period ended May 31, 1996, the yield for AFBA Five
Star Shares of the Equity Fund was 1.72% and the yield for AFBA Five Star
Shares of the Fixed Income Fund was 5.70%.
Total Return Calculations. The Funds compute their average annual
-------------------------
total returns separately for their separate share classes by determining the
average annual compounded rates of return during specified periods that equate
the initial amount invested in a particular share class to the ending redeemable
---------------------------
value of such investment in the class. This is done by dividing the ending
------------
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
-37-
<PAGE>
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of
years.
The Funds compute their aggregate total returns separately for
their separate share classes by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
----
particular share class to the ending redeemable value of such investment in the
- ---------------------- ------
class. The formula for calculating aggregate total return is as follows:
- -----
ERV
T = [(-----) - 1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
Based on the foregoing calculations, the average annual total returns
for AFBA Five Star Shares of the Equity and Fixed Income Funds for the period
from December 1, 1995 (date of initial public offering) through May 31, 1996
were 15.46% and -2.46%, respectively. The aggregate total returns for AFBA
Five Star Shares of the Equity Fund and Fixed Income Fund for the period from
December 1, 1995 (date of initial public offering) to May 31, 1996 were 7.73%
and -1.23%, respectively.
Since performance will fluctuate, performance data for the Funds
cannot necessarily be used to compare an investment in the Funds' shares with
bank deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
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<PAGE>
Distribution Rates
- ------------------
The Fixed Income Fund may also quote from time to time distribution
rates in reports to shareholders and in sales literature. The distribution rate
for a specified period is calculated by annualizing the daily distributions of
net investment income and dividing this amount by the daily ending net asset
value, and then adding all the daily numbers and dividing by the number of days
in the specified period. Distribution rates do not reflect realized and
unrealized capital gains and losses. The distribution rate for AFBA Five Star
Shares of the Fixed Income Fund for the month ended May 31, 1996 was 5.47%.
Performance Comparisons
- -----------------------
From time to time, in advertisements or in reports to shareholders, a
Fund's yield or total return may be quoted and compared to that of other mutual
funds with similar investment objectives and to stock or other relevant indices.
For example, the total return and yield of the Funds may be compared to the
Consumer Price Index, the Equity Fund may be compared to the Standard & Poor's
500 Index, an index of unmanaged groups of common stocks, or the Dow Jones
Industrial Average, a recognized unmanaged index of common stocks of 30
industrial companies listed on the New York Stock Exchange, and the Fixed Income
Fund may be compared to the Salomon Brothers Broad Investment Grade Index or the
Shearson Lehman Government Corporate Bond Index. In addition, total return and
yield data as reported in national financial publications such as Money
Magazine, Forbes, Barron's, The Wall Street Journal, and The New York Times, or
in publications of a local or regional nature, may be used in comparing the
performance of a Fund. The total return and yield of a Fund may also be
compared to data prepared by Lipper Analytical Services, Inc.
From time to time, the Company may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: discussions of general economic or financial principles (such as
the effects of inflation, the power of compounding and the benefits of dollar-
cost averaging); discussions of general economic trends; presentations of
statistical data to supplement such discussions; descriptions of past or
anticipated portfolio holdings for one or more of the Funds within the Company;
descriptions of investment strategies for one or more of such Funds;
descriptions or comparisons of various savings and investment products
(including but not limited to insured bank products, annuities, qualified
retirement plans and individual stocks and bonds) which may or may not include
the Funds; comparisons of investment products (including the Funds) with
relevant market or industry indices or other appropriate benchmarks; and
discussions of Fund rankings or ratings by recognized rating organizations. The
Company may also
-39-
<PAGE>
include calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any of the Funds.
Information concerning the current yield and performance of the Funds
may be obtained by calling 1-800-782-4797 (AFBA Five Star Shares) or 1-800-
551-2145 (Institutional Shares).
MISCELLANEOUS
- -------------
As used in this Statement of Additional Information and in the
Prospectus, a "majority of the outstanding shares" of a Fund means the lesser of
(1) 67% of the shares of the particular Fund represented at a meeting at which
the holders of more than 50% of the outstanding shares of such Fund are present
in person or by proxy, or (2) more than 50% of the outstanding shares of such
Fund.
As of July 24, 1996, Mercantile-Safe Deposit and Trust Company, MSDT
-------
Funds, Attn: Income Collection Department, P.O. Box 1101, Baltimore, Maryland
21203, owned of record substantially all of the shares of the Value Equity Fund
and Intermediate Fixed Income Fund. Mercantile-Safe Deposit and Trust Company
("Mercantile") is a wholly-owned subsidiary of Mercantile Bankshares Corporation
and is a Maryland trust company. The Company believes that substantially all of
the shares held of record by Mercantile were beneficially owned by its
customers.
As of July 24, 1996, the name, address and percentage ownership of
-------
each person, in addition to Mercantile, that beneficially owned 5% or more of
the outstanding shares of the Company was as follows:
Prime Money Market Fund - The Johns Hopkins Hospital, 600 North
Wolfe Street, Baltimore, MD 21287 (7.45%); Government Money
Market Fund - Mr. James G. Robinson, 10 East Lee Street, Suite
2705, Baltimore, MD 21202 (10.10%); Tax-Exempt Money Market
Fund - Mr. Fred Hittman, 3211 Keyser Road, Baltimore, MD 21208
(7.24%); Tax-Exempt Money Market Fund (Trust) - Mr. Frank D.
Brown, Mt. Ararat Farms, Port Deposit, MD 21904 (9.12%);
Intermediate Fixed Income Fund - National Asbestos Workers
Medical Fund, c/o Simone Rockstroh, Carday Associates, Inc.,
8401 Corporate Drive, Landover, MD 20785 (5.74%); Maryland Tax-
Exempt Bond Fund - Mr. Kenneth H. Roberts, 6287 Firethorn Drive,
Clarksville, MD 21029 (14.8%); Mr. Charles C. Fenwick, Sr.,
Belmont Farms, 3302 Belmont Road, Glyndon, MD 21071 (5.83%); and
Mr. John L Sprague, P.O. Box 362, Port Tobacco, MD 20677
(5.04%).
FINANCIAL STATEMENTS
- ----------------------
The audited financial statements and related report of Coopers &
Lybrand, L.L.P, independent accountants, contained in the Funds' annual report
to shareholders for the fiscal year ended May 31, 1996 (the "Annual Report") are
hereby incorporated herein by reference. No other parts of the Annual Report
are incorporated by reference. Copies of the Annual Report may be obtained by
calling 1-800-782-4797 or by writing Armed Forces Benefit Services, Inc., 909 N.
Washington Street, Alexandria, Virginia 22314.
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<PAGE>
APPENDIX
--------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by
A-1
<PAGE>
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used by
Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against
A-2
<PAGE>
disruption in debt service. Operating factors and market access may be subject
to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The
---------
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the
debt is regarded as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit feature
---------------------------------------------------------------------
are supported by the highest capacity for timely repayment.
- -----------------------------------------------------------
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
A-4
<PAGE>
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
----
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by
Moody's for corporate and municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are
A-6
<PAGE>
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
A-7
<PAGE>
The following summarizes the long-term debt
ratings used by Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four
ratings used by Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A-8
<PAGE>
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
-
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
A-9
<PAGE>
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
A-10
<PAGE>
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
A-11
<PAGE>
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements:
(1)(a) Included in Part A: Financial Highlights for the Prime
Money Market Fund, Government Money Market Fund and Tax-Exempt Money Market Fund
for the fiscal years ended May 31, 1996, 1995, 1994, 1993, 1992 and 1991 and for
the period from July 21, 1989 (commencement of operations) to May 31, 1990; for
the Tax-Exempt Money Market Fund (Trust) for the fiscal years ended May 31,
1996, 1995, 1994, 1993, 1992 and 1991 and for the period from July 25, 1989
(commencement of operations) to May 31, 1990; for the Value Equity Fund for the
fiscal years ended May 31, 1996, 1995, 1994, 1993 and 1992 and for the period
from February 28, 1991 (commencement of operations) to May 31, 1991
(Institutional Shares) and for the period from December 1, 1995 (date of initial
public offering) to May 31, 1996 (AFBA Five Star Shares); for the Intermediate
Fixed Income Fund for the fiscal years ended May 31, 1996, 1995, 1994, 1993 and
1992 and for the period from March 14, 1991 (commencement of operations) to May
31, 1991 (Institutional Shares) and for the period from December 1, 1995 (date
of initial public offering) to May 31, 1996 (AFBA Five Star Shares); for the
Maryland Tax-Exempt Bond Fund for the fiscal years ended May 31, 1996, 1995 and
1994 and for the period from June 2, 1992 (commencement of operations) to May
31, 1993;
<PAGE>
and for the International Equity Fund for the fiscal years ended May
31, 1996 and 1995 and for the period from July 2, 1993 (commencement of
operations) to May 31, 1994.
(b) Included in Part B: Financial Statements included in
M.S.D. & T. Funds, Inc.'s Annual Reports to Shareholders
for the fiscal year ended May 31, 1996, as previously
filed with the Commission, are incorporated herein by
reference.
(2) All required financial statements are included or
incorporated by reference into
<PAGE>
Parts A and B hereof. All
other financial statements and schedules are inapplicable.
(b) Exhibits:
(1) (a) Articles of Incorporation of Registrant dated
February 23, 1989 and recorded in the State of
Maryland on March 7, 1989 are incorporated
herein by reference to Exhibit (1) of Pre-
Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A, filed on
May 26, 1989.
(b) Notice of Change of Resident Agent and
Principal Office Address, dated May 17, 1989,
is incorporated herein by reference to Exhibit
(1)(b) of Post-Effective Amendment No. 1 to
the Registrant's Registration Statement on
Form N-1A, filed on January 19, 1990.
(c) Articles Supplementary dated October 15, 1990
and recorded in the State of Maryland on
October 30, 1990 are incorporated herein by
reference to Exhibit (1)(C) of Post-Effective
Amendment No. 4 to the Registrant's
Registration Statement on Form N-1A, filed on
November 21, 1990.
(d) Articles Supplementary dated January 16, 1992
and recorded in the State of Maryland on
January 28, 1992 are incorporated herein by
reference to
<PAGE>
Exhibit (1)(d) of Post-Effective Amendment No.
7 to the Registrant's Registration Statement
on Form N-1A, filed on October 1, 1992.
(e) Articles Supplementary dated June 23, 1993 and
recorded in the State of Maryland on June 25,
1993 are incorporated herein by reference to
Exhibit (1)(e) of Post-Effective Amendment No.
9 to the Registrant's Registration Statement
on Form N-1A, filed on July 30, 1993.
(f) Articles Supplementary dated May 31, 1994 and
recorded in the State of Maryland on June 23,
1994 are incorporated herein by reference to
Exhibit (1)(f) of Post-Effective Amendment No.
14 to the Registrant's Registration Statement
on Form N-1A, filed on July 1, 1994.
(g) Articles Supplementary dated November 22, 1995
and recorded in the State of Maryland on
November 27, 1995.
(2) (a) Bylaws of Registrant are incorporated herein
by reference to Exhibit (2) of Registrant's
Registration Statement on Form N-1A, filed on
March 10, 1989.
(b) Amendment to Bylaws adopted April 23, 1990 is
incorporated herein by reference to Exhibit
(2)(b) of Post-Effective Amendment No. 2 to
the Registrant's Registration Statement on
Form N-1A, filed on July 25, 1990.
(c) Amendment to Bylaws adopted July 17, 1991 is
incorporated herein by reference to Exhibit
(2)(C) of Post-Effective Amendment No. 6 to
the Registration Statement on Form N-1A, filed
on December 5, 1991.
(d) Amendment to Bylaws adopted January 22, 1996.
(3) None.
<PAGE>
(4) (a) Specimen copy of stock certificate for shares
of Class A Common Stock is incorporated herein
by reference to Exhibit (4)(a) of Pre-
Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A, filed on
May 26, 1989.
