<PAGE>
As filed with the Securities and Exchange Commission on March 14, 1997
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. 18 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 19 [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)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) 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.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933(1)
<TABLE>
<CAPTION>
Title of Amount of Proposed Proposed Amount
Securities Shares Maximum Maximum of
Being Being Offering Aggregate Registration
Registered Registered Price Per Share Offering Price Fee
- --------------- ---------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Shares of
Common Stock 81,063,691 NAV(2) $73,641,687 $0
</TABLE>
________________
(1) Registrant had actual aggregate redemptions of $1,254,117,358
(1,209,382,446 shares) for its fiscal year ended May 31, 1996; has used
$1,180,475,671 (1,128,318,755 shares) of available redemptions for
reductions pursuant to Rule 24f-2(c) under the Investment Company Act of
1940, as amended (the "1940 Act") and has previously used no available
redemptions for reductions in the filing fee pursuant to Rule 24e-2(a)
under the 1940 Act during the current year. Registrant elects to use
redemptions in the aggregate amount of $73,641,687 (81,063,691 shares) for
such reductions in its current amendment. No fee is required.
(2) The proposed maximum offering price per share is net asset value. Inasmuch
as the EDGAR submission header requires an actual dollar amount for the
price per share, the figure of $14.01 represents the highest average
redemption price of the portfolios whose shares were redeemed.
Registrant has previously registered an indefinite number of securities
under the Securities Act of 1933 pursuant to Rule 24f-2 under the 1940 Act.
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.
<PAGE>
This Post-Effective Amendment No. 18 to the Registrant's Registration
Statement on Form N-1A is being filed to add a new portfolio, the Diversified
Real Estate Fund, and to register shares pursuant to Rule 24e-2 under the
Investment Company Act of 1940, as amended. Accordingly, the Prospectuses and
Statements of Additional Information for the Registrant's Prime Money Market,
Government Money Market, Tax-Exempt Money Market, Tax-Exempt Money Market
(Trust), Value Equity, International Equity, Intermediate Fixed Income,
International Bond and Maryland Tax-Exempt Bond Funds are not included in this
filing.
<PAGE>
M.S.D. & T. FUNDS, INC.
DIVERSIFIED REAL ESTATE FUND
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 485(a)
under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-1A Item Number Location
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
<S> <C>
1. Cover Page........................... Cover Page
2. Synopsis............................. Expense Summary
3. Condensed Financial Information...... 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;
Investing in the Fund; Shareholder
Services
5A. Management's Discussion of Fund
Performance......................... Not Applicable
6. Capital Stock and.................... Investing in the Fund; Dividends
Other Securities.................... and Distributions; Tax Information;
Other Information Concerning the
Company and Its Shares; Shareholder
Services; Miscellaneous
7. Purchase of Securities Being Offered. Investing in the Fund
8. Redemption or Repurchase............. Investing in the Fund
9. Pending Legal Proceedings............ Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 14, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
M.S.D. & T. FUNDS, INC.
. DIVERSIFIED REAL ESTATE FUND
PROSPECTUS
June ____, 1997
<PAGE>
M.S.D. & T. FUNDS, INC.
PROSPECTUS
FOR THE
DIVERSIFIED REAL ESTATE FUND
June ____, 1997
M.S.D.& T. Funds, Inc. (the "Company") is a no-load, open-end management
investment company offering in this Prospectus shares of its Diversified Real
Estate Fund (the "Fund"). The Fund's investment objective is to seek a high
level of current income and long-term capital growth. The Fund attempts to
achieve this objective through investments primarily in securities of companies
principally engaged in the real estate business.
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
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. IN
ADDITION, THE DIVIDENDS PAID BY THE FUND WILL GO UP AND DOWN. MERCANTILE-SAFE
DEPOSIT AND TRUST COMPANY SERVES AS INVESTMENT ADVISER AND ADMINISTRATOR TO THE
FUND, IS PAID FEES FOR ITS SERVICES, AND IS NOT AFFILIATED WITH BISYS FUND
SERVICES, THE FUND'S DISTRIBUTOR.
This Prospectus describes concisely the information about the Fund that you
should know before investing. Please read and keep it for future reference.
More information about the Fund is contained in a Statement of Additional
Information dated June ____, 1997 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...................................................... 1
INVESTMENT OBJECTIVE, POLICIES AND RISKS............................. 2
FUNDAMENTAL LIMITATIONS.............................................. 10
INVESTING IN THE FUND................................................ 10
SHAREHOLDER SERVICES................................................. 16
DIVIDENDS AND DISTRIBUTIONS.......................................... 18
TAX INFORMATION...................................................... 19
MANAGEMENT OF THE COMPANY............................................ 20
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES.............. 22
PERFORMANCE REPORTING................................................ 23
MISCELLANEOUS........................................................ 24
</TABLE>
- ---------------------------------------------------------------
IF YOU HAVE QUESTIONS
For current yield, purchase and redemption information, call
1-800-551-2145.
- ---------------------------------------------------------------
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Fund. Annual Fund Operating Expenses are paid out of the 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 estimated operating expenses for
the Fund's shares. An example based on this information is also provided.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ----------------------------------------------
<S> <C>
Management Fees (after fee waivers)........... .43%
Other Expenses (after fee waivers)
(includes administration, custody
and transfer agency, and miscellaneous
other charges)........................... .57%
Total Fund Operating Expenses (after ----
fee waivers).............................
1.00%
====
</TABLE>
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:
<TABLE>
<S> <C>
1 Year....... $10
3 Years...... $32
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR
RATES OF RETURN. THE FUND IS NEW AND THE ABOVE FIGURES ARE ESTIMATES FOR THE
FIRST TWELVE MONTHS OF OPERATIONS ONLY. 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 Fund expects to
incur during its first twelve months of operations. Absent fee waivers,
Management Fees, Other Expenses and Total Fund Operating
<PAGE>
Expenses, stated as a percentage of the Fund's average daily net assets, would
be .80%, .57% and 1.37%, respectively.
The investment adviser is under no obligation to waive fees or reimburse
expenses, but has informed the Company that it presently intends to waive fees
and/or reimburse expenses during the Fund's first twelve months of operations.
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.
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 a high level of current income
and long-term capital growth. The Fund attempts to achieve this objective
through investments primarily in equity securities of companies principally
engaged in the real estate business. Under normal market and economic
conditions, the Fund will invest at least 65% of its total assets in such
securities. Companies principally engaged in the real estate business include
real estate investment trusts ("REITs"), real estate developers, mortgage
lenders and servicers, construction companies and building material suppliers.
A company is "principally engaged" in the real estate business if, at the time
of investment, the Adviser reasonably believes that such company derives at
least 50% of its revenues from the ownership, construction, financing,
management or sale of commercial, industrial or residential real estate, or that
such company has at least 50% of its assets in such real estate. The Fund may
invest up to 10% of its total assets in the securities of foreign companies
principally engaged in the real estate business. See "Risk Factors -- Risks
Associated with Foreign Securities" below.
It is expected that the Fund will invest a majority of its assets in shares
of REITs during normal market and economic conditions. REITs pool investors'
funds for investment primarily
-2-
<PAGE>
in income-producing real estate or real estate related loans or interests.
Unlike corporations, REITs do not have to pay income taxes if they meet certain
requirements of the Internal Revenue Code of 1986, as amended (the "Code"). To
qualify, a REIT must distribute at least 95% of its taxable income to its
shareholders and receive at least 75% of that income from rents, mortgages and
sales of property. For additional tax information, see "Tax Information" below.
REITs can generally be classified as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income primarily from rental and lease payments.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Mortgage REITs make loans to commercial real estate
developers and derive their income primarily from interest payments on such
loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs. The Fund expects that a substantial portion of its investments in REITs
will be in equity and hybrid REITs.
Although the Fund expects to invest primarily in equity securities of
companies principally engaged in the real estate business, it may also invest in
preferred stocks, investment grade debt obligations (i.e., obligations rated in
one of the four highest rating categories assigned by a nationally recognized
statistical rating organization ("NRSRO") or deemed by the Adviser to be of
comparable quality), convertible securities (including bonds and preferred
stocks) and warrants.
During temporary defensive periods, the Fund may invest without limit in
money market instruments, high quality corporate debt securities and debt
securities issued by the U.S. Government, its agencies or instrumentalities,
without regard to whether the issuer is principally engaged in the real estate
business.
RISK FACTORS
. Market Risk. The Fund invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Fund is
subject to market risk. That is, the possibility exists that common stocks will
decline over short or even extended periods of time and both the U.S. and
certain foreign equity markets tend to be cyclical, experiencing both periods
when stock prices generally increase and periods when stock prices generally
decrease.
. Interest Rate Risk. To the extent that the Fund invests in fixed income
securities, its holdings of such securities are sensitive to changes in interest
rates and the interest rate
-3-
<PAGE>
environment. Generally, the prices of bonds and debt securities fluctuate
inversely to interest rate changes.
. Real Estate Industry Risk. Although the Fund will not invest in real
estate directly, it is subject to the same risks that are associated with the
direct ownership of real estate. In general, real estate values are affected by
a variety of factors, including supply and demand for properties, the economic
health of the country and of different regions and the strength of specific
industries renting properties. An equity REIT's performance ultimately depends
on the types and locations of the properties it owns and on how well it manages
its properties. For instance, rental income could decline because of extended
vacancies, increased competition from nearby properties, tenants' failure to pay
rent, or incompetent management. Property values could decrease because of
overbuilding, environmental liabilities, uninsured damages caused by natural
disasters, a general decline in the neighborhood, rent controls, losses due to
casualty or condemnation, increases in property taxes and/or operating expenses,
or changes in zoning laws.
