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M.S.D. & T. FUNDS, INC.
DIVERSIFIED REAL ESTATE FUND
Prospectus
June 1, 1997
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M.S.D. & T. FUNDS, INC.
PROSPECTUS
for the
DIVERSIFIED REAL ESTATE FUND
June 1, 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 current
income and 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 1, 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.
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TABLE OF CONTENTS
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EXPENSE SUMMARY.......................................... 1
INVESTMENT OBJECTIVE, POLICIES AND RISKS................. 2
FUNDAMENTAL LIMITATIONS.................................. 9
INVESTING IN THE FUND.................................... 10
SHAREHOLDER SERVICES..................................... 16
DIVIDENDS AND DISTRIBUTIONS.............................. 18
TAX INFORMATION.......................................... 18
MANAGEMENT OF THE COMPANY................................ 20
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES.. 22
PERFORMANCE REPORTING.................................... 22
MISCELLANEOUS............................................ 24
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If You Have Questions
For current yield, purchase and redemption information, call
1-800-551-2145.
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EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in the
Fund. Shareholder Transaction Expenses are charges an investor pays when buying
or selling shares of 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 shareholder transaction expenses
charged by the Fund and the operating expenses which the Fund expects to incur
during the current fiscal year. An example based on this information is also
provided.
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Shareholder Transaction Expenses
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Sales Charge Imposed on Purchase.............. None
Sales Charge Imposed on Reinvested
Dividends................................. None
Sales Charge Imposed on Redemptions........... None
Deferred Sales Charge......................... None
Redemption Fees............................... None
Exchange Fees................................. None
Annual Fund Operating Expenses
(as a percentage of average net assets)
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Management Fees (after fee waivers).......... .43%
Other Expenses
(includes administration, custody
and transfer agency, and miscellaneous
other charges).......................... .57%
Total Fund Operating Expenses (after ----
fee waivers)............................
1.00%
====
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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:
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1 Year......................................... $10
3 Years........................................ $32
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THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR
RATES OF RETURN. THE FUND IS NEW AND 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 directly or indirectly as shareholders. The Expense Summary reflects
operating expenses which the Fund expects to incur during the current fiscal
year. Absent fee waivers, Management Fees and Total Fund Operating Expenses,
stated as a percentage of the Fund's average daily net assets, would be .80% 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 current income and capital
growth. The Fund attempts to achieve this objective through investments
primarily in domestic equity securities of companies principally engaged in the
real estate business. Under normal market and economic conditions,
substantially all, but no less than 65%, of the Fund's total assets will be
invested in such securities. Companies principally engaged in the real estate
business include real estate investment trusts ("REITs"), real estate operating
companies, 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 company derives
at least 50% of its revenues from the ownership,
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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.
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 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
various types of real property such as shopping malls, office buildings and
residential apartments, 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 investment grade 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
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or even extended periods of time and equity markets tend to be cyclical,
experiencing both periods when stock prices generally increase and periods when
stock prices generally decrease. Therefore, the Fund's net asset value may
fluctuate with movements in the equity markets. See "Investing in the Fund --
How to Buy Fund Shares" below for an explanation of net asset value.
. 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 environment. Generally, the prices of
bonds and other 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, different regions and local markets; 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").
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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 its ability to retain its tax status as a regulated
investment company. See "Tax Information" below.
. 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.
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.
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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 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 investment
grade mortgage-backed securities issued or guaranteed by U.S. Government
agencies and private issuers for defensive purposes. They may include
collateralized mortgage obligations
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("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.
. 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.
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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 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
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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 75%.
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.
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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,
provided that the Fund will concentrate its investments in the securities of
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 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.
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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.
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To Open an Account To Add to an Account
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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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By Wire . Before wiring funds, please call . Instruct your bank to
1-800-551-2145 for complete wire Federal funds to:
State Street Bank and Trust Company, Boston,
wiring instructions. Massachusetts, Bank
Routing No. 011-0000-28,
. Promptly complete a Purchase M.S.D. & T. Deposit A/C
Application and forward it to No. 99046435.
M.S.D. & T. Funds, Inc., P.O. Box
8515, Boston, MA 02266-8515.
. Be sure to include your
name and your Fund
account number.
. The wire should indicate
that you are making a
subsequent purchase as
opposed to opening a new
account.
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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
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Fund account. Please refer to the section entitled "Shareholder
Services" for more information.
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. 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. 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
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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.
<TABLE>
To Redeem Shares
--------------------------------------
<S> <C>
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).
</TABLE>
-13-
<PAGE>
<TABLE>
<S> <C>
. 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.
</TABLE>
Other redemption options, including exchanges and systematic
withdrawals, are also available. Please refer to the section
entitled "Shareholder Services" for more information.
- --------------------------------------------------------------------------------
. 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.
-14-
<PAGE>
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 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
-15-
<PAGE>
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
Medallion 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 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.
-16-
<PAGE>
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. 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,
-17-
<PAGE>
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 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
-18-
<PAGE>
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
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.
-19-
<PAGE>
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 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.