(b) Specimen copy of stock certificate for shares
of Class B Common Stock is incorporated herein
by reference to Exhibit (4)(b) of Pre-
Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A, filed on
May 26, 1989.
(c) Specimen copy of stock certificate for shares
of Class C Common Stock is incorporated herein
by reference to Exhibit (4)(C) of Pre-
Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A, filed on
May 26, 1989.
(d) Specimen copy of stock certificate for shares
of Class D Common Stock is incorporated herein
by reference to Exhibit (4)(d) of Pre-
Effective Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A, filed on
May 26, 1989.
(e) Specimen copy of stock certificate for shares
of Class E Common Stock is incorporated herein
by reference to Exhibit (4)(e) of Post-
Effective Amendment No. 3 to the Registrant's
Registration Statement on Form N-1A, filed on
September 21, 1990.
(f) Specimen copy of stock certificate for shares
of Class F Common Stock is incorporated herein
by reference to Exhibit (4)(f) of Post-
Effective Amendment No. 3 to the Registrant's
Registration Statement on Form N-1A, filed on
September 21, 1990.
(g) Specimen copy of stock certificate for shares
of Class G Common Stock is incorporated herein
by reference to
<PAGE>
Exhibit (4)(g) of Post-Effective Amendment No.
6 to the Registrant's Registration Statement
on Form N-1A, filed on December 5, 1991.
(h) Specimen copy of stock certificate for shares
of Class H Common Stock is incorporated herein
by reference to Exhibit 4(h) of Post-Effective
Amendment No. 8 to the Registrant's
Registration Statement on Form N-1A, filed on
April 30, 1993.
(i) Specimen copy of stock certificate for shares
of Class I Common Stock is incorporated herein
by reference to Exhibit 4(i) of Post-Effective
Amendment No. 12 to the Registrant's
Registration Statement on Form N-1A, filed on
May 2, 1994.
(j) Specimen copy of stock certificate for shares
of Class E - Special Series 1 Common Stock is
incorporated herein by reference to Exhibit
(4)(k) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-
1A, filed on July 1, 1994.
(k) Specimen copy of stock certificate for shares
of Class F - Special Series 1 Common Stock is
incorporated herein by reference to Exhibit
(1)(l) of Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-
1A, filed on July 1, 1994.
(5) (a) Advisory Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company with
respect to the Prime, Government and Tax-
Exempt Money Market Funds, dated July 21,
1989, is incorporated herein by reference to
Exhibit (5)(a) of Post-Effective Amendment No.
1 to the Registrant's Registration Statement
on Form N-1A, filed on January 19, 1990.
(b) Advisory Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company with
respect to the Tax-Exempt
<PAGE>
Money Market Fund (Trust), dated July 21,
1989, is incorporated herein by reference to
Exhibit (5)(b) of Post-Effective Amendment No.
1 to the Registrant's Registration Statement
on Form N-1A, filed on January 19, 1990.
(c) Advisory Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company with
respect to the Value Equity and Intermediate
Fixed Income Funds, dated November 13, 1990,
is incorporated herein by reference to Exhibit
(5)(C) of Post-Effective Amendment No. 5 to
the Registrant's Registration Statement on
Form N-1A, filed on August 12, 1991.
(d) Advisory Agreement dated February 3, 1992
between Registrant and Mercantile-Safe Deposit
and Trust Company with respect to the Maryland
Tax-Exempt Bond Fund is incorporated herein by
reference to Exhibit 5(d) of Post-Effective
Amendment No. 7 to the Registrant's
Registration Statement on Form N-1A, filed on
October 1, 1992.
(e) Advisory Agreement dated June 29, 1993 between
Registrant and Mercantile-Safe Deposit and
Trust Company with respect to the
International Equity Fund is incorporated
herein by reference to Exhibit 5(e) of Post-
Effective Amendment No. 9 to the Registrant's
Registration Statement on Form N-1A, filed on
July 30, 1993.
(f) Sub-Advisory Agreement dated as of March 19,
1996 between Mercantile-Safe Deposit and Trust
Company and CastleInternational Asset
Management Limited with respect to the
International Equity Fund.
<PAGE>
(6) (a) Distribution Agreement between Registrant and
The Winsbury Company, dated October 1, 1993 is
incorporated herein by reference to Exhibit
6(a) of Post-Effective Amendment No. 12 to the
Registrant's Registration Statement on Form N-
1A, filed on May 2, 1994.
(7) None.
(8) (a) Custody Agreement between Registrant and Fifth
Third Bank, dated May 28, 1993 is incorporated
herein by reference to Exhibit 8(a) of Post-
Effective Amendment No. 9 to the Registrant's
Registration Statement on Form N-1A, filed on
July 30, 1993.
(b) Custodian Contract dated June 29, 1993 between
Registrant and State Street Bank and Trust
Company with respect to the International
Equity Fund is incorporated herein by
reference to Exhibit 8(b) of Post-Effective
Amendment No. 9 to the Registrant's
Registration Statement on Form N-1A, filed on
July 30, 1993.
(9) (a) Transfer Agency and Service Agreement dated as
of November 1, 1992 between Registrant and
State Street Bank and Trust Company is
incorporated herein by reference to Exhibit
9(a) of Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-
1A, filed on April 30, 1993.
(b) Amendment No. 1 dated as of May 1, 1995 to
Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust
Company is incorporated herein by reference to
Exhibit 9(b) of Post-Effective Amendment No.
15 to the Registrant's Registration Statement
on Form N-1A, filed July 31, 1995.
(c) Transfer Agency Agreement between Registrant
and BISYS Fund Services Ohio, Inc. dated
November 30, 1995 with respect to AFBA Five
Star Shares.
<PAGE>
(d) Administration Agreement between Registrant
and Mercantile-Safe Deposit & Trust Company,
dated May 28, 1993 is incorporated herein by
reference to Exhibit 9(b) of Post-Effective
Amendment No. 9 to the Registrant's
Registration Statement on Form N-1A, filed on
July 30, 1993.
(e) Letter Agreement dated June 29, 1993
supplementing the Transfer Agency and Service
Agreement between Registrant and State Street
Bank and Trust Company is incorporated herein
by reference to Exhibit 9(d) of Post-Effective
Amendment No. 9 to the Registrant's
Registration Statement on Form N-1A, filed on
July 30, 1993.
(f) Fund Accounting Agreement between Registrant
and The Winsbury Service Corporation, dated
October 1, 1993 is incorporated herein by
reference to Exhibit 9(f) of Post-Effective
Amendment No. 12 to the Registrant's
Registration Statement on Form N-1A, filed on
May 2, 1994.
(g) Service Plan and Related Servicing Agreement
with respect to AFBA Five Star Shares is
incorporated herein by reference to Exhibit
9(g) of Post-Effective Amendment No. 15 to the
Registrant's Registration Statement on Form N-
1A, filed on July 31, 1995.
(10) * Opinion and Consent of Counsel.
(11) (a) Consent of Coopers & Lybrand L.L.P.
(b) Consent of Drinker Biddle & Reath.
- -----------------------------
* Filed with the Securities and Exchange Commission on July 29,
1996 under Rule 24f-2 as part of Registrant's Rule 24f-2
Notice.
<PAGE>
(12) None.
(13) (a) Purchase Agreement between Registrant and The
Winsbury Company dated May 28, 1993, is
incorporated herein by reference to Exhibit 13
of Post-Effective Amendment No. 9 to the
Registrant's Registration Statement on Form N-
1A, filed on July 30, 1993.
(b) Form of Purchase Agreement between Registrant
and The Winsbury Company is incorporated
herein by reference to Exhibit 13(b) of Post-
Effective Amendment No. 12 to the Registrant's
Registration Statement on Form N-1A, filed on
May 2, 1994.
(14) None.
(15) None.
(16) (a) Schedule for Computation of Performance
Quotations with respect to the Prime,
Government and Tax-Exempt Money Market Funds
and the Tax-Exempt Money Market Fund (Trust)
is incorporated herein by reference to Exhibit
(16) of Post-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form N-
1A, filed on November 21, 1990.
(b) Schedule for Computation of Performance
Quotations with respect to the Value Equity
and Intermediate Fixed Income Funds is
incorporated herein by reference to Exhibit
(16)(b) of Post-Effective Amendment No. 5 to
the Registrant's Registration Statement on
Form N-1A, filed on August 12, 1991.
(c) Schedule for Computation of Performance
Quotations with respect to the Maryland Tax-
Exempt Bond Fund and Intermediate Fixed Income
Fund is incorporated herein
<PAGE>
by reference to Exhibit 16(C) of Post-
Effective Amendment No. 7 to the Registrant's
Statement on Form N-1A, filed on October 1,
1992.
(d) Schedule for Computation of Performance
Quotations with respect to the International
Equity Fund is incorporated herein by
reference to Exhibit 16(d) of Post-Effective
Amendment No. 11 to the Registrant's Statement
on Form N-1A, filed on December 30, 1993.
(18) Plan pursuant to Rule 18f-3 for Operation of a
Multi-Class System is incorporated herein by
reference to Exhibit 18 of Post-Effective
Amendment No. 16 to the Registrant's
Registration Statement on Form N-1A, filed on
September 29, 1995.
Item 25. Persons Controlled by or under Common Control
with Registrant.
Registrant is controlled by its Board of Directors.
Item 26. Number of Holders of Securities.
The following information is as of July 24, 1996.
<PAGE>
Title of Class Number of Record Holders
-------------- ------------------------
Class A Common Stock 3,117
Class B Common Stock 3,333
Class C Common Stock 374
Class D Common Stock 372
Class E Common Stock 3,775
Class E Common Stock 55
- Special Series 1
Class F Common Stock 2,850
Class F Common Stock 27
- Special Series 1
Class G Common Stock 111
Class H Common Stock 2,746
Item 27. Indemnification.
Indemnification of Registrant's Adviser against certain losses is
provided for in Section 6 of the Advisory Agreement with respect to the Prime,
Government and Tax-Exempt Money Market Funds incorporated herein by reference as
Exhibit (5)(a), Section 6 of the Advisory Agreement with respect to the Tax-
Exempt Money Market Fund (Trust) incorporated herein by reference as Exhibit
(5)(b), Section 6 of the Advisory Agreement with respect to the Value Equity and
Intermediate Fixed Income Funds incorporated herein by reference as Exhibit
(5)(C), Section 6 of the Advisory Agreement with respect to the Maryland Tax-
Exempt Bond Fund incorporated herein by reference as Exhibit 5(d), and Section 6
of the Advisory Agreement with respect to the International Equity Fund included
herein as Exhibit (5)(e). Indemnification of the Registrant's Administrator is
provided for in Section 4 of the Administration Agreement included herein as
Exhibit (9)(d); and Indemnification of Registrant's principal underwriter is
provided for in Section 1.11 of the Distribution Agreement included herein as
Exhibit (6). Section 7.3 of the Registrant's Articles of Incorporation
incorporated herein by reference as Exhibit (1) provides as follows:
(a) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General
Corporation Law, no director or officer of the Corporation shall have
any liability to the Corporation or its stockholders for damages. This
limitation on liability applies to events occurring at
<PAGE>
the time a person serves as a director or officer of the Corporation
whether or not such person is a director or officer at the time of any
proceeding in which liability is asserted.
(b) The Corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent
permitted by the Maryland General Corporation Law. The Corporation
shall indemnify and advance expenses to its officers to the same
extent as its directors and to such further extent as is consistent
with law. The Board of Directors may by Bylaw, resolution, or
agreement make further provision for indemnification of directors,
officers, employees, and agents to the fullest extent permitted by the
Maryland General Corporation Law.
(c) No provision of this Article shall be effective to protect or
purport to protect any director or officer of the Corporation against
any liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved
in the conduct of his office.
(d) References to the Maryland General Corporation Law in this
Article are to the law as from time to time amended. No further
amendment to the Articles of Incorporation of the Corporation shall
affect any right of any person under this Article based on any event,
omission, or proceeding prior to such amendment.