Changes in interest rates could affect the performance of REITs. In
general, during periods of high interest rates, REITs may lose some of their
appeal to investors who may be able to obtain higher yields from other income-
producing investments, such as long-term bonds. Higher interest rates may also
mean that it is more expensive to finance property purchases, renovations and
improvements, which could hinder a REIT's performance.
While equity REITs are affected by changes in the value of the underlying
properties they own, mortgage REITs are affected by changes in the value of the
properties to which they have extended credit. REITs may not be diversified and
are subject to the risks involved with financing projects. REITs may also be
subject to substantial cash flow dependency and self-liquidation. In addition,
REITs could possibly fail to qualify for tax-free pass-through of income under
the Code or to maintain their exemptions from registration under the Investment
Company Act of 1940, as amended (the "Investment Company Act").
Such factors may also adversely affect a borrower's or a lessee's ability
to meet its obligations to a REIT. In the event of a default by a borrower or
lessee, a REIT may experience delays in enforcing its rights as a mortgagee or
lessor and may incur substantial costs associated with protecting its
investments.
Under certain circumstances the Fund could own real estate directly as a
result of a default on debt securities it owns. If the Fund has rental income
or income from the direct disposition of real property, the receipt of such
income may adversely affect
-4-
<PAGE>
its ability to retain its tax status as a regulated investment company. See
"Tax Information" below.
. Risks Associated with Foreign Securities. There are risks and costs
involved in investing in securities of foreign issuers (including foreign
governments), which differ from 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.
. Risks Associated with Derivative Instruments. The Fund may purchase
certain "derivative" instruments as described below under various headings.
Derivative instruments are instruments that derive value from the performance of
underlying assets, interest rates or indices, and include, but are not limited
to, structured debt obligations (including collateralized mortgage obligations
and other types of mortgage-related securities, "stripped" securities and
various floating rate instruments).
Derivative instruments present, to varying degrees, market risk that the
performance of the underlying assets, interest 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 the 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.
-5-
<PAGE>
The Adviser will evaluate the risks presented by the derivative instruments
purchased by the 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 evaluations
will prove to be inaccurate or incomplete and, even when accurate and complete,
it is possible that the Fund will, because of the risks discussed above, incur
loss as a result of its investments in derivative instruments.
OTHER INVESTMENT POLICIES AND RELATED RISKS
. U.S. Government Obligations and Money Market Instruments. The 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.
The 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 Fund 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
Fund's total assets at the time of purchase. Taxable commercial paper purchased
by the Fund will be rated at the time of purchase within the highest rating
category assigned by an unaffiliated national statistical rating organization
("Rating Agency"). In addition, the 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. The 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, the Fund might have trouble
selling an
-6-
<PAGE>
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.
. Mortgage-Related Securities. The 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.
The yield characteristics of mortgage-related 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.,
mortgage 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 mortgage-related 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 securities under certain
market conditions. 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.
-7-
<PAGE>
. Repurchase Agreements and Reverse Repurchase Agreements. The 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 would 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.
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 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 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 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 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 and forward
commitment transactions for speculative purposes.
. Securities Lending. The 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
-8-
<PAGE>
standing and will only be made if the Adviser believes the income to be earned
from the loans justifies the risks.
. Other Investment Companies. The 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 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 one of its shareholders. 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, the Fund will not knowingly invest more than 15% of the
value of its net assets in illiquid securities. Illiquid securities include
repurchase agreements and time deposits that do not permit the 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 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 (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 the Fund during any period that qualified institutional buyers
were no longer interested in purchasing these restricted securities.
. Portfolio Turnover. The 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
and ultimately by its shareholders. Although the Fund cannot accurately predict
its annual portfolio turnover rate, it is not expected to exceed 50%.
-9-
<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. 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 this 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 any one industry,
except that the Fund may invest 25% or more of its total assets in one or more
issuers principally engaged in the real estate business.
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
borrowings exceed 5% of the Fund's total assets, the Fund will not make any
further 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 the
Fund's portfolio securities does not mean that the limitation has been violated.
INVESTING IN THE FUND
GETTING YOUR INVESTMENT STARTED
Investing in the Fund is quick and convenient. Shares of the Fund 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
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<PAGE>
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, including purchase orders accompanied by foreign or third party
checks or drafts.
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 Fund
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 Application . Make your check payable
and mail it along with a check to the Fund and mail it
payable to the Fund to: to the address at left.
M.S.D. & T. Funds, Inc.,
P.O. Box 8515, . Please include your
Boston, MA 02266-8515. account number on your
check.
To obtain a Purchase Application,
call 1-800-551-2415
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<PAGE>
- --------------------------------------------------------------------------------
BY WIRE . Before wiring funds, please . Instruct your bank to
call 1-800-551-2145 for wire Federal funds to:
complete wiring instructions. State Street Bank and
Trust Company, Boston,
Massachusetts, Bank
. Promptly complete a Purchase Routing No. 011-0000-28,
Application and forward it to M.S.D. & T. Deposit A/C
M.S.D. & T. Funds, Inc., P.O. Box No. 99046435.
8515, Boston, MA 02266-8515.
. Be sure to include your
name and your Fund
account number.
. The wire should
indicate that you are m
making a subsequent
purchase as opposed to
opening a new account.
Consult your 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 the
Fund is based upon net asset value per share. The 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 that are outstanding. This process is sometimes
referred to as "pricing" the Fund's shares.
The assets of the Fund are valued at market value or, if market quotes
cannot be readily obtained, at fair value as determined by the Adviser under the
supervision of the Company's Board of Directors. Debt securities held by the
Fund 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 Fund's Adviser, transfer
agent or custodian or the Exchange is closed.
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<PAGE>
The Fund currently observes 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.
Shares of the Fund 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 Fund's shares (the "Transfer Agent").
Purchase orders will be accepted by the Transfer Agent only on a day on which
the shares of the Fund are priced ("Business Day").
If you purchase shares of the 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 the Fund directly from 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.
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<PAGE>
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 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
(available only if you checked the need to provide the account name,
appropriate box on the Purchase account number, name of Fund and
Application) amount of redemption ($1,000 minimum
per transaction).
. 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
(available only if you checked the need to provide the account name,
appropriate box on the Purchase account number, name of Fund and
Application) amount of redemption.
. 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 THE SECTION
ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- --------------------------------------------------------------------------------
-14-
<PAGE>
. Explanation of Redemption Price. Redemption orders received in proper
form by the Transfer Agent are processed at their net asset value per share next
determined after receipt. 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 three 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 pay redemption
proceeds in readily marketable portfolio securities having a 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 the 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 $500 as a result of redemptions and
is not increased to at least $500 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
-15-
<PAGE>
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 choose 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 Fund may be purchased in connection with certain tax-
sheltered retirement plans, including individual retirement accounts. Shares
may also be purchased in connection with profit-sharing plans, section 401(k)
plans, money purchase
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<PAGE>
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
Shares of the Fund may be exchanged for 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.
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 Fund 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.
-17-
<PAGE>
Dollar Cost Averaging can be useful in investing in portfolios such as the Fund
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 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 distributions from the Fund are
automatically reinvested in shares of the Fund. You may elect, however, to have
your dividends and capital gains distributions automatically reinvested in
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 are derived from the Fund's net investment income and are declared and
paid quarterly. The Fund realizes capital gains whenever it sells securities
for a higher price than it paid for them. Distributions of such capital gains
are generally declared and paid annually.
Shares of the 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
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<PAGE>
you purchased your shares directly from the Company, your dividends and
distributions will be automatically reinvested in additional shares of the Fund
unless you notify the Company in writing that you wish to receive dividends and
distributions in cash.
TAX INFORMATION
As with any investment, you should consider the tax implications of an
investment in the Fund. The following briefly summarizes some of the important
tax considerations generally affecting the Fund and its shareholders. You
should consult your tax adviser with specific reference to your 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.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code. If the 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 the 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. (However, if a shareholder subsequently
recognizes a loss on a sale of shares held for one year or less, that loss will
be reclassified as a long-term, rather than a short-term, capital loss to the
extent of any capital gain distribution received on those shares.) All other
distributions, to the extent taxable, are taxed to shareholders as ordinary
income.
Dividends paid by the 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 dividends
attributable to distributions made by a REIT to the Fund. In addition,
distributions paid by REITs often include a "return of capital." The Code
requires a REIT to distribute at least 95% of its taxable income to investors.
In many cases, however, because of "non-cash" expenses such as property
-19-
<PAGE>
depreciation, an equity REIT's cash flow will exceed its taxable income. The
REIT may distribute this excess cash to offer a more competitive yield. This
portion of the distribution is deemed a return of capital, and is generally not
taxable to shareholders. However, when shareholders receive a return of
capital, the cost basis of their shares is decreased by the amount of such
return of capital. This, in turn, affects the capital gain or loss realized
when shares of the Fund are exchanged or sold. Therefore, a shareholder's
original investment in the Fund will be reduced by the amount of the return of
capital and capital gains included in a distribution if such shareholder elects
to receive distributions in cash (as opposed to having them reinvested in
additional shares of the Fund). Once a shareholder's cost basis is reduced to
zero, any return of capital is taxable as a capital gain.
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 recognized by a shareholder upon the
redemption, exchange or transfer of shares depending upon their tax basis and
their price at the time of redemption, exchange or transfer.