-20-
<PAGE>
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 December 31, 1996, Mercantile had approximately $27
billion in assets under active management, of which approximately $460 million
represented the assets of an institutional real estate pension fund.
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.
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.
-21-
<PAGE>
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 an
open-end management investment company (i.e., a "mutual fund"). 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 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
-22-
<PAGE>
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 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
-23-
<PAGE>
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 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.
-24-
<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.
-25-
<PAGE>
M.S.D. & T. FUNDS, INC.
Statement of Additional Information
for the
Diversified Real Estate Fund
June 1, 1997
TABLE OF CONTENTS
-----------------
Page
----
Investment Objective and Policies.................................... 2
Fundamental Limitations.............................................. 11
Additional Purchase and Redemption Information....................... 13
Net Asset Value...................................................... 14
Additional Information Concerning Taxes.............................. 15
Management of the Company............................................ 17
Independent Accountants.............................................. 23
Counsel.............................................................. 23
Additional Information Concerning Shares............................. 24
Additional Performance Information................................... 25
Miscellaneous........................................................ 29
Appendix............................................................. A-1
This Statement of Additional Information is meant to be read in
conjunction with M.S.D. & T. Funds, Inc.'s Prospectus dated June 1, 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.
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.
<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.
-2-
<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.
-3-
<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 (100% or
more) can result in a corresponding increase in
-4-
<PAGE>
brokerage 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
-5-
<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
-6-
<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. The Fund
will not invest more than 5% of its net assets in convertible securities during
the current fiscal year.
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
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<PAGE>
fluctuate, is not secured. To the extent that the Fund purchases mortgage-
related or mortgage-backed securities at a premium, mortgage foreclosures and
prepayments of principal by mortgagors (which may be made at any time without
penalty) may result in some loss of the Fund's principal investment to the
extent of the premium paid. The yield of the Fund may be affected by
reinvestment of prepayments at higher or lower rates than the original
investment. In addition, like other debt securities, the value of mortgage-
related securities, including government and government-related mortgage pools,
will generally fluctuate in response to market interest rates.
Repurchase Agreements
---------------------
As described in 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.
-8-
<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
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<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
-10-
<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. The Fund will not
invest more than 5% of its net assets in rights and warrants during the current
fiscal year.
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, provided that the Fund will concentrate its investments in
the securities of issuers principally engaged in the real estate business, and
provided further 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
-11-
<PAGE>
gas, and electric and telephone each will be considered a separate industry).
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 (a) 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, and (b) the
Fund may sell any real estate it acquires as a result of a default on debt
securities held by the Fund.
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
-12-
<PAGE>
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 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 intend to engage in such transactions during the current
fiscal year. 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.)
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<PAGE>
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 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
-14-
<PAGE>
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.
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
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<PAGE>
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 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
-16-
<PAGE>
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.
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
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ------------------------------ -------------- -----------------------------
<S> <C> <C>
Suite 1100 Chairman of the law firm of
Baltimore, MD 21201 Piper & Marbury, Baltimore,
Age: 64 Maryland until 1995.
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 LLP,
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 LLP, of which Mr. McConnel is a partner,
receives legal fees as counsel to the Company. As of
-18-
<PAGE>
the date of this Statement of Additional Information, the Directors and officers
of the Company, as a group, owned less than 1% of the outstanding shares of each
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>
PENSION OR TOTAL
AGGREGATE RETIREMENT COMPENSATION
COMPENSATION BENEFITS FROM THE
FROM THE ACCRUED AS PART COMPANY AND
COMPANY OF COMPANY FUND COMPLEX/*/
EXPENSES PAID TO
NAME OF PERSON/POSITION 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. 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
-19-
<PAGE>
shall remain liable, however, for any loss resulting from willful misfeasance,
bad faith, or gross negligence on the part of the Adviser in the performance of
its duties or from its reckless disregard of its obligations and duties under
the Advisory Agreement.
Unless sooner terminated, the Advisory Agreement will continue in
effect through July 20, 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
-20-
<PAGE>
banks or trust companies to serve as sub-custodian on behalf of 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.
-21-
<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
-22-
<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 LLP, 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.
-23-
<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.
-24-
<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
-25-
<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 outstanding during the
period that were entitled to receive dividends.
d = net asset value per share on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by 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
-26-
<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
-27-
<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;
-28-
<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
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<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%).
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<PAGE>
APPENDIX A
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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" - The highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
"A-3" - Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
"B" - Issues are regarded as having only a speculative capacity for
timely payment.
"C" - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
"D" - Issues are 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" - Issuers or related supporting institutions have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative 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.
A-1
<PAGE>
"Prime-2" - Issuers or related supporting institutions have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuers 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" - Issuers do 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
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against 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" ratings.
"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
A-3
<PAGE>
year or less which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"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 good 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>
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong
A-8
<PAGE>
as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are
not significantly vulnerable to foreseeable future developments, short-term debt
of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - 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
A-9
<PAGE>
principal and interest is adequate, although adverse changes in business,
economic or financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating below
"AAA" 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
A-10
<PAGE>
principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
"D" - This designation indicates that the long- term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"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.
A-11
<PAGE>
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-12