Section 6.2 of the Registrant's Bylaws incorporated herein by
reference as Exhibit (2) provides further as follows:
Indemnification of Directors and Officers.
-----------------------------------------
(a) Indemnification. The Corporation shall indemnify its directors
---------------
to the fullest extent permitted by the Maryland General Corporation
Law. The Corporation shall indemnify its officers to the same extent
as its directors and to such further extent as is consistent with law.
The Corporation shall indemnify its directors and officers who while
serving as directors or officers also serve at the request of the
Corporation as a director, officer, partner, trustee, employee, agent,
or fiduciary of another corporation, partnership, joint venture,
trust, other enterprise, or employee benefit plan to the same extent
as its directors and, in the case of officers, to such further extent
as is consistent with law. This Article
<PAGE>
shall not protect any such person against any liability to the
Corporation or any stockholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the
conduct of his office ("disabling conduct").
(b) Advances. Any current or former director or officer of the
--------
Corporation claiming indemnification within the scope of this Section
6.2 shall be entitled to advances from the Corporation for payment of
the reasonable expenses incurred by him in connection with the
proceedings to which he is a party in the manner and to the full
extent permissible under applicable state corporation laws, the
Securities Act of 1933 and the Investment Company Act of 1940, as such
statutes are now or hereafter in force.
(c) Procedures. On the request of any current or former director or
----------
officer requesting indemnification or an advance under this Section
6.2, the Board of Directors shall determine, or cause to be
determined, in a manner consistent with applicable state corporation
law, the Securities Act of 1933 and the Investment Company Act of
1940, as such statutes are now or hereafter in force, whether the
standards required by this Section 6.2 have been met.
(d) Other Rights. The indemnification provided by this Section 6.2
------------
shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such
indemnification may be entitled under any insurance or other
agreement, vote of stockholders or disinterested directors or
otherwise, both as to action by a director or officer of the
Corporation in his official capacity and as to action by such person
in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators
of such a person.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment
<PAGE>
by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by the
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Item 28. Business and Other Connections of
Investment Adviser.
---------------------------------
(a) Mercantile-Safe Deposit and Trust Company ("Merc-Safe"), the
Adviser, is a Maryland trust company providing a wide range of banking, trust,
and investment services.
To the knowledge of the Registrant, none of the directors or executive
officers of Merc-Safe, except those described below, are or have been, at any
time during the past two years, engaged in any other business, profession,
vocation, or employment of a substantial nature, except that certain directors
and executive officers of Merc-Safe also hold or have held various positions
with the bank and non-bank affiliates of Merc-Safe, including its parent,
Mercantile Bankshares Corporation. Set forth below are the names and principal
business of each director and officer of Merc-Safe who is, or at any time during
the past two fiscal years has been, engaged in any other business, profession,
vocation, or employment of a substantial nature.
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
H. Furlong Director, Director, Chairman Bank Holding
Baldwin Chairman of of the Board, and Company
the Board, and Chief Executive
Chief Executive Officer
Officer Mercantile Bank-
shares Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director Electricity &
Baltimore Gas & Natural Gas
Electric Company
P.O. Box 1475
Baltimore, MD 21203
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
Director Freight Trans-
Consolidated Rail portation
Corporation
(CONRAIL)
6 Penn Center Plaza
Philadelphia, PA 19103
Director Manufacturing
GRC International, Inc.
1900 Gallows Road
Plaza 1900
Vienna, VA 22182
Director Insurance
U.S.F.& G. Corp., Inc.
P.O. Box 1138
Baltimore, MD 21203
Director Private Bank
OFFITBANK
Manhattan Tower
101 East 52/nd/ Street
New York, NY 10022
Director Holding
Wills Group, Inc. Company
P.O. Box E Wholesale &
LaPlata, MD 20646 Retail
Petroleum
Products &
Convenience
Stores
Thomas M. Director Director Bank Holding
Bancroft, Jr. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Former Chairman of the Racecourse
Board and Chief Management
Executive Officer
The New York Racing
Association, Inc.
P.O. Box 90
Jamaica, NY 11417
(prior to January 1990)
Director Manufacturing
VCOA and Distri-
P.O. Box 31 bution
Easton, PA 18042
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
Director Insurance
National Re Group
777 Long Ridge Rd.
Stamford, CT 06904
Richard O. Berndt Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Partner Law Firm
Gallagher, Evelius
& Jones
The Park Charles Building
Suite 400
218 North Charles Street
Baltimore, MD 21201
James A. Block, Director Bank Holding
M.D. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President and Chief Health
Executive Officer Services
Johns Hopkins Health
System and The Johns
Hopkins Hospital
600 N. Wolfe Street
Baltimore, MD 21287
George L. Bunting, Director Director Bank Holding
Jr. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President & Chief Private
Executive Officer Financial
Bunting Management Management
Group Company
Suite 350
9690 Deereco Road
Timonium, MD 21093
(Since July 1991)
Director Telephone
Bell Atlantic-MD., Inc. Utility
1 East Pratt Street
Baltimore, MD 21202
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
Director Insurance
U.S.F.& G. Corp., Inc.
P.O. Box 1138
Baltimore, MD 21203
Director Business Services
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
Director Oil Industry
Crown Central
Petroleum corp.
1 N. Charles Street
Baltimore, MD 21203
Edward K. Dunn, Director, Director and President Bank Holding
Jr. President & Mercantile Bankshares Company
Chief Operating Corporation
Officer Two Hopkins Plaza
Baltimore, MD 21201
Director Insurance
AEGON USA Inc.
2 East Chase Street
Baltimore, MD 21202
Martin L. Grass Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman & Chief Drug Store
Executive Officer Chain
Rite-Aid Corporation
Camp Hill, PA
B. Larry Jenkins Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director, Chairman Insurance
of the Board,
President and CEO
Monumental Life
Insurance Company
2 East Chase Street
Baltimore, MD 21202
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
Senior Vice President Insurance
of AEGON USA Inc.
2 East Chase Street
Baltimore, MD 21202
Robert D. Director Director Bank Holding
Kunisch Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director, Chairman
of the Board, Business
President and Chief Services
Executive Officer
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
Director Transportation
CSX Corporation
1 James Center
901 East Carey Street
Richmond, VA 23219
Director Manufacturing
GenCorp Inc.
175 Ghent Rd.
Fairlawn, OH 44333
William J. Director Director Bank Holding
McCarthy Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Principal, William J. Law Firm
McCarthy, P.C., a
Partner, Venable,
Baetjer and Howard
Two Hopkins Plaza
Baltimore, MD 21201
Director, Chairman of Real Estate
the Board Development
Riparius Corporation and Services
375 Padonia Road West
Timonium, MD 21093
Director Distributor of
Chesapeake Rim and Auto Parts
Wheel Distributors,
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
7601 Pulaski Highway
Baltimore, MD 21237
Morris W. Offit Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman of the Board Private Bank
and Chief Executive
Officer
OFFITBANK
Manhattan Tower
101 East 52/nd/ Street
New York, NY 10022
Director Duty Free Shops
Duty Free International,
Inc.
19 Katonah St.
Ridgefield, CT 06877
Christian H. Director Director Bank Holding
Poindexter Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director and Chairman Electricity &
of the Board and Natural Gas
Chief Executive
Officer
Baltimore Gas &
Electric Company
P.O. Box 1475
Baltimore, MD 21203
William C. Director Director Bank Holding
Richardson Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President and Chief Foundation
Executive Officer
W.K. Kellogg Foundation
One Michigan Avenue, East
Battle Creek, MI 49017
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
Director Transportation
CSX
1 James Center
901 East Carey Street
Richmond, VA 23219
Bishop L. Director Director Bank Holding
Robinson Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Secretary Government
Department of Public Agency
Safety and Correctional
Services of the State
of Maryland
6776 Reisterstown Road
Shopping Center
Suite 310
Baltimore, MD 21215
Donald J. Director Director Bank Holding
Shepard Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman of the Board, Insurance
President and Chief
Executive Officer
AEGON USA Inc.
2 East Chase Street
Baltimore, MD 21202
Member of the Insurance
Executive Board
AEGON, N.V.
2 East Chase Street
Baltimore, MD 21202
Director Business Services
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
Brian B. Director and Director and Vice Bank Holding
Topping Vice Chairman President Company
of the Board Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director Insurance
Fidelity & Deposit Co.
of Maryland
300 St. Paul Place
Baltimore, MD 21202
Calman J. Director Director Bank Holding
Zamoiski, Jr. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman of the Board Wholesale
Independent Distribu- Distributor
tors, Incorporated
3000 Waterview Avenue
Baltimore, MD 21230
Kenneth A. Executive Executive Vice President Bank Holding
Bourne, Jr. Vice President and Treasurer Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director
Potomac Valley Bank Bank
702 Russell Avenue
Gaithersburg, MD 20877
James D. Executive Vice Director Insurance
Hardesty President - Harford Mutual
Trust Division Insurance Company
200 North Main St.
Bel Air, MD 21014
Hugh W. Mohler Executive Vice Director Bank
President The Citizens National
Bank
4/th/ & Main Street
Laurel, MD 20707
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
J. Marshall Reid Executive Vice None
President
Jack K. Steil Executive Vice None
President
Donald J. Trufant Executive Vice None
President
Jay M. Wilson Executive Executive Bank Holding
Vice President Vice President Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President Manufacture
Steeltin Can and Distribution-
Corporation Containers
1101 Todds Lane
Baltimore, MD 21237
(prior to January 1994)
Frederica B. Vice President None
Baxter and Treasurer
John A. Senior Vice Senior Vice President Bank Holding
O'Connor, Jr. President and and Secretary Company
Secretary Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
(b) CastleInternational Asset Management Limited ("CastleInternational")
serves as sub-adviser to the International Equity Fund.
CastleInternational is a U.K. Corporation and a member of the Investment
Management Regulatory Organization ("IMRO") and regulated by IMRO in the
conduct of its affairs. The information required by this Item 28 with
respect to each director and officer of CastleInternational is
incorporated herein by reference to Form ADV and Schedules A and D filed
by CastleInternational with the Securities and Exchange Commission (File
No. 801-51087).
<PAGE>
Item 29. Principal Underwriter.
----------------------
(a) BISYS Fund Services Limited Partnership d/b/a BISYS Fund
Services ("BISYS") acts as distributor for Registrant. BISYS currently
serves as distributor of American Performance Funds, Pacific Capital
Funds, Summit Investment Trust, The HighMark Group, The Parkstone Group of
Funds, The Sessions Group, AmSouth Mutual Funds, The Coventry Group, BB&T
Mutual Funds Group, The ARCH Fund, Inc.,
<PAGE>
MarketWatch Funds, MMA Praxis Mutual Funds, The Riverfront Funds, Inc.,
The Qualivest Funds , The Victory Portfolios, The Pacific Horizon/Time
Horizon Funds, The Emerald Funds, The Vista Funds, BNY Hamilton Funds, The
SeaFirst Retirement Funds, The Value Star Funds, The Pilot Funds, The
First Prairie Funds and The One Group, each of which is a management
investment company.
(b) To the best of Registrant's knowledge, the partners of
BISYS are as follows:
<TABLE>
<CAPTION>
Name and
Principal Positions and
Business Positions and Offices with
Address Offices with BISYS Registrant
- --------------------------- -------------------- -------------
<S> <C> <C>
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, OH 43219-3035
WC Subsidiary Corporation Sole Limited Partner None
-------------------- -------------
3435 Stelzer Road
Columbus, OH 43219-3035
</TABLE>
(c) None.
Item 30. Location of Accounts and Records.