This is not an exhaustive discussion of applicable tax consequences, and
investors may wish to contact their tax advisers concerning investments in the
Fund. Dividends paid by the 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 the 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 of the Company is managed under the general supervision of the
Company's Board of Directors. The Statement
-20-
<PAGE>
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 Fund. Mercantile-Safe
Deposit and Trust Company ("Mercantile") serves as the Fund's 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 Fund's shares as its distributor, 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 Fund. The Fund's custodian is The Fifth Third Bank, located at 38
Fountain Square Plaza, Cincinnati, Ohio 45263. State Street Bank and Trust
Company, located at Two Heritage Drive, North Quincy, Massachusetts 02171,
serves as transfer and dividend disbursing agent for shares of the Fund.
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 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.
The Fund's portfolio manager is primarily responsible for the day-to-day
management of the Fund's investments. Robert M. Law is the Fund's portfolio
manager. Mr. Law oversees Mercantile's Institutional Real Estate Department and
is Chairman of Mercantile's Trust Real Estate Committee. Before joining
Mercantile in 1994, Mr. Law was a Senior Vice President at Maryland National
Bank, where he served as Division Manager of the bank's Real Estate Finance
Division.
ADMINISTRATOR
Mercantile also serves as the Fund's administrator and generally assists in
all aspects of its operation and administration, including maintaining the
Fund's 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.
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<PAGE>
EXPENSES
The Fund incurs certain expenses in order to support the services described
above, as well as other matters essential to the operation of the Fund.
Expenses are paid out of the 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 an
advisory fee, computed daily and paid monthly at the annual rate of .80% of the
Fund's average daily net assets.
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 Fund's average daily net assets.
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 expense 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 advisory and 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.
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 the Fund. 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
-22-
<PAGE>
regarding these other portfolios and share classes, 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.
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 the Fund's performance. You
may see references to these terms in newsletters, advertisements and shareholder
communications. These publications may also include comparisons of the 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.
. Aggregate total return reflects the total percentage change in
the value of an investment in the Fund over a specified measuring
period.
. Average annual total return represents the average annual
percentage change in the value of an investment in the 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 the Fund's return and are not
the same as actual annual results.
Both methods of calculating total return assume that during the
period you have reinvested Fund dividends and distributions in
additional Fund shares.
. Yield shows the rate of income the 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
-23-
<PAGE>
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 the 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.
Any fees charged by a Bank directly to your account in connection with an
investment in the Fund will not be included in the Fund's calculations of yield
and/or total return.
Performance quotations of the 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 the 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 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 Fund or (b) 67% or more of the shares of
the Fund present at a meeting if more than 50% of the outstanding shares of the
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 Fund.
If you have any questions concerning the Company or the Fund, 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 FUND'S STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED
-24-
<PAGE>
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 ITS
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-25-
<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:
MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY
Baltimore, Maryland
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 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.
-26-
<PAGE>
M.S.D. & T. FUNDS, INC.
DIVERSIFIED REAL ESTATE FUND
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 485(a)
under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-1A Item Number Location
- --------------------- --------
Part B Statement of Additional
- ------ Information Caption
-----------------------
<S> <C>
10. Cover Page.......................... Cover Page
11. Table of Contents................... Table of Contents
12. General Information and History..... Management of the Company;
Additional Information
Concerning Shares
13. Investment Objectives and
Policies........................... Investment Objective 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 Objective 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................ Not Applicable
</TABLE>
<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>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED
MARCH 14, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
ANY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE
A PROSPECTUS.
M.S.D. & T. FUNDS, INC.
Statement of Additional Information
for the
Diversified Real Estate Fund
June ____, 1997
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objective and Policies................ 3
Fundamental Limitations.......................... 12
Additional Purchase and Redemption Information... 14
Net Asset Value.................................. 15
Additional Information Concerning Taxes.......... 16
Management of the Company........................ 18
Independent Accountants.......................... 24
Counsel.......................................... 24
Additional Information Concerning Shares......... 25
Additional Performance Information............... 26
Miscellaneous.................................... 30
Appendix......................................... A-1
</TABLE>
This Statement of Additional Information is meant to be read in
conjunction with M.S.D. & T. Funds, Inc.'s Prospectus dated June ____, 1997 for
the Diversified Real Estate Fund (the "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 shares of the Fund should be made solely upon the information
contained herein. Copies of the Prospectus 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, OH 43219-3035. Capitalized terms used but not defined
herein have the same meanings as in the Prospectus.
<PAGE>
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
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. In
addition, the dividends paid by the fund will go up and down. Mercantile-Safe
Deposit and Trust Company serves as investment adviser and administrator to the
Fund, is paid fees for its services, and is not affiliated with BISYS Fund
Services, the Fund's 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. This Statement of Additional
Information relates to shares of the Fund. The Company also offers other
investment portfolios which are described in separate Prospectuses and
Statements of Additional Information. For information concerning these other
portfolios contact the Fund's distributor at the telephone number stated on the
cover page of this Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
- ---------------------------------
The investment objective of the Fund is described in the Fund's
Prospectus. The following information supplements the description of the
investment objective and policies as set forth in the Fund's 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 Fund.
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.
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, 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.
The 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.
The 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.
-3-
<PAGE>
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 Fund 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 the 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 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 Fund. The Board of Directors
will periodically review the commissions paid by the Fund to consider whether
the commissions paid over representative periods of time appear to be reasonable
in relation to the benefits inuring to the Fund. 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, the 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 Fund 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 Fund. When a purchase or sale of the
same security is made at substantially the same time on behalf of the 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 the 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 Fund with those to be sold or purchased for such other
accounts in order to obtain the best execution.
-4-
<PAGE>
The Fund will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with the Adviser, CastleInternational Asset Management
Limited (sub-adviser to the Company's International Equity Fund), 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 Fund 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 Company's investment portfolios, including the Fund, 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, none of the Company's
investment portfolios held any such securities.
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 the
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, 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 the 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 Fund may experience a high
portfolio turnover rate as a result of its 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. A higher portfolio turnover rate can
result in a corresponding increase in brokerage
-5-
<PAGE>
commissions and other transaction costs which must be borne by the Fund and
ultimately by its shareholders.
The portfolio turnover rate for the Fund 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 Fund
to receive favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions for the Fund, and the 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 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.
Variable and Floating Rate Instruments
--------------------------------------
With respect to the variable and floating rate instruments described
in the Fund's 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 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
-6-
<PAGE>
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 investment policies of the 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 Fund's investments
in the obligations of foreign banks and foreign branches of U.S. banks may
subject the Fund 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 U.S. banks. The
Fund 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.
Convertible Securities
----------------------
Convertible securities which may be purchased by the 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
-7-
<PAGE>
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.
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 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 Fund
purchases mortgage-related or mortgage-backed securities at a premium,
-8-
<PAGE>
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 its Prospectus, the Fund may enter into repurchase
agreements. The repurchase price under repurchase agreements generally is equal
to the price paid by the 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 Fund's Custodian or registered in the name of the
Fund 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 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 Fund under the 1940 Act.
Reverse Repurchase Agreements
-----------------------------
Whenever the 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 Fund 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 the 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.
-9-
<PAGE>
When-Issued Purchases and Forward Commitments
---------------------------------------------
As stated in its Prospectus, the Fund may purchase securities on a
firm commitment or "when-issued" basis and the Fund may 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 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
-10-
<PAGE>
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 its investment objective and policies, the Fund may
invest in securities issued by other investment companies within the limits
prescribed by the 1940 Act. The 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, the 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 the Fund bears in connection with its own operations.
Lending Portfolio Securities
----------------------------
When the Fund lends its securities, it continues to receive interest
or dividends on the securities loaned and also earns income on the loans. Any
cash collateral received by the 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
Fund may loan, fees attributable to securities lending activities are subject to
certain limits under the Internal Revenue Code of 1986, as amended (the "Code").
Rights and Warrants
-------------------
The 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
-11-
<PAGE>
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.
FUNDAMENTAL LIMITATIONS
- -----------------------
The Fund is subject to the following fundamental limitations, which
may be changed only by a vote of the holders of a majority of the Fund's
outstanding shares (as defined under "Miscellaneous").
The Fund may not:
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 the 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 the Fund, does
not exceed 10% of the value of the Fund's total assets.
2. Purchase any securities which would cause 25% or more of the
value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in any one industry, except that the Fund may invest 25% or more of the value of
its total assets in one or more issuers principally engaged in the real estate
business, and 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).
-12-
<PAGE>
3. Borrow money or issue senior securities, except that the 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. The Fund will not purchase portfolio securities while borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of the Fund's total assets are outstanding. Securities held by the 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 the Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by real estate or interests therein.
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 Fund may engage in transactions in
options on securities, securities indices, futures contracts and options on
futures contracts and may write call and put options and purchase put and call
options.
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 Fund's transactions in options, futures contracts and related
options, if any, and (b) the Fund 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 the 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 may enter into futures contracts and related options.
10. Make loans, except that (i) the Fund may purchase and hold debt
instruments in accordance with its investment
-13-
<PAGE>
objective and policies; (ii) the Fund may enter into repurchase agreements with
respect to portfolio securities; and (iii) the 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 Fund to
invest in options, futures contracts and related options, as specified above,
the Fund does not currently intend to engage in such transactions. Prior to
engaging in such transactions, the Fund would add appropriate disclosure
concerning the Fund's investment in such instruments to its Prospectus and this
Statement of Additional Information.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
- ----------------------------------------------
Information on how to purchase and redeem the Fund's shares is
included in the Fund's Prospectus. Shares of the 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 Fund 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 Fund 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 Fund 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 Fund 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
-14-
<PAGE>
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 the
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 the Fund is calculated by dividing
the total value of the assets belonging to the Fund, less the liabilities, by
the number of outstanding shares. "Assets belonging to" the Fund consist of the
consideration received upon the issuance of shares of the 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 the Fund are reduced by the direct liabilities of the 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 investment portfolios
offered by the Company 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 the Fund are conclusive.