---------------------------------
All accounts, books, and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the
rules thereunder will be maintained at the offices of:
Mercantile-Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21201
(records relating to its functions as investment adviser and as
administrator)
Fifth Third Bank
Fifth Third Center
Cincinnati, Ohio 45263
(records relating to its functions as custodian)
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
<PAGE>
(records relating to its functions as transfer agent and dividend disbursing
agent for the money market funds and Institutional Shares of the non-money
market funds)
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
(records relating to its functions as fund accounting agent and as transfer
agent and dividend disbursing agent for AFBA Five Star Shares)
State Street Bank and Trust Company
One Heritage Drive, P4N
North Quincy, MA 02171
(records relating to its functions as custodian with respect to the
International Equity Fund)
BISYS Fund Services
Limited Partnership d/b/a
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
(records relating to its functions as distributor)
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(registrant's Articles of Incorporation, Bylaws and
minute books)
Item 31. Management Services.
--------------------
None.
Item 32. Undertakings.
-------------
Registrant hereby undertakes to provide its Annual Report upon request
without charge to any recipient of a Prospectus for any of its Funds.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 17 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia and the Commonwealth of Pennsylvania, on the 31st day of July,
1996.
M.S.D. & T. FUNDS, INC.
(Registrant)
/s/* Leslie B. Disharoon
------------------------
Leslie B. Disharoon
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 17 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ----------------------- -------------
<S> <C> <C>
/s/* Leslie B. Disharoon Chairman of the July 31, 1996
- -----------------------------
Leslie B. Disharoon Board and President
/s/* Decatur H. Miller Director and Treasurer July 31, 1996
- -----------------------------
Decatur H. Miller (Principal Financial
and Accounting Officer)
/s/* John R. Murphy Director July 31, 1996
- -----------------------------
John R. Murphy
/s/* George R. Packard, III Director July 31, 1996
- -----------------------------
George R. Packard, III
/s/* J. Stevenson Peck Director July 31, 1996
- -----------------------------
J. Stevenson Peck
</TABLE>
*By: /s/W. Bruce McConnel, III
--------------------------
W. Bruce McConnel, III
Attorney-in-fact
<PAGE>
M.S.D. & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
Leslie B. Disharoon, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda A.
Durkin, jointly and severally, his true and lawful attorneys and agents, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which each said attorney and agent may deem
necessary or advisable or which may be required to enable M.S.D. & T. Funds,
Inc. (the "Company") to comply with the Investment Company Act of 1940, as
amended, the Securities Act of 1933, as amended ("Acts"), or the Internal
Revenue Code of 1986, as amended, and any rules, regulations, or requirements of
the Securities and Exchange Commission with respect to the Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a director
and/or officer of the Company any and all amendments (including post-effective
amendments) to the Company's Registration Statement(s) pursuant to the Acts
filed with the Securities and Exchange Commission, and any other instruments or
documents related thereto; and each said attorney and agent shall have full
power and authority to do and perform in the name and on behalf of the
undersigned director and/or officer of the Company, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as the undersigned director and/or officer of
the Company might or could do in person; and the undersigned does hereby ratify
and confirm all that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ Leslie B. Disharoon
------------------------------
Leslie B. Disharoon
Date: April 29, 1994
<PAGE>
M.S.D. & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
George R. Packard, III, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda A.
Durkin, jointly and severally, his true and lawful attorneys and agents, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which each said attorney and agent may deem
necessary or advisable or which may be required to enable M.S.D. & T. Funds,
Inc. (the "Company") to comply with the Investment Company Act of 1940, as
amended, the Securities Act of 1933, as amended ("Acts"), or the Internal
Revenue Code of 1986, as amended, and any rules, regulations, or requirements of
the Securities and Exchange Commission with respect to the Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a director
and/or officer of the Company any and all amendments (including post-effective
amendments) to the Company's Registration Statement(s) pursuant to the Acts
filed with the Securities and Exchange Commission, and any other instruments or
documents related thereto; and each said attorney and agent shall have full
power and authority to do and perform in the name and on behalf of the
undersigned director and/or officer of the Company, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as the undersigned director and/or officer of
the Company might or could do in person; and the undersigned does hereby ratify
and confirm all that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ George R. Packard, III
------------------------------
George R. Packard, III
Date: April 29, 1994
<PAGE>
M.S.D. & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
John R. Murphy, whose signature appears below, does hereby constitute
and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda A. Durkin,
jointly and severally, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which each said attorney and agent may deem necessary or
advisable or which may be required to enable M.S.D. & T. Funds, Inc. (the
"Company") to comply with the Investment Company Act of 1940, as amended, the
Securities Act of 1933, as amended ("Acts"), or the Internal Revenue Code of
1986, as amended, and any rules, regulations, or requirements of the Securities
and Exchange Commission with respect to the Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Company any and all amendments (including post-effective amendments) to
the Company's Registration Statement(s) pursuant to the Acts filed with the
Securities and Exchange Commission, and any other instruments or documents
related thereto; and each said attorney and agent shall have full power and
authority to do and perform in the name and on behalf of the undersigned
director and/or officer of the Company, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned director and/or officer of the
Company might or could do in person; and the undersigned does hereby ratify and
confirm all that each said attorney and agent shall do or cause to be done by
virtue hereof.
/s/ John R. Murphy
------------------------------
John R. Murphy
Date: April 29, 1994
<PAGE>
M.S.D. & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
J. Stevenson Peck, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda A.
Durkin, jointly and severally, his true and lawful attorneys and agents, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which each said attorney and agent may deem
necessary or advisable or which may be required to enable M.S.D. & T. Funds,
Inc. (the "Company") to comply with the Investment Company Act of 1940, as
amended, the Securities Act of 1933, as amended ("Acts"), or the Internal
Revenue Code of 1986, as amended, and any rules, regulations, or requirements of
the Securities and Exchange Commission with respect to the Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a director
and/or officer of the Company any and all amendments (including post-effective
amendments) to the Company's Registration Statement(s) pursuant to the Acts
filed with the Securities and Exchange Commission, and any other instruments or
documents related thereto; and each said attorney and agent shall have full
power and authority to do and perform in the name and on behalf of the
undersigned director and/or officer of the Company, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as the undersigned director and/or officer of
the Company might or could do in person; and the undersigned does hereby ratify
and confirm all that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ J. Stevenson Peck
------------------------------
J. Stevenson Peck
Date: April 29, 1994
<PAGE>
M.S.D. & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
Decatur H. Miller, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda A.
Durkin, jointly and severally, his true and lawful attorneys and agents, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which each said attorney and agent may deem
necessary or advisable or which may be required to enable M.S.D. & T. Funds,
Inc. (the "Company") to comply with the Investment Company Act of 1940, as
amended, the Securities Act of 1933, as amended ("Acts"), or the Internal
Revenue Code of 1986, as amended, and any rules, regulations, or requirements of
the Securities and Exchange Commission with respect to the Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a director
and/or officer of the Company any and all amendments (including post-effective
amendments) to the Company's Registration Statement(s) pursuant to the Acts
filed with the Securities and Exchange Commission, and any other instruments or
documents related thereto; and each said attorney and agent shall have full
power and authority to do and perform in the name and on behalf of the
undersigned director and/or officer of the Company, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as the undersigned director and/or officer of
the Company might or could do in person; and the undersigned does hereby ratify
and confirm all that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ Decatur H. Miller
------------------------------
Decatur H. Miller
Date: April 29, 1994
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO
- ----------- ----------- -------
<S> <C>
1(g) Articles Supplementary dated
November 22, 1995 and recorded
in the State of Maryland on
November 27, 1995.
2(d) Amendment to Bylaws adopted
January 22, 1996.
5(f) Sub-Advisory Agreement dated
as of March 19, 1996 between
Mercantile-Safe Deposit and
Trust Company and
CastleInternational Asset
Management Limited with respect
to the International Equity Fund.
9(c) Transfer Agency Agreement
between Registrant and BISYS
Fund Services Ohio, Inc. dated
November 30, 1995 with respect
to AFBA Five Star Shares.
11(a) Consent of Coopers & Lybrand, L.L.P.
11(b) Consent of Drinker Biddle & Reath
</TABLE>
<PAGE>
Exhibit 1(g)
ARTICLES SUPPLEMENTARY
OF
M.S.D. & T. FUNDS, INC.
M.S.D. & T. FUNDS, INC., a Maryland corporation having its principal
office in the City of Baltimore, Maryland and registered as an open-end
investment company under the Investment Company Act of 1940, as amended
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland that:
FIRST: Pursuant to Section 2-208 of the Maryland General Corporation
Law, the Board of Directors of the Corporation has classified Five Hundred
Million (500,000,000) shares of the Corporation's authorized but unissued and
unclassified shares of capital stock, of the par value of One Mill ($.001) per
share, as Class E - Special Series 1 Common Stock, of the par value of One Mill
($.001) per share, and Five Hundred Million (500,000,000) shares of the
Corporation's authorized but unissued and unclassified shares of capital stock,
of the par value of One Mill ($.001) per share, as Class F -Special Series 1
Common Stock, of the par value of One Mill ($.001) per share, pursuant to the
following resolutions adopted at a regular meeting of the Board of Directors of
the Corporation held on April 24, 1995:
RESOLVED, that pursuant to the authority expressly given to the Board
of Directors in Article VI, Section 6.4 of the Corporation's Articles of
Incorporation, the Board hereby classifies 1,000,000,000 of the
Corporation's unclassified authorized shares as follows: 500,000,000 as
Class E - Special Series 1, and 500,000,000 as Class F -Special Series 1
Common Stock (with an aggregate par value of One Million Dollars
($1,000,000));
FURTHER RESOLVED, that shares of Class E - Special Series 1 and Class
F - Special Series 1 Common Stock shall represent interests in the AFBA
retail series of the Value Equity and Intermediate Fixed Income Funds,
respectively;
FURTHER RESOLVED, that each share of Class E - Special Series 1 and
Class F - Special Series 1 Common Stock shall have the following
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption:
1. Assets Belonging to a Class. All consideration received by the
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Corporation for the issue and sale of shares of such Class E - Special
Series 1 and Class F - Special
<PAGE>
Series 1 Common Stock shall be invested and reinvested with the
consideration received by the Corporation for the issue and sale of all
other shares now or hereafter classified as shares of Class E or Class F,
respectively, Common Stock (irrespective of whether said shares have been
classified as a part of a series of said Class and, if so classified as a
part of a series, irrespective of the particular series classification),
together with all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange, or liquidation
thereof, any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, and any general assets of the
Corporation allocated to Class E and Class E -Special Series 1 shares or
Class F and Class F - Special Series 1 shares, respectively, or such other
shares by the Board of Directors in accordance with the Corporation's
Charter. All income, earnings, profits, and proceeds, including any
proceeds derived from the sale, exchange or liquidation of such shares, and
any assets derived from any reinvestment of such proceeds in whatever form
shall be allocated among shares of Class E and Class E - Special Series 1
or Class F and Class F - Special Series 1, respectively, and all other
shares now or hereafter designated as Class E or F Common Stock,
respectively (irrespective of whether said shares have been classified as a
part of a series of said Class and, if so classified as a part of a series,
irrespective of the particular series classification), in proportion to
their respective net asset values.
2. Liabilities Belonging to a Class. All the liabilities (including
--------------------------------
expenses) of the Corporation in respect of shares of Class E and Class E -
Special Series 1 or Class F and Class F - Special Series 1, respectively,
and all other shares now or hereafter designated as Class E or F Common
Stock, respectively, and in respect of any general liabilities (including
expenses) of the Corporation allocated to shares of Class E and Class E -
Special Series 1 or Class F and Class F - Special Series 1 or such other
shares by the Board of Directors in accordance with the Corporation's
Charter shall be allocated among shares of Class E and Class E - Special
Series 1 or Class F and Class F - Special Series 1, respectively, and such
other shares, respectively (irrespective of whether said shares have been
classified as a part of a series of said Class and, if so classified as a
part of a series, irrespective of the particular series classification), in
proportion to their respective net asset values:
a. If in the future the Board of Directors determines to enter into
agreements which provide for services
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<PAGE>
only for shares of Class E or Class E - Special Series 1, or Class F
or Class F - Special Series 1, and to allocate any related expenses to
the extent that may be from time to time determined by the Board of
Directors:
(1) only the shares of Class E or F Common Stock,
respectively, shall bear: (i) the expenses and liabilities of
payments to institutions under any agreements entered into by or
on behalf of the Corporation which provide for services by the
institutions exclusively for their customers who own of record or
beneficially such shares, and (ii) such other expenses and
liabilities as the Board of Directors may from time to time
determine are directly attributable to such shares and which
therefore should be borne solely by shares of Class E or F Common
Stock, respectively;
(2) only the shares of Class E - Special Series 1 and Class
F - Special Series 1, respectively, Common Stock shall bear: (i)
the expenses and liabilities of payments to institutions under
any agreements entered into by or on behalf of the Corporation
which provide for services by the institutions exclusively for
their customers who own of record or beneficially such shares;
and (ii) such other expenses and liabilities as the Board of
Directors may from time to time determine are directly
attributable to such shares and which therefore should be borne
solely by shares of Class E - Special Series 1 or Class F -
Special Series 1, respectively;
(3) No shares of Class E or F Common Stock shall bear the
expenses and liabilities described in subparagraph (2) above; and
(4) No shares of Class E - Special Series 1 and Class
F - Special Series 1 Common Stock shall bear the expenses
and liabilities described in subparagraph (1) above.