As stated in its Prospectus, the 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. Over-the-counter
securities are valued at the mean of the most recent available quoted bid and
asked prices in the over-the-counter market.
-15-
<PAGE>
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 Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its 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.
The Fund may invest in real estate investment trusts ("REITs") that
hold residual interests in real estate mortgage investment conduits ("REMICs").
Under Treasury regulations that have not yet been issued, but may apply
retroactively, a portion of the Fund's income from a REIT that is attributable
to the REIT's residual interest in a REMIC (referred to in the Code as an
"excess inclusion") will be subject to Federal income tax in all events. These
regulations are also expected to provide that excess inclusion income of a
regulated investment company, such as the Fund, will be allocated to
shareholders of the regulated investment company in proportion to the dividends
received by such shareholders, with the same consequences as if the shareholders
held the related REMIC residual interest directly. In general, excess inclusion
income allocated to shareholders (i) cannot be offset by net operating losses
(subject to a limited exception for certain thrift institutions), (ii) will
constitute unrelated business taxable income to entities (including a qualified
pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or
other tax-exempt entity) subject to tax on unrelated business income, thereby
potentially requiring such an entity that is allocated excess inclusion income,
and otherwise might not be required to file a tax return, to file a tax return
and pay tax on such income, and (iii) in the case of a foreign shareholder, will
not qualify for any reduction in U.S. Federal withholding tax. In addition, if
at any time during any taxable year a "disqualified organization" (as defined in
the Code) is a record holder of a share in a regulated investment company, then
the regulated investment company will be subject to a tax equal to that portion
of its excess inclusion income for the taxable year that is allocable to the
disqualified
-16-
<PAGE>
organization, multiplied by the highest Federal income tax rate imposed on
corporations. The Adviser does not intend on behalf of the Fund to invest in
REITs, a substantial portion of the assets of which consists of residual
interests in REMICs.
Net realized long-term capital gains, if any, will be distributed to
shareholders at least annually. The Fund 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
marginal 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). The 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.
The Fund will be treated as a separate entity under the Code, and
intends to qualify as a "regulated investment company." By following this
policy, the Fund expects 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 Fund 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 Fund and its 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.
-17-
<PAGE>
If for any taxable year the 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.
The 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 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
</TABLE>
-18-
<PAGE>
<TABLE>
<S> <C> <C>
JOHN R. MURPHY Director President and Chief Executive
1145 17th Street, N.W. Officer, National Geographic
Washington, D.C. 20036 Society; Chairman, The
Age: 63 Baltimore Sun, 1989-1992,
and Publisher prior thereto;
Director, Monarch Avalon
Inc. (games, graphic arts,
envelope manufacturing) 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
Age: 64 The 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
7 St. Paul Street Corporation until 1993.
P.O. Box 1077
Baltimore, MD 21203
Age: 74
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: 54
</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
-19-
<PAGE>
than 1% of the outstanding shares of each investment portfolio offered by the
Company.
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:
<TABLE>
<CAPTION>
================================================================================
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM THE
AGGREGATE BENEFITS COMPANY AND
COMPENSATION ACCRUED AS PART FUND COMPLEX/*/
FROM THE OF COMPANY PAID TO
NAME OF PERSON/POSITION COMPANY EXPENSES DIRECTORS
- ----------------------- ------- -------- ---------
<S> <C> <C> <C>
Leslie B. Disharoon $11,625 N/A $11,625
Chairman of the Board
of Directors and
President
Decatur H. Miller $10,000 N/A $10,000
Director and Treasurer
John R. Murphy $10,000 N/A $10,000
Director
George R. Packard, III $11,625 N/A $11,625
Director
J. Stevenson Peck $11,625 N/A $11,625
Director
================================================================================
</TABLE>
* The "Fund Complex" consists solely of the Company.
Advisory Services
- -----------------
Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") serves as investment adviser to the Fund pursuant to an Advisory
Agreement dated _____________, 1997. 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 Fund, computed
daily and payable monthly, based on the average net assets of the Fund. (See
"Management of the Company --Expenses", "Management of the Company -- Investment
Adviser" and "Management of the Company -- Administrator" in the Fund's
Prospectus for the fee schedule.)
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 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
-20-
<PAGE>
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, 1998. 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 the 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 (as well as the Adviser's other advisory agreements with the
Company), 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 and Transfer Agent
- ----------------------------
The Fifth Third Bank ("Fifth Third") serves as custodian of the Fund's
assets pursuant to a Custody Agreement, under which the custodian has agreed,
among other things, to (i) maintain a separate account in the name of the Fund,
(ii) hold and disburse portfolio securities on account of the Fund, (iii)
collect and receive all income and other payments and distributions on account
of the Fund's portfolio investments and (iv) make periodic reports to the
Company concerning the Fund's operations. The custodian is authorized to select
one or more banks or trust companies to serve as sub-custodian on behalf of
-21-
<PAGE>
the Fund, provided that the custodian shall remain liable for the performance of
all of its duties under the Custody Agreement and will hold the Fund harmless
from losses caused by the negligence or willful misconduct any bank or trust
company serving as sub-custodian.
State Street Bank and Trust Company ("State Street") serves as
transfer agent and dividend disbursing agent for shares of the Fund. Under its
Transfer Agency Agreement, State Street has agreed, among other things, to (i)
receive purchase orders and redemption requests for shares of the Fund; (ii)
issue and redeem shares of the Fund; (iii) effect transfers of shares of the
Fund; (iv) prepare and transmit payments for dividends and distributions
declared by the Fund; (v) maintain records of account for the Fund and
shareholders and advise each as to the foregoing; (vi) record the issuance of
shares of the Fund and maintain a record of and provide the Fund on a regular
basis with the total number of shares of the 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 Fund to monitor the total number of
shares sold in each State.
Distributor and Fund Accountant
- -------------------------------
Shares of the Company 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 Fund 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 the 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 the Fund's net asset value, net income and realized capital
gains, if any.
-22-
<PAGE>
Compensation of Administrator, Custodian, Transfer Agent and Fund Accountant
- ----------------------------------------------------------------------------
Mercantile, the custodian 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.
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.
Mercantile 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 Mercantile may 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
Mercantile 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
-23-
<PAGE>
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent Mercantile from continuing to
perform such services for the Fund. If Mercantile were prohibited from
continuing to perform advisory/administration services for the Fund, it is
expected that the Board of Directors would recommend that the Fund enter into
new agreements or would consider the possible termination of the Fund. 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 Fund expects that Mercantile, or an
affiliate of Mercantile, would consider the possibility of offering to perform
additional services for the Fund. 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 Mercantile or such an affiliate, might offer to provide such
services.
Expenses
- --------
Except as noted below, Mercantile 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.
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.
-24-
<PAGE>
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, 400,000,000 shares
are classified as Class J Common Stock representing shares of the Fund.
In the event of a liquidation or dissolution of the Company or the
Fund, shareholders of the Fund would be entitled to receive the assets available
for distribution belonging to the 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 the Fund are entitled to
participate equally in the net distributable assets of the Fund on liquidation,
based on the number of shares of the Fund that are held by each shareholder.
Shareholders of the Company's existing investment portfolios, 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 portfolio affected by the matter. The Fund is
affected by a matter unless it is clear that the interests of each of the
Company's portfolios 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 a fundamental investment
objective or investment policy would be effectively acted upon with respect to
the Fund only if approved by a majority of the outstanding shares of the 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 the Company voting together in the aggregate without regard to
particular portfolios.
-25-
<PAGE>
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 the 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 the 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 the Fund's assets into money and, in
connection therewith, to cause all outstanding shares of the Fund to be redeemed
at their net asset value; or (c) combine the Fund's assets with the assets
belonging to one or more of the Company's other portfolios if the Board of
Directors reasonably determines that such combination will not have a material
adverse effect on the shareholders of any portfolio participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such portfolio to be redeemed or converted into shares of another portfolio 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 Fund may quote its yield in
------------------
advertisements, sales literature or in reports to shareholders. The yield of
the Fund is calculated by dividing the net investment income per share (as
described below) earned by the Fund 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. The
Fund's net investment income per share earned during the period is based on the
average daily number of shares outstanding during the period entitled to
-26-
<PAGE>
receive dividends and includes dividends and interest earned during the period
minus expenses accrued for the period, 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 out standing 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 the Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. The 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.
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) the Fund may elect
-27-
<PAGE>
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.
Total Return Calculations. The Fund computes its average annual total
-------------------------
return by determining the average annual compounded rates of return during
specified periods that equate the initial amount invested to the ending
redeemable value of such investment. 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:
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 Fund computes its aggregate total return by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
ERV
T = [(-----) - 1]
P
-28-
<PAGE>
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.
Since performance will fluctuate, performance data for the Fund cannot
necessarily be used to compare an investment in the Fund's 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.
Performance Comparisons
- -----------------------
From time to time, in advertisements or in reports to shareholders,
the 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 Fund may be compared to
the Consumer Price Index, the Standard & Poor's 500 Index, an index of unmanaged
groups of common stocks, the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of 30 industrial companies listed on the New
York Stock Exchange, the National Association of Real Estate Investment Trusts
("NAREIT") Equity REIT Index, an unmanaged index of all tax-qualified REITs
listed on the New York Stock Exchange, the American Stock Exchange and the
National Association of Securities Dealers Automated Quotations system
("NASDAQ"), which have 75% or more of their gross invested book assets invested
directly or indirectly in the equity ownership of real estate, or the Morgan
Stanley REIT Index, an unmanaged index of all publicly traded equity REITs
(except health care REITs) which have total market capitalizations of at least
$100 million and are considered liquid. 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 the Fund. The total return and yield of the 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;
-29-
<PAGE>
(3) presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more of the
funds or investment portfolios offered by the Company; (5) descriptions of
investment strategies for one or more of such funds or investment portfolios;
(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
such funds or investment portfolios; (7) comparisons of investment products
(including the funds or investment portfolios offered by the Company) 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 the Fund.
Information concerning the current yield and performance of the Fund
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 the 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 Fund represented at a meeting at which the holders of more
than 50% of the outstanding shares of the Fund are present in person or by
proxy, or (2) more than 50% of the outstanding shares of the Fund.
As of March 5, 1997, 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 March 5, 1997, 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
-30-
<PAGE>
Company was as follows: Prime Money Market Fund - The Johns Hopkins Hospital,
600 North Wolfe Street, Baltimore, MD 21287 (9.35%); Government Money Market
Fund - Mr. James G. Robinson, 10 East Lee Street, Suite 2705, Baltimore, MD
21202 (8.85%); Tax-Exempt Money Market Fund - Reliable Liquors, Inc., 2200
Winchester St., Baltimore, MD 21216 (14.68%); Mr. Jerome H. Fader, 8000 Sunstone
Circle, Baltimore, MD 21208 (6.11%); and Mr. Fred Hittman, 3211 Keyser Road,
Baltimore, MD 21208 (5.07%); Tax-Exempt Money Market Fund (Trust) - Betty
Washington Whiting Deed of Trust, c/o Mercantile-Safe Deposit and Trust Company,
Two Hopkins Plaza, Baltimore, MD 21201 (10.95%); and Robert H. Levi Marital
Trust, c/o Mercantile-Safe Deposit and Trust Company, Two Hopkins Plaza,
Baltimore, MD 21201 (7.69%); Intermediate Fixed Income Fund - National Asbestos
Workers Medical Fund, c/o Simone Rockstroh, Carday Associates, Inc., 8401
Corporate Drive, Landover, MD 20785 (5.67%); Maryland Tax-Exempt Bond Fund - Mr.
Kenneth H. Roberts, 6287 Firethorn Drive, Clarksville, MD 21029 (16.77%); and
Mr. Charles C. Fenwick, Sr., Belmont Farms, 3302 Belmont Road, Glyndon, MD 21071
(5.99%).
-31-
<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 broker-
A-3
<PAGE>
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.
(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: None.
(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 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.
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<PAGE>
(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
are incorporated herein by reference to Exhibit (1)(g)
of Post-Effective Amendment No. 17 to the Registrant's
Registration Statement on Form N-1A, filed on July 31,
1996.
(h) Form of Articles Supplementary.
(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 Registrant's
Registration Statement on Form N-1A, filed on December
5, 1991.
(d) Amendment to Bylaws adopted January 22, 1996 is
incorporated herein by reference to Exhibit (2)(d) of
Post-Effective Amendment No. 17 to the Registrant's
Registration Statement on Form N-1A, filed on July 31,
1996.
(3) None.
(4) (a) See Article VI, Section 7.2 of Article VII, Article
VIII and Section 10.2 and 10.4 of Article X of the
Registrant's
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<PAGE>
Articles of Incorporation 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) See Article I, Section 2.1 and 2.11 of Article II,
Article IV and Section 6.1 of Article VI of the
Registrant's Bylaws incorporated herein by reference to
Exhibit (2) of Registrant's Registration Statement on
Form N-1A, filed on March 10, 1989.
(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 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
C-3
<PAGE>
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 is
incorporated herein by reference to Exhibit 5(f) of
Post-Effective Amendment No. 17 to the Registrant's
Registration Statement on Form N-1A, filed on July 31,
1996.
(g) Form of Advisory Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company with respect
to the Diversified Real Estate Fund.
(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.
(b) Form of Amendment to Distribution Agreement between
Registrant and BISYS Fund Services (f/k/a The Winsbury
Company) with respect to the Diversified Real Estate
Fund.
(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
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<PAGE>
No. 9 to the Registrant's Registration Statement on
Form N-1A, filed on July 30, 1993.
(b) Form of Amendment to Custody Agreement between
Registrant and Fifth Third Bank with respect to the
Diversified Real Estate Fund.
(c) 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) 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.
(c) 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 on July 31, 1995.
(d) Form of Amendment to Transfer Agency and Service
Agreement between Registrant and State Street Bank and
Trust Company with
C-5
<PAGE>
respect to the Diversified Real Estate Fund.
(e) Transfer Agency Agreement between Registrant and BISYS
Fund Services Ohio, Inc. dated November 30, 1995 with
respect to AFBA Five Star Shares is incorporated herein
by reference to Exhibit 9(c) of Post-Effective
Amendment No. 17 to the Registrant's Registration
Statement on Form N-1A, filed on July 31, 1996.
(f) 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.
(g) Form of Amendment to Administration Agreement between
Registrant and Mercantile-Safe Deposit and Trust
Company with respect to the Diversified Real Estate
Fund.
(h) 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.
(i) Form of Amendment to Fund Accounting Agreement between
Registrant and BISYS Fund Services Ohio, Inc. (f/k/a
The Winsbury Service Corporation) with respect to the
Diversified Real Estate Fund.
(j) 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.
C-6
<PAGE>
(10) Opinion and Consent of counsel.
(11) (a) Consent of Coopers & Lybrand L.L.P.
(b) Consent of Drinker Biddle & Reath.
(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.
(c) Form of Purchase Agreement between Registrant and BISYS
Fund Services Ohio, Inc.
(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-7
<PAGE>
(c) Schedule for Computation of Performance Quotations with
respect to the Maryland Tax-Exempt Bond Fund and
Intermediate Fixed Income Fund is incorporated herein
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.
(27) Inapplicable.
Item 25. Persons Controlled by or under Common Control
with Registrant.
---------------------------------------------
Inapplicable.
C-8
<PAGE>
Item 26. Number of Holders of Securities.
-------------------------------
The following information is as of March 5, 1997.
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A Common Stock 2,925
Class B Common Stock 2,942
Class C Common Stock 385
Class D Common Stock 366
Class E Common Stock 3,752
Class E Common Stock 158
- Special Series 1
Class F Common Stock 2,590
Class F Common Stock 68
- Special Series 1
Class G Common Stock 108
Class H Common Stock 2,786
</TABLE>
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), Section 6 of
the Advisory Agreement with respect to the International Equity Fund
incorporated herein by reference as Exhibit (5)(e), and Section 6 of the form of
Advisory Agreement with respect to the Diversified Real Estate Fund included
herein as Exhibit (5)(g). Indemnification of the Registrant's Administrator is
provided for in Section 4 of the Administration Agreement incorporated herein by
reference as Exhibit (9)(d); and Indemnification of Registrant's principal
underwriter is provided for in Section 1.11 of the Distribution Agreement
incorporated herein by reference 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
C-9
<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
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<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
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<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 Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director Electricity &
Baltimore Gas & Natural Gas
Electric Company
P.O. Box 1475
Baltimore, MD 21203
</TABLE>
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<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 52nd 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>
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<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- -------------- ----------------
<S> <C> <C> <C>
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
Director Financing
Municipal Mortgage & Housing
Equity LLC Projects
Suite 500
218 N. Charles St.
Baltimore, MD 21201
James A. Block, Director Director Bank Holding
M.D. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Former President Health Services
and Chief
Executive Officer
Johns Hopkins Health
System and The Johns
Hopkins Hospital
600 N. Wolfe Street
Baltimore, MD 21287
Director Insurance
MMI Companies, Inc.
540 Lake Cook Road
Deerfield, IL 60015-5290
William R. Brody, Director Director Bank Holding
M.D. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President University
The Johns Hopkins
University
Charles & 34th St.
Baltimore, MD 21218
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- -------------- ----------------
<S> <C> <C> <C>
Director Medical
ALZA Corporation Instruments
950 Page Mill Rd.
Palo Alto, CA
94303-0802
George L. Bunting, Director Director Bank Holding
Jr. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President & Chief Private Financial
Executive Officer Management Company
Bunting Management
Group
Suite 350
9690 Deereco Road
Timonium, MD 21093
(Since July 1991)
Director Medical/Drugs
Guilford
Pharmaceaticals, Inc.
6611 Tributary St.
Baltimore, MD 21224
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
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- -------------- ----------------
<S> <C> <C> <C>
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
Director Wireless
Tessco Technologies, Equipment
Inc.
34 Loveton Circle
Sparks, MD 21152
Freeman A. Director Director Bank Holding
Hrabowski, III Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President University
University of
Maryland
Baltimore County
1000 Hilltop Circle
Baltimore, MD 21250
Director Electricity &
Baltimore Gas & Natural Gas
Electric Company
P.O. Box 1475
Baltimore, MD 21203
Director Insurance
Baltimore Equitable
Society
21 N. Eutaw St.
Baltimore, MD 21201
Director Specialty Foods/
McCormick & Company Spices
18 Loveton Circle
Sparks, MD 21152-6000
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- -------------- ----------------
<S> <C> <C> <C>
Director Aerospace/Defense
UNC, Inc. Equipment
175 Admiral Cochran Dr.
Annapolis, MD 21401
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
Senior Vice President Insurance
of AEGON USA Inc.
2 East Chase Street
Baltimore, MD 21202
Robert A. Kinsley Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chief Executive Construction
Officer
Kinsley Construction
2700 Water St.
York, PA 17403-9306
Partner Construction
Various Construction
Ventures
Robert D. Director Director Bank Holding
Kunisch Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C-17
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- -------------- ----------------
<S> <C> <C> <C>
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
CRW Parts, Inc. Auto Parts
7601 Pulaski Highway
Baltimore, MD 21237
Morris W. Offit Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C-18
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- -------------- ----------------
<S> <C> <C> <C>
Director Medical
Cantel Industries, Products
Inc.