3. Preferences, Conversion and Other Rights, Voting Powers, Restrictions,
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Limitations as to Dividends, Qualifications, and Terms and Conditions of
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Redemption. Except as provided hereby, each share of Class E - Special
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Series 1 and Class F - Special Series 1 shall have the same preferences,
conversion, and other rights, voting powers, restrictions, limitations as
to dividends, qualifications, and terms and conditions of redemption
applicable to all
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<PAGE>
other shares of Common Stock as set forth in the Charter and shall also
have the same preferences, conversion, and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption as each other share formerly, now or hereafter
classified as a share of Class E or F Common Stock, respectively
(irrespective of whether said share has been classified as a part of a
series of said Class and, if so classified as a part of a series,
irrespective of the particular series classification) except that:
a. (i) on any matter that pertains to the agreements or expenses and
liabilities described under Section 2, clause a. (1) above (or to any
plan or other document adopted by the Corporation relating to said
agreements, expenses, or liabilities) and is submitted to a vote of
shareholders of the Corporation, only the shares of Class E or F
Common Stock (excluding the other shares classified as a series of
such Class other than Class E or F Common Stock, respectively) shall
be entitled to vote, except that if said matter affects shares of
capital stock in the Corporation other than shares of Class E or F
Common Stock, such other affected shares of capital stock in the
Corporation shall also be entitled to vote, and in such case, shares
of Class E or F Common Stock shall be voted in the aggregate together
with such other affected shares and not by class or series except
where otherwise required by law or permitted by the Board of Directors
of the Corporation; and (ii) if any matter submitted to a vote of
shareholders does not affect the shares of Class E or F Common Stock,
such shares shall not be entitled to vote (except where required by
law or permitted by the Board of Directors) even though the matter is
submitted to a vote of the holders of shares of capital stock in the
Corporation other than said shares of Class E or F Common Stock; and
b. (i) on any matter that pertains to the agreements or expenses and
liabilities described in Section 2, clause a. (2) above (or to any
plan or other document adopted by the Corporation relating to said
agreements, expenses, or liabilities) and is submitted to a vote of
shareholders of the Corporation, only shares of Class E - Special
Series 1 or Class F - Special Series 1, respectively (excluding shares
designated as a series of such Class other than Class E - Special
Series 1 or Class F - Special Series 1, respectively) shall be
entitled to vote, except that if said matter affects shares of capital
stock of the Corporation other than shares of Class E - Special Series
1 or Class F -Special Series 1, respectively, such other affected
shares of capital stock of the Corporation shall also be entitled to
vote, and in such case shares of Class E
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<PAGE>
- Special Series 1 or Class F - Special Series 1, respectively shall
be voted in the aggregate together with such other affected shares and
not by class or series except where otherwise required by law or
permitted by the Board of Directors of the Corporation; and (ii) if
any matter submitted to a vote of shareholders does not affect shares
of Class E -Special Series 1 or Class F - Special Series 1,
respectively, said shares shall not be entitled to vote (except where
required by law or permitted by the Board of Directors) even though
the matter is submitted to a vote of holders of shares of capital
stock of the Corporation other than said shares of Class E - Special
Series 1 or Class F - Special Series 1, respectively.
SECOND: The shares of Common Stock of the Corporation classified
pursuant to the resolutions set forth herein have been classified by the
Corporation's Board of Directors under the authority contained in the
Corporation's Articles of Incorporation.
THIRD: The total number of shares of capital stock which the
Corporation is presently authorized to issue remains Ten Billion
(10,000,000,000) shares of Common Stock, of which Seven Hundred Million
(700,000,000) shares of the par value of One Mill ($.001) per share each are
Class A Common Stock; Seven Hundred Million (700,000,000) shares of the par
value of One Mill ($.001) per share each are Class B Common Stock; Six Hundred
Million (600,000,000) shares of the par value of One Mill ($.001) per share each
are Class C Common Stock; Six Hundred Million (600,000,000) shares of the par
value of One Mill ($.001) per share each are Class D Common Stock; Five Hundred
Million (500,000,000) shares of the par value of One Mill ($.001) per share each
are Class E Common Stock; Five Hundred Million (500,000,000) shares of the par
value of One Mill ($.001) per share each are Class E - Special Series 1 Common
Stock; Five Hundred Million (500,000,000) shares of the par value of One Mill
($.001) per share each are Class F Common Stock; Five Hundred Million
(500,000,000) shares of the par value of One Mill ($.001) per share each are
Class F - Special Series 1 Common Stock; Four Hundred Million (400,000,000)
shares of the par value of One Mill ($.001) per share each are Class G Common
Stock; Four Hundred Million (400,000,000) shares of the par value of One Mill
($.001) per share each are Class H Common Stock; and Four Hundred Million
(400,000,000) shares of the par value of One Mill ($.001) per share each are
Class I Common Stock. The aggregate par value of all Common Stock having par
value is unchanged at Ten Million Dollars ($10,000,000).
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<PAGE>
The total number of authorized and unclassified shares of capital
stock of the Company remaining after the actions described above is Four Billion
Two Hundred Million (4,200,000,000) shares of capital stock of the par value of
One Mill ($0.001) and of the aggregate par value of Four Million Two Hundred
Thousand Dollars ($4,200,000).
IN WITNESS WHEREOF, M.S.D. & T. FUNDS, INC. has caused these presents
to be signed in its name and on its behalf by its President and its corporate
seal to be hereunto affixed and attested by its Secretary as of this 22nd day of
November, 1995
[CORPORATE SEAL] M.S.D. & T. FUNDS, INC.
By:/s/ Leslie B. Disharoon
----------------------------
Leslie B. Disharoon
President
Attest:
/s/ W. Bruce McConnel, III
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W. Bruce McConnel, III
Secretary
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<PAGE>
CERTIFICATE
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THE UNDERSIGNED, President of M.S.D. & T. FUNDS, INC., who executed on
behalf of said Corporation the attached Articles Supplementary of said
Corporation, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said Corporation, the attached Articles Supplementary
to be the corporate act of said Corporation, and certifies that to the best of
his knowledge, information and belief the matters and facts set forth in the
attached Articles Supplementary with respect to authorization and approval are
true in all material respects, under the penalties for perjury.
/s/ Leslie B. Disharoon
---------------------------
Dated as of November 22, 1995 Leslie B. Disharoon
President
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<PAGE>
Exhibit 2(d)
M.S.D. & T. FUNDS, INC.
Amendment to Bylaws
Adopted by the Board of Directors
On January 22, 1996
RESOLVED, that Article I, Section 1.2 of the Company's Bylaws be, and
it hereby is, amended and restated in its entirety to read as follows:
SECTION 1.2. Special Meetings. Special meetings of the stockholders
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for any purpose or purposes, unless otherwise prescribed by statute or by
the charter, may be held at any place, within or without the State of
Maryland, and may be called at any time by the Board of Directors or by the
President, and shall be called at the request in writing of stockholders
entitled to cast at least ten (10) percent of all the votes entitled to be
cast at such meeting. Such request shall state the purpose or purposes of
the proposed meeting and the matters proposed to be acted on at it;
provided, however, that unless requested by stockholders entitled to cast a
majority of all the votes entitled to be cast at the meeting, a special
meeting need not be called to consider any matter which is substantially
the same as a matter voted on at any special meeting of the stockholders
held during the preceding twelve (12) months. The Secretary shall inform
such stockholders of the reasonably estimated costs of preparing and
mailing the notice of the meeting and on payment of these costs to the
Corporation shall notify each stockholder entitled to notice of the
meeting.
<PAGE>
Exhibit 5(f)
SUB-ADVISORY AGREEMENT
(International Equity Fund)
AGREEMENT made as of March 19, 1996 between MERCANTILE-SAFE DEPOSIT &
TRUST COMPANY, a Maryland trust company (the "Adviser"), and CASTLEINTERNATIONAL
ASSET MANAGEMENT LIMITED, a U.K. corporation registered under the U.S.
Investment Advisers Act of 1940, as amended, and a member of the Investment
Management Regulatory Organization ("IMRO") and regulated by IMRO in the conduct
of its affairs ("Sub-Adviser").
WHEREAS, M.S.D. & T. Funds, Inc. ("M.S.D. & T.") is registered as an
open-end, management investment company under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser has been appointed investment adviser to
M.S.D. & T.'s International Equity Fund (the "Fund"); and
WHEREAS, the Adviser desires to retain Sub-Adviser to assist it in the
provision of a continuous investment program for the Fund and Sub-Adviser is
willing to do so; and
WHEREAS, the Board of Directors of the Fund has approved this
Agreement, subject to approval by the shareholders of the Fund, and Sub-Adviser
is willing to furnish such services upon the terms and conditions herein set
forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. Effective March 19, 1996, the Adviser hereby
-----------
appoints Sub-Adviser to act as sub-adviser to the Fund as permitted by the
Adviser's Advisory Agreement with M.S.D. & T. pertaining to the Fund. Intending
to be legally bound, Sub-Adviser accepts such appointment and agrees to render
the services herein set forth for the compensation herein provided.
2. Sub-Advisory Services. Subject to the supervision of
---------------------
M.S.D. & T.'s Board of Directors, Sub-Adviser will assist the Adviser in
providing a continuous investment program for the Fund, including research and
management with respect to all securities and investments and cash equivalents
in the Fund. Sub-Adviser will provide services under this Agreement in
accordance with the Fund's investment objective, policies and restrictions as
stated in the Fund's prospectuses and resolutions of M.S.D. & T.'s Board of
Directors applicable to the Fund.
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<PAGE>
Adviser hereby undertakes to provide Sub-Adviser with copies of such
prospectuses and resolutions as the same became available from time to time.
Without limiting the generality of the foregoing, Sub-Adviser
further agrees that it will:
(a) prepare, subject to the Adviser's approval, lists of foreign
countries for investment by the Fund and determine from time to time what
securities and other investments will be purchased, retained or sold for
the Fund, including, with the assistance of the Adviser, the Fund's
investments in futures and forward currency contracts; provided, however,
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that Sub-Adviser shall not be responsible for taking action with respect to
any proxies, notices, reports or other communications relating to any of
the Fund's portfolio securities;
(b) manage in consultation with the Adviser the Fund's temporary
investments in securities;
(c) place orders for the Fund either directly with the issuer or
with any broker or dealer;
(d) provide, at Sub-Adviser's expense, using one or more pricing
services believed by Sub-Adviser to be reliable, the value of the portfolio
securities and other assets of the Fund in accordance with the 1940 Act,
the Fund's current prospectuses and applicable resolutions of the Board of
Directors of M.S.D. & T. on each day that the Fund's assets are required to
be valued, such information to be transmitted by telephone, telecopy or
other transmission as soon as possible and in any event within 24 hours of
the time of valuation to BISYS Fund Services Ohio, Inc., as fund
accountant, or to such other person(s) as the Adviser may direct for the
benefit of the Fund;
(e) manage the Fund's overall cash position, and determine from
time to time what portion of the Fund's assets will be held in different
currencies;
(f) provide the Adviser with foreign broker research, a quarterly
review of international economic and investment developments, and
occasional "White Papers" on international investment issues;
(g) attend regular business and investment-related meetings with
M.S.D. & T.'s Board of Directors and the Adviser if requested to do so by
M.S.D. & T. and/or the Adviser; and
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<PAGE>
(h) maintain books and records with respect to the securities
transactions for the Fund, furnish to the Adviser and M.S.D. & T.'s Board
of Directors such periodic and special reports as they may request with
respect to the Fund, and provide in advance to the Adviser all reports to
the Board of Directors for examination and review within a reasonable time
prior to M.S.D. & T. Board meetings. Adviser hereby undertakes to provide
Sub-Adviser with at least fourteen days prior written notice of the date,
time and location of all M.S.D. & T. Board meetings pertaining to the Fund.