1135 Broad Street
Clifton, NJ 07013
Chairman of the Board Private Bank
and Chief Executive
Officer
OFFITBANK
Manhattan Tower
101 East 52nd Street
New York, NY 10022
Director Toy
Hasbro, Inc. Manufacturer
P.O. Box 1059
1027 Newport Ave.
Pawtucket, RI 02862-1059
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
and Subsidiaries
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>
C-19
<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
Donald J. Shepard Director Director Bank Holding
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
Director Insurance
Health Insurance
Association of
America
555 13th Street, N.W.
Washington, DC 20004
Director Insurance
Scottish Equitable PLC
28 St. Andrews Square
Edinborough, Scotland
EH21YF
Brian B. Topping Director Director and Vice Bank Holding
and Vice President Company
Chairman of Mercantile Bankshares
the Board Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C-20
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- -------------- ----------------
<S> <C> <C> <C>
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 Director Bank
Bourne, Jr. Vice President Potomac Valley Bank
702 Russell Avenue
Gaithersburg, MD 20877
Hugh W. Mohler Executive Director Bank
Vice President The Citizens National
Bank
4th & Main Street
Laurel, MD 20707
J. Marshall Executive None
Reid Vice President
Jack K. Steil Executive None
Vice President
Terry L. Executive Executive Bank Holding
Troupe Vice President Vice President Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C-21
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- -------------- ----------------
<S> <C> <C> <C>
Jay M. Wilson Executive Executive Bank Holding
Vice President Vice President Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Malcolm C. Wilson Executive None
Vice President
Frederica B. Vice President None
Baxter and Treasurer
Alan D. Yarbro General Counsel General Counsel Bank Holding
and Secretary and Secretary Company
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).
Item 29. Principal Underwriter.
---------------------
(a) BISYS Fund Services ("BISYS") acts as distributor for Registrant.
BISYS currently serves as distributor of American Performance Funds, AmSouth
Mutual Funds, The ARCH Fund, Inc., The BB&T Mutual Funds Group, The Coventry
Group, Empire Builder Tax Free Bond Fund, First Choice Funds Trust, Fountain
Square Funds, Hirtle Callaghan Trust, HSBC Family of Funds, The Infinity Mutual
Funds, Inc., Intrust Funds, The Kent Funds, Marketwatch Funds, Meyers Sheppard
Investment Trust, Minerva Funds, MMA Praxis Mutual Funds, Pacific Capital Funds,
Parkstone Group of Funds, The Parkstone Advantage Funds, Pegasus Funds,
Qualivest Funds, The Republic Funds Trust, The Republic Advisors Funds Trust,
The Riverfront Funds, Inc., SBSF Funds, Inc. dba Key Mutual Funds, Sefton Funds,
The Sessions
C-22
<PAGE>
Group, Summit Investment Trust, The Time Horizon Funds and The Victory
Portfolios, 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)
CastleInternational Asset Management Limited
125 S. Wacker Drive, Suite 300
Chicago, IL 60606
and
7 Castle Street
Edinburgh, Scotland EH3 3AM
(records relating to its functions as sub-adviser to
Registrant's International Equity Fund)
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
C-23
<PAGE>
North Quincy, MA 02171
(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
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 to
Shareholders upon request and without charge to any person to whom a Prospectus
for any of its Funds is delivered.
Registrant hereby undertakes to file a post-effective amendment with
respect to the Diversified Real Estate Fund, using financial statements which
need not be certified, within four to six months from the effective date of
Registrant's 1933 Act Registration Statement pertaining to such Fund.
C-24
<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. 18 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Baltimore
and the State of Maryland, on the 12th day of March, 1997.
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. 18 to Registrant's Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/* Leslie B. Disharoon Chairman of the March 12, 1997
- ------------------------------
Leslie B. Disharoon Board and President
/s/* Decatur H. Miller Director and Treasurer March 12, 1997
- ------------------------------
Decatur H. Miller (Principal Financial
and Accounting Officer)
/s/* John R. Murphy Director March 12, 1997
- ------------------------------
John R. Murphy
/s/* George R. Packard, III Director March 12, 1997
- ------------------------------
George R. Packard, III
/s/* J. Stevenson Peck Director March 12, 1997
- ------------------------------
J. Stevenson Peck
*By: /s/ Linda A. Durkin
-------------------
Linda A. Durkin
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
-------------
EXHIBIT NO. DESCRIPTION PAGE NO
- ----------- ----------- -------
1(h) Form of Articles Supplementary.
5(g) Form of Advisory Agreement between
Registrant and Mercantile-Safe
Deposit and Trust Company with
respect to the Diversified Real
Estate Fund.
6(b) Form of Amendment to Distribution
Agreement between Registrant and
BISYS Fund Services (f/k/a The
Winsbury Company) with respect to
the Diversified Real Estate Fund.
8(b) Form of Amendment to Custody
Agreement between Registrant and
Fifth Third Bank with respect to
the Diversified Real Estate Fund.
9(d) Form of Amendment to Transfer Agency
and Service Agreement between Registrant
and State Street Bank and Trust Company
with respect to the Diversified
Real Estate Fund.
9(g) Form of Amendment to Administration
Agreement between Registrant and
Mercantile-Safe Deposit and Trust
Company with respect to the Diversified
Real Estate Fund.
9(i) Form of Amendment to Fund Accounting
Agreement between Registrant and
BISYS Fund Services Ohio, Inc.
(f/k/a The Winsbury Service Corporation)
with respect to the Diversified
Real Estate Fund.
(10) Opinion and Consent of counsel.
11(a) Consent of Coopers & Lybrand L.L.P.
11(b) Consent of Drinker Biddle & Reath
13(c) Form of Purchase Agreement between
Registrant and BISYS Fund
Services Ohio, Inc.
<PAGE>
EXHIBIT (1) (h)
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 Four Hundred
Million (400,000,000) 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 J 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 January 24, 1997:
RESOLVED, that pursuant to the authority expressly given to the Board of
Directors in Article VI, Section 6.4 of the Company's Articles of
Incorporation, the Board hereby classifies Four Hundred Million (400,000,000)
of the Company's authorized but unissued and unclassified shares as Class J
Common Stock (with an aggregate par value of Four Hundred Thousand Dollars
($400,000));
FURTHER RESOLVED, that shares of Class J Common Stock shall represent
interests in the Diversified Real Estate Fund;
FURTHER RESOLVED, that each share of Class J Common Stock shall have the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption as set forth in the Articles; and
FURTHER RESOLVED, that the officers of the Company be, and each of them
hereby is, authorized and empowered to execute, seal, deliver and file any
and all documents, instruments, papers and writings, including but not
limited to filing Articles Supplementary with the State Department of
Assessments and Taxation of Maryland, and to do any and all other acts,
including but not limited to changing the foregoing resolutions upon advice
of the Company's counsel
<PAGE>
prior to filing said Articles Supplementary, in the name of the Company
and on its behalf, as may be necessary or desirable in connection with
or in furtherance of the foregoing resolutions, such determination to be
conclusively evidenced by said officer taking any such actions.
SECOND: The shares of Common Stock of the Corporation classified
pursuant to the resolutions set forth herein have been classified by the
Corporation's Board of Directors under the authority contained in the
Corporation's Articles of Incorporation.
THIRD: The total number of shares of capital stock which the Corporation
is presently authorized to issue remains Ten Billion (10,000,000,000) shares of
Common Stock, of which Seven Hundred Million (700,000,000) shares of the par
value of One Mill ($.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 ($.001) per share each are Class H Common Stock; Four Hundred
Million (400,000,000) shares of the par value of One Mill ($.001) per share each
are Class I Common Stock; and Four Hundred Million (400,000,000) shares of the
par value of One Mill ($.001) per share each are Class J Common Stock. The
aggregate par value of all Common Stock having par value is unchanged at Ten
Million Dollars ($10,000,000).
The total number of authorized and unclassified shares of capital stock
of the Company remaining after the actions described above is Three Billion
Eight Hundred Million (3,800,000,000) shares of capital stock of the par value
of One Mill ($0.001) and of the aggregate par value of Three Million Eight
Hundred Thousand Dollars ($3,800,000).
-2-
<PAGE>
EXHIBIT (5)(G)
ADVISORY AGREEMENT
DIVERSIFIED REAL ESTATE FUND
M.S.D.& T. FUNDS, INC.
Two Hopkins Plaza
Baltimore, Maryland 21201
______ __, 1997
Mercantile-Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21201
Dear Sirs:
This will confirm the agreement, entered into in consideration of the
premises and mutual covenants herein contained, and for other good and valuable
consideration, between the undersigned (the "Company") and you as follows:
1. General. The Company is an open-end investment company. This
-------
Agreement relates to one of the Company's portfolios -- the Diversified Real
Estate Fund (the "Fund" and collectively with other Company portfolios, the
"Funds"). The Company proposes to engage in the business of investing and
reinvesting the assets of the Fund in the manner and in accordance with the
investment objective, policies and limitations specified in the Fund's
Prospectus and Statement of Additional Information (the "Prospectus") included
in the Company's Registration Statement on Form N-1A, as amended from time to
time (the "Registration Statement"), filed under the Investment Company Act of
1940, as amended (the "1940 Act"), and the Securities Act of 1933, as amended.
Copies of the Prospectus have been furnished to you. Any amendments to the
Prospectus shall be furnished to you promptly.
2. Advisory Services. Subject to the supervision and approval of
-----------------
the Company's Board of Directors, you will provide investment management of the
Fund's portfolio in accordance with the Fund's investment objective, policies
and limitations as stated in the Prospectus as from time to time in effect, and
resolutions of the Company's Board of Directors of which you will be advised.
In connection therewith, you will obtain and provide investment research and
will supervise the Fund's investments and conduct a continuous program of
investment, evaluation and, if appropriate, sale and reinvestment of the Fund's
assets.
<PAGE>
In the event that the Company establishes one or more portfolios other
than the Fund with respect to which it desires to retain you as investment
adviser hereunder, it shall notify you in writing. If you are willing to render
such services under this Agreement you shall notify the Company in writing,
whereupon such portfolio shall become a Fund hereunder and shall be subject to
the provisions of this Agreement to the same extent as the Fund except to the
extent that said provisions (including those relating to compensation payable by
such additional Fund to you as investment adviser) are modified with respect to
such additional Fund in writing by you and the Company at the time.
You will comply with all rules and regulations of the Securities and
Exchange Commission applicable to you in connection with your performance of
this Agreement, and will in addition conduct your activities under this
Agreement in accordance with other law, including banking law, applicable to
you.
You will not make loans for the purpose of purchasing or carrying Fund
shares, or make interest-bearing loans to the Company.
You will 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. You
will place orders pursuant to your investment determination for the Fund either
directly with the issuer or with any broker or dealer selected by you. In
executing portfolio transactions and selecting brokers or dealers, you will use
your reasonable best efforts to seek the most favorable execution of orders,
after taking into account all factors you deem 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, you 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, as amended) to or for the
benefit of the Fund and/or other accounts over which you or any of your
affiliates exercises investment discretion. You are 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 you determine 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 your overall responsibilities to the
-2-
<PAGE>
Fund and to the Company. In no instance will portfolio securities be purchased
from or sold to you, or the Fund's principal underwriter, or any affiliated
person thereof except as permitted by the Securities and Exchange Commission.
3. Assistance. You may employ or contract with other persons to
----------
assist you in the performance of this Agreement including, without limitation,
one or more sub-advisers who may perform under your supervision any or all
services described under Section 2; provided, however, that the retention of any
sub-adviser shall be approved as may be required by the 1940 Act. Such other
persons and/or sub-advisers may include other investment advisory or management
firms and officers or employees who are employed by both you and the Company.
The fees or other compensation of any such other persons or sub-advisers shall
be paid by you and no obligation may be incurred on the Company's behalf to any
such person or sub-adviser.
In the event that you appoint a sub-adviser, you will review, monitor,
and report to the Company's Board of Directors on the performance and investment
procedures of any such sub adviser; assist and consult with any sub-adviser in
connection with the Fund's continuous investment program; and approve lists of
foreign countries which may be recommended by any sub-adviser for investment by
the Fund.
4. Fees. In consideration of the advisory services rendered
----
pursuant to this Agreement, the Fund will pay you on the first business day of
each month a fee at the annual rate of .80 of 1% of the value of such Fund's
average daily net assets during the preceding month. Net asset value shall be
computed in the manner, on such days and at such time or times as described in
the Fund's Prospectus from time to time. The fee for the period from the
effective date of the Registration Statement to the end of the first month
thereafter shall be prorated according to the proportion which such period bears
to the full monthly period, and upon any termination of this Agreement before
the end of any month, the fee for such part of a month shall be prorated
according to the proportion which such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement.
5. Expenses. You will bear all your own expenses in connection with
--------
the performance of your services under this Agreement, provided that such
expenses will not include the expenses to be borne by the Fund, as set forth
below. The expenses to be borne by the Fund include, without limitation, the
following: organizational costs; taxes; interest; brokerage fees and
commissions and other expenses in any way related to the execution, recording
and settlement of portfolio security transactions; fees of Directors who are not
also your officers; Securities and Exchange Commission fees; state Blue Sky
-3-
<PAGE>
qualification fees; charges of custodians and transfer and dividend paying
agents; premiums for directors and officers liability insurance; costs of
fidelity bonds; industry association fees; outside auditing and legal expenses;
costs of maintaining corporate existence; costs of maintaining required books
and accounts; cost of office facilities and supplies; data processing, clerical,
accounting and bookkeeping services and other administrative expenses; costs
attributable to investor services (including, without limitation, telephone and
personnel expenses); costs of Securities and Exchange Commission regulatory
reports; costs of shareholders' reports and meetings; costs of preparing,
printing and mailing prospectuses for regulatory purposes and for distribution
to existing shareholders; and any extraordinary expenses.
6. Liability. You shall exercise your best judgment in rendering
---------
the services to be provided to the Fund. You shall remit to the Fund the amount
of any recovery you obtain for the benefit of the Fund from any person or sub-
adviser whom you have employed or with whom you have contracted pursuant to
Section 3 of this Agreement, for the acts and omissions of such person or sub-
adviser. Subject to the foregoing, the Fund agrees as an inducement to you and
others who may assist you in providing services to the Fund that you and such
other persons shall not be liable for any alleged or actual error of judgment or
mistake of law or for any alleged or actual loss suffered by such Fund and the
Fund and the Company agree to indemnify and hold harmless you and such other
persons against and from any claims, liabilities, actions, suits, proceedings,
judgments or damages (and expenses as and when incurred in connection therewith,
including the reasonable cost of investigating or defending same, including, but
not limited to attorneys' fees) arising out of any such alleged or actual error
of judgment or mistake of law or loss; provided, however, that nothing herein
-------- -------
shall be deemed to protect or purport to protect you or any such other persons
against any liability to the Fund or to its shareholders to which you or they
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties hereunder, or by reason of reckless
disregard of the obligations and duties hereunder; and provided further, that
-------- -------
this sentence shall not inure to the benefit of any person or sub-adviser (or
others who may assist any such person or sub-adviser) whom you have employed or
with whom you have contracted pursuant to Section 3 of this Agreement.
7. Other Accounts. The Company understands that you and other
--------------
persons with whom you contract to provide the services hereunder may from time
to time act as investment adviser to one or more other investment companies and
fiduciary or other managed accounts, and the Company has no objection to your or
their so acting. When purchase or sale of securities of the same issuer is
suitable for the investment objectives of two or more
-4-
<PAGE>
companies or accounts managed by you or such other persons which have available
funds for investment, the available securities may be allocated in a manner
believed by you and such other persons to be equitable to each company or
account. It is recognized that in some cases this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtainable for or disposed of by the Fund.
In addition, it is understood that you and the persons with whom you
contract to assist in the performance of your duties hereunder will not devote
their full time to such service and nothing contained herein shall be deemed to
limit or restrict your or their right to engage in and devote time and attention
to similar or other businesses.
8. Books and Records. In compliance with the requirements of Rule
-----------------
31a-3 under the 1940 Act, you agree that all records which you maintain for the
Company are the property of the Company and you further agree to surrender
promptly to the Company any of such records upon the Company's request. You
further agree to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act such records that you, as investment adviser, are required to maintain
by Rule 31a-1 under the 1940 Act.
9. Term. This Agreement shall continue with respect to the Fund
----
until July 20, 1998 and thereafter shall continue automatically for successive
12-month periods, provided such continuance with respect to the Fund is
specifically approved at least annually by the Company'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% of the outstanding shares of the Fund,
provided that in either event its continuance also is approved by a majority of
the Company'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 with
respect to the Fund without penalty, on 60 days' notice, by you or by the
Company'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).
10. Amendment. This Agreement may be amended only by an instrument
---------
in writing signed by the party against which enforcement of the amendment is
sought. No amendment of this Agreement shall be effective with respect to the
Fund until
-5-
<PAGE>
approved by vote of a majority of the Fund's outstanding voting securities.
11. M.S.D.& T. or Mercantile-Safe Deposit & Trust Company. The
-----------------------------------------------------
Company recognizes that from time to time your directors, officers and employees
may serve as directors, trustees, partners, officers and employees of other
corporations, business trusts, partnerships or other entities (including other
investment companies) and that such other entities may include the name "M.S.D.&
T." or "Mercantile-Safe Deposit & Trust Company" as part of their name. You or
your affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Company's investment adviser, the
Company agrees that, at your request, the Company will take all necessary action
to change the name of the Company and its Funds to a name not including "M.S.D.&
T." or "Mercantile-Safe Deposit & Trust Company" in any form or combination of
words.
12. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or limit 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; provided, that nothing herein shall be construed in a
manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940, as
amended, or any rule or regulation of the Securities and Exchange Commission
thereunder.
If the foregoing is in accordance with your understanding, will you
kindly so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
M.S.D.& T. INC.
By: ________________________
Accepted:
MERCANTILE-SAFE DEPOSIT AND
TRUST COMPANY
By: _______________________
-6-
<PAGE>
EXHIBIT (6)(b)
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BETWEEN M.S.D. & T. FUNDS, INC. AND BISYS FUND SERVICES
(FORMERLY KNOWN AS THE WINSBURY COMPANY LIMITED PARTNERSHIP)
DATED OCTOBER 1, 1993
NAMES OF FUNDS
- --------------
Prime Money Market Fund
Government Money Market Fund
Tax-Exempt Money Market Fund
Tax-Exempt Money Market Fund (Trust)
Value Equity Fund
Intermediate Fixed Income Fund
Maryland Tax-Exempt Bond Fund
International Equity Fund
Diversified Real Estate Fund
M.S.D. & T. FUNDS, INC.