3. Subcontractors. It is understood that Sub-Adviser may from time
--------------
to time engage or associate itself with such person or persons as Sub-Adviser
may believe to be particularly fitted to assist Sub-Adviser in the performance
of certain ministerial or administrative services required by this Agreement;
provided, however, that such person or persons shall have been approved by the
- -------- -------
Board of Directors of M.S.D. & T., that the compensation of such person or
persons shall be paid by Sub-Adviser and that Sub-Adviser shall be as fully
responsible to the Adviser and M.S.D. & T. for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
4. Covenants by Sub-Adviser. Sub-Adviser agrees with respect to the
------------------------
services provided to the Fund that it:
(a) will conform with all Rules and Regulations of the Securities
and Exchange Commission ("SEC") applicable to it and will also conform with
all Rules and Regulations of IMRO;
(b) will telecopy trade information to the Adviser on the first
business day following the day of the trade and cause broker confirmations
to be sent directly to the Adviser; and
(c) will treat confidentially and as proprietary information of
M.S.D. & T. all records and other information relative to the Fund and
prior, present or potential shareholders, and will not use such records and
information for any purpose other than performance of its responsibilities
and duties hereunder (except after prior notification to and approval in
writing by M.S.D. & T., which approval shall not be unreasonably withheld
and may not be withheld and will be deemed granted where Sub-Adviser may be
exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted authorities,
or when so requested by M.S.D. & T.).
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<PAGE>
5. Services Not Exclusive.
----------------------
(a) The services furnished by Sub-Adviser hereunder are deemed
not to be exclusive, and nothing in this Agreement shall (i) prevent Sub-Adviser
or any affiliated person (as defined in the 1940 Act) of Sub-Adviser from acting
as investment adviser or manager for any other person or persons, including
other management investment companies with investment objectives and policies
the same as or similar to those of the Fund or (ii) limit or restrict Sub-
Adviser or any such affiliated person from buying, selling or trading any
securities or other investments (including any securities or other investments
which the Fund is eligible to buy) for its or their own accounts or for the
accounts of others for whom it or they may be acting; provided, however, that
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Sub-Adviser agrees that it will not undertake any activities which, in its
reasonable judgment, will adversely affect the performance of its obligations to
the Fund under this Agreement.
(b) Nothing contained herein, however, shall prohibit Sub-
Adviser from advertising or soliciting the public generally with respect to
products or services, regardless of whether such advertisement or solicitation
may include prior, present or potential shareholders of M.S.D. & T.
6. Portfolio Transactions. Investment decisions for the Fund shall
----------------------
be made by Sub-Adviser independently from those for any other investment
companies and accounts advised or managed by Sub-Adviser. The Fund and such
investment companies and accounts may, however, invest in the same securities.
When a purchase or sale of the same security is made at substantially the same
time on behalf of the Fund and/or another investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which Sub-Adviser believes to be equitable to the Fund
and such other investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the Fund
or the size of the position obtained or sold by the Fund. To the extent
permitted by law, Sub-Adviser may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for other investment
companies or accounts in order to obtain best execution.
Sub-Adviser shall place orders for the purchase and sale of portfolio
securities and will solicit broker-dealers to execute transactions in accordance
with the Fund's policies and restrictions regarding brokerage allocations. Sub-
Adviser shall place orders pursuant to its investment determination for the Fund
either directly with the issuer or with any broker or dealer selected by Sub-
Adviser. In executing portfolio transactions and selecting brokers or dealers,
Sub-Adviser shall use its reasonable best efforts to seek the most favorable
execution of
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<PAGE>
orders, after taking into account all factors Sub-Adviser deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, both for the specific transaction
and on a continuing basis. Consistent with this obligation, Sub-Adviser may, to
the extent permitted by law, purchase and sell portfolio securities to and from
brokers and dealers who provide brokerage and research services (within the
meaning of Section 28(e) of the Securities Exchange Act of 1934) to or for the
benefit of the Fund and/or other accounts over which Sub-Adviser or any of its
affiliates exercises investment discretion. Sub-Adviser is authorized to pay to
a broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction for the Fund which is in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction if Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or Sub-Adviser's overall responsibilities to the Fund and
to M.S.D. & T. In no instance will portfolio securities be purchased from or
sold to Sub-Adviser, or the Fund's principal underwriter, or any affiliated
person thereof except as permitted by the Securities and Exchange Commission.
7. Books and Records. In compliance with the requirements of Rule
-----------------
31a-3 under the 1940 Act, Sub-Adviser hereby agrees that all records which it
maintains for M.S.D. & T. are the property of M.S.D. & T. and further agrees to
surrender promptly to M.S.D. & T. any of such records upon M.S.D. & T.'s
request; provided, however, that the Sub-Adviser may make and retain photocopies
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of such records in order to comply with applicable regulatory requirements.
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
8. Expenses. During the term of this Agreement, Sub-Adviser will
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pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities, commodities and other investments
(including brokerage commissions and other transaction charges, if any)
purchased for the Fund.
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<PAGE>
9. Compensation. For the services provided and the expenses assumed
------------
with respect to the Fund pursuant to this Agreement, Sub-Adviser will be
entitled to a fee, computed daily and payable quarterly, from the Adviser,
calculated at the annual rate of .45% of the Fund's average daily net assets.
Notwithstanding any other provision of the Agreement, all fees payable to Sub-
Adviser pursuant to this Agreement shall be withheld by Adviser until such time
as this Agreement shall have been approved by vote of the lesser (1) 67% of the
shares of the Fund represented at a meeting if holders of more than 50% of the
outstanding shares of the Fund are present in-person or by proxy or (b) more
than 50% of the outstanding shares of the Fund. Upon such approval, the Adviser
shall forthwith remit to the Sub-Adviser all withheld fees, with interest at a
rate to be agreed upon by the Adviser and Sub-Adviser. If such approval is not
obtained within 120 days after the effective date of this Agreement, this
Agreement shall terminate and all withheld fees shall be retained by the
Adviser, but all other provisions of this Agreement shall be effective in
accordance with their terms.
10. Standard of Care; Limitation of Liability. Sub-Adviser shall
-----------------------------------------
exercise due care and diligence and use the same skill and care in providing its
services hereunder as it uses in providing services to other investment
companies, but shall not be liable for any action taken or omitted by Sub-
Adviser in the absence of bad faith, willful misconduct, negligence or reckless
disregard of its duties. Notwithstanding the foregoing it is agreed that the
relative investment performance of the Fund shall not constitute a breach by the
Sub-Adviser of these obligations.
11. Reference to Sub-Adviser. Neither the Adviser nor any affiliate
------------------------
or agent of it shall make reference to or use the name of Sub-Adviser or any of
its affiliates, or any of their clients, except references concerning the
identity of and services provided by Sub-Adviser to the Fund, which references
shall not differ in substance from those included in the current registration
statement pertaining to the Fund, this Agreement and the Advisory Agreement
between the Adviser and M.S.D. & T. with respect to the Fund, in any advertising
or promotional materials without the prior approval of Sub-Adviser, which
approval shall not be unreasonably withheld or delayed. The Adviser hereby
agrees to make all reasonable efforts to cause M.S.D. & T. and any affiliate
thereof to satisfy the foregoing obligation.
12. Duration and Termination. Unless sooner terminated, this
------------------------
Agreement shall continue until July 20, 1997 and thereafter shall continue
automatically for successive annual periods, provided such continuance is
specifically approved at least annually by M.S.D. & T.'s Board of Directors or
vote of the lesser of (a) 67% of the shares of the Fund represented at a meeting
if holders of more than 50% of the outstanding shares of the Fund are present in
person or by proxy or (b) more than 50%
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<PAGE>
of the outstanding shares of the Fund, provided that in either event its
continuance also is approved by a majority of M.S.D. & T.'s Directors who are
not "interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This Agreement is terminable at any time without penalty, on
60 days' notice, by Adviser, Sub-Adviser or by M.S.D. & T.'s Board of Directors
or by vote of the lesser of (a) 67% of the shares of the Fund represented at a
meeting if holders of more than 50% of the outstanding shares of the Fund are
present in person or by proxy or (b) more than 50% of the outstanding shares of
the Fund. This Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
13. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement shall be
effective with respect to the Fund until approved by the vote of a majority of
the outstanding voting securities of the Fund.
14. Notice. Any notice, advice or report to be given pursuant to
------
this Agreement shall be delivered or mailed:
To Sub-Adviser at:
-----------------
125 S. Wacker Drive
Suite 300
Chicago, IL 60606
To the Adviser at:
-----------------
Two Hopkins Plaza
Baltimore, MD 21201
To M.S.D. & T. at:
-----------------
Two Hopkins Plaza
Baltimore, MD 21201
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and shall be governed by
Maryland law.
-7-
<PAGE>
16. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
MERCANTILE-SAFE DEPOSIT & TRUST
COMPANY
Attest:
/s/ Kevin J. Dachille By:/s/ David L. Donabedian
- --------------------- ----------------------------
CASTLEINTERNATIONAL ASSET
MANAGEMENT LIMITED
Attest:
____________________ By:/s/ Douglas B. Waggoner
----------------------------
Douglas B. Waggoner
Managing Director
-8-
<PAGE>
Exhibit 9(c)
M.S.D. & T. FUNDS, INC.
TRANSFER AGENCY AGREEMENT
-------------------------
Agreement dated November 30, 1995 between M.S.D. & T. FUNDS, INC., a
Maryland corporation (the "Company"), and BISYS FUND SERVICES OHIO, INC., an
Ohio corporation (the "Transfer Agent").
WHEREAS, the Company is registered as an open-end, diversified,
management investment company under the Investment Company Act of 1940, as
amended ("the 1940 Act");
WHEREAS, the Company is authorized to issue shares of common stock in
separate series and classes representing interests in separate portfolios of
securities and other assets;
WHEREAS, the Company is currently authorized to issue two classes of
shares, i.e., Institutional Shares and AFBA Five Star Shares, in each of two
series, i.e., the Value Equity Fund and Intermediate Fixed Income Fund
(individually a "Portfolio" and collectively the "Portfolios"); and
WHEREAS, the Company desires to retain the Transfer Agent to serve as
transfer agent, registrar and dividend disbursing agent for the AFBA Five Star
shares of common stock in the Portfolios and the Transfer Agent is willing to
furnish such transfer agency, registrar, and dividend disbursing agency
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and intending to be legally bound hereby, it is agreed between
the parties hereto as follows:
1. Appointment. The Company hereby appoints the Transfer Agent to
-----------
serve as transfer agent, registrar and dividend disbursing agent for the Company
for the AFBA Five Stare Shares ("shares") of the Portfolios on the terms and for
the period set forth in this Agreement. The Transfer Agent accepts such
respective appointments and agrees to perform the services and duties set forth
in Section 4 below in return for the compensation, if any, provided in Section 5
below. In the event that the Company establishes additional series or classes
other than the shares of the Portfolios covered by this Agreement with respect
to which it desires to retain the Transfer Agent to serve as transfer agent,
registrar, and dividend disbursing agent hereunder, the Company shall notify the
Transfer Agent in writing, whereupon such portfolio shall become a Portfolio
hereunder and shall be subject to the provisions of this
<PAGE>
Agreement to the same extent as the Portfolios (except to the extent that said
provisions, including the compensation payable on behalf of such new Portfolio,
may be modified in writing by the Company and Transfer Agent at the time).
2. Delivery of Documents. The Company has furnished the Transfer
---------------------
Agent with copies, properly certified or authenticated, of each of the following
documents and will deliver to it all future amendments and supplements, if any:
a. The Company's Articles of Incorporation, filed with the
Maryland State Department of Assessments and Taxation on February 23, 1989,
as amended and supplemented (the "Charter,");
b. The Company's By-Laws, as amended ("ByLaws");
c. Resolutions of the Company's Board of Directors authorizing
the execution and delivery of this Agreement;
d. The Company's most recent amendment to its Registration
Statement under the Securities Act of 1933, as amended (the "1933 Act"), and
under the 1940 Act on Form N-1A as filed with the Securities and Exchange
Commission (the "Commission") relating to the shares of the Portfolios (the
Registration Statement, as presently in effect and as amended or supplemented
from time to time, is herein called the "Registration Statement");
e. Two copies of the Company's most recent Prospectuses and
Statements of Additional Information relating to the shares of the Portfolios
and all amendments and supplements thereto (such Prospectuses and Statements of
Additional Information and supplements thereto, as presently in effect and as
from time to time amended and supplemented, are herein called the
"Prospectuses");
f. The Company's Service Plan for the shares, and related form
of Servicing Agreement;
g. The following agreements of the Company: the Advisory
Agreement with the Mercantile-Safe Deposit & Trust Company dated
November 13, 1990 with respect to the Portfolios; the Administration Agreement
with Mercantile-Safe Deposit & Trust Company dated May 28, 1993; the
Distribution Agreement with The Winsbury Company Limited Partnership dated
October 1, 1993; and the Custody Agreement with The Fifth Third Bank (the
"Custodian") dated May 28, 1993;
h. The Company agrees to provide a copy of the Company's most
recent Articles Supplementary to its Charter as
-2-
<PAGE>
filed with the State Department of Assessments and Taxation of Maryland as to
the number of shares authorized in each Portfolio;
i. Before entering into a transaction regulated by the Commodity
Futures Trading Commission ("CFTC"), a copy of either (i) a filed notice of
eligibility to claim the exclusion from the definition of "commodity pool
operator" contained in Section 2(s)(1)(A) of the Commodity Exchange Act ("CEA")
that is provided in Rule 4.5 under the CEA, together with all supplements as are
required by the CFTC, or (ii) a letter which has been granted the Company by the
CFTC which states that the Company will not be treated as a "pool" as defined in
Section 4.10(d) of the CFTC's General Regulations, or (iii) a letter which has
been granted the Company by the CFTC which states that the CFTC will not take
any enforcement action if the Company does not register as a "commodity pool
operator"; and
j. Resolutions identifying all officers of the Company who are
authorized to instruct the Transfer Agent in all matters.
3. Authorized Shares. The Company is authorized to issue (i)
-----------------
500,000,000 shares representing interests in the Value Equity Fund, and (ii)
500,000,000 shares representing interests in the Intermediate Fixed Income Fund,
each with par value of $.001 per share. The Transfer Agent shall record issues
of all shares and shall notify the Company in case any proposed issue of shares
by the Company shall result in an over-issue as defined by Section 8-104(2) of
Article 8 of the Maryland Commercial Law Article. In case any issue of shares
would result in such an over-issue, the Transfer Agent shall refuse to issue
said shares and shall not countersign and issue certificates (if any) for such
shares.
4. Services.
--------
a. The Transfer Agent shall perform for the Company the
services set forth in Appendix A hereto.
b. The Transfer Agent also agrees to perform for the Company
such special services incidental to the performance of the services enumerated
herein as agreed to by the parties from time to time. The Transfer Agent shall
perform such additional services as are provided on an amendment to Appendix A
hereof, in consideration of such fees as the parties hereto may agree.
c. The Transfer Agent may, in its discretion and upon thirty
(30) days' prior written notice to the Company, appoint in writing other parties
qualified to perform transfer agency services reasonably acceptable to the
Company (a "SubTransfer Agent") to carry out some or all of its responsibilities
-3-
<PAGE>
under this Agreement with respect to a Portfolio; provided, however, that the
-------- -------
Sub-Transfer Agent shall be the agent of the Transfer Agent and not the agent of
the Company or such Portfolio, and that the Transfer Agent shall be fully
responsible for the acts of such Sub-Transfer Agent and shall not be relieved of
any of its responsibilities hereunder by the appointment of such Sub-Transfer
Agent.
5. Fees and Expenses. There shall not be initially any fees payable
-----------------
by the Company to the Transfer Agent for the services to be provided by the
Transfer Agent under this Agreement. In addition, the Company shall not be
obligated initially to reimburse the Transfer Agent for its out-of-pocket
expenses in providing services hereunder.
6. Instructions.
------------
a. Whenever the Transfer Agent is requested or authorized to take
action hereunder pursuant to instructions from a shareholder, or a properly
authorized agent of a shareholder ("shareholder's agent"), concerning an account
in a Portfolio, the Transfer Agent shall be entitled to rely upon instructions
by letter, telephone or other instrument or communication, provided the Transfer
--------
Agent has followed its procedures which were designed to provide reasonable
assurance that the instructions are genuine and were properly made, signed or
authorized by an officer or other authorized agent of the Company or by the
shareholder or shareholder's agent, as the case may be, and shall be entitled to
receive as conclusive proof of any fact or matter required to be ascertained by
it hereunder a certificate signed by an officer of the Company or any other
person authorized by the Company's Board of Directors or by the shareholder or
shareholder's agent, as the case may be.
b. As to the services to be provided hereunder, the Transfer
Agent may rely conclusively upon the terms of the Prospectuses of the Company
relating to the shares of the Portfolios to the extent that such services are
described therein unless the Transfer Agent receives written instructions to
the contrary in a timely manner from the Company.
7. Records.
-------
a. The Transfer Agent shall keep and maintain on behalf of the
Company all books and records which the Company or the Transfer Agent is, or may
be, required to keep and maintain pursuant to any applicable statutes, rules and
regulations, including without limitation Rules 31a-1 and 31a-2 under the 1940
Act, relating to the maintenance of books and records in connection with the
services to be provided hereunder. The Transfer Agent further agrees that all
such books and records shall be the property of the Company or its authorized
-4-
<PAGE>
representative and to make such books and records available for inspection by
the Company or its authorized representative or by the Commission at reasonable
times and otherwise to keep confidential all books and records and other
information relative to the Company and its shareholders, except when requested
to divulge such information by duly constituted authorities or court process, or
requested by a shareholder or shareholder's agent with respect to information
concerning an account as to which such shareholder has either a legal or
beneficial interest or when requested by the Company or its authorized
representative, the shareholder, or shareholder's agent, or the dealer of record
as to such account.
b. The Transfer Agent agrees to surrender promptly upon the
Company's demand, all books, records and files maintained pursuant to this
Agreement (or copies of any such books, records and files needed by the Transfer
Agent in the performance of its duties or for its legal protection). Upon the
reasonable request of the Company, copies of any such books, records and files
shall be provided by the Transfer Agent to the Company or the Company's
authorized representative at the Company's expense.
8. Reports. The Transfer Agent will furnish to the Company (and its
-------
counsel upon request) and to its properly authorized auditors, investment
advisers, custodians, examiners, distributors, dealers, underwriters, salesmen,
insurance companies and others designated by the Company in writing, such
reports at such times as are prescribed in Appendix B attached hereto, or as
subsequently agreed upon by the parties pursuant to an amendment to Appendix B.
9. Rights of Ownership. All computer programs and procedures
-------------------
developed to perform services required to be provided by the Transfer Agent
under this Agreement are the property of the Transfer Agent. All records and
other data except such computer programs and procedures are the exclusive
property of the Company, and all such other records and data will be furnished
to the Company in appropriate form as soon as practicable after termination of
this Agreement for any reason.
10. Cooperation with Auditors. The Transfer Agent shall cooperate
-------------------------
with the Company's independent auditors and shall take all reasonable action in
the performance of its obligations under this Agreement to assure that the
necessary information is made available to such accountants for the expression
of their opinion as such may be required from time to time by the Company.
11. Confidentiality. The Transfer Agent agrees on behalf of itself
---------------
and its employees to treat confidentially and as the proprietary information of
the Company all records and other information relative to the Company and its
prior, present or
-5-
<PAGE>
potential shareholders and relative to the distributor and its prior, present or
potential customers, and not to use such records and information for any purpose
other than performance of its responsibilities and duties hereunder; provided,
--------
however, that upon notification to and written approval from the Company, which
- -------
approval shall not be unreasonably withheld, the Transfer Agent may divulge such
information in those instances where the Transfer Agent may be exposed to civil
or criminal contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, or when so requested
by the Company.
12. Equipment Failures. In the event of equipment failures beyond
------------------
the Transfer Agent's control, the Transfer Agent shall, at no additional expense
to the Company, take reasonable steps to minimize service interruptions but
shall have no liability with respect thereto. The Transfer Agent shall enter
into and shall maintain in effect with appropriate parties one or more
agreements making reasonable provision for emergency use of electronic data
processing equipment to the extent appropriate equipment is available.
13. Right to Receive Advice.
-----------------------
a. Advice of Company. If the Transfer Agent shall be in doubt
-----------------
as to any action to be taken or omitted by it, it may request, and shall
receive, from the Company and its counsel directions or advice.
b. Advice of Counsel. If the Transfer Agent shall be in doubt
-----------------
as to any question of law involved in any action to be taken or omitted by the
Transfer Agent, it may request advice at its own cost from counsel of its own
choosing (who may be counsel for the adviser, the custodian, the distributor, a
service organization, the Company or the Transfer Agent, at the option of the
Transfer Agent).
c. Conflicting Advice. In case of conflict between directions or
------------------
advice received by the Transfer Agent pursuant to subparagraph (a) of this
paragraph and advice received by the Transfer Agent pursuant to subparagraph (b)
of this paragraph, the Transfer Agent shall be entitled to rely on and follow
the advice received pursuant to the latter provision alone.
d. Protection of Transfer Agent. The Transfer Agent shall be
----------------------------
protected in any action or inaction which it takes in reliance on any directions
or advice received pursuant to subparagraphs (a) or (b) of this paragraph which
the Transfer Agent, after receipt of any such directions or advice, reasonably
and in good faith believes to be consistent with such directions or advice.
However, nothing in this paragraph shall be construed
-6-
<PAGE>
as imposing upon the Transfer Agent any obligation (i) to seek such directions
or advice when received, unless, under the terms of another provision of this
Agreement, the same is a condition to the Transfer Agent's properly taking or
omitting to take such action. Nothing in this subparagraph shall excuse the
Transfer Agent when an action or omission on the part of the Transfer Agent
constitutes willful misfeasance, bad faith, negligence or reckless disregard by
the Transfer Agent of its duties under this Agreement.
14. Compliance with Governmental Rule and Regulations. The Company
-------------------------------------------------
assumes full responsibility for insuring that the contents of the Prospectuses
comply with all applicable requirements of the 1933 Act, the 1940 Act, the CEA
and any laws, rules and regulations of governmental authorities having
jurisdiction, except to the extent that the contents were based upon information
provided by the Transfer Agent, administrator or distributor to the Company.
15. Indemnification. The Company agrees to indemnify and hold the
---------------
Transfer Agent harmless from all taxes, charges, expenses, assessments, claims
and liabilities (including, without limitation, liabilities arising under the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the
1940 Act, the CEA, and any state and foreign securities and blue sky laws, all
as or as to be amended from time to time), including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from any
action or thing which the Transfer Agent takes or does or omits to take or do at
the request or on the direction of or in reliance on the advice of the Company,
provided that the Transfer Agent shall not be indemnified against any lability
to the Company or to its shareholders (or any expenses incident to such
liability) arising out of the Transfer Agent's negligent failure to perform its
duties under this Agreement.
16. Responsibility of Transfer Agent. The Transfer Agent shall be
--------------------------------
under no duty to take any action on behalf of the Company except as specifically
set forth herein or as may be specifically agreed to by the Transfer Agent in
writing. In the performance of its duties hereunder, the Transfer Agent shall
be obligated to exercise care and diligence and to act in good faith and to use
its best efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement. The Transfer Agent shall be responsible for its
own negligent failure to perform its duties under this Agreement, but to the
extent that duties, obligations and responsibilities are not expressly set forth
in this Agreement, the Transfer Agent shall not be liable for any act or
omission which does not constitute willful misfeasance, bad faith or negligence
on the part of the Transfer Agent or reckless disregard of such duties,
obligations and responsibilities. Without limiting the generality of the
-7-
<PAGE>
foregoing or of any other provision of this Agreement, the Transfer Agent in
connection with its duties under this Agreement shall not be under any duty or
obligation to inquire into and shall not be liable for or in respect of (a) the
validity or invalidity or authority or lack thereof of any advice, direction,
instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, if any, and which the Transfer Agent reasonably
believes to be genuine, or (b) delays or errors or loss of data occurring by
reason of circumstances beyond the Transfer Agent's control, including acts of
civil or military authority, national emergencies, labor difficulties, fire,
mechanical breakdown (except as provided in paragraph 13), flood or catastrophe,
acts of God, insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
17. Representations of the Transfer Agent. The Transfer Agent
-------------------------------------
represents and warrants that: (i) all requisite corporate proceedings have been
taken to authorize the Transfer Agent to enter into and to perform this
Agreement; (ii) the Transfer Agent has been in, and shall continue to be in,
substantial compliance with all provisions of law, including Section 17A(c) of
the 1934 Act, required in connection with the performance of its duties under
this Agreement; and (iii) the various procedures and systems which the Transfer
Agent has implemented with regard to safeguarding from loss or damage
attributable to fire, theft, or any other cause, the blank checks, records, and
other data of the Company and the Transfer Agent's records, data, equipment,
facilities and other property used in the performance of its obligations
hereunder are adequate and that it will make such changes therein from time to
time as are required for the secure performance of its obligations hereunder.
Should the Transfer Agent fail to be registered pursuant to Section 17A of the
1934 Act as a transfer agent at any time during this Agreement, the Company may
(notwithstanding Paragraph 19 hereof), on written notice to the Transfer Agent,
immediately terminate this Agreement.
18. Representations of the Company. The Company hereby represents
------------------------------
and warrants that: (i) The Company is an investment company registered under
the 1940 Act; (ii) all requisite corporate proceedings have been taken to
authorize the Company to enter into and to perform this Agreement; and (iii) the
Company shall promptly deliver to the Transfer Agent a written notice of any
change in the number of authorized shares as set forth in Section 3 hereof,
which notice shall be in the form of a copy of the Articles of Incorporation of
the Company or any amendments thereto affecting such change as certified by the
Secretary of State (or other appropriate official) of the state of organization.
19. Duration and Termination.
------------------------
-8-
<PAGE>
a. This Agreement shall become effective upon its execution as
of the date first written above and, unless sooner terminated as provided
herein, shall continue until September 30, 1998. Thereafter, if not terminated,
this Agreement shall continue automatically for successive terms of one year;
provided, however, that this Agreement may be terminated by the Company at any
- -------- -------
time, without the payment of any penalty, by vote of a majority of the entire
Board of Directors or a vote of a "majority of the outstanding voting
securities" of the Company, on 60-days' written notice to the Transfer Agent, or
by the Transfer Agent at any time, without the payment of any penalty, on 60-
days' written notice to the Company. This Agreement will automatically and
immediately terminate in the event of its assignment. (As used in this
Agreement, the terms majority of the outstanding voting securities," "interested
person" and "assignment" shall have the same meaning as such terms have in the
1940 Act.)
b. If the Transfer Agent, upon mutual agreement of the parties
hereto, continues to perform one or more of the services contemplated by this
Agreement after it has been terminated, the provisions of this Agreement,
including without limitation the provisions dealing with indemnification, shall
continue in full force and effect. The Transfer Agent shall be entitled to
collect from the Company the amount of all of the Transfer Agent's costs in
connection with the Transfer Agent's activities in effecting such termination,
including without limitation the delivery to the Company and/or its distributor
or investment adviser and/or other parties, of the Company's property, records,
instruments and documents, or any copies thereof. Subsequent to such
termination, the Transfer Agent, for a reasonable fee, will provide the Company
with reasonable access to any Company documents or records remaining in its
possession.
20. Amendment of this Agreement. No provision of this Agreement may
---------------------------
be changed, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, discharge
or termination is sought.
21. Notices. Notices of any kind to be given to the Company
-------
hereunder by the Transfer Agent shall be in writing and shall be duly given if
mailed or delivered to the Company c/o Mercantile-Safe Deposit & Trust Company,
Two Hopkins Plaza, Baltimore, Maryland 21201, Attention: Linda A. Durkin, with
a copy to Philadelphia National Bank Building, 1345 Chestnut Street, Suite 1100,
Philadelphia Pennsylvania 19107-3496, Attention: W. Bruce McConnel, III,
Secretary, or at such other address or to such individual as shall be so
specified by the Company to the Transfer Agent. Notices of any kind to be given
to the Transfer Agent hereunder by the Company shall be in writing and shall be
duly given if mailed or delivered to 1900 E.
-9-
<PAGE>
Dublin-Granville Road, Columbus, Ohio 43229, Attention: Nancy Converse, or at
such other address or to such other individual as shall be so specified by the
Transfer Agent to the Company.
22. Further Actions. Each party agrees to perform such further acts
---------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
23. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24. Miscellaneous. This Agreement embodies the entire agreement and
-------------
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. This Agreement shall be governed by Maryland law. If any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this Agreement shall not be affected thereby.
This Agreement shall be binding and shall insure to the benefit of the parties
hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the day and year first
above written.
M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
------------------------------
Leslie B. Disharoon, President
BISYS FUND SERVICES OHIO, INC.
By: /s/ Stephen G. Mintos
------------------------------
Stephen G. Mintos,
Executive Vice President
-10-
<PAGE>
Appendix A
----------
to the Transfer Agency Agreement
between
M.S.D. & T. Funds, Inc. and BISYS Fund Services Ohio, Inc.
----------------------------------------------------------
TRANSFER AGENCY SERVICES
------------------------
1. Shareholder Transactions
------------------------
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend option,
taxpayer identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10 under the Securities
Exchange Act of 1934, as amended, and in accordance with Section 8-408
of the Maryland Commercial Law Article, as amended.
d. Issue periodic statements for shareholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new shares
through dividend reinvestment.
g. Provide timely notification of Company activity, and such other
information as may be agreed upon from time to time between the
Transfer Agent and the Custodian, to the Fund or the Custodian.
h. Maintain Automated Clearing House interface capabilities.
2. Shareholder Services
---------------------
a. Make information available to shareholder servicing unit and other
remote access units regarding trade date, shareholder price, current
holdings, yields, and dividend information.
b. Produce detailed history of transactions through duplicate or special
order statements upon request.
c. Provide mailing labels for distribution of, or if so requested by the
Company arrange for the mailing of,
<PAGE>
financial reports, prospectuses, proxy statements, or marketing
material to current shareholders.
d. Provide toll-free lines for direct shareholder use, plus customer
liaison staff with on-line inquiry capacity.
e. Provide voice response unit.
3. Compliance Reporting
--------------------
a. Provide reports, or information necessary for reports, to the
Securities and Exchange Commission, the National Association of
Securities Dealers and the States in which the Fund is registered.
b. Prepare and distribute appropriate Internal Revenue Service forms for
corresponding Portfolio and shareholder income and capital gains.
c. Issue tax withholding reports to the Internal Revenue Service and, if
applicable, to any states.
4. Shareholder Account Maintenance
-------------------------------
a. Maintain all shareholder records for each account in the Company.
b. Issue customer statements on scheduled cycle, providing duplicate
second and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
-2-
<PAGE>
Appendix B
----------
to the Transfer Agency Agreement
between
M.S.D. & T. Funds, Inc. and BISYS Fund Services Ohio, Inc.
----------------------------------------------------------
REPORTS
I. Daily Shareholder Activity Journal
II. Daily Portfolio Activity Summary Report
A. Beginning Balance
B. Dealer Transactions
C. Shareholder Transactions
D. Reinvested Dividends
E. Exchanges
F. Adjustments
G. Ending Balance
III. Daily Wire and Check Registers
IV. Monthly Dealer Processing Reports
V. Monthly Dividend Reports
VI. Monthly Reports
A. Number of new accounts by Portfolio
B. Number of closed accounts by Portfolio
C. Number of new customers
D. Number of lost customers
E. Number of 800 calls
VII. Sales Data Reports for Blue Sky Registration
<PAGE>
VIII. Annual report by independent auditors concerning the Transfer
Agent's shareholder system and internal accounting control
systems to be filed with the Securities and Exchange Commission
pursuant to Rule 17Ad-13 of the Securities Exchange Act of 1934,
as amended.
-2-
<PAGE>
Exhibit 11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the following with respect to Post-Effective Amendment No. 17
pursuant to the Securities Act of 1933 and the Investment Company Act of 1940,
respectively, as amended, to the Registration Statement on Form N-1A of M.S.D. &
T. Funds, Inc. (File Nos. 33-27491 and 811-5782):
1. The incorporation by reference of our report dated July 18, 1996 into
the Prospectuses relating to the Prime Money Market Fund, the
Government Money Market Fund, the Tax-Exempt Money Market Fund, the
Tax-Exempt Money Market Fund (Trust), and the Institutional Shares of
the Value Equity Fund, the International Equity Fund, the Intermediate
Fixed Income Fund, and the Maryland Tax-Exempt Bond Fund.
2. The incorporation by reference of our report dated July 18, 1996
accompanying the financial statements relating to the Prime Money
Market Fund, the Government Money Market Fund, the Tax-Exempt Money
Market Fund, the Tax-Exempt Money Market Fund (Trust), and the
Institutional Shares of the Value Equity Fund, the International
Equity Fund, the Intermediate Fixed Income Fund, and the Maryland Tax-
Exempt Bond Fund incorporated by reference in the Statement of
Additional Information for each Fund.
3. The incorporation by reference of our report dated July 18, 1996 into
the Prospectus relating to the AFBA Five Star Shares of the Value
Equity Fund and the Intermediate Fixed Income Fund.
4. The incorporation by reference of our report dated July 18, 1996
accompanying the financial statements relating to the Value Equity
Fund and the Intermediate Fixed Income Fund incorporated by reference
in the Statement of Additional Information for the AFBA Five Star
Shares.
5. The reference to our Firm under the heading "Financial Highlights" in
the applicable Prospectuses.
6. The reference to our Firm under the heading "Independent Accountants"
and "Financial Statements" in the applicable Statements of Additional
Information.
/s/Coopers & Lybrand L.L.P.
- ---------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 31, 1996
<PAGE>
Exhibit 11(b)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the captions "Management of the Company" and "Counsel" in the
Statements of Additional Information included in Post-Effective Amendment No. 17
to the Registration Statement (File Nos. 33-27491 and 811-5782) on Form N-1A of
M.S.D. & T. Funds, Inc. under the Securities Act of 1933 and the Investment
Company Act of 1940. This consent does not constitute a consent under Section 7
of the Securities Act of 1933, and in consenting to the use of our name and the
references to our firm under such captions we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under Section 7 or the rules and regulations
of the Securities and Exchange Commission thereunder.
/s/ Drinker Biddle & Reath
----------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
July 31, 1996