By:____________________________
Title:_________________________
Date:__________________________
BISYS FUND SERVICES
By:____________________________
Title: ________________________
Date:__________________________
<PAGE>
EXHIBIT (8)(b)
CUSTODY AGREEMENT
(Diversified Real Estate Fund)
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, OH 45265
Gentlemen:
Pursuant to Article XIV, Paragraph 14.4, of the Custody Agreement
dated May 28, 1993 that you and we have entered into, we are writing to request
that you render custody services under the terms of said agreement with respect
to the Diversified Real Estate Fund, an additional portfolio which we are
establishing. Your compensation for the services provided under said agreement
for said additional portfolio shall be determined in accordance with the Exhibit
C attached to said agreement. Please execute a copy of this letter where
indicated to signify your agreement to provide said services.
Sincerely,
Dated: _____ __, 1997 M.S.D. & T. FUNDS, INC.
By:____________________
Title:_________________
ACKNOWLEDGED AND AGREED:
THE FIFTH THIRD BANK
By: _________________ Dated: _______ __, 1997
Title: ______________
<PAGE>
EXHIBIT (9)(d)
TRANSFER AGENCY AND SERVICE AGREEMENT
(Diversified Real Estate Fund)
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
Gentlemen:
Pursuant to Article 10, Paragraph 10.01, of the Transfer Agency and
Service Agreement dated November 1, 1992 that you and we have entered into, we
are writing to request that you render transfer agency services under the terms
of said agreement with respect to the Diversified Real Estate Fund, an
additional portfolio which we are establishing. Your compensation for the
services provided under said agreement for said additional portfolio shall be
determined in accordance with the Fee Schedules attached to said agreement.
Please execute a copy of this letter where indicated to signify your agreement
to provide said services.
Sincerely,
Dated: _____ __, 1997 M.S.D. & T. FUNDS, INC.
By:____________________
Title:_________________
ACKNOWLEDGED AND AGREED:
STATE STREET BANK AND TRUST COMPANY
By: _________________ Dated: _______ __, 1997
Title: ______________
<PAGE>
EXHIBIT (9)(g)
SCHEDULE A
TO THE ADMINISTRATION AGREEMENT
BETWEEN MERCANTILE-SAFE DEPOSIT & TRUST COMPANY
AND M.S.D. & T. FUNDS, INC.
DATED MAY 28, 1993
NAME OF FUND
- ------------
Prime Money Market Fund
Government Money Market Fund
Tax-Exempt Money Market Fund
Tax-Exempt Money Market Fund (Trust)
Value Equity Fund
Intermediate Fixed Income Fund
Maryland Tax-Exempt Bond Fund
International Equity Fund
Diversified Real Estate Fund
M.S.D. & T. FUNDS, INC.
By:______________________________
Title:___________________________
Date:____________________________
MERCANTILE-SAFE DEPOSIT & TRUST COMPANY
By: _______________________________
Title:_____________________________
Date:______________________________
<PAGE>
EXHIBIT (9)(i)
SCHEDULE A
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN BISYS FUND SERVICES OHIO, INC.
(FORMERLY KNOWN AS THE WINSBURY SERVICE CORPORATION)
AND M.S.D. & T. FUNDS, INC.
DATED OCTOBER 1, 1993
NAME OF FUND
- ------------
Prime Money Market Fund
Government Money Market Fund
Tax-Exempt Money Market Fund
Tax-Exempt Money Market Fund (Trust)
Value Equity Fund
Intermediate Fixed Income Fund
Maryland Tax-Exempt Bond Fund
International Equity Fund
Diversified Real Estate Fund
[SEAL] M.S.D. & T. FUNDS, INC.
By:____________________________
Title:_________________________
Date:__________________________
[SEAL] BISYS FUND SERVICES OHIO, INC.
By:____________________________
Title:_________________________
Date: __________________________
<PAGE>
SCHEDULE B
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN BISYS FUND SERVICES OHIO, INC.
(FORMERLY KNOWN AS THE WINSBURY SERVICE CORPORATION)
AND M.S.D. & T. FUNDS, INC.
DATED OCTOBER 1, 1993
Name of Fund Compensation
- ------------ ------------
Prime Money Market Fund Annual rate of three one-hundredths
of one percent (.03%) of the Prime
Money Market Fund's average daily
net assets
Government Money Market Fund Annual rate of three one-hundredths
of one percent (.03%) of the
Government Money Market Fund's
average daily net assets
Tax-Exempt Money Market Fund Annual rate of four one-hundredths
of one percent (.04%) of the Tax-
Exempt Money Market Fund's average
daily net assets
Tax-Exempt Money Market Fund (Trust) Annual rate of four one-hundredths
of one percent (.04%) of the Tax-
Exempt Money Market Fund's (Trust)
average daily net assets
Value Equity Fund Annual rate of four one-hundredths
of one percent (.04%) of the Value
Equity Fund's average daily net
assets
Intermediate Fixed Income Fund Annual rate of four one-hundredths
of one percent (.04%) of the
Intermediate Fixed Income Fund's
average daily net assets
B-1
<PAGE>
Maryland Tax-Exempt Bond Fund Annual rate of five one-hundredths
of one percent (.05%) of the
Maryland Tax Exempt Bond Fund's
average daily net assets
International Equity Fund Annual rate of five one-hundredths
of one percent (.05%) of the
International Equity Fund's average
daily net assets, with a minimum fee
of $2000 per month
Diversified Real Estate Fund Annual rate of __________ of one
percent(.__%) of the Diversified
Real Estate Fund's average daily net
assets
Multiple Classes of Shares:
- --------------------------
Each class of shares within a Fund that maintains multiple classes of shares
having different net asset values or paying different daily dividends are
subject to a minimum annual fee of $10,000 per additional class.
M.S.D.& T. FUNDS, INC.
By:______________________________
Title: __________________________
Date: ___________________________
BISYS FUND SERVICES OHIO, INC.
By:______________________________
Title: __________________________
Date: ___________________________
B-2
<PAGE>
EXHIBIT 10
DRINKER BIDDLE & REATH
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
March 11, 1997
M.S.D.& T. Funds, Inc.
Two Hopkins Plaza
Baltimore, Maryland 21201
RE: SHARES REGISTERED BY POST-EFFECTIVE AMENDMENT NO. 18 TO
REGISTRATION STATEMENT ON FORM N-1A (FILE NO. 33-27491)
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to M.S.D.& T. Funds, Inc. (the "Company") in
connection with the preparation and filing with the Securities and Exchange
Commission of Post-Effective Amendment No. 18 to the Company's Registration
Statement on Form N-1A under the Securities Act of 1933, as amended, registering
81,063,691 shares of the Company's Common Stock, $.001 par value per share, to
be issued and sold by the Company. The registration of such Common Stock has
been made in reliance upon Rule 24e-2 under the Investment Company Act of 1940,
as amended.
In this connection, we have reviewed originals or copies, certified or
otherwise identified to our satisfaction, of the Company's Certificate of
Incorporation, ByLaws, resolutions of its Board of Directors and such other
documents and corporate records as we deem appropriate for the purpose of giving
this opinion. We express no opinion concerning the laws of any jurisdiction
other than the Maryland General Corporation Law and the federal law of the
United States of America.
Based upon the foregoing, it is our opinion that the foregoing shares of
Common Stock, when issued for payment as described in the Company's Prospectuses
and in accordance with the Company's Articles of Incorporation for not less than
$.001 per share, will be legally issued, fully paid and non-assessable shares of
Common Stock of the Company.
<PAGE>
M.S.D. & T. Funds, Inc.
March 11, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to Post-
Effective Amendment No. 18 to the Company's Registration Statement.
Very truly yours,
/s/ DRINKER BIDDLE & REATH
DRINKER BIDDLE & REATH
<PAGE>
EXHIBIT 11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our name and to the reference to our firm under
the caption "Independent Accountants" in the Statement of Additional Information
included in Post-Effective Amendment No. 18 to the Registration Statement on
Form N-1A of M.S.D. & T. Funds, Inc. (File Nos. 33-27491 and 811-5782) under the
Securities Act of 1933 and the Investment Company Act of 1940, respectively, as
amended.
/s/ Coopers & Lybrand L.L.P.
- -----------------------------
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 12, 1997
<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
Statement of Additional Information included in Post-Effective Amendment No. 18
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
March 12, 1997
<PAGE>
EXHIBIT (13)(c)
PURCHASE AGREEMENT
------------------
M.S.D. & T. Funds, Inc. (the "Company"), a Maryland corporation, and BISYS
Fund Services Ohio, Inc. ("BISYS"), an Ohio corporation, hereby agree as
follows:
1. The Company hereby offers BISYS and BISYS hereby purchases one (1)
share of Class J Common Stock at $10.00 per share (such share of Common Stock in
the Company representing an interest in the Company's Diversified Real Estate
Fund (the "Fund") and being hereinafter known as the "Share"). BISYS hereby
acknowledges purchase of the Share and the Company hereby acknowledges receipt
from BISYS of funds in the amount of $10.00 in full payment for the Share.
2. BISYS represents and warrants to the Company that the Share is being
acquired for investment purposes and not for the purpose of distribution.
3. BISYS agrees that if it or any direct or indirect transferee of the
Share redeems the Share prior to the fifth anniversary of the date the Fund
begins investment activities, BISYS will pay to the Company an amount equal to
the number resulting from multiplying the Fund's total unamortized
organizational expenses by a fraction, the numerator of which is equal to the
number of shares redeemed by BISYS or such transferee and the denominator of
which is equal to the number of shares outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
4. All persons dealing with any class of shares of the Company must look
solely to the net assets belonging to such class for enforcement of any claims
against the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the______day of____________, 1997.
Attest: M.S.D. & T. FUNDS, INC.
_____________________________ By: ________________________________
President
Attest: BISYS FUND SERVICES OHIO, INC.
_____________________________ By: ________________________________
Title:
