<PAGE>
As filed with the Securities and Exchange Commission on July 31, 1998
Registration Nos. 33-27491
811-5782
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[x]
Pre-Effective Amendment No.
[_]
Post-Effective Amendment No. 22
[x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x]
Amendment No. 23
[x]
____________________________
M.S.D. & T. Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
Two Hopkins Plaza
Baltimore, Maryland 21201
(Address of Principal Executive Offices)
Registrant's Telephone Number:
1-800-551-2145
W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath LLP
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Common Stock
<PAGE>
M.S.D. & T. FUNDS, INC.
GROWTH & INCOME FUND
EQUITY INCOME FUND
EQUITY GROWTH FUND
INTERNATIONAL EQUITY FUND
DIVERSIFIED REAL ESTATE FUND
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 485(a)
under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-1A Item Number Location
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
<S> <C>
1. Cover Page............................. Cover Page
2. Synopsis............................... Expense Summary
3. Condensed Financial Information........ Financial Highlights; Performance
Reporting
4. General Description of Registrant..... Cover Page; Investment
Objectives, Policies and Risks;
Fundamental Limitations; Other
Information Concerning the Company
and Its Shares; Miscellaneous
5. Management of the Fund................ Management of the Company;
Investing in the Funds; Shareholder
Services
5A. Management's Discussion of Fund
Performance........................... Not Applicable
6. Capital Stock and Investing in the Funds; Dividends
Other Securities...................... and Distributions; Tax Information;
Other Information Concerning the
Company and Its Shares; Shareholder
Services; Miscellaneous
7. Purchase of Securities Being Offered.. Investing in the Funds
8. Redemption or Repurchase.............. Investing in the Funds
9. Pending Legal Proceedings............. Not Applicable
</TABLE>
<PAGE>
M.S.D. & T. FUNDS, INC.
. GROWTH & INCOME FUND
. EQUITY INCOME FUND
. EQUITY GROWTH FUND
. INTERNATIONAL EQUITY FUND
. DIVERSIFIED REAL ESTATE FUND
PROSPECTUS
September __, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY........................................................... 3
FINANCIAL HIGHLIGHTS...................................................... 5
INVESTMENT OBJECTIVES, POLICIES AND RISKS................................. 9
FUNDAMENTAL LIMITATIONS................................................... 23
INVESTING IN THE FUNDS.................................................... 23
SHAREHOLDER SERVICES...................................................... 29
DIVIDENDS AND DISTRIBUTIONS............................................... 31
TAX INFORMATION........................................................... 31
MANAGEMENT OF THE COMPANY................................................. 33
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES................... 37
PERFORMANCE REPORTING..................................................... 37
MISCELLANEOUS............................................................. 38
</TABLE>
- --------------------------------------------------------------------------------
IF YOU HAVE QUESTIONS
For current yield, purchase and redemption information, call 1-800-551-2145.
- --------------------------------------------------------------------------------
<PAGE>
M.S.D. & T. FUNDS, INC.
PROSPECTUS
FOR THE
GROWTH & INCOME FUND
EQUITY INCOME FUND
EQUITY GROWTH FUND
INTERNATIONAL EQUITY FUND
DIVERSIFIED REAL ESTATE FUND
SEPTEMBER __, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
M.S.D. & T. FUND GOAL FOR INVESTORS WHO WANT
---------------- ---- ----------------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GROWTH & INCOME Long-term capital appreciation with income as Long-term capital appreciation and are
a secondary objective through investments willing to accept the risks associated
primarily in common and preferred stock and with investments in equity securities.
debt securities convertible into common stock.
- -------------------------------------------------------------------------------------------------------------------
EQUITY INCOME Current income and long-term capital Current income and long-term capital
appreciation with reasonable risk through appreciation and are willing to accept
investments primarily in common and preferred the relative risks associated with
stock and debt securities convertible into investments in equity securities.
common stock.
- -------------------------------------------------------------------------------------------------------------------
EQUITY GROWTH Long-term capital appreciation through Long-term capital appreciation and are
investments primarily in common and preferred willing to accept the relative risks
stock and debt securities convertible into associated with investments in equity
common stock that represent growth potential. securities.
- -------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY Long-term growth of capital and income with Long-term growth of capital and income
reasonable risk through investments primarily and are willing to accept the risks
in equity securities of foreign issuers. associated with foreign equity
investments.
- -------------------------------------------------------------------------------------------------------------------
DIVERSIFIED REAL ESTATE Current income and capital growth through Current income and growth of capital
investments primarily in securities of and are willing to accept the same
companies principally engaged in the real risks as are associated with direct
estate business. ownership of real estate.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
-1-
<PAGE>
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND SUCH SHARES ARE NOT FEDERALLY INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. IN
ADDITION, THE DIVIDENDS PAID BY THE FUNDS WILL GO UP AND DOWN. MERCANTILE-SAFE
DEPOSIT AND TRUST COMPANY SERVES AS INVESTMENT ADVISER AND ADMINISTRATOR TO THE
FUNDS, IS PAID FEES FOR ITS SERVICES, AND IS NOT AFFILIATED WITH BISYS FUND
SERVICES LIMITED PARTNERSHIP, THE FUNDS' DISTRIBUTOR.
This Prospectus relates to shares of the Growth & Income Fund, Equity
Income Fund, Equity Growth Fund, International Equity Fund and Diversified Real
Estate Fund (collectively the "Funds") of M.S.D. & T. Funds, Inc. (the
"Company"), a no-load, open-end management investment company. This Prospectus
describes concisely the information about the Funds that you should know before
investing. Please read and keep it for future reference. More information about
the Funds is contained in the Statement of Additional Information dated
September __, 1998 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.
-2-
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a Fund.
Annual Fund Operating Expenses are paid out of a Fund's assets and include fees
for portfolio management, maintenance of shareholder accounts, general Fund
administration, accounting, custody and other services.
Below is information regarding the operating expenses for the Funds.
Examples based on this information are also provided.
<TABLE>
<CAPTION>
GROWTH & EQUITY EQUITY INTERNATIONAL DIVERSIFIED
INCOME INCOME GROWTH EQUITY REAL ESTATE
FUND FUND FUND FUND FUND
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees (after fee
waivers)(1)................................ .50% .48% .41% .73% .39%
Other Expenses (after fee waivers)
(includes administration, custody
and transfer agency, and
miscellaneous other charges)(1)............ .20% .22% .29% .27% .61%
Total Fund Operating Expenses --- --- --- ---- ----
(after fee waivers)(1)..................... .70% .70% .70% 1.00% 1.00%
=== === === ==== ====
</TABLE>
- --------------------------
(1) This expense information is provided to help you understand the various
costs and expenses that you would bear indirectly as a shareholder of one
of the Funds. The expense information is based on the expenses incurred by
the Funds during the fiscal year or period ended May 31, 1998, as restated
to reflect the expenses which the Funds expect to incur during the current
fiscal year. Without fee waivers by the investment adviser and
administrator, Management Fees, Other Expenses and Total Fund Operating
Expenses, stated as a percentage of average daily net assets, would be
.60%, .28% and .88%, respectively, for the Growth & Income Fund, .60%, .30%
and .90%, respectively, for the Equity Income Fund; .60%, .31% and .99%,
respectively, for the Equity Growth Fund; .80%, .33% and 1.13%,
respectively, for the International Equity Fund; and .80%, 2.73% and 3.53%,
respectively, for the Diversified Real Estate Fund.
The investment adviser and administrator are under no obligation to waive
fees or reimburse expenses, but have informed the Company that they expect
to waive fees and/or reimburse expenses during the current fiscal year as
necessary to maintain the Funds' total operating expenses at the levels set
forth in the above table. You should note that any fees that are charged by
the investment adviser, its affiliates or any other institutions directly
to their customer accounts for services related to an investment in the
Funds are in addition to, and are not reflected in, the fees and expenses
described above.
For more complete descriptions of the Funds' operating expenses, see
"Management of the Company" in this Prospectus.
-3-
<PAGE>
EXAMPLE:
Assume a Fund's annual return is 5% and its expenses are the same as those
stated above. For every $1,000 you invest, here's how much you would pay in
total expenses if you closed your account after the number of years indicated:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------- ------- ------- --------
<S> <C> <C> <C> <C>
Growth & Income Fund...................................... $ 7 $22 $39 $ 87
Equity Income Fund........................................ $ 7 $22 $39 $ 87
Equity Growth Fund........................................ $ 7 $22 $39 $ 87
International Equity Fund................................. $10 $32 $55 $122
Diversified Real Estate Fund.............................. $10 $32 $55 $122
</TABLE>
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR
FUTURE INVESTMENT RETURNS OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights, which have been derived from the Funds'
financial statements, have been audited by PricewaterhouseCoopers LLP, the
Funds' independent accountants, whose unqualified report on the financial
statements containing such information for the five years in the period ended
May 31, 1998 is incorporated by reference into the Statement of Additional
Information. The Financial Highlights should be read along with the financial
statements and related notes, which are also incorporated by reference into the
Statement of Additional Information. Further information about the performance
of the Funds is available in the Company's Annual Report to Shareholders for the
fiscal year ended May 31, 1998. For a free copy of the Statement of Additional
Information or the Annual Report to Shareholders, contact the Company at the
address or telephone number on the first page of this Prospectus.
-5-
<PAGE>
GROWTH & INCOME FUND
Financial Highlights for a share of the Growth & Income Fund outstanding
throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 5/31/93
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $ 18.25 $ 14.58 $ 13.42 $ 12.14 $ 12.39 $ 11.36
-------- -------- -------- -------- -------- --------
Income From Investment Operations:
Net Investment Income................................... 0.20 0.23 0.33 0.35 0.29 0.29
Net Realized and Unrealized Gain (Loss)
on Investments........................................ 5.01 4.19 1.89 1.55 (0.18) 1.13
-------- -------- -------- -------- -------- --------
Total From Investment Operations...................... 5.21 4.42 2.22 1.90 0.11 1.42
-------- -------- -------- -------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income.................................
(0.23) (0.25) (0.35) (0.34) (0.28) (0.30)
Net Capital Gains..................................... 1.86) (0.50) (0.71) (0.28) (0.08) (0.09)
-------- -------- -------- -------- -------- --------
Total Distributions................................... (2.09) (0.75) (1.06) (0.62) (0.36) (0.39)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period............................ $ 21.37 $ 18.25 $ 14.58 $ 13.42 $ 12.14 $ 12.39
======== ======== ======== ======== ======== ========
Total Return.............................................. 29.40% 31.26% 17.24% 16.22% 0.87% 12.87%
Ratios/Supplemental Data
Net Assets, End of Period (000)......................... $373,864 $142,452 $107,233 $ 91,277 $ 53,240 $ 46,754
Ratio of Expenses to Average
Net Assets
After Expense Waiver.................................. 0.71% 0.73% 0.73% 0.73% 0.68% 0.68%
Before Expense Waiver................................. 0.88% 0.89% 0.89% 0.89% 0.87% 0.88%
Ratio of Net Investment Income to
Average Net Assets.................................... 0.99% 1.52% 2.38% 2.99% 2.41% 2.68%
Portfolio turnover rate................................... 24.09% 27.10% 45.15% 33.26% 61.16% 11.99%
<CAPTION>
Year 2/28/91/1/
Ended to
5/31/92 5/31/91
-------- ---------
<S> <C> <C>
Net Asset Value, Beginning of Period..................... $ 10.69 $ 10.00
-------- ---------
Income From Investment Operations:
Net Investment Income................................... 0.33 0.09
Net Realized and Unrealized Gain (Loss)
on Investments........................................ 0.66 0.60
-------- ---------
Total From Investment Operations...................... 0.99 0.69
-------- ---------
Less Distributions to Shareholders from:
Net Investment Income.................................
(0.32) --
Net Capital Gains..................................... -- --
-------- ---------
Total Distributions................................... (0.32) 0.00
-------- ---------
Net Asset Value, End of Period............................ $ 11.36 $ 10.69
======== =========
Total Return.............................................. 9.51% 6.90%
Ratios/Supplemental Data
Net Assets, End of Period (000)......................... $ 17,463 $ 4,801
Ratio of Expenses to Average
Net Assets
After Expense Waiver.................................. 0.68% 0.68%/2/
Before Expense Waiver................................. 0.96% 1.20%
Ratio of Net Investment Income to
Average Net Assets.................................... 3.05% 4.10%/2/
Portfolio turnover rate................................... 9.57% 1.98%
</TABLE>
____________________________
/1/ Commencement of operations.
/2/ Annualized.
-6-
<PAGE>
EQUITY INCOME FUND, EQUITY GROWTH FUND
AND DIVERSIFIED REAL ESTATE FUND
Financial Highlights for a share of the Equity Income Fund, Equity Growth
Fund and Diversified Real Estate Fund outstanding throughout the period
indicated:
<TABLE>
<CAPTION>
EQUITY INCOME FUND EQUITY GROWTH FUND
------------------- -------------------
March 1, 1998/1/ March 1, 1998/1/
to May 31, 1998 to May 31, 1998
--------------- ---------------
<S> <C> <C>
Net Asset Value, Beginning of Period.............................. $ 10.00 $ 10.00
-------- -------
Income From Investment Operations:
Net Investment Income........................................... 0.04 0.02
Net Realized and Unrealized Gain (Loss)
on Investments................................................ 0.19 0.27
-------- -------
Total From Investment Operations.............................. 0.23 0.29
-------- -------
Less Distributions to Shareholders from:
Net Investment Income......................................... (0.02) (0.01)
Net Capital Gains............................................. -- --
Total Distributions........................................... (0.02) (0.01)
-------- -------
Net Asset Value, End of Period.................................... $ 10.21 $ 10.28
======== =======
Total Return...................................................... 2.28% 2.89%
Ratios/Supplemental Data
Net Assets, End of Period (000)................................. $319,971 $34,876
Ratio of Expenses to Average
Net Assets
After Expense Waiver.......................................... 0.70%/2/ 0.70%/2/
Before Expense Waiver......................................... 0.93%/2/ 1.02%/2/
Ratio of Net Investment Income to
Average Net Assets............................................ 1.45%/2/ 0.68%/2/
Portfolio turnover rate........................................... 2.00% 7.99%
<CAPTION>
DIVERSIFIED REAL ESTATE FUND
-----------------------------
August 1, 1997/1/
to May 31, 1998
---------------
<S> <C>
Net Asset Value, Beginning of Period.............................. $ 10.00
-------
Income From Investment Operations:
Net Investment Income........................................... 0.32
Net Realized and Unrealized Gain (Loss)
on Investments................................................ 0.12
-------
Total From Investment Operations.............................. 0.44
-------
Less Distributions to Shareholders from:
Net Investment Income......................................... (0.28)
Net Capital Gains............................................. (0.03)
Total Distributions........................................... (0.31)
-------
Net Asset Value, End of Period.................................... $ 10.13
=======
Total Return...................................................... 4.31%
Ratios/Supplemental Data
Net Assets, End of Period (000)................................. $ 6,677
Ratio of Expenses to Average
Net Assets
After Expense Waiver.......................................... 1.00%/2/
Before Expense Waiver......................................... 2.25%/2/
Ratio of Net Investment Income to
Average Net Assets............................................ 4.17%/2/
Portfolio turnover rate........................................... 0.84%
</TABLE>
- --------------------------------
/1/ Commencement of operations.
/2/ Annualized.
-7-
<PAGE>
INTERNATIONAL EQUITY FUND
Financial Highlights for a share of the International Equity Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year Year Year 7/2/93/1/
Ended Ended Ended Ended to
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................................. $ 13.18 $ 12.47 $ 11.60 $ 11.81 $ 10.00
-------- -------- -------- -------- --------
Income From Investment Operations:
Net Investment Income.............................................. 0.12 0.31 0.09 0.03 0.08
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency................................ 1.42 0.88 1.51 0.08 1.81
-------- -------- -------- -------- --------
Total From Investment Operations................................... 1.54 1.19 1.60 0.11 1.89
-------- -------- -------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income............................................ (0.15) (0.24) (0.07) (0.04) (0.07)
Net Capital Gains................................................ (0.67) (0.24) (0.66) (0.28) (0.01)
-------- -------- -------- -------- --------
Total Distributions.............................................. (0.82) (0.48) (0.73) (0.32) (0.08)
-------- -------- -------- -------- --------
Net Asset Value, End of Period....................................... $ 13.90 $ 13.18 $ 12.47 $ 11.60 $ 11.81
======== ======== ======== ======== ========
Total Return......................................................... 12.77% 9.81% 14.27% 0.82% 18.98%
Ratios/Supplemental Data
Net Assets, End of Period (000).................................... $ 85,402 $ 83,313 $ 75,676 $ 69,172 $ 47,472
Ratio of Expenses to Average
Net Assets
After Expense Waivers............................................ 1.03% 1.05% 1.05% 1.05% 1.00%/2/
Before Expense Waiver............................................ 1.14% 1.16% 1.17% 1.16% 1.20%/2/
Ratio of Net Investments Income to
Average Net Assets............................................. 0.92% 0.97% 0.78% 0.06% 0.82%/2/
Portfolio turnover rate.............................................. 55.55% 74.15% 53.58% 42.15% 39.49%
</TABLE>
- ----------------------------
/1/ Commencement of operations.
/2/ Annualized.
-8-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Funds' investment adviser (the "Adviser") and, with respect to the
International Equity Fund, the Fund's sub-adviser (the "Sub-Adviser") use a
range of different investments and investment techniques in seeking to achieve a
Fund's investment objective. All Funds do not use all of the investments and
investment techniques described below, which involve various risks, and which
are also described in the following sections. You should consider which Funds
best meet your investment goals. The Adviser and Sub-Adviser will use their best
efforts to achieve a Fund's investment objective, although its achievement
cannot be assured. An investor should not consider an investment in any Fund to
be a complete investment program. Each Fund is classified as a diversified
portfolio under the Investment Company Act.
GROWTH & INCOME FUND
The investment objective of the Growth & Income Fund is to seek long-term
capital appreciation, with income being a secondary objective. The Fund pursues
its objective by investing substantially all of its assets in common stock,
preferred stock and debt obligations convertible into common stock that the
Adviser believes to be undervalued. The Fund seeks to purchase individual stocks
that appear to represent good relative values and seem likely to appreciate in
price. The ratios of a stock's price to earnings and book value, its earnings
trend and its dividend growth rate are factors considered in stock selection.
Securities purchased by the Fund may produce higher than average dividend
yields, although income is a secondary objective in the selection of
investments.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in common stock, preferred stock and debt obligations
convertible into common stock. Although the Fund will invest primarily in
publicly-traded common stocks of companies incorporated in the United States,
the Fund may also invest up to 25% of its total assets in the securities of
foreign issuers, either directly or through American Depository Receipts
("ADRs"), European Depository Receipts ("EDRs") and Global Depository Receipts
("GDRs") as described below under "Other Investment Policies and Related Risks."
During normal market and economic conditions, the Fund may hold up to 25%
of its total assets in debt securities. These securities will either be issued
or guaranteed by the U.S. Government, its agencies or instrumentalities or will
be debt obligations, including but not limited to debt obligations convertible
into common stock ("convertible securities"), that at the time of purchase carry
one of the three highest ratings assigned by an unaffiliated national
statistical rating organization ("Rating Agency"). Investments may also be made
in unrated debt obligations which the Adviser has determined to be of comparable
quality. Up to 10% of the Fund's total assets may be invested in convertible
securities that are rated at the time of purchase in the fourth highest rating
category or lower by one or more Rating Agencies. Convertible securities that
carry the lowest of the four highest ratings assigned by a Rating Agency are
considered to have speculative characteristics, even though they are of
investment grade quality, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade debt obligations. Lower
quality debt securities (including convertible securities), also known as "junk
-9-
<PAGE>
bonds," are considered to be speculative and involve greater risk of default or
price changes due to the issuer's creditworthiness. The market prices of these
securities may fluctuate more than those of higher quality securities and may
decline significantly in periods of general economic difficulty, which may
follow periods of rising rates. Securities in the lowest quality category may
present the risk of default, or may be in default. See the Appendix to the
Statement of Additional Information for a description of applicable debt
security ratings.
The Fund may reduce the percentage of its equity investments and
temporarily invest its assets in fixed-income securities, including the types of
debt securities described above and high quality short-term money market
instruments, when, in the opinion of the Adviser, a defensive position is
warranted, or to meet anticipated redemption requests.
EQUITY INCOME FUND
The investment objective of the Equity Income Fund is to seek current
income and long-term capital appreciation consistent with reasonable risk. The
Fund pursues its objective by investing substantially all of its assets in
common stock, preferred stock and debt obligations convertible into common
stock. The Fund seeks to purchase individual stocks that are likely to produce
higher than average dividend yields and appear to represent good relative values
with the potential for price appreciation. A stock's dividend growth rate, the
ratios of price to earnings and book value and its earnings trend are factors
considered in stock selection.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in income-producing equity securities, including common
stock, preferred stock and debt obligations convertible into common stock.
Although the Fund will invest primarily in publicly-traded common stocks of
companies incorporated in the United States, the Fund may also invest up to 25%
of its total assets in the securities of foreign issuers, either directly or
through ADRs, EDRs and GDRs as described under "Other Investment Policies and
Related Risks."
During normal market and economic conditions, the Fund may hold up to 25%
of its total assets in debt securities. These securities will either be issued
or guaranteed by the U.S. Government, its agencies or instrumentalities or will
be debt obligations, including but not limited to convertible securities, that
at the time of purchase carry one of the three highest ratings assigned by a
Rating Agency. Investments may also be made in unrated debt obligations which
the Adviser has determined to be of comparable quality. Up to 10% of the Fund's
total assets may be invested in convertible securities that are rated at the
time of purchase in the fourth highest rating category or lower by one or more
Rating Agencies. See "Growth & Income Fund" above for a discussion of certain
risks in investing in convertible securities that are rated in the fourth
highest rating category or lower by a Rating Agency. See Appendix A to the
Statement of Additional Information for a description of applicable debt
security ratings.
The Fund may reduce the percentage of its equity investments and
temporarily invest its assets, without limitation, in fixed income securities,
including the types of debt securities described above and high quality short-
term money market instruments, when in the opinion of the Adviser, a defensive
position is warranted, or to meet anticipated redemption requests.
-10-
<PAGE>
EQUITY GROWTH FUND
The investment objective of the Equity Growth Fund is to seek long-term
capital appreciation. The Fund pursues its objective by investing substantially
all of its assets in common stock, preferred stock and debt obligations
convertible into common stock. The Fund seeks to purchase individual stocks that
appear to represent good growth potential and seem likely to appreciate in
price.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in common stock, preferred stock and debt obligations
convertible into common stock. Although the Fund will invest primarily in
publicly-traded common stocks of companies incorporated in the United States,
the Fund may also invest up to 25% of its total assets in the securities of
foreign issuers, either directly or through ADRs, EDRs and GDRs as described
under "Other Investment Policies and Related Risks."
During normal market and economic conditions, the Fund may hold up to 25%
of its total assets in debt securities. These securities will either be issued
or guaranteed by the U.S. Government, its agencies or instrumentalities or will
be debt obligations, including but not limited to convertible securities, that
at the time of purchase carry one of the three highest ratings assigned by a
Rating Agency. Investments may also be made in unrated debt obligations which
the Adviser has determined to be of comparable quality. Up to 10% of the Fund's
total assets may be invested in convertible securities that are rated at the
time of purchase in the fourth highest rating category or lower by one or more
Rating Agencies. See "Growth & Income Fund" above for a discussion of certain
risks in investing in convertible securities that are rated in the fourth
highest rating category or lower by a Rating Agency. See Appendix A to the
Statement of Additional Information for a description of applicable debt
security ratings.
The Fund may reduce the percentage of its equity investments and
temporarily invest its assets, without limitation, in fixed income securities,
including the types of debt securities described above and high quality short-
term money market instruments, when in the opinion of the Adviser, a defensive
position is warranted, or to meet anticipated redemption requests.
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INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is long-term
growth of capital and income consistent with reasonable risk. Current income
from dividends, interest and other sources is a secondary consideration for the
Fund. Under normal market and economic conditions, at least 65% of the Fund's
total assets will be invested in the equity securities of issuers located in at
least three different foreign countries. Currently, the Fund is authorized to
invest in the securities of issuers located in Argentina, Australia, Austria,
Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark,
Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia,
Ireland, Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, the Netherlands,
New Zealand, Norway, Pakistan, Peru, the Philippines, Poland, Portugal, Russia,
Singapore, Spain, South Africa, Sri Lanka, Sweden, Switzerland, Taiwan,
Thailand, Turkey, the United Kingdom, Venezuela and Zimbabwe. There are no
limitations on the amount of the Fund's assets which can be invested in
securities of issuers in any one country, provided, however, that under normal
market and economic conditions, no more than 25% of the Fund's net assets will
be invested in the aggregate in the securities of issuers located in countries
with emerging economies or securities markets. The Fund may also purchase the
securities of issuers located in the United States, although it has no present
intention of doing so.
Foreign securities which the Fund may acquire include common stock,
preferred stock, debt securities convertible into common stock, warrants, bonds,
notes and other debt obligations issued by foreign entities. The Fund will
generally acquire stocks with relatively low ratios of market values to earnings
and to book values. The Fund may also invest in the securities of foreign
issuers in the form of ADRs, EDRs and GDRs as described below under "Other
Investment Policies and Related Risks."
The Fund may hold up to 100% of its assets in cash and short-term money
market instruments (i) when the Adviser believes that the Fund should assume a
temporary defensive position because of unfavorable investment conditions, (ii)
to maintain liquidity to meet shareholder redemption requests, or (iii) to take
advantage of new investment opportunities.
DIVERSIFIED REAL ESTATE FUND
The investment objective of the Diversified Real Estate Fund 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,
construction, financing, management or sale of commercial, industrial or
residential real estate, or such company has at least 50% of its assets in such
real estate.
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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, convertible securities
(including investment grade bonds and preferred stocks) and warrants. Debt
obligations that carry one of the four highest ratings assigned by a Rating
Agency are considered to be investment grade. See "Growth & Income Fund" above
for a discussion of certain risks in investing in debt obligations that carry
the lowest of the four highest ratings assigned by a Rating Agency.
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. Each Fund invests primarily in equity securities. As with
other mutual funds that invest primarily in equity securities, the Funds are
subject to market risk. That is, the possibility exists that common stocks will
decline over short or even extended periods of time and both the U.S. and
certain foreign equity markets tend to be cyclical, experiencing both periods
when stock prices generally increase and periods when stock prices generally
decrease. Therefore, each Fund's net asset value may fluctuate with movements in
the equity markets. See "Investing in the Funds -- How to Buy Fund Shares" below
for an explanation of net asset value.
. Interest Rate Risk. To the extent that a 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.
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. Foreign Securities. There are risks and costs involved in investing in
securities of foreign issuers (including foreign governments), which are in
addition to the usual risks inherent in U.S. investments. Investments in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction costs as well as the imposition of additional taxes
by foreign governments. In addition, foreign investments may involve risks
associated with the level of currency exchange rates, less complete financial
information about the issuer, less market liquidity and political instability.
Future political and economic developments, the possible imposition of
withholding taxes on interest income, the possible seizure or nationalization of
foreign holdings, the possible difficulty in taking appropriate legal action in
a foreign court, the possible establishment of exchange controls or the adoption
of other governmental restrictions might adversely affect the payment of
principal and interest on foreign obligations. Additionally, foreign banks and
foreign branches of domestic banks may be subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.
Although the International Equity Fund will invest primarily in securities
denominated in foreign currencies, the Fund values its securities and other
assets in U.S. dollars. As a result, the net asset value of the Fund's shares
will fluctuate with U.S. dollar exchange rates, as well as with price changes of
the Fund's securities in the various local markets and currencies. Thus, an
increase in the value of the U.S. dollar compared to the currencies in which the
Fund makes its investments could reduce the effect of increases and magnify the
effect of decreases in the prices of the Fund's securities in their local
markets. Conversely, a decrease in the value of the U.S. dollar will have the
opposite effect of magnifying the effect of increases and reducing the effect of
decreases in the prices of the Fund's securities in their local markets. In
addition to favorable and unfavorable currency exchange-rate developments, the
Fund is subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.
Certain of the risks associated with investments in foreign securities are
heightened with respect to investments in developing countries and fledgling
democracies. The risks of expropriation, nationalism and social, political and
economic instability are greater in those countries than in more developed
capital markets.
. European Currency Unification. Many European countries are about to adopt
a single European currency, the euro. On January 1, 1999, the euro will become
legal tender for all countries participating in the Economic and Monetary Union
("EMU"). A new European Central Bank will be created to manage the monetary
policy of the new unified region. On the same date, the exchange rates will be
irrevocably fixed between the EMU member countries. National currencies will
continue to circulate until they are replaced by euro coins and bank notes by
the middle of 2002.
This change is likely to significantly impact the European capital markets
in which the International Equity Fund invests and may result in the Fund facing
risks that are different than the risks which it ordinarily faces in pursuing
its investment objective. These risks, which include, but are not limited to,
uncertainty as to the proper tax treatment of the currency conversion,
volatility of currency exchange rates as a result of the conversion, uncertainty
as to capital market reaction, conversion costs that may affect issuer
profitability and creditworthiness,
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and lack of participation by some European countries, may increase the
volatility of the Fund's net asset value per share.
. Real Estate Industry Risk. Although the Diversified Real Estate 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.
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. Each 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 or currency exchange rates or indices, and include,
but are not limited to, futures contracts, options, forward foreign currency
contracts and structured debt obligations (including collateralized mortgage
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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 or exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the assets, rates or indices on which it is
based; liquidity risk that 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 is lacking regarding their actual performance over complete
market cycles.
The Adviser (Sub-Adviser in the case of the International Equity Fund) will
evaluate the risks presented by the derivative instruments purchased by a Fund,
and will determine, in connection with its day-to-day management of the Fund,
how they will be used in furtherance of the Fund's investment objective. It is
possible, however, that the Adviser's or Sub-Adviser's evaluations will prove to
be inaccurate or incomplete and, even when accurate and complete, it is possible
that a Fund will, because of the risks discussed above, incur loss as a result
of its investments in derivative instruments.
OTHER INVESTMENT POLICIES AND RELATED RISKS
. U.S. Government Obligations and Money Market Instruments. Each Fund
except the International Equity 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 those of 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 those of 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
those of the Federal Home Loan Mortgage Corporation, 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. Some of these instruments may be variable or floating rate instruments.
Each Fund may from time to time invest in money market instruments,
including bank obligations, commercial paper and corporate bonds with remaining
maturities of thirteen months or less. Bank obligations include bankers'
acceptances, negotiable certificates of deposit and non-negotiable time deposits
issued or supported by U.S. or foreign banks that have total assets of more than
$1 billion at the time of purchase. Each Fund except the International Equity
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
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foreign banks and foreign branches of U.S. banks will not exceed 25% of the
particular Fund's total assets at the time of purchase. Taxable commercial paper
purchased by each Fund will be rated at the time of purchase within the highest
rating category assigned by a Rating Agency. In addition, each Fund may acquire
unrated commercial paper and corporate bonds that are determined by the Adviser
at the time of purchase to be of comparable quality. Commercial paper may
include variable and floating rate instruments.
. Municipal Obligations. The Equity Income Fund and Equity Growth Fund may
invest from time to time in tax-exempt debt obligations issued by states,
territories and possessions of the United States, the District of Columbia and
their respective political subdivisions, agencies, instrumentalities and
authorities ("municipal obligations"). These securities may be advantageous for
a Fund when, as a result of prevailing economic, regulatory or other
circumstances, the yield of such securities on a pre-tax basis is comparable to
that of other debt securities the Fund can purchase. Dividends paid by a Fund
that come from interest on municipal obligations will be taxable to
shareholders.
The two main types of municipal obligations are "general obligation"
securities (which are secured by the issuer's full faith, credit and taxing
power) and "revenue" securities (which are payable only from revenues received
from the operation of a particular facility or other revenue source). A third
type of municipal obligation, normally issued by special purpose public
authorities, is known as a "moral obligation" security because if the issuer
cannot meet its obligations it draws on a reserve fund, the restoration of which
is not a legal requirement. Private activity bonds (which are a type of
obligation that, although exempt from regular federal income tax, may be subject
to the federal alternative minimum tax) are usually revenue securities issued by
or for public authorities to finance a privately operated facility.
Municipal obligations purchased by the Funds in some cases may be insured
as to the timely payment of principal and interest. There is no guarantee,
however, that the insurer will meet its obligations in the event of a default in
payment by the issuer. In other cases, municipal obligations may be backed by
letters of credit or guarantees issued by domestic or foreign banks or other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or guarantee with
respect to a municipal obligation held by a Fund could have an adverse effect on
the Fund's portfolio and the value of its shares. As described above under "Risk
Factors -- Foreign Securities," foreign letters of credit and guarantees involve
certain risks in addition to those of domestic obligations.
. Variable and Floating Rate Instruments. Each Fund may purchase variable
and floating rate instruments. Because of the absence of a market in which to
resell a variable or floating rate instrument, a Fund might have trouble selling
an instrument should the issuer default or during periods when the Fund is not
permitted by agreement to demand payment of the instrument, and for this and
other reasons a loss could occur with respect to the instrument.
. Mortgage-Related Securities. The Diversified Real Estate Fund may invest
for defensive purposes in investment grade mortgage-backed securities issued or
guaranteed by U.S.
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Government agencies and private issuers. Such securities may include
collateralized mortgage obligations ("CMOs") and U.S. Government stripped
mortgage-backed securities ("SMBS").
CMOs are a type of bond issued by non-governmental entities which provide
the holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. Issuers of CMOs frequently elect
to be taxed as a pass-through entity known as a real estate mortgage investment
conduit or REMIC. CMOs are issued in multiple classes, each with a specified
fixed or floating interest rate and a final distribution date.
SMBS represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage-backed certificates issued by a U.S. Government agency and representing
interests in pools of mortgage loans. These principal-only or interest-only
distributions are stripped from the underlying mortgage-backed security by
private entities or by the agency that issued the mortgage-backed certificate.
The yield characteristics of mortgage-related securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
mortgage loans) generally may be prepaid at any time. The prepayment rate is
primarily a function of current market rates and conditions. In periods of
rising interest rates, the rate of prepayment tends to increase. During periods
of falling interest rates, the reinvestment of prepayment proceeds by the Fund
will generally be at a lower rate than the rate on the prepaid obligation.
Prepayments may also result in some loss of the Fund's principal investment if
any premiums were paid. As a result of these yield characteristics, some high-
yielding mortgage-related securities may have less potential for growth in value
than conventional bonds with comparable maturities. These characteristics may
result in a higher level of price volatility for these securities under certain
market conditions. In addition, SMBS may exhibit greater price volatility and
interest rate risk than other types of mortgage-related securities because of
the manner in which their principal and interest are returned to investors.
. Repurchase Agreements and Reverse Repurchase Agreements. Each Fund may
buy portfolio securities subject to the seller's agreement to repurchase them at
an agreed upon date and price. These transactions are known as repurchase
agreements. Repurchase agreements involve the risk that the seller will fail to
repurchase the securities as agreed. In that event, the Fund will bear the risk
of possible loss due to adverse market action or delays in liquidating the
underlying obligations. Repurchase agreements are considered to be loans under
the Investment Company Act.
Each Fund may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, a Fund sells portfolio securities
to a financial institution and agrees to buy them back at an agreed upon date
and price. Reverse repurchase agreements may be used to meet redemption requests
without selling portfolio securities. Reverse repurchase agreements involve the
risk of counterparty default and possible loss of collateral held by the
counterparty. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act.
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. When-Issued Purchases and Forward Commitments. Each Fund except the
Growth & Income Fund and International Equity Fund may purchase securities on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis. These transactions, which involve a commitment by a Fund to
purchase or sell particular securities with payment and delivery taking place at
a future date, permit the Fund to lock in a price or yield on a security it
intends to purchase or sell, regardless of future changes in interest rates. The
Fund will bear the risk, however, that the price or yield obtained in a
transaction may be less favorable than the price or yield available in the
market when the delivery takes place. When-issued and forward commitment
transactions are not expected to exceed 25% of the value of a Fund's total
assets under normal circumstances. Because a Fund is required to set aside cash
or liquid securities to satisfy these purchase commitments, a Fund's liquidity
and ability to manage its portfolio might be affected during periods in which
its commitments exceed 25% of the value of its total assets. The Funds do not
intend to engage in when-issued and forward commitment transactions for
speculative purposes.
. Stand-By Commitments. The Equity Income Fund and Equity Growth Fund may
acquire stand-by commitments under which a dealer agrees to purchase certain
municipal obligations at a Fund's option at a price equal to their amortized
cost value plus interest. These commitments will be used only to assist in
maintaining a Fund's liquidity and not for trading purposes.
. Securities Lending. Each Fund may lend its portfolio securities to
broker-dealers and other institutions as a means of earning additional income.
Although securities loans will be fully collateralized, such loans present risks
of delay in receiving additional collateral or in recovering the securities
loaned or even a loss of rights in the collateral if the borrower of the
securities fails financially. However, securities loans will be made only to
parties the Adviser deems to be of good standing and will only be made if the
Adviser believes the income to be earned from the loans justifies the risks.
. Other Investment Companies. Each Fund except the International Equity
Fund may invest in securities issued by other investment companies which invest
in eligible quality, short-term debt securities, whether taxable or tax-exempt,
and which seek to maintain a $1.00 net asset value per share, i.e., "money
market" funds. Such investments will be made by a Fund in connection with the
management of its daily cash position and will be subject to the requirements of
applicable securities laws. When a Fund invests in another investment company,
it pays a pro rata portion of the advisory and other expenses of that company as
one of its shareholders. These expenses are in addition to the Fund's own
expenses.
. American, European and Global Depository Receipts. The International
Equity Fund may invest up to 100% of its total assets, and the Growth & Income
Fund, Equity Income Fund and Equity Growth Fund each may invest up to 25% of its
total assets, in ADRs, EDRs, GDRs and similar securities. ADRs typically are
issued by a U.S. bank or trust company and evidence ownership of underlying
securities issued by a foreign issuer. EDRs, which are sometimes referred to as
Continental Depository Receipts, are receipts issued in Europe typically by non-
U.S. banks or trust companies and foreign branches of U.S. banks that evidence
ownership of underlying foreign or U.S. securities. GDRs are depository receipts
structured similarly to EDRs
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and are issued and traded in several international financial markets. GDRs are
designed for trading in non-U.S. securities markets. These instruments may not
be denominated in the same currency as the securities they represent.
Investments in ADRs, EDRs and GDRs involve risks similar to those accompanying
direct investments in foreign securities.
. Foreign Currency Exchange Contracts. Each Fund except the Diversified
Real Estate Fund may from time to time use foreign currency exchange contracts
to hedge against movements in the value of foreign currencies (including the
European Currency Unit) relative to the U.S. dollar in connection with specific
portfolio transactions or with respect to portfolio positions. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Foreign currency exchange contracts do not eliminate fluctuations in the values
of portfolio securities but rather allow a Fund to establish a rate of exchange
for a future point in time.
. Options. The Equity Income Fund and Equity Growth Fund may write covered
call options, buy put options, buy call options and sell, or "write," secured
put options on particular securities or various securities indices. A call
option for a particular security gives the purchaser of the option the right to
buy, and a writer the obligation to sell, the underlying security at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract. A put
option for a particular security gives the purchaser the right to sell the
underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
In contrast to an option on a particular security, an option on a securities
index provides the holder with the right to make or receive a cash settlement
upon exercise of the option.
Options purchased by a Fund will not exceed 5%, and options written by a
Fund will not exceed 25%, of its net assets. Options may or may not be listed on
a national securities exchange and issued by the Options Clearing Corporation.
Unlisted options are not subject to the protections afforded purchasers of
listed options issued by the Options Clearing Corporation which performs the
obligations of its members if they default.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, a Fund gives up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price (except to the
extent the premium represents such a profit). Moreover, it will not be able to
sell the underlying security until the covered call option expires or is
exercised or a Fund closes out the option. In writing a secured put option, a
Fund assumes the risk that the market value of the security will decline below
the exercise price of the option. The use of covered call and secured put
options will not be a primary investment technique of either Fund.
. Futures and Related Options. The Equity Income Fund and Equity Growth
Fund may invest to a limited extent in futures contracts and options on futures
contracts in order to gain fuller exposure to movements of securities prices
pending investment, for hedging purposes or to maintain liquidity. Futures
contracts obligate a Fund, at maturity, to take or make delivery of
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certain securities or the cash value of a securities index. A Fund may not
purchase or sell a futures contract (or related option) unless immediately after
any such transaction the sum of the aggregate amount of margin deposits on its
existing futures positions and the amount of premiums paid for related options
is 5% or less of its total assets (after taking into account certain technical
adjustments).
Each of these Funds may also purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or seller of a futures contract at a specified exercise price at any
time during the option period. When a Fund sells an option on a futures
contract, it becomes obligated to purchase or sell a futures contract if the
option is exercised. In anticipation of a market advance, a Fund may purchase
call options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
that Fund intends to purchase. Similarly, if the value of a Fund's portfolio
securities is expected to decline, the Fund might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
The International Equity Fund may enter into interest rate futures contracts,
other types of financial futures contracts (such as foreign currency futures
contracts, which are similar to forward foreign currency contracts described
above) and related futures options, as well as any index or foreign market
futures which are available in recognized exchanges or in other established
financial markets.
More information regarding futures contracts and related options can be found
in Appendix B to the Statement of Additional Information.
. Rights and Warrants. The Equity Income Fund, Equity Growth Fund and
International Equity Fund may invest in rights and warrants to purchase
securities. It is the current intention of each Fund to limit investments in
rights and warrants to no more than 5% of its net assets.
. Other Investment Policies and Techniques of the International Equity Fund.
From time to time the International Equity Fund may use the investment
techniques identified below. It is the International Equity Fund's current
intention that no more than 5% of its net assets will be at risk in the use of
any one of such investment techniques, except that a different limitation
applies to writing foreign currency call options.
- Foreign Currency Put Options. The International Equity Fund may
purchase foreign currency put options on U.S. exchanges or U.S. over-the-counter
markets. A put option gives the Fund, upon payment of a premium, the right to
sell a currency at the exercise price until the expiration of the option and
serves to insure against adverse currency price movements in the underlying
portfolio assets denominated in that currency.
- Foreign Currency Call Options. A call option written by the
International Equity Fund gives the purchaser, upon payment of a premium, the
right to purchase from the Fund a currency at the exercise price until the
expiration of the option. The Fund may write a call option on a foreign currency
only in conjunction with a purchase of a put option on that
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currency. Such a strategy is designed to reduce the cost of downside currency
protection by limiting currency appreciation potential. The face value of such
writing may not exceed 90% of the value of the securities denominated in such
currency invested in by the Fund to cover such call writing.
- Unlisted Foreign Currency Put and Call Options. A number of major
investment firms trade unlisted currency options which are more flexible than
exchange-listed options with respect to strike price and maturity date. These
unlisted options generally are available on a wider range of currencies.
Unlisted foreign currency options are generally less liquid than listed options
and involve the credit risk associated with the individual issuer. They will be
deemed to be illiquid for purposes of the International Equity Fund's limitation
on investments in illiquid securities.
- Emergency Borrowing. As a temporary measure for extraordinary or
emergency purposes, the International Equity Fund may borrow money from banks on
an unsecured basis.
. Managing Liquidity. Disposing of illiquid investments may involve time-
consuming negotiations and legal expenses, and it may be difficult or impossible
to dispose of such investments promptly at an acceptable price. Additionally,
the absence of a trading market can make it difficult to value a security. For
these and other reasons the Funds will not knowingly invest more than 15% (10%
with respect to the Growth & Income Fund) of the value of their respective net
assets in illiquid securities. Illiquid securities include repurchase
agreements and time deposits that do not permit a Fund to terminate them after
seven days' notice, restricted securities, unlisted foreign currency options and
other securities, for which market quotations are not readily available.
Certain securities that might otherwise be considered illiquid, however, such as
some issues of commercial paper and variable amount master demand notes with
maturities of nine months or less and securities for which the Adviser (Sub-
Adviser in the case of the International Equity Fund) has determined pursuant to
guidelines adopted by the Company's Board of Directors that a liquid trading
market exists (including certain securities that may be purchased by
institutional investors under SEC Rule 144A) are not subject to this limitation.
Investments in Rule 144A securities could have the effect of increasing the
level of illiquidity in a Fund during any period that qualified institutional
buyers were no longer interested in purchasing these restricted securities.
. Portfolio Turnover. A Fund may sell a portfolio security soon after it is
purchased if the Adviser (Sub-Adviser in the case of the International Equity
Fund) believes that a sale is consistent with the Fund's investment objective.
A high rate of portfolio turnover (100% or more) involves correspondingly
greater brokerage commission expenses, tax consequences (including the possible
realization of additional taxable capital gains and income) and other
transaction costs, which must be borne directly by the Fund involved and
ultimately by its shareholders.
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<PAGE>
FUNDAMENTAL LIMITATIONS
The investment objective of each of the Growth & Income Fund, International
Equity Fund and Diversified Real Estate Fund discussed above is "fundamental",
which means that it may not be changed for a Fund without the approval of a
majority of that Fund's outstanding shares. The investment objective of each of
the Equity Income Fund and Equity Growth Fund discussed above may be changed by
the Company's Board of Directors without shareholder approval, although
shareholders will be given at least 30 days' written notice before such a change
occurs. Unless otherwise noted, each Fund's investment policies discussed above
are not fundamental and may be changed by the Company's Board of Directors
without shareholder approval. However, each Fund has in place certain
"fundamental" investment limitations that cannot be changed for a Fund without
the approval of a majority of that Fund's outstanding shares. Some of these
fundamental limitations are summarized below, and all of the Funds' fundamental
limitations are set out in full in the Statement of Additional Information.
1. A Fund may not purchase securities (with certain exceptions, including
U.S. Government securities) if more than 5% of its total assets will be invested
in the securities of any one issuer, except that up to 25% of the total assets
of each Fund can be invested without regard to this 5% limitation.
2. A Fund may not invest 25% or more of its total assets in one or more
issuers conducting their principal business activities in the same industry,
subject to certain exceptions, provided that the Diversified Real Estate Fund
will concentrate its investments in the securities of issuers principally
engaged in the real estate business.
3. A Fund may not borrow money except for temporary purposes in amounts up
to 10% (5% in the case of the International Equity Fund) of its total assets at
the time of such borrowing. Whenever borrowings exceed 5% of a Fund's total
assets, the Fund will not make any further investments.
If a percentage limitation set forth above is met at the time an investment
is made, a subsequent change in that percentage resulting from a change in value
of a Fund's portfolio securities does not mean that the limitation has been
violated.
INVESTING IN THE FUNDS
GETTING YOUR INVESTMENT STARTED
Investing in the Funds is quick and convenient. Shares of the Funds may be
purchased either through the account you maintain with certain financial
institutions or directly through the Company. Fund shares are distributed by
BISYS Fund Services Limited Partnership (called the "Distributor"). The
Distributor's principal offices are located at 3435 Stelzer Road, Columbus, Ohio
43219-3035.
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<PAGE>
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 and third party
checks.
HOW TO BUY FUND SHARES
. Minimum Investments. Each Fund generally requires a $25,000 minimum
initial investment ($50,000 with respect to the Diversified Real Estate Fund).
Subsequent investments must be a minimum of $100. The minimum investment
requirements do not apply to purchases by Banks acting on behalf of their
customers and the Banks do not impose a minimum initial or subsequent investment
requirement for shares purchased on behalf of their customers. The Company
reserves the right to waive these minimums in other instances.
. Opening and Adding to Your Fund Account. Direct investments in the Funds
may be made in a number of different ways, as shown in the following chart.
Simply choose the method that is most convenient for you. Any questions you
have may be answered by calling 1-800-551-2145. As described above under
"Getting Your Investment Started," you may also purchase Fund shares through the
Banks.
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<PAGE>
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
------------------ --------------------
<S> <C> <C>
BY MAIL . Complete a New Account Application and . Make your check payable to the
mail it along with a check payable to the particular Fund in which you are
particular Fund you want to invest in to: investing and mail it to the address at
left.
M.S.D. & T. Funds, Inc. . Please include your account number on
P.O. Box 8515 your check.
Boston, MA 02266-8515
To obtain a New Account Application,
call 551-2145
- --------------------------------------------------------------------------------------------------------------------------
BY WIRE . Before wiring funds, please call . Instruct your bank to wire Federal
1-800-551-2145 for complete wiring funds to: State Street Bank and Trust
instructions. Company, Boston, Massachusetts, Bank
Routing No. 011-0000-28, M.S.D. & T.
. Promptly complete a New Account Deposit A/C No. 99046435.
Application and forward it to:
Be sure to include your name and your
M.S.D. & T. Funds, Inc. Fund account number.
P.O. Box 8515
Boston, MA 02266-8515 . The wire should indicate that you are
making a subsequent purchase as opposed
to opening a new account.
Consult your bank for information on remitting funds by wire and associated
bank charges.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS, EXCHANGES AND
DIRECTED REINVESTMENTS, TO INVEST IN YOUR FUND ACCOUNT. PLEASE REFER TO THE SECTION
BELOW ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
. Explanation of Sales Price. The public offering price for shares of a Fund
is based upon net asset value per share. A Fund will calculate its net asset
value per share by adding the value of a Fund's investments, cash and other
assets, subtracting the Fund's liabilities, and then dividing the result by the
number of shares of the Fund that are outstanding. This process is sometimes
referred to as "pricing" a Fund's shares.
The assets of the Funds 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
Funds that have sixty days or less until they mature are valued at amortized
cost, which generally approximates market value. More information about
valuation can be found in the Funds' Statement of Additional Information, which
you may request by calling 1-800-551-2145.
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<PAGE>
Net asset value is computed as of the close of regular trading hours on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern Time) each
weekday, with the exception of those holidays on which the Federal Reserve Bank
of Cleveland, the purchasing Bank (if applicable), the Funds' Adviser, transfer
agent or custodian or the Exchange is closed. The Funds currently observe the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day.
Shares of the Funds are sold at the public offering price per share next
computed after receipt of a purchase order by State Street Bank and Trust
Company, the Funds' transfer agent (the "Transfer Agent"). Purchase orders will
be accepted by the Transfer Agent only on a day on which the shares of a Fund
are priced ("Business Day").
If you purchase shares of a Fund through a Bank, the Bank is responsible for
transmitting your purchase order and required funds to the Transfer Agent on a
timely basis. If the Transfer Agent receives your purchase order from a Bank on
a Business Day prior to the close of regular trading hours (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 hours on that day
provided that the Fund's custodian receives payment on the next Business Day in
immediately available funds. If such payment is not received on the next
Business Day, the Bank which submitted the order will be notified that the order
has not been accepted.
If you purchase shares of a Fund directly through the Company and if your
purchase order, in proper form and accompanied by payment, is received by the
Transfer Agent on a Business Day prior to the close of regular trading hours on
the Exchange, your Fund shares will be purchased at the public offering price
calculated at the close of regular trading hours on that day. Otherwise, your
Fund shares will be purchased at the public offering price next calculated after
the Transfer Agent receives your purchase order in proper form with the required
payment.
On a Business Day when the Exchange closes early due to a partial holiday or
otherwise, the Company reserves the right to advance the times at which purchase
orders must be received in order to be processed on that Business Day.
HOW TO SELL FUND SHARES
You can arrange to get money out of your Fund account by selling some or all
of your shares. This process is known as "redeeming" your shares. If you
purchased your shares through an account at a Bank, you may redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you have the ability to redeem shares by
any of the methods described below.
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<PAGE>
TO REDEEM SHARES
----------------
BY MAIL
. Send a written request to M.S.D. & T. Funds, Inc.,
P.O. Box 8515, Boston, MA 02266-8515.
. Your written request must
- be signed by each account holder;
- state the number or dollar amount of shares to be
redeemed and identify the specific Fund;
- include your account number.
. Signature guarantees are required
- for all redemption requests over $100,000;
- for any redemption request where the proceeds are
to be sent to someone other than the shareholder of
record or to an address other than the address of
record.
- --------------------------------------------------------------------------------
BY WIRE . Call 1-800-551-2145. You will need to provide the
(available only if account name, account number, name of Fund and
you checked the amount of redemption ($1,000 minimum per transaction).
appropriate box
on the New Account
Application)
. If you have already opened your account and would like
to have the wire redemption feature, send a written
request to: M.S.D. & T. Funds, Inc., P.O. Box 8515,
Boston, MA 02266-8515. The request must be signed (and
signatures guaranteed) by each account owner.
. To change bank instructions, send a written request to
the above address. The request must be signed (and
signatures guaranteed) by each account owner.
- --------------------------------------------------------------------------------
BY TELEPHONE . Call 1-800-551-2145. You will need to provide the
(available only account name, account number, name of Fund and
if you checked the amount of redemption.
appropriate box on
the New Account
Application)
. If you have already opened your account and would like
to add the telephone redemption feature, send a
written request to: M.S.D. & T. Funds, Inc., P.O. Box
8515, Boston, MA 02266-8515. The request must be
signed (and signatures guaranteed) by each account
owner.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND SYSTEMATIC
WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO THE SECTION
BELOW 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.
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<PAGE>
Redemption proceeds generally will be wired or sent to the shareholder(s) of
record within three Business Days after receipt of the redemption order.
However, the Company reserves the right to wire or send redemption proceeds
within seven days after receiving the redemption order if the Adviser believes
that earlier payment would adversely affect the Company. If you purchased your
shares directly through the Company, your redemption proceeds will be sent by
check unless you otherwise direct the Company or the Transfer Agent. The
Automated Clearing House ("ACH") system may also be utilized for payment of
redemption proceeds. In unusual circumstances, the Company may pay redemption
proceeds in readily marketable portfolio securities having a market value equal
to the redemption price.
Banks are responsible for transmitting their customers' redemption orders to
the Transfer Agent and crediting their customers' accounts with redemption
proceeds on a timely basis. No charge is imposed by the Company for wiring
redemption proceeds, although the Banks may charge their customers' accounts
directly for redemption and other services. In addition, if a customer has
agreed with a Bank to maintain a minimum cash balance in his or her account
maintained with the Bank and the balance falls below that minimum, the customer
may be obliged to redeem some or all of the Fund shares held in the account in
order to maintain the required minimum balance.
The Company imposes no charge when you redeem shares. The value of the shares
you redeem may be more or less than your cost, depending on a Fund's current net
asset value.
. Other Purchase and Redemption Information. Federal regulations require
that you provide a certified taxpayer identification number whenever you open or
reopen an account.
Shareholders who purchased Fund shares directly through the Company should
note that if an account balance falls below $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 New Account 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
-28-
<PAGE>
periods of unusual market activity. If this happens, you may redeem your shares
by mail as described above.
The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
its shares) for such periods as permitted under the Investment Company Act.
Certain redemption requests and other communications with the Company require
a signature guarantee. Signature guarantees are designed to protect both you
and the Company from fraud. To obtain a signature guarantee you should visit a
financial institution that participates in the Stock Transfer Agents 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 New
Account 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 each 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 plan, 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 a Fund may be exchanged for shares of another Fund or for shares of
one of the other portfolios offered by the Company. You may exchange shares by
mail at the address provided above 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.
-29-
<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 Funds if an ACH transfer is
rejected. To select this option, or for more information, please call 1-800-
551-2145.
The Automatic Investment Plan is one means by which you may use "Dollar Cost
Averaging" in making investments. Dollar Cost Averaging can be useful in
investing in portfolios such as the Funds whose price per share fluctuates.
Instead of trying to time market performance, a fixed dollar amount is invested
in Fund shares at predetermined intervals. This may help you to reduce your
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. You
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 you may find Dollar Cost Averaging to be beneficial, it will
not prevent a loss if you ultimately redeem your shares at a price which is
lower than their purchase price.
SYSTEMATIC WITHDRAWALS
The Company offers a convenient way of withdrawing money from your Fund
account. You may request regular monthly, quarterly, semi-annual or annual
withdrawals in any amount of $100 or more. The withdrawal will be made on the
last Business Day of the period you select and distributed in cash or reinvested
in shares of another Fund or portfolio offered by the Company. To elect this
option, or for more information, please call 1-800-551-2145.
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<PAGE>
DIRECTED REINVESTMENTS
Generally, dividends and capital gain distributions are automatically
reinvested in shares of the Fund from which the dividends and distributions are
paid. You may elect, however, to have your dividends and capital gain
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
for each Fund are derived from its net investment income. A Fund realizes
capital gains whenever it sells securities for a higher price than it paid for
them.
Shares in each Fund begin earning dividends on the day a purchase order is
processed and continue earning dividends through and including the day before
the shares are redeemed. If you purchased your Fund shares through a Bank, your
dividends and distributions will be paid in cash and wired to your Bank. If you
purchased your shares directly from the Company, your dividends and
distributions will be automatically reinvested in additional shares of the Fund
on which the dividend or distribution was declared unless you notify the Company
in writing that you wish to receive dividends and/or distributions in cash. If
you have elected to receive dividends and/or distributions in cash and the
postal or other delivery service is unable to deliver checks to your address of
record, you will be deemed to have rescinded your election to receive dividends
and/or distributions in cash and your dividends and distributions will be
automatically reinvested in additional shares. No interest will accrue on
amounts represented by uncashed dividend and/or distribution checks.
<TABLE>
<CAPTION>
Distribution Schedule
- ----------------------------------------------------------------------------------------------------
Fund Dividends Capital Gains
- ---- --------- -------------
<S> <C> <C>
Growth & Income Declared and paid monthly Declared and paid annually
Equity Income Declared and paid monthly Declared and paid annually
Equity Growth Declared and paid monthly Declared and paid annually
International Equity Declared and paid semi-annually Declared and paid annually
Diversified Real Estate Declared and paid quarterly Declared and paid annually
- ----------------------------------------------------------------------------------------------------
</TABLE>
TAX INFORMATION
As with any investment, you should consider the tax implications of an
investment in the Funds. The following briefly summarizes some of the important
tax considerations generally affecting the Funds and their shareholders. You
should consult your tax adviser with specific reference to 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.
-31-
<PAGE>
FEDERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Fund qualifies, it generally will be relieved of federal income tax on amounts
distributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
treated as a return of capital), regardless of whether the distributions are
paid in cash or reinvested in additional shares.
Distributions paid out of a Fund's "net capital gain" (the excess of net long-
term capital gain over net short-term capital loss), if any, will be taxed to
shareholders as long-term capital gain, regardless of the length of time a
shareholder holds the shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
Dividends paid by the Funds will be eligible for the dividends received
deduction allowed to certain corporations only to the extent of the total
qualifying dividends received by a Fund from domestic corporations for a taxable
year. Corporate shareholders will have to take into account the entire amount
of any dividend received in making certain adjustments for federal alternative
minimum tax purposes. The dividends received deduction is not available for
capital gain dividends.
The dividends received deduction is not available for dividends attributable
to distributions made by a REIT to the Diversified Real Estate 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 December of any year payable to shareholders of record
on a specified date in that month will be deemed to have been received by the
shareholders on December 31 of such year, if the dividends are paid during the
following January.
An investor considering buying shares of a Fund 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.
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<PAGE>
A taxable gain or loss may be realized by a shareholder upon the redemption or
transfer of shares depending upon their tax basis and their price at the time of
redemption or transfer.
Dividends and certain interest income earned by a Fund from foreign securities
may be subject to foreign withholding taxes or other taxes. So long as more
than 50% of the value of a Fund's total assets at the close of any taxable year
consists of stock or securities of foreign corporations, the Fund may elect, for
U.S. federal income tax purposes, to treat certain foreign taxes paid by it,
including generally any withholding taxes and other foreign income taxes, as
paid by its shareholders. The International Equity Fund intends to make this
election. As a result, the amount of such foreign taxes paid by the Fund will
be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and each shareholder will be entitled
either (a) to credit a proportionate amount of such taxes against a
shareholder's U.S. federal income tax liabilities, or (b) if a shareholder
itemizes deductions, to deduct such proportionate amounts from U.S. federal
taxable income, should the shareholder so choose.
This is not an exhaustive discussion of applicable tax consequences, and
investors may wish to contact their tax advisers concerning investments in the
Funds. Except as discussed below, dividends paid by each Fund may be taxable to
investors under state or local law as dividend income even though all or a
portion of the dividends may be derived from interest on obligations which, if
realized directly, would be exempt from such income taxes. In addition, future
legislative or administrative changes or court decisions may materially affect
the tax consequences of investing in a Fund. Shareholders who are non-resident
alien individuals, foreign trusts or estates, foreign corporations or foreign
partnerships may be subject to different U.S. federal income tax treatment.
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 Funds. Mercantile-Safe Deposit
and Trust Company ("Mercantile") serves as the Funds' investment adviser and
administrator and has its principal offices at Two Hopkins Plaza, Baltimore,
Maryland 21201. BlackRock International Ltd. ("BlackRock") acts as sub-adviser
for the International Equity Fund and is located at 345 Park Avenue, New York,
New York 10137. BISYS Fund Services Limited Partnership, a wholly-owned
subsidiary of The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, is the registered broker-dealer that sells the Funds' shares,
and BISYS Fund Services Ohio, Inc., also a wholly-owned subsidiary of The BISYS
Group, Inc. and located at the same address, provides fund accounting services
to the Funds. The Funds also have custodians, The Fifth Third Bank, located at
38 Fountain Square Plaza, Cincinnati, Ohio 45263, for the Growth & Income,
Equity Income, Equity Growth and Diversified Real Estate Funds, and State Street
Bank and Trust Company, located at Two Heritage Drive, North Quincy,
Massachusetts
-33-
<PAGE>
02171, for the International Equity Fund. State Street Bank and Trust Company
also serves as transfer and dividend disbursing agent for the Funds.
INVESTMENT ADVISER AND SUB-ADVISER
Mercantile manages the investment portfolios of the Growth & Income, Equity
Income, Equity Growth and Diversified Real Estate Funds, including selecting
portfolio investments and making purchase and sale orders. BlackRock manages
the investment portfolio of the International Equity Fund in accordance with the
investment requirements and policies established by Mercantile.
Mercantile is the lead bank of Mercantile Bankshares Corporation, a multi-bank
holding company organized in Maryland in 1969. Mercantile has acted as
investment adviser to the Funds since their commencement of operations.
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 July 20, 1998, Mercantile had approximately $13 billion in assets under
active management, of which approximately $5.3 million represented the assets of
an institutional real estate pension fund.
BlackRock is a subsidiary of PNC Holding Corp., which holds an 80% equity
interest in BlackRock with the remaining 20% equity interest held by senior
BlackRock professionals. BlackRock had approximately $2.2 billion in
international equity assets under management at June 30, 1998, with total assets
under management of approximately $116 billion. BlackRock (or its predecessor)
has served as sub-adviser to the International Equity Fund since 1996.
A Fund's portfolio manager is primarily responsible for the day-to-day
management of a Fund's investments.
. The Growth & Income Fund is managed by Manind V. Govil, CFA, with the
guidance of Brian B. Topping. Mr. Topping, Vice Chairman of Mercantile, has
participated in the management of the Fund since December, 1995 and has
managed endowment, employee benefit and foundation portfolios at Mercantile
since 1976. Mr. Govil, Vice President of Mercantile, assisted in the
management of the Fund since 1994, and has managed endowment, employee
benefit and foundation portfolios at Mercantile since 1994. Following the
completion of his MBA from the University of Cincinnati in 1992, Mr. Govil
was an analyst with Complete Business Solutions, Inc., a computer
consulting firm, before joining Mercantile in 1993.
. The organizational arrangements of Mercantile require that all investment
decisions with respect to the Equity Income Fund and Equity Growth Fund be
made by a committee, and no one person is primarily responsible for making
recommendations to that committee. The committee members are:
George S. Michaels, C.F.A., Senior Vice President of Mercantile, has
--------------------------
managed institutional equity portfolios at Mercantile during the past
twenty-nine years.
-34-
<PAGE>
J. Patrick Bradley, Senior Vice President of Mercantile, is
------------------
responsible for economic analysis and security selection at
Mercantile. In addition, he is Chairman of the Investment Strategy
Committee at Mercantile. Mr. Bradley has been at Mercantile since
1997. Prior to joining Mercantile, he was the Director of Economic and
Investment Research at PNC Bank. Mr. Bradley has sixteen years of
investment experience.
Glenn E. Ross, Senior Vice President of Mercantile, has been
-------------
responsible for quantitative analysis on equity securities at
Mercantile during the past sixteen years.
Charles W. Brooks, Jr., C.F.A., Vice President of Mercantile, is
------------------------------
responsible for the management of equity selection at Mercantile. Mr.
Brooks has been at Mercantile since 1993. Prior to joining Mercantile,
he was Vice President at Robert Torray and Company. Mr. Brooks has
thirty-five years of investment experience.
Charles G. Rishell, C.F.A., Vice President of Mercantile, has been
--------------------------
responsible for the management of institutional equity portfolios
during the past twenty one years.
J. Jordan Schlick, C.F.A., Assistant Vice President of Mercantile, is
-------------------------
responsible for equity security analysis. Mr. Schlick has been at
Mercantile since 1994. Prior to joining Mercantile, he was a Portfolio
Manager at First Maryland Bancorp. Mr. Schlick has 10 years of
investment experience.
. The organizational arrangements of BlackRock's international equity team
require that all investment decisions with respect to the International
Equity Fund be made by the BlackRock International Equity Investment Group,
chaired by its Investment Director, and no one person is primarily
responsible for making recommendations to that Group.
. The Diversified Real Estate Fund is managed by Robert M. Law. 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 its Real Estate Finance Division.
-35-
<PAGE>
ADMINISTRATOR
Mercantile also serves as the Funds' administrator and generally assists in
all aspects of their operation and administration, including maintaining the
Funds' offices, coordinating the preparation of reports to shareholders,
preparing filings with state securities commissions, coordinating federal and
state tax returns, and performing other administrative functions.
EXPENSES
The Funds incur certain expenses in order to support the services described
above, as well as other matters essential to the operation of the Funds.
Expenses are paid out of a Fund's assets and thus are reflected in the Fund's
dividends and net asset value, but they are not billed directly to you or
deducted from your account.
In its capacity as investment adviser, Mercantile is entitled to advisory fees
from the Funds that are calculated daily and paid monthly at the following
annual rates: with respect to the Growth & Income Fund, Equity Income Fund and
Equity Growth Fund: .60% of the first $1 billion of each Fund's average daily
net assets plus .40% of each Fund's average daily net assets in excess of $1
billion; with respect to the International Equity Fund: .80% of the first $1
billion of the Fund's average daily net assets plus .70% of the Fund's average
daily net assets in excess of $1 billion; and with respect to the Diversified
Real Estate Fund: .80% of the first $1 billion of the Fund's average daily net
assets plus .60% of the Fund's average daily net assets in excess of $1 billion.
Mercantile has agreed to pay BlackRock a sub-advisory fee, computed daily and
paid quarterly, at the annual rate of .45% of the International Equity Fund's
average daily net assets. The fees paid by Mercantile to BlackRock for the
International Equity Fund come out of Mercantile's advisory fee and are not an
additional expense of the Fund.
For the fiscal year ended May 31, 1997, Mercantile received advisory fees,
after fee waivers, at the effective annual rates of .43% of the average daily
net assets of the Growth & Income Fund and .74% of the average daily net assets
of the International Equity Fund. For the same period, Mercantile paid sub-
advisory fees to BlackRock at the effective annual rate of .42% of the
International Equity Fund's average daily net assets. For the period August 1,
1997 (commencement of operations) through May 31, 1998, Mercantile received
advisory fees, after fee waivers, at the effective annual rate of .00% of the
Diversified Real Estate Fund's average daily net assets. For the period March
1, 1998 (commencement of operations) through May 31, 1998, Mercantile received
advisory fees, after fee waivers, at the effective annual rates of .45% of the
average daily net assets of the Equity Income Fund and .31% of the average daily
net assets of the Equity Growth Fund.
In its capacity as administrator, Mercantile is also entitled to an
administration fee, computed daily and paid monthly, at the annual rate of .125%
of the average daily net assets of each Fund.
The Funds also bear other operating expenses in connection with their
operations, which are described in more detail in the Statement of Additional
Information.
-36-
<PAGE>
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Mercantile and the Funds' other service providers. The amount of the fee
waivers may be changed at any time at the sole discretion of Mercantile with
respect to advisory and administration fees, and by the Funds' other service
providers, with respect to all other fees. As to any amounts voluntarily waived
or reimbursed, the service providers retain the ability to be reimbursed by a
Fund for such amounts prior to fiscal year-end. Such waivers and reimbursements
would increase the return to investors when made but would decrease the return
if a Fund were required to reimburse a service provider.
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES
The Company was incorporated in Maryland on March 7, 1989 and is a mutual fund
of the type known as an "open-end management investment company." The Company's
charter authorizes the Board of Directors to issue up to 10,000,000,000 full and
fractional shares of capital stock ($.001 par value per share) and to classify
or reclassify any unissued shares into one or more classes of shares. Pursuant
to this authority, the Board of Directors has authorized the issuance of one
class of shares in each 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, call 1-800-551-2145.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shares of all
portfolios of the Company vote together and not by portfolio or class, unless
otherwise required by law or permitted by the Board of Directors. The Company
does not currently intend to hold annual shareholder meetings unless it is
required to do so by the Investment Company Act or other applicable law.
As of July 20, 1998, Mercantile held of record, in a fiduciary or other
representative capacity for beneficial owners, a majority of the outstanding
shares of the Company. Mercantile does not, however, have any economic interest
in such shares which are held solely for the benefit of its customers.
Mercantile may be deemed to be a controlling person of the Company within the
meaning of the Investment Company Act by reason of its record ownership of such
shares.
PERFORMANCE REPORTING
Performance information provides you with a method of measuring and monitoring
your investments. This section will help you to understand the various terms
that are commonly used to describe a Fund's performance. You may see references
to these terms in newsletters, advertisements and shareholder communications.
These publications may also include comparisons of a Fund's performance to the
performance of various indices and investments for which reliable performance
data are available and to averages, performance rankings or other information
compiled by recognized mutual fund statistical services.
-37-
<PAGE>
. Aggregate total return reflects the total percentage change in the
value of an investment in a Fund over a specified measuring period.
. Average annual total return represents the average annual percentage
change in the value of an investment in a Fund over a specified
measuring period. It is calculated by taking the aggregate total
return for the measuring period and determining what constant annual
return would have produced the same aggregate return. Average annual
returns for more than one year tend to smooth out variations in a
Fund's return and are not the same as actual annual results.
. Both methods of calculating total return assume that during the
period you have reinvested Fund dividends and distributions in
additional Fund shares.
. Yield shows the rate of income a Fund earns on its investments as a
percentage of its share price. It is calculated by dividing the
Fund's net investment income for a 30-day period by the product of
the average daily number of shares entitled to receive dividends and
the Fund's net asset value per share at the end of the 30-day period.
The result is then annualized. This represents the amount you would
earn if you remained invested in a Fund for a year and the Fund
continued to have the same yield for the year. Yield does not include
changes in net asset value.
Any fees charged by a Bank directly to your account in connection with an
investment in a Fund will not be included in the Fund's calculations of yield
and/or total return.
Performance quotations of a Fund represent its past performance, and you
should not consider them representative of future results. The investment
return and principal value of an investment in a Fund will fluctuate so that
your shares, when redeemed, may be worth more or less than their original cost.
Since performance will fluctuate, you cannot necessarily compare an investment
in Fund shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time.
MISCELLANEOUS
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of a particular Fund, with respect to the approval of the
Fund's investment advisory agreement or a change in the Fund's investment
objective (if fundamental) or a fundamental investment policy, means the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
such Fund or (b) 67% or more of the shares of such Fund present at a meeting if
more than 50% of the outstanding shares of such Fund are represented at the
meeting in person or by proxy.
-38-
<PAGE>
The Company or your Bank will send you a statement of your account quarterly
and a confirmation after every transaction that affects your share balance or
your account registration. A statement with tax information will be mailed to
you by January 31 of each year and filed with the Internal Revenue Service. At
least twice a year, you will receive financial statements in the form of Annual
and Semi-Annual Reports of the Funds.
If you have any questions concerning the Company or any of the Funds, please
call 1-800-551-2145.
YEAR 2000 RISKS. Like other investment companies, financial and business
organizations and individuals around the world, the Company could be adversely
affected if the computer systems used by Mercantile and the Company's other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." Mercantile is taking steps to address the Year 2000 Problem with
respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Company's other major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Company as a result of the Year
2000 Problem.
____________________
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE FUNDS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE COMPANY, THE FUNDS OR THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-39-
<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 FOR THE GROWTH & INCOME, EQUITY INCOME, EQUITY GROWTH AND DIVERSIFIED
REAL ESTATE FUNDS:
The Fifth Third Bank
Cincinnati, Ohio
CUSTODIAN FOR THE INTERNATIONAL EQUITY FUND AND TRANSFER AGENT:
State Street Bank and Trust Company
Boston, Massachusetts
DISTRIBUTOR:
BISYS Fund Services Limited Partnership
Columbus, Ohio
In considering an investment in the Funds, please read this Prospectus
carefully.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
-40-
<PAGE>
M.S.D. & T. FUNDS, INC.
PRIME MONEY MARKET FUND
GOVERNMENT MONEY MARKET FUND
LIMITED MATURITY BOND FUND
TOTAL RETURN BOND FUND
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495
under the Securities Act of 1933
FORM N-1A ITEM NUMBER LOCATION
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
1. Cover Page.......................... Cover Page
2. Synopsis............................ Expense Summary
3. Condensed Financial Information..... Financial Highlights; Performance
Reporting
4. General Description of Registrant... Cover Page; Investment Objectives,
Policies and Risks; Fundamental
Limitations; Other Information
Concerning the Company and Its
Shares; Miscellaneous
5. Management of the Fund.............. Management of the Company;
Investing in the Funds; Shareholder
Services
5A. Management's Discussion of Fund
Performance......................... Not Applicable
6. Capital Stock and Investing in the Funds; Dividends
Other Securities.................... and Distributions; Tax Information;
Other Information Concerning the
.................................... Company and Its Shares; Shareholder
Services; Miscellaneous
7. Purchase of Securities Being Offered Investing in the Funds
8. Redemption or Repurchase............ Investing in the Funds
9. Pending Legal Proceedings........... Not Applicable
<PAGE>
M.S.D. & T. FUNDS, INC.
.PRIME MONEY MARKET FUND
.GOVERNMENT MONEY MARKET FUND
.LIMITED MATURITY BOND FUND
.TOTAL RETURN BOND FUND
PROSPECTUS
September __, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
EXPENSE SUMMARY............................................................. 3
FINANCIAL HIGHLIGHTS........................................................ 5
INVESTMENT OBJECTIVES, POLICIES AND RISKS................................... 10
FUNDAMENTAL LIMITATIONS..................................................... 21
INVESTING IN THE FUNDS...................................................... 22
SHAREHOLDER SERVICES........................................................ 28
DIVIDENDS AND DISTRIBUTIONS................................................. 30
TAX INFORMATION............................................................. 30
MANAGEMENT OF THE COMPANY................................................... 31
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES..................... 33
PERFORMANCE REPORTING....................................................... 33
MISCELLANEOUS............................................................... 35
- --------------------------------------------------------------------------------
IF YOU HAVE QUESTIONS
For current yield, purchase and redemption information, call 1-800-551-2145.
- --------------------------------------------------------------------------------
<PAGE>
M.S.D. & T. FUNDS, INC.
PROSPECTUS
FOR THE
PRIME MONEY MARKET FUND
GOVERNMENT MONEY MARKET FUND
LIMITED MATURITY BOND FUND
TOTAL RETURN BOND FUND
SEPTEMBER __, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
M.S.D. & T. FUND GOAL FOR INVESTORS WHO WANT
---------------- ---- ----------------------
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRIME MONEY High current income, liquidity and stability A flexible and convenient way to manage
MARKET of principal through investments in short-term cash while earning money market returns.
money market instruments.
- ---------------------------------------------------------------------------------------------------------------------------
GOVERNMENT High current income, liquidity and stability A way to earn money market returns with
MONEY MARKET of principal through investments in U.S. the extra margin of safety associated
Government obligations and related repurchase with U.S. Government obligations.
agreements.
- ---------------------------------------------------------------------------------------------------------------------------
LIMITED High level of current income and protection of Current income from short-intermediate
MATURITY BOND capital through investments primarily in term corporate and government
corporate and government debt obligations. securities and can accept fluctuations
The Fund will generally have an average in price and yield.
weighted maturity of from two to five years.
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN High level of current income and relative Current income from medium-large term
BOND protection of capital through investments corporate and government securities and
primarily in corporate and government debt can accept fluctuations in price and
obligations. The Fund will generally have an yield.
average weighted maturity of from four to
fifteen years.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND SUCH SHARES ARE NOT FEDERALLY INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISKS,
<PAGE>
INCLUDING POSSIBLE LOSS OF PRINCIPAL. WHILE THE PRIME MONEY MARKET FUND AND
GOVERNMENT MONEY MARKET FUND EACH WILL ATTEMPT TO MAINTAIN ITS NET ASSET VALUE
AT $1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT EITHER FUND WILL BE ABLE TO
DO SO ON A CONTINUOUS BASIS. IN ADDITION, THE DIVIDENDS PAID BY THE FUNDS WILL
GO UP AND DOWN. MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY SERVES AS INVESTMENT
ADVISER AND ADMINISTRATOR TO THE FUNDS, IS PAID FEES FOR ITS SERVICES, AND IS
NOT AFFILIATED WITH BISYS FUND SERVICES LIMITED PARTNERSHIP, THE FUNDS'
DISTRIBUTOR.
This Prospectus relates to shares of the Prime Money Market Fund, Government
Money Market Fund, Limited Maturity Bond Fund and Total Return Bond Fund
(collectively the "Funds") of M.S.D. & T. Funds, Inc. (the "Company"), a no-
load, open-end management investment company. This Prospectus describes
concisely the information about the Funds that you should know before investing.
Please read and keep it for future reference. More information about the Funds
is contained in the Statement of Additional Information dated September __, 1998
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.
-2-
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a Fund.
Annual Fund Operating Expenses are paid out of a Fund's assets and include fees
for portfolio management, maintenance of shareholder accounts, general Fund
administration, accounting, custody and other services.
Below is information regarding the operating expenses for the Funds. Examples
based on this information are also provided.
<TABLE>
<CAPTION>
PRIME GOVERNMENT LIMITED TOTAL
MONEY MONEY MATURITY RETURN
MARKET MARKET BOND BOND
FUND FUND FUND FUND
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees (after fee
waivers)(1)................................ .230% .220% .250% .220%
Other Expenses (after fee waivers)
(includes administration, custody
and transfer agency, and
miscellaneous other charges)(1)............ .145% .155% .200% .230%
Total Fund Operating Expenses ---- ---- ---- ----
(after fee waivers)(1)..................... .375% .375% .450% .450%
==== ==== ==== ====
</TABLE>
____________________________
(1) This expense information is provided to help you understand the various
costs and expenses that you would bear indirectly as a shareholder of one
of the Funds. The expense information is based on the expenses incurred by
the Funds during the fiscal year or period ended May 31, 1998, as restated
to reflect the expenses which the Funds expect to incur during the current
fiscal year. Without fee waivers by the investment adviser and
administrator, Management Fees, Other Expenses and Total Fund Operating
Expenses, stated as a percentage of average daily net assets, would be
.25%, .22% and .47%, respectively, for the Prime Money Market Fund; .25%,
.21% and .46%, respectively, for the Government Money Market Fund; .35%,
.43% and .78%, respectively, for the Limited Maturity Bond Fund; and .35%,
.35% and .70%, respectively, for the Total Return Bond Fund.
The investment adviser and administrator are under no obligation to waive
fees or reimburse expenses, but have informed the Company that they expect
to waive fees and/or reimburse expenses during the current fiscal year as
necessary to maintain the Funds' total operating expenses at the levels set
forth in the above table. You should note that any fees that are charged by
the investment adviser, its affiliates or any other institutions directly
to their customer accounts for services related to an investment in the
Funds are in addition to, and are not reflected in, the fees and expenses
described above.
For more complete descriptions of the Funds' operating expenses, see
"Management of the Company" in this Prospectus.
-3-
<PAGE>
EXAMPLE:
Assume a Fund's annual return is 5% and its expenses are the same as those
stated above. For every $1,000 you invest, here's how much you would pay in
total expenses if you closed your account after the number of years indicated:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Prime Money Market Fund..................................... $ 4 $ 12 $ 21 $ 48
Government Money Market Fund................................ $ 4 $ 12 $ 21 $ 48
Limited Maturity Bond Fund.................................. $ 5 $ 14 $ 25 $ 57
Total Return Bond Fund...................................... $ 5 $ 14 $ 25 $ 57
</TABLE>
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR
FUTURE INVESTMENT RETURNS OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights, which have been derived from the Funds'
financial statements, have been audited by PricewaterhouseCoopers LLP, the
Funds' independent accountants, whose unqualified report on the financial
statements containing such information for the five years in the period ended
May 31, 1998 is incorporated by reference into the Statement of Additional
Information. The Financial Highlights should be read along with the financial
statements and related notes, which are also incorporated by reference into the
Statement of Additional Information. Further information about the performance
of the Funds is available in the Company's Annual Report to Shareholders for the
fiscal year ended May 31, 1998. For a free copy of the Statement of Additional
Information or the Annual Report to Shareholders, contact the Company at the
address or telephone number on the first page of this Prospectus.
-5-
<PAGE>
PRIME MONEY MARKET FUND
Financial Highlights for a share of the Prime Money Market Fund outstanding
throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 5/31/93
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Income From Investment Operations:
Net Investment Income................................. 0.0521 0.0498 0.0532 0.0491 0.0296 0.0297
-------- -------- -------- -------- -------- --------
Total From Investment Operations.................... 0.0521 0.0498 0.0532 0.0491 0.0296 0.0297
-------- -------- -------- -------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income............................... (0.0521) (0.0498) (0.0532) (0.0491) (0.0296) (0.0297)
-------- -------- -------- -------- -------- --------
Total Distributions................................. (0.0521) (0.0498) (0.0532) (0.0491) (0.0296) (0.0297)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total Return............................................ 5.33% 5.10% 5.45% 5.02% 3.00% 3.01%
Ratios/Supplemental Data
Net Assets, End of Period (000)....................... $448,751 $368,853 $326,878 $382,059 $346,694 $432,415
Ratio of Expenses to Average Net Assets
After Expense Waiver................................ 0.42% 0.43% 0.43% 0.43% 0.38% 0.37%
Before Expense Waiver............................... 0.47% 0.48 0.48% 0.48% 0.47% 0.43%
Ratio of Net Investment Income to
Average Net Assets.................................. 5.21% 4.98% 5.33% 4.92% 2.95% 2.96%
<CAPTION>
YEAR YEAR 7/21/89/1/
ENDED ENDED TO
5/31/92 5/31/91 5/31/90
------- ------- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $ 1.00 $ 1.00 $ 1.00
-------- -------- ---------
Income From Investment Operations:
Net Investment Income................................. 0.0467 0.0712 0.0706
-------- -------- ---------
Total From Investment Operations.................... 0.0467 0.0712 0.0706
-------- -------- ---------
Less Distributions to Shareholders from:
Net Investment Income............................... (0.0467) 0.0712 0.0706
-------- -------- ---------
Total Distributions................................. (0.0467) (0.0712) (0.0706)
-------- -------- ---------
Net Asset Value, End of Period.......................... $ 1.00 $ 1.00 $ 1.00
======== ======== =========
Total Return............................................ 4.77% 7.35% 8.49%/2/
Ratios/Supplemental Data
Net Assets, End of Period (000)....................... $402,745 $311,819 $178,708
Ratio of Expenses to Average Net Assets
After Expense Waiver................................ 0.35% 0.38% 0.38%/2/
Before Expense Waiver............................... 0.42% 0.45 0.46%/2/
Ratio of Net Investment Income to
Average Net Assets.................................. 4.55% 6.96% 8.13%/2/
</TABLE>
_________________________
1 Commencement of operations.
2 Annualized.
-6-
<PAGE>
GOVERNMENT MONEY MARKET FUND
Financial Highlights for a share of the Government Money Market Fund outstanding
throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 5/31/93
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Income From Investment Operations:
Net Investment Income............................... 0.0515 0.0495 0.0526 0.0485 0.0294 0.0293
-------- -------- -------- -------- -------- --------
Total From Investment Operations............... 0.0515 0.0495 0.0526 0.0485 0.0294 0.0293
-------- -------- -------- -------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income........................... (0.0515) (0.0495) (0.0526) (0.0485) (0.0294) (0.0293)
-------- -------- -------- -------- -------- --------
Total Distributions............................. (0.0515) (0.0495) (0.0526) (0.0485) (0.0294) (0.0293)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total Return.............................................. 5.27% 5.06% 5.39% 4.95% 2.98% 2.97%
Ratios/Supplemental Data
Net Assets, End of Period (000)...................... $391,133 $340,809 $264,725 $263,752 $273,790 $255,637
Ratio of Expenses to Average
Net Assets
After Expense Waiver................................. 0.42% 0.43% 0.43% 0.43% 0.38% 0.37%
Before Expense Waiver................................ 0.46% 0.49% 0.48% 0.48% 0.47% 0.44%
Ratio of Net Investment Income to
Average Net Assets................................... 5.15% 4.95% 5.27% 4.85% 2.94% 2.93%
<CAPTION>
YEAR YEAR 7/21/89/1/
ENDED ENDED TO
5/31/92 5/31/91 5/31/90
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income From Investment Operations:
Net Investment Income............................... 0.0465 0.0700 0.0696
-------- -------- --------
Total From Investment Operations............... 0.0465 0.0700 0.0696
-------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income........................... (0.0465) (0.0700) (0.0696)
-------- -------- --------
Total Distributions............................. (0.0465) (0.0700) (0.0696)
-------- -------- --------
Net Asset Value, End of Period............................ $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total Return.............................................. 4.75% 7.23% 8.37%/1/
Ratios/Supplemental Data
Net Assets, End of Period (000)...................... $293,450 $333,121 $293,422
Ratio of Expenses to Average
Net Assets
After Expense Waiver............................ 0.34% 0.37% 0.38%/2/
Before Expense Waiver........................... 0.41% 0.45% 0.46%/2/
Ratio of Net Investment Income to
Average Net Assets.............................. 4.64% 6.97% 8.04%/2/
</TABLE>
____________________________
/1/ Commencement of operations.
/2/ Annualized.
-7-
<PAGE>
LIMITED MATURITY BOND FUND
Financial Highlights for a share of the Limited Maturity Bond Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year Year Year Year Year Year 3/14/91/1/
Ended Ended Ended Ended Ended Ended Ended to
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91
--------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $ 10.31 $ 10.19 $ 10.43 $ 10.10 $ 10.55 $ 10.31 $ 9.97 $ 10.00
--------- -------- -------- -------- -------- -------- ------- ---------
Income From Investment Operations:
Net Investment Income..................... 0.60 0.59 0.59 0.56 0.50 0.56 0.60 0.13
Net Realized and Unrealized Gain (Loss)
On Investments........................... 0.22 0.12 (0.24) 0.33 (0.39) 0.24 0.34 (0.03)
--------- -------- -------- -------- -------- -------- ------- ---------
Total From Investment Operations........ 0.82 0.71 0.35 0.89 0.11 0.80 0.94 0.10
Less Distributions to Shareholders from:
Net Investment Income................... (0.60) (0.59) (0.59) (0.56) (0.50) (0.56) (0.60) (0.13)
Net Capital Gains...................... (0.08) -- -- -- (0.06) -- -- --
--------- -------- -------- -------- -------- -------- ------- ---------
Total Distributions..................... (0.68) (0.59) (0.59) (0.56) (0.56) (0.56) (0.60) (0.13)
--------- -------- -------- -------- -------- -------- ------- ---------
Net Asset Value, End of Period............. $ 10.45 $ 10.31 $ 10.19 $ 10.43 $ 10.10 $ 10.55 $ 10.31 $ 9.97
========= ======== ======== ======== ======== ======== ======= =========
Total Return............................... 8.15% 7.12% 3.38% 9.13% 0.94% 7.94% 9.68% 4.78%/2/
Ratios/Supplemental Data
Net Assets, End of Period (000)........... $151,922 $ 43,010 $ 44,102 $ 44,652 $ 35,008 $ 28,078 $ 17,549 $ 1.298
Ratio of Expenses to Average
Net Assets
After Expense Waiver.................... 0.50% 0.60% 0.60% 0.60% 0.55% 0.55% 0.55% 0.55%/2/
Before Expense Waiver................... 0.78% 0.75% 0.72% 0.70% 0.66% 0.64% 0.72% 0.97%/2/
Ratio of Net Investment Income to
Average Net Assets...................... 5.71% 5.72% 5.66% 5.56% 4.75% 5.32% 5.76% 6.17%/2/
Portfolio turnover rate..................... 48.24% 20.92% 52.79% 22.01% 48.58% 12.29% 13.76% 34.73%/2/
</TABLE>
___________________________________________
/1/ Commencement of operations.
/2/ Annualized.
-8-
<PAGE>
TOTAL RETURN BOND FUND
Financial Highlights for a share of the Total Return Bond Fund outstanding
throughout each of the periods indicated:
<TABLE>
<CAPTION>
March 1, 1998/1/
to May 31, 1998
-------------------
<S> <C>
Net Asset Value, Beginning of Period................ $ 10.00
--------
Income From Investment Operations:
Net Investment Income............................. 0.15
Net Realized and Unrealized Gain (Loss)
On Investments.................................. 0.02
--------
Total From Investment Operations................ 0.17
--------
Less Distributions to Shareholders from:
Net Investment Income........................... (0.15)
Net Capital Gains............................... --
--------
Total Distributions............................. (0.15)
Net Asset Value, End of Period...................... $ 10.02
========
Total Return........................................ 1.69%
Ratios/Supplemental Data
Net Assets, End of Period (000)................... $101,363
Ratio of Expenses to Average
Net Assets
After Expense Waiver............................ 0.45%/2/
Before Expense Waiver........................... 0.73%/2/
Ratio of Net Investment Income to
Average Net Assets.............................. 5.89%/2/
Portfolio turnover rate............................. 10.51%
</TABLE>
___________________________________________
/1/ Commencement of operations.
/2/ Annualized.
-9-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Funds' investment adviser (the "Adviser") uses a range of different
investments and investment techniques in seeking to achieve a Fund's investment
objective. All Funds do not use all of the investments and investment
techniques described below, which involve various risks, and which are also
described in the following sections. You should consider which Funds best meet
your investment goals. The Adviser will use its best efforts to achieve a
Fund's investment objective, although its achievement cannot be assured. An
investor should not consider an investment in any Fund to be a complete
investment program. Each Fund is classified as a diversified portfolio under
the Investment Company Act.
PRIME MONEY MARKET FUND
The investment objective of the Prime Money Market Fund is to seek as high
a level of current income as is consistent with liquidity and stability of
principal by investing in a portfolio of high quality money market instruments.
The Fund may invest in a broad range of short-term, high quality, U.S. dollar-
denominated instruments, such as government, bank, commercial and other
obligations of both foreign and domestic issuers, that are available in the
money markets. In particular, the Fund may invest in:
. U.S. dollar-denominated obligations issued or supported by the credit of
U.S. or foreign banks or savings institutions with total assets in excess
of $1 billion (including obligations of foreign branches of U.S. banks);
. obligations issued or guaranteed as to principal and interest by the U.S.
Government or by its agencies or instrumentalities;
. commercial paper rated at the time of purchase within the highest rating
category assigned by one or more unaffiliated nationally recognized
statistical rating organizations (each a "Rating Agency") and corporate
bonds rated at the time of purchase within one of the two highest rating
categories assigned by one or more Rating Agencies;
. unrated commercial paper, corporate bonds and other instruments that are
of comparable quality as determined by the Adviser pursuant to guidelines
approved by the Company's Board of Directors;
. asset-backed securities rated at the time of purchase within the highest
rating category assigned by one or more Rating Agencies;
. obligations issued by state and local governmental bodies; and
. repurchase agreements relating to the above instruments.
-10-
<PAGE>
GOVERNMENT MONEY MARKET FUND
The investment objective of the Government Money Market Fund is to seek as
high a level of current income as is consistent with liquidity and stability of
principal by investing in a portfolio of direct Treasury obligations, other
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements relating to such obligations.
LIMITED MATURITY BOND FUND
The investment objective of the Limited Maturity Bond Fund is to seek as high
a level of current income as is consistent with protection of capital. The Fund
invests substantially all of its assets in debt obligations, such as bonds and
debentures, of domestic and foreign corporations; obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; debt
obligations of foreign, state and local governments and their political
subdivisions; asset-backed securities, including various collateralized mortgage
obligations and other mortgage-related securities with effective maturities of
ten years or less; and money market instruments. The Fund will purchase only
those securities that are rated at the time of purchase within the four highest
rating categories assigned by a Rating Agency or, if unrated, are determined by
the Adviser to be of comparable quality. Debt obligations rated within the four
highest rating categories assigned by a Rating Agency are considered to be
investment grade. Debt obligations rated in the lowest of the four highest
rating categories assigned by a Rating Agency are considered to have speculative
characteristics, even though they are of investment grade quality, and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case with
higher-rated debt obligations. If a security's rating is reduced below the
minimum rating that is permitted for the Fund, the Adviser will consider whether
the Fund should continue to hold that security.
Under normal market and economic conditions, the Fund will invest at least 65%
of its total assets in corporate debt obligations such as bonds and debentures,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and mortgage-backed securities, including collateralized
mortgage obligations. Most obligations acquired by the Fund will be issued by
companies or governmental entities located within the United States. Up to 25%
of the Fund's total assets, however, may be invested in debt obligations of
foreign issuers. The Fund may also invest, without limitation, in high quality
short-term money market instruments for temporary defensive purposes. The
Adviser expects that under normal market conditions the Fund's portfolio
securities will have an average weighted maturity of two to five years.
TOTAL RETURN BOND FUND
The investment objective of the Total Return Bond Fund is to seek as high a
level of current income as is consistent with relative protection of capital.
Subject to this objective, the Adviser will consider the total rate of return on
portfolio securities in managing the Fund. The Fund will invest substantially
all its assets in debt obligations, such as bonds and debentures, of
-11-
<PAGE>
domestic and foreign corporations; obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; debt obligations of foreign,
state and local governments and their political subdivisions; asset-backed
securities, including various collateralized mortgage obligations and other
mortgage-related securities; and money market instruments.
Debt securities in which the Fund may invest include, without limitation,
Brady Bonds, which are securities issued in various currencies (primarily the
U.S. dollar) that have been created through the exchange of existing commercial
bank loans to Latin American public and private entities for new bonds in
connection with debt restructurings under a debt restructuring plan announced by
former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently and for that reason do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively
traded in the over-the-counter secondary market for Latin American debt
instruments. Brady Bonds are neither issued nor guaranteed by the U.S.
Government. Additional information on Brady Bonds is included in the Statement
of Additional Information.
The Fund generally will purchase only those securities that are rated at the
time of purchase within the four highest rating categories assigned by a Rating
Agency or, if unrated, are determined by the Adviser to be of comparable
quality. See "Limited Maturity Bond Fund" above for a discussion of certain
risks in investing in debt obligations rated in the lowest of the four highest
ratings assigned by a Rating Agency. When deemed appropriate by the Adviser,
however, the Fund may invest up to 10% of its net assets in lower quality debt
securities. Lower quality debt securities, also known as "junk bonds," are
considered to be speculative and involve greater risk of default or price
changes due to changes in the issuer's creditworthiness. The market prices of
these securities may fluctuate more than those of higher quality securities and
may decline significantly in periods of general economic difficulty, which may
follow periods of rising interest rates. Securities in the lowest quality
category may present the risk of default, or may be in default.
Under normal market and economic conditions, the Fund will invest at least 65%
of its total assets in corporate debt obligations such as bonds and debentures,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and mortgage-backed securities, including collateralized
mortgage obligations. Most obligations acquired by the Fund will be issued by
companies or governmental entities located within the United States. Up to 25%
of the Fund's total assets, however, may be invested in obligations of foreign
issuers. The Fund may also invest, without limitation, in high-quality short-
term money market instruments for temporary defensive purposes.
The Fund's average weighted maturity will vary from time to time depending on,
among other things, current market and economic conditions and the comparative
yields on instruments with different maturities. The Adviser expects that under
normal market conditions the Fund will have an average weighted maturity of
between 4 and 15 years.
-12-
<PAGE>
RISK FACTORS
. Market and Interest Rate Risk. Generally, the market value of fixed income
securities in the Funds can be expected to vary inversely to changes in
prevailing interest rates. You should recognize that in periods of declining
interest rates the market value of investment portfolios comprised primarily of
fixed income securities will tend to increase, and in periods of rising interest
rates the market value will tend to decrease. You should also recognize that in
periods of declining interest rates, the yields of investment portfolios
comprised primarily of fixed income securities will tend to be higher than
prevailing market rates and, in periods of rising interest rates, yields will
tend to be somewhat lower. Debt securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities. Changes in the
financial strength of an issuer or changes in the ratings of any particular
security may also affect the value of these investments. Fluctuations in the
market value of fixed income securities subsequent to their acquisition will not
affect cash income from such securities but will be reflected in a Fund's net
asset value.
. Risk Factors Associated with Derivative Instruments. The Limited Maturity
Bond Fund and Total Return Bond Fund may purchase certain "derivative"
instruments as described above under various headings. Derivative instruments
are instruments that derive value from the performance of underlying assets,
interest or currency exchange rates, or indices, and include, but are not
limited to, futures contracts, options, forward foreign currency contracts,
participation certificates, custodial receipts, and structured debt obligations
(including collateralized mortgage obligations and other types of asset-backed
securities, "stripped" securities and various floating rate instruments).
Derivative instruments present, to varying degrees, market risk that the
performance of the underlying assets, exchange rates or indices will decline;
credit risk that the dealer or other counterparty to the transaction will fail
to pay its obligations; volatility and leveraging risk that, if interest or
exchange rates change adversely, the value of the derivative instrument will
decline more than the assets, rates or indices on which it is based; liquidity
risk that a Fund will be unable to sell a derivative instrument when it wants
because of lack of market depth or market disruption; pricing risk that the
value of a derivative instrument will not correlate exactly to the value of the
underlying assets, rates or indices on which it is based; and operations risk
that loss will occur as a result of inadequate systems and controls, human error
or otherwise. Some derivative instruments are more complex than others, and for
those instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The Adviser will evaluate the risks presented by the derivative instruments
purchased by a Fund, and will determine, in connection with its day-to-day
management of the Fund, how they will be used in furtherance of the Fund's
investment objective. It is possible, however, that the Adviser's evaluations
will prove to be inaccurate or incomplete and, even when accurate and complete,
it is possible that a Fund will, because of the risks discussed above, incur
loss as a result of its investments in derivative instruments.
-13-
<PAGE>
. Foreign Securities. There are risks and costs involved in investing in
securities of foreign issuers (including foreign governments), which are in
addition to the usual risks inherent in U.S. investments. Investments in
foreign securities may involve higher costs than investments in U.S. securities,
including higher transaction costs as well as the imposition of additional taxes
by foreign governments. In addition, foreign investments may involve risks
associated with the level of currency exchange rates, less complete financial
information about the issuer, less market liquidity and political instability.
Future political and economic developments, the possible imposition of
withholding taxes on interest income, the possible seizure or nationalization of
foreign holdings, the possible difficulty in taking appropriate legal action in
a foreign court, the possible establishment of exchange controls or the adoption
of other governmental restrictions might adversely affect the payment of
principal and interest on foreign obligations. Additionally, foreign banks and
foreign branches of domestic banks may be subject to less stringent reserve
requirements, and to different accounting, auditing and recordkeeping
requirements.
OTHER INVESTMENT POLICIES AND RELATED RISKS
. Quality and Maturity - Prime Money Market Fund and Government Money Market
Funds. All securities acquired by the Prime Money Market Fund and Government
Money Market Fund will be determined at the time of purchase by the Adviser,
pursuant to guidelines approved by the Company's Board of Directors, to present
minimal credit risks and will be "Eligible Securities" as defined by the SEC.
Eligible Securities are (a) securities that either (i) have short-term debt
ratings at the time of purchase in the two highest rating categories assigned by
at least two Rating Agencies (or one Rating Agency if the security is rated by
only one Rating Agency), or (ii) are comparable in priority and security with an
instrument issued by an issuer which has such ratings, and (b) securities that
are unrated (including securities of issuers that have long-term but not short-
term ratings) but are of comparable quality as determined in accordance with
guidelines approved by the Company's Board of Directors. In accordance with
current SEC regulations, the Prime Money Market Fund intends to invest no more
than 5% of its total assets in securities, other than U.S. Government
securities, that are rated at the time of purchase within the second highest
rating category assigned by one or more Rating Agencies (including securities
that are unrated but determined by the Adviser to be of comparable quality).
See the Statement of Additional Information for a description of the Rating
Agencies' various rating categories.
Each Fund is managed so that the average dollar-weighted maturity of all
instruments held by it will not exceed 90 days. In no event will a Fund
purchase securities which mature more than 397 days from the date of purchase
(except for certain variable and floating rate instruments and securities
collateralizing repurchase agreements). Securities in which the Funds invest
may not earn as high a level of income as longer-term or lower quality
securities, which generally have greater market risk and more fluctuation in
market value.
. U.S. Government Obligations and Money Market Instruments. Each Fund may
invest in securities issued or guaranteed by the U.S. Government, including but
not limited to direct U.S. Treasury obligations, as well as in obligations
issued or guaranteed by U.S. Government agencies
-14-
<PAGE>
and instrumentalities. Obligations of certain agencies and instrumentalities,
such as those of 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 those of 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 those of the Federal Home Loan
Mortgage Corporation, 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. Some of these instruments
may be variable or floating rate instruments.
Each Fund except the Government Money Market Fund may from time to time invest
in money market instruments, including bank obligations, commercial paper and
corporate bonds with remaining maturities of 397 days 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. A Fund will
invest in obligations of foreign banks or foreign branches of U.S. banks when
the Adviser determines that the investment presents minimal credit risks.
Investments in the obligations of foreign banks and foreign branches of U.S.
banks will not exceed 25% of the particular Fund's total assets at the time of
purchase. The Prime Money Market Fund may also make interest-bearing savings
deposits in commercial and savings banks in amounts in excess of 5% of its net
assets. Taxable commercial paper purchased by the Funds will be rated at the
time of purchase within the highest rating category assigned by a Rating Agency.
Corporate bonds purchased by the Funds will be rated at the time of purchase
within the highest rating category (two highest rating categories with respect
to the Prime Money Market Fund) assigned by a Rating Agency. In addition, each
Fund may acquire unrated commercial paper and corporate bonds that are
determined by the Adviser at the time of purchase to be of comparable quality.
Commercial paper may include variable and floating rate instruments. The Prime
Money Market Fund may also invest in short-term, high quality, U.S. dollar-
denominated corporate debt obligations of foreign issuers where the Adviser
deems the investments to present minimal credit risks.
. Municipal Obligations. Each Fund except the Government Money Market Fund
may invest from time to time in municipal obligations. These securities may be
advantageous for a Fund when, as a result of prevailing economic, regulatory or
other circumstances, the yield of such securities on a pre-tax basis is
comparable to that of other debt securities the Fund can purchase. Dividends
paid by a Fund that come from interest on municipal obligations will be taxable
to shareholders.
The two main types of municipal obligations are "general obligation"
securities (which are secured by the issuer's full faith, credit and taxing
power) and "revenue" securities (which are payable only from revenues received
from the operation of a particular facility or other revenue source). A third
type of municipal obligation, normally issued by special purpose public
authorities, is known as a "moral obligation" security because if the issuer
cannot meet its obligations it draws on a reserve fund, the restoration of which
is not a legal requirement. Private activity bonds (which are a type of
obligation that, although exempt from regular federal
-15-
<PAGE>
income tax, may be subject to the federal alternative minimum tax) are usually
revenue securities issued by or for public authorities to finance a privately
operated facility.
Municipal obligations purchased by the Funds in some cases may be insured as
to the timely payment of principal and interest. There is no guarantee,
however, that the insurer will meet its obligations in the event of a default in
payment by the issuer. In other cases, municipal obligations may be backed by
letters of credit or guarantees issued by domestic or foreign banks or other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or guarantee with
respect to a municipal obligation held by a Fund could have an adverse effect on
the Fund's portfolio and the value of its shares. As described above under
"Risk Factors Foreign Securities", foreign letters of credit and guarantees
involve certain risks in addition to those of domestic obligations.
. Variable and Floating Rate Instruments. Each Fund may purchase variable
and floating rate instruments, including variable amount master demand notes
that permit the indebtedness thereunder to vary in addition to providing for
periodic adjustments in the interest rates. Unless guaranteed by the U.S.
Government or one of its agencies or instrumentalities, variable or floating
rate notes purchased by the Prime Money Market Fund and Government Money Market
Fund must permit the Funds to demand payment of the principal of the instrument
at least once every 397 days upon not more than 30 days' notice. Because of the
absence of a market in which to resell a variable or floating rate instrument, a
Fund might have trouble selling an instrument should the issuer default or
during periods when the Fund is not permitted by agreement to demand payment of
the instrument, and for this and other reasons a loss could occur with respect
to the instrument.
. Asset-Backed Securities. Each Fund except the Government Money Market Fund
may purchase asset-backed securities, which are securities backed by installment
sale contracts, credit card receivables or other assets. Asset-backed
securities purchased by the Prime Money Market Fund will have remaining
maturities of 397 days or less. The yield characteristics of asset-backed
securities differ from traditional debt securities. A major difference is that
the principal amount of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) generally may be prepaid at any time. The
prepayment rate is primarily a function of current market rates and conditions.
In periods of falling interest rates, the rate of prepayment tends to increase.
During such periods, the reinvestment of prepayment proceeds by the Fund will
generally be at a lower rate than the rate on the prepaid obligation.
Prepayments may also result in some loss of the Fund's principal investment if
any premiums were paid. As a result of these yield characteristics, some high-
yielding asset-backed securities may have less potential for growth in value
than conventional bonds with comparable maturities. These characteristics may
result in a higher level of price volatility for these assets under certain
market conditions.
Asset-backed securities are subject to greater risk of default during periods
of economic downturn than conventional debt instruments and the holder
frequently has no recourse against the entity that originated the security. In
addition, the secondary market for certain asset-backed securities may not be as
liquid as the market for other types of securities, which could result in
-16-
<PAGE>
the Fund experiencing difficulty in valuing or liquidating such securities. For
these reasons, under certain circumstances, such instruments may be considered
illiquid securities subject to each Fund's limitation on illiquid investments
described below under "Managing Liquidity."
. Mortgage-Related Securities. The Limited Maturity Bond Fund and Total
Return Bond Fund may invest in mortgage-backed securities issued or guaranteed
by U.S. Government agencies and private issuers. Such securities may include
collateralized mortgage obligations ("CMOs") and U.S. Government stripped
mortgage-backed securities ("SMBS").
CMOs are a type of bond issued by non-governmental entities which provide the
holder with a specified interest in the cash flow of a pool of underlying
mortgages or other mortgage-backed securities. Issuers of CMOs frequently elect
to be taxed as a pass-through entity known as a real estate mortgage investment
conduit or REMIC. CMOs are issued in multiple classes, each with a specified
fixed or floating interest rate and a final distribution date.
SMBS represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage-backed certificates issued by a U.S. Government agency and representing
interests in pools of mortgage loans. These principal-only or interest-only
distributions are stripped from the underlying mortgage-backed security by
private entities or by the agency that issued the mortgage-backed certificate.
Mortgage-related securities involve risks similar to those described above
under "Asset-Backed Securities," including prepayment risks. In addition, SMBS
may exhibit greater price volatility and interest rate risk than other types of
mortgage-related securities because of the manner in which their principal and
interest are returned to investors.
. Repurchase Agreements and Reverse Repurchase Agreements. Each Fund may buy
portfolio securities subject to the seller's agreement to repurchase them at an
agreed upon date and price. These transactions are known as repurchase
agreements. Repurchase agreements involve the risk that the seller will fail to
repurchase the securities as agreed. In that event, the Fund will bear the risk
of possible loss due to adverse market action or delays in liquidating the
underlying obligations. Repurchase agreements are considered to be loans under
the Investment Company Act.
Each Fund may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, a Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be used to meet
redemption requests without selling portfolio securities. Reverse repurchase
agreements involve the risk of counterparty default and possible loss of
collateral held by the counterparty. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act.
. When-Issued Purchases and Forward Commitments. Each Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by a
Fund to purchase or
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sell particular securities with payment and delivery taking place at a future
date, permit the Fund to lock in a price or yield on a security it intends to
purchase or sell, regardless of future changes in interest rates. The Fund will
bear the risk, however, that the price or yield obtained in a transaction may be
less favorable than the price or yield available in the market when the delivery
takes place. When-issued and forward commitment transactions are not expected to
exceed 25% of the value of a Fund's total assets under normal circumstances.
Because a Fund is required to set aside cash or liquid securities to satisfy
these purchase commitments, a Fund's liquidity and ability to manage its
portfolio might be affected during periods in which its commitments exceed 25%
of the value of its total assets. The Funds do not intend to engage in when-
issued and forward commitment transactions for speculative purposes.
. Stand-By Commitments. The Limited Maturity Bond Fund and Total Return Bond
Fund may acquire stand-by commitments under which a dealer agrees to purchase
certain municipal obligations at a Fund's option at a price equal to their
amortized cost value plus interest. These commitments will be used only to
assist in maintaining a Fund's liquidity and not for trading purposes.
. Securities Lending. Each Fund may lend its portfolio securities to broker-
dealers and other institutions as a means of earning additional income.
Although securities loans will be fully collateralized, such loans present risks
of delay in receiving additional collateral or in recovering the securities
loaned or even a loss of rights in the collateral if the borrower of the
securities fails financially. However, securities loans will be made only to
parties the Adviser deems to be of good standing and will only be made if the
Adviser believes the income to be earned from the loans justifies the risks.
. Other Investment Companies. Each Fund may invest in securities issued by
other investment companies which invest in eligible quality, short-term debt
securities, whether taxable or tax-exempt, and which seek to maintain a $1.00
net asset value per share, i.e., "money market" funds. Such investments will be
made by a Fund in connection with the management of its daily cash position and
will be subject to the requirements of applicable securities laws. When a Fund
invests in another investment company, it pays a pro rata portion of the
advisory and other expenses of that company as one of its shareholders. These
expenses are in addition to the Fund's own expenses.
. American, European and Global Depository Receipts. The Limited Maturity
Bond Fund and Total Return Bond Fund may invest up to 25% of their respective
total assets in ADRs, EDRs, GDRs and similar securities. ADRs typically are
issued by a U.S. bank or trust company and evidence ownership of underlying
securities issued by a foreign issuer. EDRs, which are sometimes referred to as
Continental Depository Receipts, are receipts issued in Europe typically by non-
U.S. banks or trust companies and foreign branches of U.S. banks that evidence
ownership of underlying foreign or U.S. securities. GDRs are depository
receipts structured similarly to EDRs and are issued and traded in several
international financial markets. GDRs are designed for trading in non-U.S.
securities markets. These instruments may not be denominated
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in the same currency as the securities they represent. Investments in ADRs, EDRs
and GDRs involve risks similar to those accompanying direct investments in
foreign securities.
. Foreign Currency Exchange Contracts. The Limited Maturity Bond Fund and
Total Return Bond Fund may from time to time use foreign currency exchange
contracts to hedge against movements in the value of foreign currencies
(including the European Currency Unit) relative to the U.S. dollar in connection
with specific portfolio transactions or with respect to portfolio positions. A
forward foreign currency exchange contract involves an obligation to purchase or
sell a specified currency at a future date at a price set at the time of the
contract. Foreign currency exchange contracts do not eliminate fluctuations in
the values of portfolio securities but rather allow a Fund to establish a rate
of exchange for a future point in time.
. Options. The Total Return Bond Fund may write covered call options, buy put
options, buy call options and sell, or "write," secured put options on
particular securities or various securities indices. A call option for a
particular security gives the purchaser of the option the right to buy, and a
writer the obligation to sell, the underlying security at the stated exercise
price at any time prior to the expiration of the option, regardless of the
market price of the security. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract. A put
option for a particular security gives the purchaser the right to sell the
underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
In contrast to an option on a particular security, an option on a securities
index provides the holder with the right to make or receive a cash settlement
upon exercise of the option.
Options purchased by the Fund will not exceed 5%, and options written by the
Fund will not exceed 25%, of its net assets. Options may or may not be listed
on a national securities exchange and issued by the Options Clearing
Corporation. Unlisted options are not subject to the protections afforded
purchasers of listed options issued by the Options Clearing Corporation which
performs the obligations of its members if they default.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, the Fund gives up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price (except to the
extent the premium represents such a profit). Moreover, it will not be able to
sell the underlying security until the covered call option expires or is
exercised or a Fund closes out the option. In writing a secured put option, the
Fund assumes the risk that the market value of the security will decline below
the exercise price of the option. The use of covered call and secured put
options will not be a primary investment technique of the Fund.
. Futures and Related Options. The Total Return Bond Fund may invest to a
limited extent in futures contracts and options on futures contracts in order to
gain fuller exposure to movements of securities prices pending investment, for
hedging purposes or to maintain liquidity. Futures contracts obligate the Fund,
at maturity, to take or make delivery of certain securities or the cash value of
a securities index. The Fund may not purchase or sell a futures
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contract (or related option) unless immediately after any such transaction the
sum of the aggregate amount of margin deposits on its existing futures positions
and the amount of premiums paid for related options is 5% or less of its total
assets (after taking into account certain technical adjustments).
The Fund may also purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When the Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or seller
of a futures contract at a specified exercise price at any time during the
option period. When the Fund sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised. In
anticipation of a market advance, the Fund may purchase call options on futures
contracts as a substitute for the purchase of futures contracts to hedge against
a possible increase in the price of securities which the Fund intends to
purchase. Similarly, if the value of the Fund's portfolio securities is
expected to decline, the Fund might purchase put options or sell call options on
futures contracts rather than sell futures contracts.
More information regarding futures contracts and related options can be found
in Appendix B to the Statement of Additional Information.
. Rights and Warrants. The Total Return Bond Fund may invest in rights and
warrants to purchase securities. It is the current intention of the Fund to
limit investment in rights and warrants to no more than 5% of its net assets.
. 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 Funds will not knowingly invest more than 10% (15%
with respect to the Total Return Bond Fund) of the value of their respective net
assets in illiquid securities. Illiquid securities include repurchase
agreements and time deposits that do not permit a Fund to terminate them after
seven days' notice, restricted securities and other securities for which market
quotations are not readily available. Certain securities that might otherwise
be considered illiquid, however, such as some issues of commercial paper and
variable 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. Investments in Rule
144A securities could have the effect of increasing the level of illiquidity in
a Fund during any period that qualified institutional buyers were no longer
interested in purchasing these restricted securities.
. Portfolio Turnover. A Fund may sell a portfolio security soon after it is
purchased if the Adviser believes that a sale is consistent with the Fund's
investment objective. A high rate of portfolio turnover (100% or more) involves
correspondingly greater brokerage commission expenses, tax consequences
(including the possible realization of additional taxable capital gains
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and income) and other transaction costs, which must be borne directly by the
Fund involved and ultimately by its shareholders.
FUNDAMENTAL LIMITATIONS
The investment objective of each of the Prime Money Market Fund, Government
Money Market Fund and Limited Return Bond Fund discussed above is "fundamental",
which means that it may not be changed for a Fund without the approval of a
majority of that Fund's outstanding shares. The investment objective of the
Total Return Bond Fund discussed above may be changed by the Company's Board of
Directors without shareholder approval, although shareholders will be given at
least 30 days' written notice before such a change occurs. Unless otherwise
noted, each Fund's investment policies discussed above may be changed by the
Company's Board of Directors without shareholder approval. However, each Fund
has in place certain "fundamental" investment limitations that cannot be changed
for a Fund without the approval of a majority of that Fund's outstanding shares.
Some of these fundamental limitations are summarized below, and all of the
Funds' fundamental limitations are set out in full in the Statement of
Additional Information.
1. A Fund may not purchase securities (with certain exceptions, including
U.S. Government securities) if more than 5% of its total assets will be invested
in the securities of any one issuer, except that up to 25% of the total assets
of each Fund can be invested without regard to this 5% limitation.
2. A Fund may not invest 25% or more of its total assets in one or more
issuers conducting their principal business activities in the same industry,
subject to certain exceptions.
3. A Fund may not borrow money except for temporary purposes in amounts up
to 10% of its total assets at the time of such borrowing. Whenever borrowings
exceed 5% of a Fund's total assets, the Fund will not make any further
investments.
As a matter of non-fundamental policy and in accordance with current
regulations of the SEC, the Prime Money Market Fund intends to subject its
entire investment portfolio, other than U.S. Government securities, to the 5%
limitation described in Fundamental Limitation No. 1 above. However, in
accordance with such regulations, the Fund may invest more than 5% (but no more
than 25%) of its total assets in the securities of a single issuer for a period
of up to three business days, provided the securities are rated at the time of
purchase in the highest rating category assigned by one or more Rating Agencies
or are determined by the Adviser to be of comparable quality. The Fund may not
hold more than one such investment at any one time.
If a percentage limitation set forth above is met at the time an investment is
made, a subsequent change in that percentage resulting from a change in value of
a Fund's portfolio securities does not mean that the limitation has been
violated.
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INVESTING IN THE FUNDS
GETTING YOUR INVESTMENT STARTED
Investing in the Funds is quick and convenient. Shares of the Funds may be
purchased either through the account you maintain with certain financial
institutions or directly through the Company. Fund shares are distributed by
BISYS Fund Services Limited Partnership (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 and third party
checks.
HOW TO BUY FUND SHARES
. Minimum Investments. Each Fund generally requires a $25,000 minimum
initial investment. Subsequent investments must be a minimum of $100. The
minimum investment requirements do not apply to purchases by Banks acting on
behalf of their customers and the Banks do not impose a minimum initial or
subsequent investment requirement for shares purchased on behalf of their
customers. The Company reserves the right to waive these minimums in other
instances.
. Opening and Adding to Your Fund Account. Direct investments in the Funds
may be made in a number of different ways, as shown in the following chart.
Simply choose the method that is most convenient for you. Any questions you
have may be answered by calling 1-800-551-2145. As described above under
"Getting Your Investment Started," you may also purchase Fund shares through the
Banks.
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<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT To Add to an Account
------------------- --------------------
<S> <C> <C>
By Mail . Complete a New Account Application and . Make your check payable to the
mail it along with a check payable to the particular Fund in which you are
particular Fund you want to invest in to: investing and mail it to the address at
left.
M.S.D. & T. Funds, Inc. . Please include your account number on
P.O. Box 8515 your check.
Boston, MA 02266-8515
To obtain a New Account Application,
call 1-800-551-2145
- ------------------------------------------------------------------------------------------------------------------------------
BY WIRE . Before wiring funds, please call . Instruct your bank to wire Federal
1-800-551-2145 for complete wiring funds to: State Street Bank and Trust
instructions. Company, Boston, Massachusetts, Bank
Routing No. 011-0000-28, M.S.D. & T.
. Promptly complete a New Account Deposit A/C No. 99046435.
Application and forward it to:
. Be sure to include your name and your
M.S.D. & T. Funds, Inc. Fund account number.
P.O. Box 8515
Boston, MA 02266-8515 . The wire should indicate that you are
making a subsequent purchase as opposed
to opening a new account.
Consult your bank for information on remitting funds by wire and associated
bank charges.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS, EXCHANGES AND
DIRECTED REINVESTMENTS, TO INVEST IN YOUR FUND ACCOUNT. PLEASE REFER TO THE SECTION
BELOW ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
. Explanation of Sales Price. The public offering price for shares of a Fund
is based upon net asset value per share. A Fund will calculate its net asset
value per share by adding the value of a Fund's investments, cash and other
assets, subtracting the Fund's liabilities, and then dividing the result by the
number of shares of the Fund that are outstanding. This process is sometimes
referred to as "pricing" a Fund's shares.
The assets of the Prime Money Market Fund and Government Money Market Fund
(the "Money Market Funds") are valued at amortized cost, which generally
approximates market value. Although each Money Market Fund seeks to maintain
its net asset value per share at $1.00, there can be no assurance that the net
asset value per share will not vary. The assets of the Limited Maturity Bond
Fund and Total Return Bond
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<PAGE>
Fund (the "Bond Funds") 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
Bond Funds that have sixty days or less until they mature are valued at
amortized cost, which generally approximates market value. More information
about valuation can be found in the Funds' Statement of Additional Information,
which you may request by calling 1-800-551-2145.
Net asset value is computed (i) with respect to each Money Market Fund, as of
11:00 a.m. Eastern Time and as of the close of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern Time) each
weekday and (ii) with respect to each Bond Fund, as of the close of regular
trading hours on the Exchange (currently 4:00 p.m. Eastern Time) each weekday,
in each case with the exception of those holidays on which the Federal Reserve
Bank of Cleveland, the purchasing Bank (if applicable), the Funds' Adviser,
transfer agent or custodian or the Exchange is closed. The Funds currently
observe the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day.
Purchase orders will be accepted by State Street Bank and Trust Company
("State Street") only on a day on which the shares of a Fund are priced
("Business Day"). If you purchase shares of a Fund through a Bank, the Bank is
responsible for transmitting your purchase order and required funds to the
Transfer Agent on a timely basis.
If your purchase order for shares of a Money Market Fund is received by the
Transfer Agent on a Business Day before 11:00 a.m. Eastern Time, your Fund
shares will be purchased at the public offering price calculated at 11:00 a.m.
provided that the Fund's custodian receives payment in immediately available
funds by the close of regular trading hours on the Exchange that day. If your
purchase order for shares of a Money Market Fund is received by the Transfer
Agent on a Business Day after 11:00 a.m. Eastern Time but before the close of
regular trading hours on the Exchange that day, your Fund shares will be
purchased at the public offering price calculated at 11:00 a.m. Eastern Time on
the following Business Day if the Fund's custodian receives payment in
immediately available funds by the close of regular trading hours on the
Exchange on the following Business Day. If the procedures described above are
not followed and if a Bank submitted the order, the Bank will be notified that
the order has not been accepted. If you purchase shares of a Money Market Fund
directly through the Company and if your purchase order is accompanied by
payment in any form other than immediately available funds, your Fund shares
will be purchased at the public offering price calculated at 11:00 a.m. Eastern
Time on the next Business Day after the Business Day on which both the order and
payment in immediately available funds are received by the Transfer Agent.
Payments for orders which are not received or accepted will be returned after
prompt inquiry.
Shares of the Bond Funds are sold at the public offering price per share next
computed after receipt of a purchase order by the Transfer Agent. If you
purchase shares of a Bond Fund through a Bank and if the Transfer Agent receives
your purchase order from the Bank on a Business Day prior to the close of
regular trading hours (currently 4:00 P.M. Eastern Time) on the Exchange, your
Fund shares will be purchased at the public offering price calculated at the
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<PAGE>
close of regular trading hours on that day provided that the Fund's custodian
receives payment on the next Business Day in immediately available funds. If
such payment is not received on the next Business Day, the Bank which submitted
the order will be notified that the order has not been accepted.
If you purchase shares of a Bond Fund directly through the Company and if your
purchase order, in proper form and accompanied by payment, is received by the
Transfer Agent on a Business Day prior to the close of regular trading hours on
the Exchange, your Fund shares will be purchased at the public offering price
calculated at the close of regular trading hours on that day. Otherwise, your
Fund shares will be purchased at the public offering price next calculated after
the Transfer Agent receives your purchase order in proper form with the required
payment.
On a Business Day when the Exchange closes early due to a partial holiday or
otherwise, the Company reserves the right to advance the times at which purchase
orders must be received in order to be processed on that Business Day.
HOW TO SELL FUND SHARES
You can arrange to get money out of your Fund account by selling some or all
of your shares. This process is known as "redeeming" your shares. If you
purchased your shares through an account at a Bank, you may redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you have the ability to redeem shares by
any of the methods described below.
TO REDEEM SHARES
----------------
BY MAIL
. Send a written request to M.S.D. & T. Funds, Inc.,
P.O. Box 8515, Boston, MA 02266-8515.
. Your written request must
- be signed by each account holder;
- state the number or dollar amount of shares to
be redeemed and identify the specific Fund;
- include your account number.
. Signature guarantees are required
- for all redemption requests over $100,000;
- for any redemption request where the proceeds
are to be sent to someone other than the
shareholder of record or to an address other
than the address of record.
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<PAGE>
- --------------------------------------------------------------------------------
BY WIRE . Call 1-800-551-2145. You will need to provide
(available only if the account name, account number, name of Fund
you checked the and amount of redemption ($1,000 minimum
appropriate box on per transaction).
the New Account Application)
. If you have already opened your account and would
like to have the wire redemption feature, send a
written request to: M.S.D. & T. Funds, Inc., P.O.
Box 8515, Boston, MA 02266-8515. The request must
be signed (and signatures guaranteed) by each
account owner.
. To change bank instructions, send a written request
to the above address. The request must be signed
(and signatures guaranteed) by each account owner.
- --------------------------------------------------------------------------------
BY TELEPHONE . Call 1-800-551-2145. You will need to provide
(available only if the account name, account number, name of Fund
you checked the and amount of redemption.
Application) appropriate
box on the New Account
. If you have already opened your account and would
like to add the telephone redemption feature, send
a written request to: M.S.D. & T. Funds, Inc., P.O.
Box 8515, Boston, MA 02266-8515. The request must
be signed (and signatures guaranteed) by each
account owner.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND SYSTEMATIC
WITHDRAWALS, ARE ALSO AVAILABLE. PLEASE REFER TO THE SECTION
BELOW 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.
Payment for redemption orders with respect to a Money Market Fund which are
received by the Transfer Agent before 11:00 a.m. Eastern Time normally will be
wired or sent to the shareholder(s) of record on the same Business Day. Payment
for redemption orders with respect to a Money Market Fund which are received
between 11:00 a.m. and the close of regular trading hours on the Exchange
(currently 4:00 p.m. Eastern Time) or on a non-Business Day normally will be
wired or sent to the shareholder(s) of record on the next Business Day. Payment
for redemption orders with respect to a Bond Fund generally will be wired or
sent to the shareholder(s) of record within three Business Days after receipt of
the redemption order. However, in each case 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
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<PAGE>
redemption proceeds in readily marketable portfolio securities having a market
value equal to the redemption price.
Banks are responsible for transmitting their customers' redemption orders to
the Transfer Agent and crediting their customers' accounts with redemption
proceeds on a timely basis. No charge is imposed by the Company for wiring
redemption proceeds, although the Banks may charge their customers' accounts
directly for redemption and other services. In addition, if a customer has
agreed with a Bank to maintain a minimum cash balance in his or her account
maintained with the Bank and the balance falls below that minimum, the customer
may be obliged to redeem some or all of the Fund shares held in the account in
order to maintain the required minimum balance.
The Company imposes no charge when you redeem shares. The value of the shares
you redeem may be more or less than your cost, depending on a Fund's current net
asset value.
. Other Purchase and Redemption Information. Federal regulations require
that you provide a certified taxpayer identification number whenever you open or
reopen an account.
Shareholders who purchased Fund shares directly through the Company should
note that if an account balance falls below $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 New Account 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 recordation of the transfer of
its shares) for such periods as permitted under the Investment Company Act.
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<PAGE>
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 Agents 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 New
Account 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 each 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 plan, 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 a Fund may be exchanged for shares of another Fund or for shares of
one of the other portfolios offered by the Company. You may exchange shares by
mail at the address provided above under "How To Buy Shares - Opening and Adding
to Your Fund Account" or by telephone at 1-800-551-2145. If you are opening a
new account in a different Fund or portfolio by exchange, the exchanged shares
must be at least equal in value to the minimum investment for the Fund or
portfolio in which the account is being opened.
You should read the prospectus for the Fund or portfolio into which you are
exchanging. Exchanges will be processed only when the shares being offered can
legally be sold in your state. Exchanges may have tax consequences for you.
Consult your tax adviser for further information.
To elect the exchange privilege after you have opened a Fund account, or for
further information about the exchange privilege, call 1-800-551-2145. The
Company reserves the right to reject any exchange request. The Company may
modify or terminate the exchange privilege, but will not materially modify or
terminate it without giving shareholders 60 days' notice.
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<PAGE>
AUTOMATIC INVESTMENT PLAN
One easy way to pursue your financial goals is to invest money regularly. The
Company offers an Automatic Investment Plan - a convenient service that lets you
transfer money from your bank account into your Fund account automatically on a
regular basis. At your option, your bank account will be debited in a
particular amount ($100 minimum) that you have specified, and Fund shares will
automatically be purchased on the 15th day of each month or, if that day is not
a Business Day, on the preceding Business Day. Your bank account must be
maintained at a domestic financial institution that is an ACH member. You will
be responsible for any loss or expense to the Funds if an ACH transfer is
rejected. To select this option, or for more information, please call 1-800-
551-2145.
The Automatic Investment Plan is one means by which you may use "Dollar Cost
Averaging" in making investments. Dollar Cost Averaging can be useful in
investing in portfolios such as the Limited Maturity Bond Fund and Total Return
Bond 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 you to reduce your 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. You 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 you may find Dollar Cost
Averaging to be beneficial, it will not prevent a loss if you ultimately redeem
your shares at a price which is lower than their purchase price.
SYSTEMATIC WITHDRAWALS
The Company offers a convenient way of withdrawing money from your Fund
account. You may request regular monthly, quarterly, semi-annual or annual
withdrawals in any amount of $100 or more. The withdrawal will be made on the
last Business Day of the period you select and distributed in cash or reinvested
in shares of another Fund or portfolio offered by the Company. To elect this
option, or for more information, please call 1-800-551-2145.
DIRECTED REINVESTMENTS
Generally, dividends and capital gain distributions are automatically
reinvested in shares of the Fund from which the dividends and distributions are
paid. You may elect, however, to have your dividends and capital gain
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
for each Fund are derived from its net investment income and are declared daily
and paid monthly. A
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<PAGE>
Fund realizes capital gains whenever it sells securities for a higher price than
it paid for them. Capital gains distributions will be made at least annually.
Shares in each Fund begin earning dividends on the day a purchase order is
processed and continue earning dividends through and including the day before
the shares are redeemed. If you purchased your Fund shares through a Bank, your
dividends and distributions will be paid in cash and wired to your Bank. If you
purchased your shares directly from the Company, your dividends and
distributions will be automatically reinvested in additional shares of the Fund
on which the dividend or distribution was declared unless you notify the Company
in writing that you wish to receive dividends and/or distributions in cash. If
you have elected to receive dividends and/or distributions in cash and the
postal or other delivery service is unable to deliver checks to your address of
record, you will be deemed to have rescinded your election to receive dividends
and/or distributions in cash and your dividends and distributions will be
automatically reinvested in additional shares. No interest will accrue on
amounts represented by uncashed dividend and/or distribution checks.
TAX INFORMATION
As with any investment, you should consider the tax implications of an
investment in the Funds. The following briefly summarizes some of the important
federal income tax considerations generally affecting the Funds and their
shareholders under current law. 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.
FEDERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Fund qualifies, it generally will be relieved of federal income tax on amounts
distributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are or
are treated as a return of capital), regardless of whether the distributions are
paid in cash or reinvested in additional shares.
Distributions paid out of a Fund's "net capital gain" (the excess of net long-
term capital gain over net short-term capital loss), if any, will be taxed to
shareholders as long-term capital gain, regardless of the length of time a
shareholder holds the shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
Dividends declared in December of any year payable to shareholders of record
on a specified date in that month 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.
You will generally recognize a taxable gain or loss upon a redemption or
exchange of shares depending upon their tax basis and their price at the time of
redemption or exchange.
-30-
<PAGE>
Shareholders who are non-resident alien individuals, foreign trusts or
estates, foreign corporations or foreign partnerships will generally be subject
to different U.S. federal income tax treatment from that described above.
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 Funds. Mercantile-Safe Deposit
and Trust Company ("Mercantile") serves as the Funds' investment adviser and
administrator and has its principal offices at Two Hopkins Plaza, Baltimore,
Maryland 21201. BISYS Fund Services Limited Partnership, a wholly-owned
subsidiary of The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, is the registered broker-dealer that sells the Funds' shares,
and BISYS Fund Services Ohio, Inc., also a wholly-owned subsidiary of The BISYS
Group, Inc. and located at the same address, provides fund accounting services
to the Funds. The Funds also have a custodian, The Fifth Third Bank, located at
38 Fountain Square Plaza, Cincinnati, Ohio 45263, and a transfer and dividend
disbursing agent, State Street Bank and Trust Company, located at Two Heritage
Drive, North Quincy, Massachusetts 02171.
INVESTMENT ADVISER
Mercantile is the lead bank of Mercantile Bankshares Corporation, a multi-bank
holding company organized in Maryland in 1969. Mercantile manages the
investment portfolios of the Funds, including selecting portfolio investments
and making purchase and sale orders. 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 July 20, 1998, Mercantile had
approximately $13 billion in assets under active management.
A Fund's portfolio manager is primarily responsible for the day-to-day
management of a Fund's investments.
. Mark G. McGlone, Vice President of Mercantile, has managed the Limited
Maturity Bond Fund since June 1992. During the past seventeen years,
Mr. McGlone has managed institutional fixed income portfolios at
Mercantile, including pension plans, endowment funds and self-insurance
funds.
. Kevin J. Dachille, Senior Vice President of Mercantile, has managed the
Total Return Bond Fund since its commencement of operations. During the
past nineteen years, Mr. Dachille has managed institutional fixed
income portfolios at Mercantile, including pension plans, endowment
funds and self-insurance funds.
-31-
<PAGE>
ADMINISTRATOR
Mercantile also serves as the Funds' administrator and generally assists in
all aspects of their operation and administration, including maintaining the
Funds' offices, coordinating the preparation of reports to shareholders,
preparing filings with state securities commissions, coordinating federal and
state tax returns, and performing other administrative functions.
EXPENSES
The Funds incur certain expenses in order to support the services described
above, as well as other matters essential to the operation of the Funds.
Expenses are paid out of a Fund's assets and thus are reflected in the Fund's
dividends and net asset value, but they are not billed directly to you or
deducted from your account.
In its capacity as investment adviser, Mercantile is entitled to advisory fees
from the Funds that are calculated daily and paid monthly at the following
annual rates: with respect to the Prime Money Market Fund and Government Money
Market Fund: .25% of the first $1 billion of each Fund's average daily net
assets plus .20% of each Fund's average daily net assets in excess of $1
billion; and with respect to the Limited Maturity Bond Fund and Total Return
Bond Fund: .35% of the first $1 billion of each Fund's average daily net assets
plus .20% of each Funds' average daily net assets in excess of $1 billion.
For the fiscal year ended May 31, 1998, Mercantile received advisory fees,
after fee waivers, at the effective annual rates of .24% of the average daily
net assets of the Prime Money Market Fund, .23% of the average daily net assets
of the Government Money Market Funds, and .15% of the average daily net assets
of the Limited Maturity Bond Fund. For the period March 1, 1998 (commencement
of operations) through May 31, 1998, Mercantile received advisory fees, after
fee waivers, at the effective annual rate of .20% of the average daily net
assets of the Total Return Bond Fund.
In its capacity as administrator, Mercantile is also entitled to an
administration fee, computed daily and paid monthly, at the annual rate of .125%
of the average daily net assets of each Fund.
The Funds also bear other operating expenses in connection with their
operations, which are described in more detail in the Statement of Additional
Information.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Mercantile and the Funds' other service providers. The amount of the fee
waivers may be changed at any time at the sole discretion of Mercantile with
respect to advisory and administration fees, and by the Funds' other service
providers, with respect to all other fees. As to any amounts voluntarily waived
or reimbursed, the service providers retain the ability to be reimbursed by a
Fund for such amounts prior to fiscal year-end. Such waivers and
-32-
<PAGE>
reimbursements would increase the return to investors when made but would
decrease the return if a Fund were required to reimburse a service provider.
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES
The Company was incorporated in Maryland on March 7, 1989 and is a mutual fund
of the type known as an "open-end management investment company." The Company's
charter authorizes the Board of Directors to issue up to 10,000,000,000 full and
fractional shares of capital stock ($.001 par value per share) and to classify
or reclassify any unissued shares into one or more classes of shares. Pursuant
to this authority, the Board of Directors has authorized the issuance of one
class of shares in each 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, 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 a Fund's performance. You may see references
to these terms in newsletters, advertisements and shareholder communications.
These publications may also include comparisons of a Fund's performance to the
performance of various indices and investments for which reliable performance
data are available and to averages, performance rankings or other information
compiled by recognized mutual fund statistical services.
. Aggregate total return for the Limited Maturity Bond Fund and
Total Return Bond Fund reflects the total percentage change in
the value of an investment in a particular Fund over a specified
measuring period.
. Average annual total return for the Limited Maturity Bond Fund
and Total Return Bond Fund represents the average annual
percentage change in the value of an investment in a particular
Fund over a specified measuring period. It is calculated by
taking the aggregate total return for the measuring period and
determining what constant annual return would have produced the
same aggregate return. Average annual returns for more than one
year tend to smooth out variations in a Fund's return and are not
the same as actual annual results.
-33-
<PAGE>
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 a Fund earns on its investments
as a percentage of its share price. The 7-day yield for the
Prime Money Market Fund and Government Money Market Fund is an
annualized figure - the amount you would earn if you stayed in a
particular Fund for a year and the Fund continued to earn the
same net investment income throughout that year. To calculate 7-
day yield, net investment income per share over a 7-day period
(which period will be identified in the quotation) is multiplied
by 52 weeks, then divided by net asset value to get a percentage,
which is the 7-day yield. The yield for the Limited Maturity
Bond Fund and Total Return Bond Fund is calculated by dividing a
particular Fund's net investment income for a 30-day period by
the product of the average daily number of shares entitled to
receive dividends and the Fund's net asset value per share at the
end of the 30-day period. The result is then annualized. This
represents the amount you would earn if you remained invested in
a particular 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.
. Effective Yield for the Prime Money Market Fund and Government
Money Market Fund is calculated similarly to yield but, the
income earned by an investment in a particular Fund is assumed to
be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed
reinvestment.
Any fees charged by a Bank directly to your account in connection with an
investment in a Fund will not be included in the Fund's calculations of yield
and/or total return.
Performance quotations of a Fund represent its past performance, and you
should not consider them representative of future results. The investment
return and principal value of an investment in a Fund will fluctuate so that
your shares, when redeemed, may be worth more or less than their original cost.
Since performance will fluctuate, you cannot necessarily compare an investment
in Fund shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time.
MISCELLANEOUS
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of a particular Fund, with respect to the approval of the
Fund's investment advisory agreement or a change in the Fund's investment
objective (if fundamental) or a fundamental investment policy, means the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
such
-34-
<PAGE>
Fund or (b) 67% or more of the shares of such Fund present at a meeting if
more than 50% of the outstanding shares of such Fund are represented at the
meeting in person or by proxy.
The Company or your Bank will send you a statement of your account quarterly
and a confirmation after every transaction that affects your share balance or
your account registration. A statement with tax information will be mailed to
you by January 31 of each year and filed with the Internal Revenue Service. At
least twice a year, you will receive financial statements in the form of Annual
and Semi-Annual Reports of the Funds.
If you have any questions concerning the Company or any of the Funds, please
call 1-800-551-2145.
YEAR 2000 RISKS. Like other investment companies, financial and business
organizations and individuals around the world, the Company could be adversely
affected if the computer systems used by Mercantile and the Company's other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." Mercantile is taking steps to address the Year 2000 Problem with
respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Company's other major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Company as a result of the Year
2000 Problem.
____________________
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE FUNDS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE COMPANY, THE FUNDS OR THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-35-
<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 Limited Partnership
Columbus, Ohio
In considering an investment in the Funds, please read this Prospectus
carefully.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THERE
CAN BE NO GUARANTEE THAT THE PRIME MONEY MARKET FUND AND GOVERNMENT MONEY MARKET
FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
-36-
<PAGE>
M.S.D. & T. FUNDS, INC.
TAX-EXEMPT MONEY MARKET FUND
MARYLAND TAX-EXEMPT BOND FUND
INTERMEDIATE TAX-EXEMPT BOND FUND
NATIONAL TAX-EXEMPT BOND FUND
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495
under the Securities Act of 1933
FORM N-1A ITEM NUMBER LOCATION
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
1. Cover Page.......................... Cover Page
2. Synopsis............................ Expense Summary
3. Condensed Financial Information..... Financial Highlights; Performance
Reporting
4. General Description of Registrant... Cover Page; Investment
Objectives, Policies and Risks;
Fundamental Limitations; Other
Information Concerning the Company
and Its Shares; Miscellaneous
5. Management of the Fund.............. Management of the Company;
Investing in the Funds;Shareholder
Services
5A. Management's Discussion of Fund.....
Performance......................... Not Applicable
6. Capital Stock and Investing in the Funds; Dividends
Other Securities.................... and Distributions; Tax Information;
Other Information Concerning the
.................................... Company and Its Shares;Shareholder
Services; Miscellaneous
7. Purchase of Securities Being Offered Investing in the Funds
8. Redemption or Repurchase............ Investing in the Funds
9. Pending Legal Proceedings........... Not Applicable
<PAGE>
M.S.D. & T. FUNDS, INC.
.TAX-EXEMPT MONEY MARKET FUND
.MARYLAND TAX-EXEMPT BOND FUND
.INTERMEDIATE TAX-EXEMPT BOND FUND
.NATIONAL TAX-EXEMPT BOND FUND
PROSPECTUS
September __, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY........................................................... 3
FINANCIAL HIGHLIGHTS...................................................... 5
INVESTMENT OBJECTIVES, POLICIES AND RISKS................................. 9
FUNDAMENTAL LIMITATIONS................................................... 21
INVESTING IN THE FUNDS.................................................... 22
SHAREHOLDER SERVICES...................................................... 29
DIVIDENDS AND DISTRIBUTIONS............................................... 30
TAX INFORMATION........................................................... 31
MANAGEMENT OF THE COMPANY................................................. 33
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES................... 35
PERFORMANCE REPORTING..................................................... 35
MISCELLANEOUS............................................................. 37
</TABLE>
- --------------------------------------------------------------------------------
IF YOU HAVE QUESTIONS
For current yield, purchase and redemption information, call 1-800-551-2145.
- --------------------------------------------------------------------------------
<PAGE>
M.S.D. & T. FUNDS, INC.
PROSPECTUS
FOR THE
TAX-EXEMPT MONEY MARKET FUND
MARYLAND TAX-EXEMPT BOND FUND
INTERMEDIATE TAX-EXEMPT BOND FUND
NATIONAL TAX-EXEMPT BOND FUND
SEPTEMBER ___, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
M.S.D. & T. FUND GOAL FOR INVESTORS WHO WANT
---------------- ---- ----------------------
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TAX-EXEMPT High current income free of federal income A way to earn tax-free money market
MONEY MARKET tax, with liquidity and stability of principal returns.
through investments in short-term municipal
obligations.
MARYLAND TAX- High tax-free income through investments Current income from an investment that
EXEMPT BOND primarily in Maryland municipal obligations. is both free from federal and Maryland
state and local income taxes.
INTERMEDIATE High current income free of federal income tax Current income from an investment that
TAX-EXEMPT and relative protection of capital through is free from federal income tax and
BOND investments primarily in short-term and less principal volatility than normally
medium-term municipal obligations. associated with a long-term fund.
NATIONAL TAX- High current income free of federal income tax Current income and relative protection
EXEMPT BOND and relative protection of capital through of capital from an investment that is
investments primarily in medium-term and free from federal income tax.
long-term municipal obligations.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND SUCH SHARES ARE NOT FEDERALLY INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. WHILE
THE TAX-EXEMPT MONEY MARKET FUND WILL ATTEMPT TO MAINTAIN ITS NET ASSET VALUE AT
$1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO
ON A CONTINUOUS BASIS. IN ADDITION, THE DIVIDENDS PAID BY THE FUNDS WILL GO UP
AND DOWN. MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY SERVES AS
<PAGE>
INVESTMENT ADVISER AND ADMINISTRATOR TO THE FUNDS, IS PAID FEES FOR ITS
SERVICES, AND IS NOT AFFILIATED WITH BISYS FUND SERVICES LIMITED PARTNERSHIP,
THE FUNDS' DISTRIBUTOR.
This Prospectus relates to shares of the Tax-Exempt Money Market Fund,
Maryland Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and National
Tax-Exempt Bond Fund (collectively the "Funds") of M.S.D. & T. Funds, Inc. (the
"Company"), a no-load, open-end management investment company. This Prospectus
describes concisely the information about the Funds that you should know before
investing. Please read and keep it for future reference. More information
about the Funds is contained in the Statement of Additional Information dated
September ___, 1998 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.
-2-
<PAGE>
EXPENSE SUMMARY
Expenses are one of several factors to consider when investing in a Fund.
Annual Fund Operating Expenses are paid out of a Fund's assets and include fees
for portfolio management, maintenance of shareholder accounts, general Fund
administration, accounting, custody and other services.
Below is information regarding the operating expenses for the Funds.
Examples based on this information are also provided.
<TABLE>
<CAPTION>
MARYLAND INTERMEDIATE NATIONAL
TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT TAX-EXEMPT
MONEY MARKET BOND BOND BOND
FUND FUND FUND FUND
---- ---- ---- ----
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees (after fee
waivers)(1)..................................... .220% .100% .220% .220%
Other Expenses (after fee waivers)
(includes administration, custody
and transfer agency, and
miscellaneous other charges)(1)................. .155% .350% .230% .230%
Total Fund Operating Expenses ---- ---- ---- ----
(after fee waivers)(1).......................... .375% .450% .450% .450%
==== ==== ==== ====
</TABLE>
____________________
(1) This expense information is provided to help you understand the various
costs and expenses that you would bear indirectly as a shareholder of one
of the Funds. The expense information is based on the expenses incurred by
the Funds during the fiscal year or period ended May 31, 1998, as restated
to reflect the expenses which the Funds expect to incur during the current
fiscal year. Without fee waivers by the investment adviser and
administrator, Management Fees, Other Expenses and Total Fund Operating
Expenses, stated as a percentage of average daily net assets, would be
.25%, .25% and .50%, respectively, for the Tax-Exempt Money Market Fund;
50%, .53% and 1.03%, respectively, for the Maryland Tax-Exempt Bond Fund;
.50%, .35% and .85%, respectively, for the Intermediate Tax-Exempt Bond
Fund; and .50%, .33% and .83%, respectively, for the National Tax-Exempt
Bond Fund.
The investment adviser and administrator are under no obligation to waive
fees or reimburse expenses, but have informed the Company that they expect
to waive fees and/or reimburse expenses during the current fiscal year as
necessary to maintain the Funds' total operating expenses at the levels set
forth in the above table. You should note that any fees that are charged by
the investment adviser, its affiliates or any other institutions directly
to their customer accounts for services related to an investment in the
Funds are in addition to, and are not reflected in, the fees and expenses
described above.
For more complete descriptions of the Funds' operating expenses, see
"Management of the Company" in this Prospectus.
-3-
<PAGE>
EXAMPLE:
Assume a Fund's annual return is 5% and its expenses are the same as those
stated above. For every $1,000 you invest, here's how much you would pay in
total expenses if you closed your account after the number of years indicated:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market Fund.............................. $ 4 $ 12 $ 21 $ 48
Maryland Tax-Exempt Bond Fund............................. $ 5 $ 14 $ 25 $ 57
Intermediate Tax-Exempt Bond Fund......................... $ 5 $ 14 $ 25 $ 57
National Tax-Exempt Bond Fund............................. $ 5 $ 14 $ 25 $ 57
</TABLE>
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR
FUTURE INVESTMENT RETURNS OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURNS AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights, which have been derived from the Funds'
financial statements, have been audited by PricewaterhouseCoopers LLP, the
Funds' independent accountants, whose unqualified report on the financial
statements containing such information for the five years in the period ended
May 31, 1998 is incorporated by reference into the Statement of Additional
Information. The Financial Highlights should be read along with the financial
statements and related notes, which are also incorporated by reference into the
Statement of Additional Information. Further information about the performance
of the Funds is available in the Company's Annual Report to Shareholders for the
fiscal year ended May 31, 1998. For a free copy of the Statement of Additional
Information or the Annual Report to Shareholders, contact the Company at the
address or telephone number on the first page of this Prospectus.
-5-
<PAGE>
TAX-EXEMPT MONEY MARKET FUND
Financial Highlights for a share of the Tax-Exempt Money Market Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR Year YEAR YEAR YEAR YEAR YEAR YEAR 7/21/89/1/
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED TO
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 5/31/93 5/31/92 5/31/91 5/31/90
-------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations: 0.0318 0.0304 0.0321 0.0303 0.0202 0.0217 0.0346 0.0494 0.0483
Net Investment Income.......
Net Realized Gain on
Investments............... -- -- -- -- 0.0004 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations.............. 0.0318 0.0304 0.0321 0.0303 0.0206 0.0217 0.0346 0.0494 0.0483
-------- -------- -------- -------- -------- -------- -------- -------- --------
Less Distributions to
Shareholders from: (0.0318) (0.0304) (0.0321) (0.0303) (0.0202) (0.0217) (0.0346) (0.0494) (0.0483)
Net Investment Income.....
Net Capital Gains......... -- -- -- -- (0.0004) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Distributions....... (0.0318) (0.0304) (0.0321) (0.0303) (0.0206) (0.0217) (0.0346) (0.0494) (0.0483)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return.................. 3.22% 3.09% 3.26% 3.08% 2.08% 2.19% 3.51% 5.05% 5.74%/2/
Ratios/Supplemental Data
Net Assets, End of Period
(000)....................... $ 89,965 $ 79,492 $ 50,137 $ 69,100 $ 82,222 $ 81,838 $ 76,687 $ 67,328 $ 65,101
Ratio of Expenses to
Average Net Assets 0.43% 0.43% 0.43% 0.43% 0.38% 0.37% 0.38% 0.38% 0.38%/2/
After Expense Waiver....
Before Expense Waiver... 0.50% 0.53% 0.51% 0.52% 0.50% 0.44% 0.46% 0.47% 0.48%/2/
Ratio of Net Investment
Income to Average Net
Assets..................... 3.17% 3.05% 3.22% 3.01% 2.02% 2.16% 3.42% 4.91% 5.58%/2/
</TABLE>
_________________________________________
1 Commencement of operations.
2 Annualized.
-6-
<PAGE>
MARYLAND TAX-EXEMPT BOND FUND
Financial Highlights for a share of the Maryland Tax-Exempt Bond Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year Year Year Year 6/2/92/1/
Ended Ended Ended Ended Ended to
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94 5/31/93
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period........... $ 10.38 $ 10.20 $ 10.40 $ 10.25 $ 10.55 $ 10.00
-------- -------- -------- -------- -------- --------
Income From Investment Operations:
Net Investment Income........................ 0.48 0.50 0.49 0.49 0.50 0.48
Net Realized and Unrealized
Gain (Loss) on Investments................. 0.44 0.18 (0.20) 0.15 (0.28) 0.55
-------- -------- -------- -------- -------- --------
Total From Investment
Operations............................... 0.92 0.68 0.29 0.64 0.22 1.03
-------- -------- -------- -------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income..................... (0.48) (0.50) (0.49) (0.49) (0.50) (0.48)
Net Capital Gains......................... -- -- -- -- (0.02) --
-------- -------- -------- -------- -------- --------
Total Distributions........................ (0.48) (0.50) (0.49) (0.49) (0.52) (0.48)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period................. $ 10.82 $ 10.38 $ 10.20 $ 10.40 $ 10.25 $ 10.55
======== ======== ======== ======== ======== ========
Total Return................................... 9.03% 6.80% 2.84% 6.48% 1.99% 10.59%/2/
Ratios/Supplemental Data
Net Assets, End of Period
(000)...................................... $ 14,980 $ 8,298 $ 10,186 $ 12,360 $ 20,008 $ 15,707
Ratio of Expenses to Average
Net Assets
After Expense Waiver...................... 0.49% 0.55% 0.62% 0.62% 0.55% 0.55%/2/
Before Expense Waiver..................... 1.03% 1.13% 1.04% 0.97% 0.86% 0.94%/2/
Ratio of Net Investment Income
to Average Net Assets...................... 4.49% 4.84% 4.74% 4.83% 4.66% 4.78%/2/
Portfolio turnover rate........................ 55.95% 28.11% 20.58% 36.80% 33.89% 17.59%
</TABLE>
_________________________________
1 Commencement of operations.
2 Annualized.
-7-
<PAGE>
INTERMEDIATE TAX-EXEMPT BOND FUND
AND NATIONAL TAX-EXEMPT BOND FUND
Financial Highlights for a share of the Intermediate Tax-Exempt Bond Fund
and National Tax-Exempt Bond Fund outstanding throughout the period indicated:
<TABLE>
<CAPTION>
Intermediate National
Tax-Exempt Tax-Exempt
Bond Fund Bond Fund
--------- ---------
March 1, 1998/1/ March 1, 1998/1/
to to
May 31, 1998 May 31, 1998
------------ ------------
<S> <C> <C>
Net Asset Value, Beginning of Period.............................. $10.00 $10.00
------ ------
Income From Investment Operations:
Net Investment Income........................................... 0.10 0.11
Net Realized and Unrealized
Gain (Loss) on Investments.................................... 0.01 0.05
------ ------
Total From Investment
Operations................................................... 0.11 0.16
------ ------
Less Distributions to Shareholders from:
Net Investment Income........................................... (0.10) (0.11)
Net Capital Gains............................................... -- --
------ ------
Total Distributions............................................. (0.10) (0.11)
------ ------
Net Asset Value, End of Period.................................... $10.01 $10.05
====== ======
Total Return...................................................... 1.07% 1.64%
Ratios/Supplement Data
Net Assets, End of Period
(000).......................................................... $93,992 $178,116
Ratio of Expenses to Average Net Assets
After Expense Reimbursement and Waiver......................... 0.45%/2/ 0.45%/2/
Before Expense Reimbursement and Waiver........................ 0.88%/2/ 0.86%/2/
Ratio of Net Investment Income
to Average Net Assets.......................................... 3.84%/2/ 4.49%/2/
Portfolio turnover rate........................................... 10.13% 7.37%
</TABLE>
______________________________________
1 Commencement of operations.
2 Annualized.
-8-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The Funds' investment adviser (the "Adviser") uses a range of different
investments and investment techniques in seeking to achieve a Fund's investment
objective. All Funds do not use all of the investments and investment
techniques described below, which involve various risks, and which are also
described in the following sections. You should consider which Funds best meet
your investment goals. The Adviser will use its best efforts to achieve a
Fund's investment objective, although its achievement cannot be assured. An
investor should not consider an investment in any Fund to be a complete
investment program.
TAX-EXEMPT MONEY MARKET FUND
The investment objective of the Tax-Exempt Money Market Fund is to seek as
high a level of current income exempt from federal income tax as is consistent
with liquidity and stability of principal by investing substantially all of its
assets in a diversified portfolio of short-term obligations issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia and their political subdivisions, agencies, instrumentalities and
authorities ("municipal obligations") the interest on which, in the opinion of
counsel to the issuer or bond counsel, is exempt from regular federal income
tax. The Fund seeks to achieve its investment objective by investing primarily
in:
. municipal notes, including variable rate demand notes, rated at the
time of purchase within the highest rating category assigned by one or
more unaffiliated nationally recognized statistical rating
organizations (each a "Rating Agency");
. tax-exempt commercial paper rated at the time of purchase within the
highest rating category assigned by one or more Rating Agencies;
. municipal bonds rated at the time of purchase within one of the two
highest rating categories assigned by one or more Rating Agencies; and
. unrated municipal notes, tax-exempt commercial paper, municipal
bonds and other instruments that are of comparable quality as
determined by the Adviser pursuant to guidelines approved by the
Company's Board of Directors.
As a matter of fundamental policy, during normal market conditions at least
80% of the Tax-Exempt Money Market Fund's total assets will be invested in
municipal obligations the interest on which is exempt from regular federal
income tax and is not treated as a specific tax preference item under the
federal alternative minimum tax for either individuals or corporations. Up to
20% of the Fund's total assets may be invested in private activity bonds that
are subject to the federal alternative minimum tax or taxable money market
instruments, although the Fund does not intend to invest in such instruments on
a regular basis. The Fund may hold uninvested cash reserves during temporary
defensive periods or if, in the opinion of the Adviser, suitable municipal
obligations are not available.
-9-
<PAGE>
MARYLAND TAX-EXEMPT BOND FUND
The investment objective of the Maryland Tax-Exempt Bond Fund is to seek a
high level of interest income that is exempt from federal and Maryland state and
local income taxes. The Fund invests substantially all of its assets in tax-
exempt debt obligations issued by the State of Maryland and other states,
territories and possessions of the United States, the District of Columbia and
their respective political subdivisions, agencies, instrumentalities and
authorities ("municipal obligations"), that are rated at the time of purchase
within one of the four highest rating categories assigned by a Rating Agency.
The Fund may also acquire short-term municipal obligations such as tax-exempt
commercial paper, municipal notes, and variable rate demand obligations that are
rated at the time of purchase within the two highest rating categories assigned
by a Rating Agency. Obligations purchased by the Fund that have not been
assigned a rating will be determined by the Adviser to be of comparable quality.
Debt obligations (including municipal obligations) rated in the lowest of the
top four rating categories assigned by a Rating Agency are considered to have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. If a security
held by the Fund is downgraded below the minimum permitted rating, the Adviser
will reassess the creditworthiness of the security and consider such an event in
determining whether the Fund should continue to hold that security.
Except during periods of unusual market conditions or during temporary
defensive periods, at least 80% of the Fund's net assets will be invested in
securities the interest on which is exempt from federal income tax. In
addition, except during temporary defensive periods or when acceptable
securities are unavailable for investment by the Fund, at least 65% of the
Fund's total assets will be invested in securities issued by the State of
Maryland and its municipalities, counties and other taxing districts, as well as
in other securities exempt from Maryland state and local taxes.
The Fund may from time to time invest a portion of its assets on a
temporary basis (for example, when appropriate municipal obligations are
unavailable) or for temporary defensive purposes during periods of unusual
market conditions in short-term taxable money market instruments, securities
issued by other investment companies which invest in taxable or tax-exempt money
market instruments, U.S. Government obligations, and other securities as
described below under "Other Investment Policies." Investments by the Fund in
any such taxable instruments will not exceed 20% of the net assets of the Fund,
except when made for temporary defensive purposes during periods of unusual
market conditions, when up to 100% of the Fund's assets may be invested in such
instruments. The Fund may also hold uninvested cash reserves pending investment,
to meet anticipated redemption requests, or during temporary defensive periods.
There is no percentage limitation on the amount of assets which may be held
uninvested by the Fund.
Although the Fund has the flexibility to invest in municipal obligations
with short, medium or long maturities, the Adviser expects that under normal
conditions the Fund will invest primarily in obligations with medium and long
maturities.
-10-
<PAGE>
INTERMEDIATE TAX-EXEMPT BOND FUND
The investment objective of the Intermediate Tax-Exempt Bond Fund is to
seek as high a level of interest income that is exempt from regular federal tax
as is consistent with relative protection of capital. The Fund invests
substantially all of its assets in tax-exempt debt obligations issued by states,
territories and possessions of the United States, the District of Columbia and
their respective political subdivisions, agencies, instrumentalities and
authorities ("municipal obligations"), that are rated at the time of purchase
within one of the four highest rating categories assigned by a Rating Agency.
The Fund may also acquire short-term municipal obligations such as tax-exempt
commercial paper, municipal notes, and variable rate demand obligations that are
rated at the time of purchase within the two highest rating categories assigned
by a Rating Agency. Obligations purchased by the Fund that have not been
assigned a rating will be determined by the Adviser to be of comparable quality.
See "Maryland Tax-Exempt Bond Fund" above for a discussion of certain risks in
investing in debt obligations (including municipal obligations) rated in the
lowest of the four highest rating categories assigned by a Rating Agency. If a
security held by the Fund is downgraded below the minimum permitted rating, the
Adviser will reassess the creditworthiness of the security and will consider
such an event in determining whether the Fund should continue to hold that
security.
As a matter of fundamental policy, except during periods of unusual market
conditions or during temporary defensive periods, at least 80% of the Fund's net
assets will be invested in securities the interest on which is exempt from
regular federal income tax.
The Fund may from time to time invest a portion of its assets on a
temporary basis (for example, when appropriate municipal obligations are
unavailable) or for temporary defensive purposes during periods of unusual
market conditions in short-term taxable money market instruments, securities
issued by other investment companies which invest in taxable or tax-exempt money
market instruments, U.S. Government obligations, and other securities as
described below under "Other Investment Policies." Investments by the Fund in
any such taxable instruments will not exceed 20% of the net assets of the Fund,
except when made for temporary defensive purposes during periods of unusual
market conditions, when up to 100% of the Fund's assets may be invested in such
instruments. The Fund may also hold uninvested cash reserves pending investment,
to meet anticipated redemption requests, or during temporary defensive periods.
There is no percentage limitation on the amount of assets which may be held
uninvested by the Fund.
Although the Fund has the flexibility to invest in municipal obligations
with short, medium or long maturities, the Adviser expects that under normal
market and economic conditions the Fund will invest primarily in obligations
with medium and long maturities.
NATIONAL TAX-EXEMPT BOND FUND
The investment objective of the National Tax-Exempt Bond Fund is to seek as
high a level of interest income that is exempt from regular federal income tax
as is consistent with relative protection of capital. The Fund invests
substantially all of its assets in tax-exempt debt obligations issued by states,
territories and possessions of the United States, the District of
-11-
<PAGE>
Columbia and their respective political subdivisions, agencies,
instrumentalities and authorities ("municipal obligations"), that are rated at
the time of purchase within one of the four highest rating categories assigned
by a Rating Agency. The Fund may also acquire short-term municipal obligations
such as tax-exempt commercial paper, municipal notes, and variable rate demand
obligations that are rated at the time of purchase within the two highest rating
categories assigned by a Rating Agency. Obligations purchased by the Fund that
have not been assigned a rating will be determined by the Adviser to be of
comparable quality. See "Maryland Tax-Exempt Bond Fund" above for a discussion
of certain risks in investing in debt obligations (including municipal
obligations) rated in the lowest of the four highest rating categories assigned
by a Rating Agency. If a security held by the Fund is downgraded below the
minimum permitted rating, the Adviser will reassess the creditworthiness of the
security and will consider such an event in determining whether the Fund should
continue to hold that security.
As a matter of fundamental policy, except during periods of unusual market
conditions or during temporary defensive periods, at least 80% of the Fund's net
assets will be invested in securities the interest on which is exempt from
regular federal income tax.
The Fund may from time to time invest a portion of its assets on a
temporary basis (for example, when appropriate municipal obligations are
unavailable) or for temporary defensive purposes during periods of unusual
market conditions in short-term taxable money market instruments, securities
issued by other investment companies which invest in taxable or tax-exempt money
market instruments, U.S. Government obligations, and other securities as
described below under "Other Investment Policies." Investments by the Fund in
any such taxable instruments will not exceed 20% of the net assets of the Fund,
except when made for temporary defensive purposes during periods of unusual
market conditions, when up to 100% of the Fund's assets may be invested in such
instruments. The Fund may also hold uninvested cash reserves pending investment,
to meet anticipated redemption requests, or during temporary defensive periods.
There is no percentage limitation on the amount of assets which may be held
uninvested by the Fund.
Although the Fund has the flexibility to invest in municipal obligations
with short, medium or long maturities, the Adviser expects that under normal
market and economic conditions the Fund will invest primarily in obligations
with short and medium maturities.
RISK FACTORS
. Market and Interest Rate Risk. Generally, the market value of fixed
income securities (including municipal obligations) in the Funds can be expected
to vary inversely to changes in prevailing interest rates. You should recognize
that in periods of declining interest rates the market value of investment
portfolios comprised primarily of fixed income securities will tend to increase,
and in periods of rising interest rates the market value will tend to decrease.
You should also recognize that in periods of declining interest rates, the
yields of investment portfolios comprised primarily of fixed income securities
will tend to be higher than prevailing market rates and, in periods of rising
interest rates, yields will tend to be somewhat lower. Each Fund except the Tax-
Exempt Money Market Fund may purchase zero-coupon bonds (i.e., discount debt
obligations that do not make periodic interest payments). Zero-coupon bonds are
-12-
<PAGE>
subject to greater market fluctuations from changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Debt securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater capital appreciation and depreciation
than obligations with shorter maturities. Changes in the financial strength of
an issuer or changes in the ratings of any particular security may also affect
the value of these investments. Fluctuations in the market value of fixed income
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
. Risks Associated with Derivative Instruments. Each Fund except the Tax-
Exempt Money Market 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 participation certificates,
custodial receipts, futures contracts, options and structured debt obligations
(including 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
interest rates change adversely, the value of the derivative instrument will
decline more than the assets, rates or indices on which it is based; liquidity
risk that a Fund will be unable to sell a derivative instrument when it wants
because of lack of market depth or market disruption; pricing risk that the
value of a derivative instrument will not correlate exactly to the value of the
underlying assets, rates or indices on which it is based; and operations risk
that loss will occur as a result of inadequate systems and controls, human error
or otherwise. Some derivative instruments are more complex than others, and for
those instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The Adviser will evaluate the risks presented by the derivative instruments
purchased by a Fund, and will determine, in connection with its day-to-day
management of the Fund, how they will be used in furtherance of the Fund's
investment objective. It is possible, however, that the Adviser's evaluations
will prove to be inaccurate or incomplete and, even when accurate and complete,
it is possible that a Fund will, because of the risks discussed above, incur
loss as a result of its investments in derivative instruments.
. Risks Associated with Investments in Maryland Municipal Obligations. The
Maryland Tax-Exempt Bond Fund's concentration in securities issued primarily by
the State of Maryland and its political subdivisions, agencies and
instrumentalities involves greater risks than a fund more broadly invested in
securities issued by many different states and municipalities.
Some of the significant financial considerations relating to the
investments of the Maryland Tax-Exempt Bond Fund are summarized below. This
information is derived principally from the Official Statement with respect to
State of Maryland General Obligation Bonds dated July 8, 1998 and does not
purport to be a complete description.
-13-
<PAGE>
The State's total expenditures for the fiscal year ending June 30, 1995, June
30, 1996 and June 30, 1997 were $13.528 billion, $14.169 billion and $14.787
billion, respectively. As of July 8, 1998, its was estimated that total
expenditures for fiscal year 1998 would be $15.851 billion. The State's General
Fund had unreserved surpluses on a budgetary basis of $13.1 million, $207.2
million and $317.2 million (estimated) in fiscal years 1996, 1997 and 1998,
respectively.
When the 1998 Budget was enacted, it was estimated that the General Fund
surplus on a budgetary basis at June 30, 1998 would be approximately $27.9
million. As of July 8, 1998, it was estimated to be $317.2 million.
In April 1997, the General Assembly approved the $15,438 billion 1998 fiscal
year Budget. The Budget included $3.1 billion in aid to local governments
(reflecting a $206 million increase in funding over fiscal year 1997), and a
$0.3 million in General Fund deficiency appropriations for fiscal year 1997.
The Budget incorporates the first one-half year of a five-year phase-in of a 10%
reduction in personal income taxes estimated to result in a reduction of
revenues of $38.5 million in fiscal year 1998 (and estimated to reduce revenues
by $450 million when fully phased in). In addition, legislation enacted by the
1997 General Assembly provided for a phased reduction in the sales and use tax
on certain categories of manufacturing equipment. This legislation, scheduled
to take effect in fiscal year 1999, is expected to reduce revenues by $38.6
million when fully implemented in fiscal year 2001. Upon enactment of the 1998
Budget, it was estimated that the General Fund surplus on a budgetary basis at
June 30, 1998, would be approximately $27.9 million; as of July 8, 1998 it is
estimated to be $317.2 million. In addition, the balance in the Revenue
Stabilization Account of the State Reserve Fund is estimated to be $617.16
million at June 30, 1998.
In April 1998, the General Assembly approved the $16.613 billion 1999 fiscal
year Budget. The Budget includes $3.3 billion in aid to local governments and
retirement contributions on their behalf (reflecting a $169.1 million increase
over fiscal year 1998), and $75.5 million in General Fund deficiency
appropriations for fiscal year 1998, which includes a $25 million appropriation
for computer modifications to address the "year 2000" problem. The Budget
incorporates the first full year of the five-year phase-in for the 10% reduction
in personal income taxes, which was accelerated by legislation enacted by the
1998 General Assembly. The phase-in is estimated to result in a reduction in
revenues of approximately $300 million in fiscal year 1999. Legislation was
also enacted making the State's existing earned income tax credit refundable,
reducing revenues by an estimated $17.5 million in fiscal year 1999. The
estimated reduction in fiscal 1999 revenues will be mitigated by a transfer of
$185.2 million to the General Fund from the Revenue Stabilization Account of the
State Reserve Fund. Based on the 1999 Budget, it is estimated that the General
Fund surplus on a budgetary basis at June 30, 1999, will be approximately $14.5
million. In addition, the balance in the Revenue Stabilization Account of the
State Reserve Fund is estimated to be $634.0 million at June 30, 1999 (after the
$185.2 million transfer to the General Fund).
The public indebtedness of Maryland and its instrumentalities is divided into
three basic types. The State issues general obligation bonds, to the payment of
which State ad valorem taxes are exclusively pledged, for capital improvements
and for various State-sponsored projects. The Department of Transportation of
Maryland issues limited, special obligation bonds for
-14-
<PAGE>
transportation purposes payable primarily from specific, fixed-rate excise taxes
and other revenues related mainly to highway use. Certain authorities issue
obligations payable solely from specific non-tax enterprise fund revenues and
for which the State has no liability and has given no moral obligation
insurance. The State and certain of its agencies also have entered into a
variety of lease purchase agreements to finance the acquisition of capital
assets. The lease agreements specify that payments thereunder are subject to
annual appropriation by the General Assembly.
While the factors mentioned above indicate that Maryland and its
instrumentalities overall are in satisfactory economic health, there can, of
course, be no assurance that this will continue or that particular Maryland
municipal obligations may not be adversely affected by changes in state or local
economic or political conditions.
. Other Risk Considerations. Each Fund may invest in municipal obligations
that are private activity bonds the interest on which is subject to the federal
alternative minimum tax. Investments in such securities will be subject to a
Fund's 20% limitation on taxable investments. Although no Fund presently
intends to do so on a regular basis, each Fund may invest 25% or more of its
total assets in industrial development bonds issued before August 7, 1986 that
are not subject to the federal alternative minimum tax, and in municipal
obligations the interest on which is paid solely from revenues of similar
projects. When a Fund's assets are concentrated in obligations payable from
revenues on similar projects or in industrial development bonds, the Fund will
be subject to the particular risks (including legal and economic conditions)
presented by such securities to a greater extent than it would be if its assets
were not so concentrated. Furthermore, payment of municipal obligations held by
a Fund relating to certain projects may be secured by mortgages or deeds of
trust. In the event of a default, enforcement of a mortgage or deed of trust
may be delayed and the amount of the proceeds received may not be enough to pay
the principal and accrued interest on the defaulted municipal obligations.
While the other Funds are classified as "diversified," the Maryland Tax-Exempt
Bond Fund is classified as a "non-diversified" portfolio. The investment return
on a non-diversified portfolio is typically dependent upon the performance of a
smaller number of securities than a diversified portfolio and the change in
value of any one security may have a greater impact on the value of a non-
diversified portfolio. A non-diversified portfolio may therefore be subject to
greater fluctuations in net asset value. In addition, a non-diversified
portfolio may be more susceptible to economic, political and regulatory
developments than a diversified investment portfolio with a similar objective.
OTHER INVESTMENT POLICIES AND RELATED RISKS
. Quality and Maturity Tax-Exempt Money Market Fund. All securities acquired
by the Tax-Exempt Money Market Fund will be determined at the time of purchase
by the Adviser, pursuant to guidelines approved by the Company's Board of
Directors, to present minimal credit risks and will be "Eligible Securities" as
defined by the SEC. Eligible Securities are (a) securities that either (i) have
short-term debt ratings at the time of purchase in the two highest rating
categories assigned by at least two Rating Agencies (or one Rating Agency if the
security
-15-
<PAGE>
is rated by only one Rating Agency), or (ii) are comparable in priority and
security with an instrument issued by an issuer which has such ratings, and (b)
securities that are unrated (including securities of issuers that have long-term
but not short-term ratings) but are of comparable quality as determined in
accordance with guidelines approved by the Company's Board of Directors. See the
Statement of Additional Information for a description of the Rating Agencies'
various rating categories.
The Fund is managed so that the average dollar-weighted maturity of all
instruments held by it will not exceed 90 days. In no event will the Fund
purchase securities which mature more than 397 days from the date of purchase
(except for certain variable and floating rate instruments). Securities in
which the Fund invests may not earn as high a level of income as longer-term or
lower quality securities, which generally have greater market risk and more
fluctuation in market value.
. U.S. Government Obligations and Money Market Instruments. Each Fund may
invest in securities issued or guaranteed by the U.S. Government, including but
not limited to direct U.S. Treasury obligations, as well as in obligations
issued or guaranteed by U.S. Government agencies and instrumentalities.
Obligations of certain agencies and instrumentalities, such as those of 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
those of 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 those of the Federal Home Loan Mortgage
Corporation, 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. Some of these instruments may be
variable or floating rate instruments.
Each Fund may from time to time invest in money market instruments, including
bank obligations, commercial paper and corporate bonds with remaining maturities
of thirteen months or less. Bank obligations include bankers' acceptances,
negotiable certificates of deposit and non-negotiable time deposits issued or
supported by U.S. or foreign banks that have total assets of more than $1
billion at the time of purchase. Investments in the obligations of foreign
banks and foreign branches of U.S. banks involve different risks than
investments in the obligations of U.S. banks, including less stringent reserve
requirements and different accounting, auditing and recordkeeping standards. A
Fund will invest in the obligations of foreign banks or foreign branches of U.S.
banks only when the Adviser determines that the investment presents minimal
credit risks. Investments in the obligations of foreign banks and foreign
branches of U.S. banks will not exceed 25% of the particular Fund's total assets
at the time of purchase. Taxable commercial paper purchased by the Funds will
be rated at the time of purchase within the highest rating category assigned by
a Rating Agency. Corporate bonds purchased by the Funds will be rated at the
time of purchase within the highest rating category assigned by a Rating Agency.
In addition, each Fund may acquire unrated commercial paper and corporate bonds
that are determined by the Adviser at the time of purchase to be of comparable
quality. Commercial paper may include variable and floating rate instruments.
-16-
<PAGE>
. Municipal Obligations. Each Fund will invest primarily in municipal
obligations. The two main types of municipal obligations are "general
obligation" securities (which are secured by the issuer's full faith, credit and
taxing power) and "revenue" securities (which are payable only from revenues
received from the operation of a particular facility or other revenue source).
A third type of municipal obligation, normally issued by special purpose public
authorities, is known as a "moral obligation" security because if the issuer
cannot meet its obligations it draws on a reserve fund, the restoration of which
is not a legal requirement. Private activity bonds (which are a type of
obligation that, although exempt from regular federal income tax, may be subject
to the federal alternative minimum tax) are usually revenue securities issued by
or for public authorities to finance a privately operated facility.
Within the principal classifications described above there are a variety of
categories, including certificates of participation and custodial receipts which
may be purchased by the Funds. Certificates of participation represent
undivided proportional interests in lease payments by a governmental or non-
profit agency. The lease payments and other rights under the lease provide for
and secure the payments on the certificates. Certain lease obligations may
include "non-appropriation" clauses, which provide that the entity has no
obligation to make lease payments in future years unless money is appropriated
for such purpose on a yearly basis. Participation in such leases presents the
risk that an entity will not appropriate funds for lease payments. For this and
other reasons, certificates of participation are generally not as liquid or
marketable as other types of municipal obligations and are generally valued at
par or less than par in the open market. To the extent that these securities
are illiquid, they will be subject to each Fund's limitation on investments in
illiquid securities described below under "Managing Liquidity."
Custodial receipts evidence the right to receive either specific future
interest payments, principal payments or both on certain municipal obligations.
Such obligations are held in custody by a bank on behalf of holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts," "Municipal Certificates of Accrual on Tax-Exempt
Securities" or "M-CATS", and "Municipal Zero-Coupon Receipts."
Each Fund except the Tax-Exempt Money Market Fund may also make privately
arranged loans to municipal borrowers. Generally such loans are unrated, in
which case they will be determined by a Fund's Adviser to be of comparable
quality at the time of purchase to rated instruments that may be acquired by the
Fund. Such loans may be secured or unsecured and may have limited marketability
or may be marketable only by virtue of a provision requiring repayment following
demand by the lender. To the extent these securities are illiquid, they will be
subject to each Fund's limitation on investments in illiquid securities.
In many cases, the Internal Revenue Service has not ruled on whether the
interest received on a municipal obligation is tax-exempt and, accordingly, the
purchase of such securities is based on the opinion of bond counsel or counsel
to the issuers of such instruments. The Company and the Adviser rely on these
opinions and do not intend to review the bases for them.
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Municipal obligations purchased by the Funds in some cases may be insured as
to the timely payment of principal and interest. There is no guarantee,
however, that the insurer will meet its obligations in the event of a default in
payment by the issuer. In other cases, municipal obligations may be backed by
letters of credit or guarantees issued by domestic or foreign banks or other
financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or guarantee with
respect to a municipal obligation held by a Fund could have an adverse effect on
the Fund's portfolio and the value of its shares. As described above under
"U.S. Government Obligations and Money Market Instruments", foreign letters of
credit and guarantees involve certain risks in addition to those of domestic
obligations.
. Variable and Floating Rate Instruments. Each Fund may purchase variable
and floating rate instruments, including variable rate demand notes that permit
the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rates. Unless guaranteed by the U.S. Government or
one of its agencies or instrumentalities, variable or floating rate instruments
purchased by the Tax-Exempt Money Market Fund must permit the Fund to demand
payment of the principal of the instrument at least once every 397 days upon not
more than 30 days' notice. Because of the absence of a market in which to resell
a variable or floating rate instrument, a Fund might have trouble selling an
instrument should the issuer default or during periods when the Fund is not
permitted by agreement to demand payment of the instrument, and for this and
other reasons a loss could occur with respect to the instrument.
. Repurchase Agreements and Reverse Repurchase Agreements. Each Fund except
the Tax-Exempt Money Market Fund may buy portfolio securities subject to the
seller's agreement to repurchase them at an agreed upon date and price. These
transactions are known as repurchase agreements. Repurchase agreements involve
the risk that the seller will fail to repurchase the securities as agreed. In
that event, the Fund will bear the risk of possible loss due to adverse market
action or delays in liquidating the underlying obligations. Repurchase
agreements are considered to be loans under the Investment Company Act.
Each Fund may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, a Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be used to meet
redemption requests without selling portfolio securities. Reverse repurchase
agreements involve the risk of counterparty default and possible loss of
collateral held by the counterparty. Reverse repurchase agreements are
considered to be borrowings under the Investment Company Act.
. When-Issued Purchases and Forward Commitments. Each Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by a
Fund to purchase or 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
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delivery takes place. When-issued and forward commitment transactions are not
expected to exceed 25% of the value of a Fund's total assets under normal
circumstances. Because a Fund is required to set aside cash or liquid securities
to satisfy these purchase commitments, a Fund's liquidity and ability to manage
its portfolio might be affected during periods in which its commitments exceed
25% of the value of its total assets. The Funds do not intend to engage in when-
issued and forward commitment transactions for speculative purposes.
. Stand-By Commitments. Each Fund may acquire stand-by commitments under
which a dealer agrees to purchase certain municipal obligations at a Fund's
option at a price equal to their amortized cost value plus interest. These
commitments will be used only to assist in maintaining a Fund's liquidity and
not for trading purposes.
. Securities Lending. Each Fund except the Tax-Exempt Money Market 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. Each Fund may invest in securities issued by
other investment companies which invest in eligible quality, short-term debt
securities, whether taxable or tax-exempt, and which seek to maintain a $1.00
net asset value per share, i.e., "money market" funds. Such investments will be
made by a Fund in connection with the management of its daily cash position and
will be subject to the requirements of applicable securities laws. When a Fund
invests in another investment company, it pays a pro rata portion of the
advisory and other expenses of that company as one of its shareholders. These
expenses are in addition to the Fund's own expenses.
. Options. The Intermediate Tax-Exempt Bond Fund and National Tax-Exempt
Bond Fund may write covered call options, buy put options, buy call options and
sell, or "write," secured put options on particular securities or various
securities indices. A call option for a particular security gives the purchaser
of the option the right to buy, and a writer the obligation to sell, the
underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is the consideration for undertaking the obligations
under the option contract. A put option for a particular security gives the
purchaser the right to sell the underlying security at the stated exercise price
at any time prior to the expiration date of the option, regardless of the market
price of the security. In contrast to an option on a particular security, an
option on a securities index provides the holder with the right to make or
receive a cash settlement upon exercise of the option.
Options purchased by a Fund will not exceed 5%, and options written by a Fund
will not exceed 25%, of its net assets. Options may or may not be listed on a
national securities exchange
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and issued by the Options Clearing Corporation. Unlisted options are not subject
to the protections afforded purchasers of listed options issued by the Options
Clearing Corporation which performs the obligations of its members if they
default.
Options trading is a highly specialized activity and carries greater than
ordinary investment risk. Purchasing options may result in the complete loss of
the amounts paid as premiums to the writer of the option. In writing a covered
call option, a Fund gives up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price (except to the
extent the premium represents such a profit). Moreover, it will not be able to
sell the underlying security until the covered call option expires or is
exercised or a Fund closes out the option. In writing a secured put option, a
Fund assumes the risk that the market value of the security will decline below
the exercise price of the option. The use of covered call and secured put
options will not be a primary investment technique of either Fund.
. Futures and Related Options. The Intermediate Tax-Exempt Bond Fund and
National Tax-Exempt Bond Fund may invest to a limited extent in futures
contracts and options on futures contracts in order to gain fuller exposure to
movements of securities prices pending investment, for hedging purposes or to
maintain liquidity. Futures contracts obligate a Fund, at maturity, to take or
make delivery of certain securities or the cash value of a securities index. A
Fund may not purchase or sell a futures contract (or related option) unless
immediately after any such transaction the sum of the aggregate amount of margin
deposits on its existing futures positions and the amount of premiums paid for
related options is 5% or less of its total assets (after taking into account
certain technical adjustments).
Each of these Funds may also purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or seller of a futures contract at a specified exercise price at any
time during the option period. When a Fund sells an option on a futures
contract, it becomes obligated to purchase or sell a futures contract if the
option is exercised. In anticipation of a market advance, a Fund may purchase
call options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
that Fund intends to purchase. Similarly, if the value of a Fund's portfolio
securities is expected to decline, the Fund might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
. 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 Funds will not knowingly invest more than 15% (10%
with respect to the Tax-Exempt Money Market Fund and Maryland Tax-Exempt Bond
Fund) of the value of their respective net assets in illiquid securities.
Illiquid securities include repurchase agreements and time deposits that do not
permit a Fund to terminate them after seven days' notice, restricted securities
and other securities for which market quotations are not readily available.
Certain securities that might otherwise be considered illiquid, however, such as
some issues of commercial paper and variable amount master demand
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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. Investments in Rule 144A securities could have the effect of
increasing the level of illiquidity in a Fund during any period that qualified
institutional buyers were no longer interested in purchasing these restricted
securities.
. Portfolio Turnover. A Fund may sell a portfolio security soon after it is
purchased if the Adviser believes that a sale is consistent with the Fund's
investment objective. A high rate of portfolio turnover (100% or more) involves
correspondingly greater brokerage commission expenses, tax consequences
(including the possible realization of additional taxable capital gains and
income) and other transaction costs, which must be borne directly by the Fund
involved and ultimately by its shareholders.
FUNDAMENTAL LIMITATIONS
The investment objective of each of the Tax-Exempt Money Market Fund and
Maryland Tax-Exempt Bond Fund discussed above is "fundamental," which means that
it may not be changed for a Fund without the approval of a majority of that
Fund's outstanding shares. The investment objective of each of the Intermediate
Tax-Exempt Bond Fund and National Tax-Exempt Bond Fund discussed above may be
changed by the Company's Board of Directors without shareholder approval,
although shareholders will be given at least 30 days' written notice before such
a change occurs. Unless otherwise noted, each Fund's investment policies
discussed above may be changed by the Company's Board of Directors without
shareholder approval. However, each Fund also has in place certain
"fundamental" investment limitations that cannot be changed for a Fund without
the approval of a majority of that Fund's outstanding shares. Some of these
fundamental limitations are summarized below, and all of the Funds' fundamental
limitations are set out in full in the Statement of Additional Information.
1. A Fund may not purchase securities (with certain exceptions, including
U.S. Government securities) if more than 5% of its total assets will be invested
in the securities of any one issuer, except that up to 50% of the Maryland Tax-
Exempt Bond Fund's total assets, and up to 25% of the total assets of each other
Fund, can be invested without regard to this 5% limitation.
2. A Fund may not invest 25% or more of its total assets in one or more
issuers conducting their principal business activities in the same industry,
subject to certain exceptions.
3. A Fund may not borrow money except for temporary purposes in amounts up
to 10% of its total assets at the time of such borrowing. Whenever borrowings
exceed 5% of a Fund's total assets with respect to the Maryland Tax-Exempt Bond,
Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds, or whenever any
borrowings are outstanding with respect to the Tax-Exempt Money Market Fund, the
Fund will not make any further investments.
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As a matter of non-fundamental policy and in accordance with current
regulations of the SEC, the Tax-Exempt Money Market Fund intends to subject its
entire investment portfolio, other than U.S. Government securities, to the 5%
limitation described in Fundamental Limitation No. 1 above. However, in
accordance with such regulations, the Fund may invest more than 5% (but no more
than 25%) of its total assets in the securities of a single issuer for a period
of up to three business days, provided the securities are rated at the time of
purchase in the highest rating category assigned by one or more Rating Agencies
or are determined by the Adviser to be of comparable quality. The Fund may not
hold more than one such investment at any one time.
If a percentage limitation set forth above is met at the time an investment is
made, a subsequent change in that percentage resulting from a change in value of
a Fund's portfolio securities does not mean that the limitation has been
violated.
INVESTING IN THE FUNDS
GETTING YOUR INVESTMENT STARTED
Investing in the Funds is quick and convenient. Shares of the Funds may be
purchased either through the account you maintain with certain financial
institutions or directly through the Company. Fund shares are distributed by
BISYS Fund Services Limited Partnership (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 and third party
checks.
HOW TO BUY FUND SHARES
. Minimum Investments. Each Fund generally requires a $25,000 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.
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<PAGE>
. Opening and Adding to Your Fund Account. Direct investments in the Funds
may be made in a number of different ways, as shown in the following chart.
Simply choose the method that is most convenient for you. Any questions you
have may be answered by calling 1-800-551-2145. As described above under
"Getting Your Investment Started," you may also purchase Fund shares through the
Banks.
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<CAPTION>
TO OPEN AN ACCOUNT To Add to an account
------------------ --------------------
<S> <C> <C>
BY MAIL . Complete a New Account Application and . Make your check payable to the
mail it along with a check payable to the particular Fund in which you are
particular Fund you want to invest in to: investing and mail it to the address at
left.
M.S.D. & T. Funds, Inc.
P.O. Box 8515 . Please include your account number on
Boston, MA 02266-8515 your check.
To obtain a New Account
Application, call
1-800-551-2145
- --------------------------------------------------------------------------------------------------------------------------
BY WIRE . Before wiring funds, please call . Instruct your bank to wire Federal
1-800-551-2145 for complete wiring funds to: State Street Bank and Trust
instructions. Company, Boston, Massachusetts, Bank
Routing No. 011-0000-28, M.S.D. & T.
. Promptly complete a New Account Deposit A/C No. 99046435.
Application and forward it to:
. Be sure to include your name and your
M.S.D. & T. Funds, Inc. Fund account number.
P.O. Box 8515
Boston, MA 02266-8515 . The wire should indicate that you are
making a subsequent purchase as opposed
to opening a new account.
Consult your bank for information on remitting funds by wire and associated
bank charges.
YOU MAY USE OTHER INVESTMENT OPTIONS, INCLUDING AUTOMATIC INVESTMENTS, EXCHANGES AND
DIRECTED REINVESTMENTS, TO INVEST IN YOUR FUND ACCOUNT. PLEASE REFER TO THE SECTION
BELOW ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION.
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</TABLE>
. Explanation of Sales Price. The public offering price for shares of a Fund
is based upon net asset value per share. A Fund will calculate its net asset
value per share by adding the value of a Fund's investments, cash and other
assets, subtracting the Fund's liabilities, and then dividing the result by the
number of shares of the Fund that are outstanding. This process is sometimes
referred to as "pricing" a Fund's shares.
The assets of the Tax-Exempt Money Market Fund (the "Money Market Fund") are
valued at amortized cost, which generally approximates market value. Although
the Money Market Fund seeks to maintain its net asset value per share at $1.00,
there can be no assurance that the net asset value per share will not vary. The
assets of the Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and
National Tax-Exempt Bond Funds (the "Bond Funds") 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
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Company's Board of Directors. Debt securities held by the Bond Funds that have
sixty days or less until they mature are valued at amortized cost, which
generally approximates market value. More information about valuation can be
found in the Funds' Statement of Additional Information, which you may request
by calling 1-800-551-2145.
Net asset value is computed (i) with respect to the Money Market Fund, at
11:00 a.m. Eastern Time and as of the close of regular trading hours on the New
York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern Time) each
weekday and (ii) with respect to the Bond Funds, as of the close of regular
trading hours on the Exchange (currently 4:00 p.m. Eastern Time) each weekday,
in each case with the exception of those holidays on which the Federal Reserve
Bank of Cleveland, the purchasing Bank (if applicable), the Funds' Adviser,
transfer agent or custodian or the Exchange is closed. The Funds currently
observe the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day.
Purchase orders will be accepted by State Street Bank and Trust Company, the
Funds' transfer agent (the "Transfer Agent"), only on a day when the shares of a
Fund are priced ("Business Day"). If you purchase shares of a Fund through a
Bank, the Bank is responsible for transmitting your purchase order and required
funds to the Transfer Agent on a timely basis.
If your purchase order for shares of the Money Market Fund is received by the
Transfer Agent on a Business Day before 11:00 a.m. Eastern Time, your Fund
shares will be purchased at the public offering price calculated at 11:00 a.m.
provided that the Fund's custodian receives payment in immediately available
funds by the close of regular trading hours on the Exchange that day. If your
purchase order for shares of the Money Market Fund is received by the Transfer
Agent on a Business Day after 11:00 a.m. Eastern Time but before the close of
regular trading hours on the Exchange that day, your Fund shares will be
purchased at the public offering price calculated at 11:00 a.m. Eastern Time on
the following Business Day if the Fund's custodian receives payment in
immediately available funds by the close of regular trading hours on the
Exchange on the following Business Day. If the procedures described above are
not followed and if a Bank submitted the order, the Bank will be notified that
the order has not been accepted. If you purchase shares of the Money Market
Fund directly through the Company and if your purchase order is accompanied by
payment in any form other than immediately available funds, your Fund shares
will be purchased at the public offering price calculated at 11:00 a.m. Eastern
Time on the next Business Day after the Business Day on which both the order and
payment in immediately available funds are received by the Transfer Agent.
Payments for orders which are not received or accepted will be returned after
prompt inquiry.
Shares of the Bond Funds are sold at the public offering price per share next
computed after receipt of a purchase order by the Transfer Agent. If you
purchase shares of a Bond Fund through a Bank and the Transfer Agent receives
your purchase order from the Bank on a Business Day prior to the close of
regular trading hours (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 hours 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
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next Business Day, the Bank which submitted the order will be notified that the
order has not been accepted. If you purchase shares of a Bond Fund directly
through the Company and if your purchase order, in proper form and accompanied
by payment, is received by the Transfer Agent on a Business Day prior to the
close of regular trading hours on the Exchange, your Fund shares will be
purchased at the public offering price calculated at the close of regular
trading hours on that day. Otherwise, your Fund shares will be purchased at the
public offering price next calculated after the Transfer Agent receives your
purchase order in proper form with the required payment.
On a Business Day when the Exchange closes early due to a partial holiday or
otherwise, the Company reserves the right to advance the times at which purchase
orders must be received in order to be processed on that Business Day.
HOW TO SELL FUND SHARES
You can arrange to get money out of your Fund account by selling some or all
of your shares. This process is known as "redeeming" your shares. If you
purchased your shares through an account at a Bank, you may redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you have the ability to redeem shares by
any of the methods described below.
TO REDEEM SHARES
----------------
BY MAIL
. Send a written request to M.S.D. & T. Funds, Inc.,
P.O. Box 8515, Boston, MA 02266-8515.
. Your written request must
- be signed by each account holder;
- state the number or dollar amount of shares to be
redeemed and identify the specific Fund;
- include your account number.
. Signature guarantees are required
- for all redemption requests over $100,000;
- for any redemption request where the proceeds are to be
sent to someone other than the shareholder of record or
to an address other than the address of record.
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BY WIRE . Call 1-800-551-2145. You will need to provide the account name,
(available only if you checked the account number, name of Fund and amount of redemption ($1,000 minimum
appropriate box on the New Account per transaction).
Application)
. If you have already opened your account and would like to have the
wire redemption feature, send a written request to: M.S.D. & T. Funds,
Inc., P.O. Box 8515, Boston, MA
02266-8515. The request must be signed (and
signatures guaranteed) by each account owner.
. To change bank instructions, send a written request to the above
address. The request must be signed (and signatures guaranteed) by
each account owner.
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BY TELEPHONE . Call 1-800-551-2145. You will need to provide the account name,
(available only if you checked the account number, name of Fund and amount of redemption.
appropriate box on the New Account
Application) . If you have already opened your account and would like to add the
telephone redemption feature, send a written request to: M.S.D. & T.
Funds, Inc., P.O. Box 8515, Boston, MA 02266-8515. The request must
be signed (and signatures guaranteed) by each account owner.
OTHER REDEMPTION OPTIONS, INCLUDING EXCHANGES AND SYSTEMATIC WITHDRAWALS, ARE ALSO AVAILABLE.
PLEASE REFER TO THE SECTION BELOW ENTITLED "SHAREHOLDER SERVICES" FOR MORE INFORMATION
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</TABLE>
. 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.
Payment for redemption orders with respect to the Money Market Fund which are
received by the Transfer Agent before 11:00 a.m. Eastern Time normally will be
wired or sent to the shareholder(s) of record on the same Business Day. Payment
for redemption orders with respect to the Money Market Fund which are received
between 11:00 a.m. and the close of regular trading hours on the Exchange
(currently 4:00 p.m. Eastern Time) or on a non-Business Day normally will be
wired or sent to the shareholder(s) of record on the next Business Day. Payment
for redemption orders with respect to the Bond Funds generally will be wired or
sent to the shareholder(s) of record within three Business Days after receipt of
the redemption order. However, in each case 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
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<PAGE>
redemption proceeds in readily marketable portfolio securities having a market
value equal to the redemption price.
Banks are responsible for transmitting their customers' redemption orders to
the Transfer Agent and crediting their customers' accounts with redemption
proceeds on a timely basis. No charge is imposed by the Company for wiring
redemption proceeds, although the Banks may charge their customers' accounts
directly for redemption and other services. In addition, if a customer has
agreed with a Bank to maintain a minimum cash balance in his or her account
maintained with the Bank and the balance falls below that minimum, the customer
may be obliged to redeem some or all of the Fund shares held in the account in
order to maintain the required minimum balance.
The Company imposes no charge when you redeem shares. The value of the shares
you redeem may be more or less than your cost, depending on a Fund's current net
asset value.
. Other Purchase and Redemption Information. Federal regulations require
that you provide a certified taxpayer identification number whenever you open or
reopen an account.
Shareholders who purchased Fund shares directly through the Company should
note that if an account balance falls below $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 New Account 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 recordation of the transfer of
its shares) for such periods as permitted under the Investment Company Act.
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<PAGE>
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 Agents 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 New
Account Application or you may request them after opening an account by calling
1-800-551-2145. These options are available only to shareholders who purchase
their Fund shares directly through the Company.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged for shares of another Fund or for shares of
one of the other portfolios offered by the Company. You may exchange shares by
mail at the address provided above under "How To Buy Shares - Opening and Adding
to Your Fund Account" or by telephone at 1-800-551-2145. If you are opening a
new account in a different Fund or portfolio by exchange, the exchanged shares
must be at least equal in value to the minimum investment for the Fund or
portfolio in which the account is being opened.
You should read the prospectus for the Fund or portfolio into which you are
exchanging. Exchanges will be processed only when the shares being offered can
legally be sold in your state. Exchanges may have tax consequences for you.
Consult your tax adviser for further information.
To elect the exchange privilege after you have opened a Fund account, or for
further information about the exchange privilege, call 1-800-551-2145. The
Company reserves the right to reject any exchange request. The Company may
modify or terminate the exchange privilege, but will not materially modify or
terminate it without giving shareholders 60 days' notice.
AUTOMATIC INVESTMENT PLAN
One easy way to pursue your financial goals is to invest money regularly. The
Company offers an Automatic Investment Plan - a convenient service that lets you
transfer money from your bank account into your Fund account automatically on a
regular basis. At your option, your bank account will be debited in a
particular amount ($100 minimum) that you have specified, and Fund shares will
automatically be purchased on the 15th day of each month or, if that day is not
a Business Day, on the preceding Business Day. Your bank account must be
maintained at a domestic financial institution that is an ACH member. You will
be responsible for any loss or expense to the Funds if an ACH transfer is
rejected. To select this option, or for more information, please call 1-800-
551-2145.
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<PAGE>
The Automatic Investment Plan is one means by which you may use "Dollar Cost
Averaging" in making investments. Dollar Cost Averaging can be useful in
investing in portfolios such as the Maryland Tax-Exempt Bond, Intermediate Tax-
Exempt Bond and National Tax-Exempt Bond Funds whose price per share fluctuates.
Instead of trying to time market performance, a fixed dollar amount is invested
in Fund shares at predetermined intervals. This may help you to reduce your
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. You
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 you may find Dollar Cost Averaging to be beneficial, it will
not prevent a loss if you ultimately redeem your shares at a price which is
lower than their purchase price.
SYSTEMATIC WITHDRAWALS
The Company offers a convenient way of withdrawing money from your Fund
account. You may request regular monthly, quarterly, semi-annual or annual
withdrawals in any amount of $100 or more. The withdrawal will be made on the
last Business Day of the period you select and distributed in cash or reinvested
in shares of another Fund or portfolio offered by the Company. To elect this
option, or for more information, please call 1-800-551-2145.
DIRECTED REINVESTMENTS
Generally, dividends and capital gain distributions are automatically
reinvested in shares of the Fund from which the dividends and distributions are
paid. You may elect, however, to have your dividends and capital gain
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
for each Fund are derived from its net investment income and are declared daily
and paid monthly. A Fund realizes capital gains whenever it sells securities
for a higher price than it paid for them. Capital gain distributions, if any,
will be made at least annually.
Shares in each Fund begin earning dividends on the day a purchase order is
processed and continue earning dividends through and including the day before
the shares are redeemed. If you purchased your Fund shares through a Bank, your
dividends and distributions will be paid in cash and wired to your Bank. If you
purchased your shares directly from the Company, your dividends and
distributions will be automatically reinvested in additional shares of the Fund
on which the dividend or distribution was declared unless you notify the Company
in writing that you wish to receive dividends and/or distributions in cash. If
you have elected to receive dividends and/or distributions in cash and the
postal or other delivery service is unable to deliver
-30-
<PAGE>
checks to your address of record, you will be deemed to have rescinded your
election to receive dividends and/or distributions in cash and your dividends
and distributions will be automatically reinvested in additional shares. No
interest will accrue on amounts represented by uncashed dividend and/or
distribution checks.
TAX INFORMATION
As with any investment, you should consider the tax implications of an
investment in the Funds. The following briefly summarizes some of the important
tax considerations generally affecting the Funds and their shareholders under
current law. 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.
FEDERAL
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If
a Fund qualifies, it generally will be relieved of federal income tax on amounts
distributed to shareholders, but shareholders, unless otherwise exempt, will pay
income or capital gains taxes on distributions (except distributions that are
"exempt interest dividends" or are treated as a return of capital), regardless
of whether the distributions are paid in cash or reinvested in additional
shares.
Distributions paid out of a Fund's "net capital gain" (the excess of net long-
term capital gain over net short-term capital loss), if any, will be taxed to
shareholders as long-term capital gain, regardless of the length of time a
shareholder holds the shares. All other distributions, to the extent taxable,
are taxed to shareholders as ordinary income.
Each Fund intends to pay substantially all of its dividends as "exempt
interest dividends." However, taxpayers are required to report the receipt of
"exempt interest dividends" on their federal income tax returns, and in two
circumstances such amounts, while exempt from regular federal income tax, are
taxable to persons subject to alternative minimum tax. First, "exempt interest
dividends" derived from certain private activity bonds issued after August 7,
1986 generally will constitute an item of tax preference for corporate and non-
corporate taxpayers in determining alternative minimum tax liability. Second,
"exempt interest dividends" must be taken into account by corporate taxpayers in
determining certain adjustments for alternative minimum tax purposes.
Shareholders who are recipients of Social Security Act or Railroad Retirement
Act benefits should also note that "exempt interest dividends" will be taken
into account in determining the taxability of their benefit payments.
Each Fund will determine annually the percentages of its net investment income
which are exempt from the regular federal income tax, which constitute an item
of tax preference for federal alternative minimum tax purposes, and which are
fully taxable. These percentages will apply uniformly to all distributions
declared from net investment income during that year and may differ
significantly from the actual percentages for any particular day.
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<PAGE>
Dividends declared in December of any year payable to shareholders of record
on a specified date in that month 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.
A taxable gain or loss may be realized by a shareholder upon the redemption or
exchange of shares depending upon their tax basis and their price at the time of
redemption or exchange.
Any loss upon the sale or exchange of shares held for six months or less will
be disallowed for federal income tax purposes to the extent of any exempt
interest dividends received by the shareholder.
This is not an exhaustive discussion of applicable tax consequences, and
investors may wish to contact their tax advisers concerning investments in the
Funds. Except as discussed below, dividends paid by each Fund may be taxable to
investors under state or local law as dividend income even though all or a
portion of the dividends may be derived from interest on obligations which, if
realized directly, would be exempt from such income taxes. In addition, future
legislative or administrative changes or court decisions may materially affect
the tax consequences of investing in a Fund. Shareholders who are non-resident
alien individuals, foreign trusts or estates, foreign corporations or foreign
partnerships may be subject to different U.S. federal income tax treatment.
MARYLAND STATE TAXES
Shareholders of the Maryland Tax-Exempt Bond Fund who are individuals,
corporations, estates or trusts and subject to Maryland state and local taxes
will not be subject to such taxes on dividends paid by the Fund to the extent
they qualify as exempt-interest dividends of a regulated investment company
under Section 852 (b)(5) of the Code and are attributable to any of the
following:
. interest on tax-exempt obligations issued by the State of
Maryland or its political subdivisions and authorities;
. interest on obligations issued by the U.S. Government and its
agencies, instrumentalities, authorities and possessions or
territories;
. gain realized by the Fund on the sale or exchange of the tax-
exempt obligations issued by the State of Maryland or its
political subdivision, agencies, instrumentalities and
authorities;
. gain realized by the Fund on the sale or exchange of
obligations issued by the U.S. Government and its agencies,
instrumentalities and authorities.
Distributions attributable to sources other than those described above will
not be exempt from Maryland State and local taxes.
-32-
<PAGE>
The State of Maryland currently includes in taxable net income items of tax
preference as defined in the Code. Interest paid on certain private activity
bonds constitutes a tax preference item. Accordingly, subject to a threshold
amount, 50% of any of the distributions of the Maryland Tax-Exempt Bond Fund
attributable to such private activity bonds will not be exempt from Maryland
state and local income taxes.
MANAGEMENT OF THE COMPANY
The business 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 Funds. Mercantile-Safe Deposit
and Trust Company ("Mercantile") serves as the Funds' investment adviser and
administrator and has its principal offices at Two Hopkins Plaza, Baltimore,
Maryland 21201. BISYS Fund Services Limited Partnership, a wholly-owned
subsidiary of The BISYS Group, Inc., located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035, is the registered broker-dealer that sells the Funds' shares,
and BISYS Fund Services Ohio, Inc., also a wholly-owned subsidiary of The BISYS
Group, Inc. and located at the same address, provides fund accounting services
to the Funds. The Funds also have a custodian, The Fifth Third Bank, located at
38 Fountain Square Plaza, Cincinnati, Ohio 45263, and a transfer and dividend
disbursing agent, State Street Bank and Trust Company, located at Two Heritage
Drive, North Quincy, Massachusetts 02171.
INVESTMENT ADVISER
Mercantile is the lead bank of Mercantile Bankshares Corporation, a multi-bank
holding company organized in Maryland in 1969. Mercantile manages the
investment portfolios of the Funds, including selecting portfolio investments
and making purchase and sale orders. 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 July 20, 1998, Mercantile had
approximately $13 billion in assets under active management.
A Fund's portfolio manager is primarily responsible for the day-to-day
management of a Fund's investments. The organizational arrangements of
Mercantile require that all investment decisions with respect to the Maryland
Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and National Tax-Exempt
Bond Fund be made by a committee, and no one person is primarily responsible for
making recommendations to that committee.
-33-
<PAGE>
ADMINISTRATOR
Mercantile also serves as the Funds' administrator and generally assists in
all aspects of their operation and administration, including maintaining the
Funds' offices, coordinating the preparation of reports to shareholders,
preparing filings with state securities commissions, coordinating federal and
state tax returns, and performing other administrative functions.
EXPENSES
The Funds incur certain expenses in order to support the services described
above, as well as other matters essential to the operation of the Funds.
Expenses are paid out of a Fund's assets and thus are reflected in the Fund's
dividends and net asset value, but they are not billed directly to you or
deducted from your account.
In its capacity as investment adviser, Mercantile is entitled to advisory fees
from the Funds that are calculated daily and paid monthly at the following
annual rates: with respect to the Tax-Exempt Money Market Fund: .25% of the
first $1 billion of the Fund's average daily net assets plus .20% of the Fund's
average daily net assets in excess of $1 billion; and with respect to the
Maryland Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and National
Tax-Exempt Bond Fund: .50% of the first $1 billion of each Fund's average daily
net assets plus .25% of each Fund's average daily net assets in excess of $1
billion.
For the fiscal year ended May 31, 1998, Mercantile received advisory fees,
after fee waivers, at the effective annual rates of .23% of the average daily
net assets of the Tax-Exempt Money Market Fund and .07% of the average daily net
assets of the Maryland Tax-Exempt Bond Fund. For the fiscal period March 1,
1998 (commencement of operations) through May 31, 1998, Mercantile received
advisory fees, after fee waivers, at the effective annual rates of .20% of the
average daily net assets of the Intermediate Tax-Exempt Bond Fund and .21% of
the average daily net assets of the National Tax-Exempt Bond Fund.
In its capacity as administrator, Mercantile is also entitled to an
administration fee, computed daily and paid monthly, at the annual rate of .125%
of the average daily net assets of each Fund.
The Funds also bear other operating expenses in connection with their
operations, including organizational costs; taxes; interest; fees (including
fees paid to the Company's directors and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; charges of the
custodian, transfer agent and fund accountant; certain insurance premiums;
outside auditing and legal expenses; fees of independent pricing services; costs
of shareholders' reports and shareholder meetings; fees of industry
organizations such as the Investment Company Institute; and any extraordinary
expenses. The Funds also pay for brokerage fees and commissions, if any, in
connection with the purchase of their portfolio securities.
-34-
<PAGE>
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements by
Mercantile and the Funds' other service providers. The amount of the fee
waivers may be changed at any time at the sole discretion of Mercantile with
respect to advisory and administration fees, and by the Funds' other service
providers, with respect to all other fees. As to any amounts voluntarily waived
or reimbursed, the service providers retain the ability to be reimbursed by a
Fund for such amounts prior to fiscal year-end. Such waivers and reimbursements
would increase the return to investors when made but would decrease the return
if a Fund were required to reimburse a service provider.
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES
The Company was incorporated in Maryland on March 7, 1989 and is a mutual fund
of the type known as an "open-end management investment company." The Company's
charter authorizes the Board of Directors to issue up to 10,000,000,000 full and
fractional shares of capital stock ($.001 par value per share) and to classify
or reclassify any unissued shares into one or more classes of shares. Pursuant
to this authority, the Board of Directors has authorized the issuance of one
class of shares in each 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, 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 a Fund's performance. You may see references
to these terms in newsletters, advertisements and shareholder communications.
These publications may also include comparisons of a Fund's performance to the
performance of various indices and investments for which reliable performance
data are available and to averages, performance rankings or other information
compiled by recognized mutual fund statistical services.
. Aggregate total return for the Maryland Tax-Exempt Bond Fund,
Intermediate Tax-Exempt Bond Fund and National Tax-Exempt Bond
Fund reflects the total percentage change in the value of an
investment in a particular Fund over a specified measuring
period.
-35-
<PAGE>
. Average annual total return for the Maryland Tax-Exempt Bond
Fund, Intermediate Tax-Exempt Bond Fund and National Tax-Exempt
Bond Fund represents the average annual percentage change in the
value of an investment in a particular Fund over a specified
measuring period. It is calculated by taking the aggregate total
return for the measuring period and determining what constant
annual return would have produced the same aggregate return.
Average annual returns for more than one year tend to smooth out
variations in a Fund's return and are not the same as actual
annual results.
Both methods of calculating total return assume that during the
period you have reinvested Fund dividends and distributions in
additional Fund shares.
. Yield shows the rate of income a Fund earns on its investments as
a percentage of its share price. The Tax-Exempt Money Market
Fund's 7-day yield is an annualized figure - the amount you would
earn if you stayed in the Fund for a year and the Fund continued
to earn the same net investment income throughout that year. To
calculate 7-day yield, net investment income per share over a 7-
day period (which period will be identified in the quotation) is
multiplied by 52 weeks, then divided by net asset value to get a
percentage, which is the 7-day yield. The yield for the Maryland
Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and
National Tax-Exempt Bond Fund is calculated by dividing the
Fund's net investment income for a 30-day period by the product
of the average daily number of shares entitled to receive
dividends and the Fund's net asset value per share at the end of
the 30-day period. The result is then annualized. This represents
the amount you would earn if you remained invested in a Fund for
a year and the Fund continued to have the same yield for the
year. Yield does not include changes in net asset value.
. Effective Yield for the Tax-Exempt Money Market Fund is
calculated similarly to yield but, the income earned by an
investment in a Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
. Monthly yield for the Tax-Exempt Money Market Fund is also an
annualized figure. To calculate monthly yield, net investment
income per share over a particular calendar month (which month
will be identified in the quotation) is multiplied by 12 months,
then divided by net asset value to get a percentage, which is the
monthly yield.
. Tax-Equivalent Yield shows the level of taxable yield needed to
produce an after-tax yield equivalent to the Fund's tax-free
yield. It is calculated
-36-
<PAGE>
by increasing Fund's yield by the amount necessary to reflect the
payment of federal income taxes at a stated tax rate. A Fund's
tax-equivalent yield will always be higher than its yield.
Any fees charged by a Bank directly to your account in connection with an
investment in a Fund will not be included in the Fund's calculations of yield
and/or total return.
Performance quotations of a Fund represent its past performance, and you
should not consider them representative of future results. The investment
return and principal value of an investment in the Maryland Tax-Exempt Bond
Fund, Intermediate Tax-Exempt Bond Fund or National Tax-Exempt Bond Fund will
fluctuate so that your shares, when redeemed, may be worth more or less than
their original cost. Since performance will fluctuate, you cannot necessarily
compare an investment in Fund shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time.
MISCELLANEOUS
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of a particular Fund, with respect to the approval of the
Fund's investment advisory agreement or a change in the Fund's investment
objective (if fundamental) or a fundamental investment policy, means the
affirmative vote of the lesser of (a) 50% or more of the outstanding shares of
such Fund or (b) 67% or more of the shares of such Fund present at a meeting if
more than 50% of the outstanding shares of such Fund are represented at the
meeting in person or by proxy.
The Company or your Bank will send you a statement of your account quarterly
and a confirmation after every transaction that affects your share balance or
your account registration. A statement with tax information will be mailed to
you by January 31 of each year and filed with the Internal Revenue Service. At
least twice a year, you will receive financial statements in the form of Annual
and Semi-Annual Reports of the Funds.
If you have any questions concerning the Company or any of the Funds, please
call 1-800-551-2145.
YEAR 2000 RISKS. Like other investment companies, financial and business
organizations and individuals around the world, the Company could be adversely
affected if the computer systems used by Mercantile and the Company's other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." Mercantile is taking steps to address the Year 2000 Problem with
respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Company's other major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Company as a result of the Year
2000 Problem.
___________________
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<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS' STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE FUNDS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE COMPANY, THE FUNDS OR THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-38-
<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 Limited Partnership
Columbus, Ohio
In considering an investment in the Funds, please read this Prospectus
carefully.
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THERE
CAN BE NO ASSURANCE THAT THE TAX-EXEMPT MONEY MARKET FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
-39-
<PAGE>
M.S.D. & T. FUNDS, INC.
TAX-EXEMPT MONEY MARKET FUND (TRUST)
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495
under the Securities Act of 1933
FORM N-1A ITEM NUMBER LOCATION
- --------------------- --------
Part A Prospectus Caption
- ------ ------------------
1. Cover Page.......................... Cover Page
2. Synopsis............................ Expense Summary
3. Condensed Financial Information..... Financial Highlights; Performance
Reporting
4. General Description of Registrant... Cover Page; Investment
Objective, Policies and Risks;
Fundamental Limitations;
Other Information Concerning the
Company and Its Shares;
Miscellaneous
5. Management of the Fund.............. Management of the Company;
How to Purchase and Redeem
Shares
5A. Management's Discussion of Fund
Performance......................... Not Applicable
6. Capital Stock and How to Purchase and Redeem
Other Securities.................... Shares; Dividends and
Distributions; Tax Information;
Other Information Concerning the
.................................... Company and Its Shares;
Miscellaneous
7. Purchase of Securities Being Offered Pricing of Shares; How to Purchase
and Redeem Shares
8. Redemption or Repurchase............ How to Purchase and Redeem Shares
9. Pending Legal Proceedings........... Not Applicable
<PAGE>
M.S.D. & T. FUNDS, INC.
TAX-EXEMPT MONEY MARKET FUND (TRUST)
PROSPECTUS
September __, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPENSE SUMMARY............................................................ 2
FINANCIAL HIGHLIGHTS....................................................... 3
INVESTMENT OBJECTIVE, POLICIES AND RISKS................................... 5
FUNDAMENTAL LIMITATIONS.................................................... 8
HOW TO PURCHASE AND REDEEM SHARES.......................................... 9
PRICING OF SHARES.......................................................... 12
DIVIDENDS AND DISTRIBUTIONS................................................ 12
TAX INFORMATION............................................................ 12
MANAGEMENT OF THE COMPANY.................................................. 14
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES.................... 15
PERFORMANCE REPORTING...................................................... 16
MISCELLANEOUS.............................................................. 16
</TABLE>
<PAGE>
M.S.D. & T. FUNDS, INC.
Two Hopkins Plaza
Baltimore, MD 21201
For current yield, purchase and redemption information, call 1-800-551-2145.
M.S.D. & T. Funds, Inc. (the "Company") is a no-load, open-end, professionally
managed investment company offering in this Prospectus shares in the TAX-EXEMPT
MONEY MARKET FUND (TRUST) (the "Fund"), which is designed to seek as high a
level of current income exempt from Federal income tax as is consistent with
liquidity and stability of principal by investing substantially all of its
assets in high quality municipal obligations, the interest on which is exempt
from regular Federal income tax. The Fund may hold uninvested cash reserves
pending investment, during temporary defensive periods or when suitable tax-
exempt obligations are unavailable.
Mercantile-Safe Deposit and Trust Company is the Fund's investment adviser.
Shares of the Fund are sold without a sales charge by BISYS Fund Services
Limited Partnership, the Fund's distributor.
SHARES OF THE FUND ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND SUCH SHARES ARE NOT FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE U.S. GOVERNMENT, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. THERE CAN BE NO ASSURANCE THAT
THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus briefly sets forth information about the Fund that a
prospective investor should consider before investing. Investors are advised to
read this Prospectus and retain it for future reference. Additional information
about the Fund, contained in the Statement of Additional Information dated
September __, 1998, has been filed with the Securities and Exchange Commission
(the "SEC") and is available upon request without charge by writing to the
Company at the above address or by calling 1-800-551-2145. The Statement of
Additional Information is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
September __, 1998
<PAGE>
EXPENSE SUMMARY
ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVERS
AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS
TAX-EXEMPT
MONEY
MARKET FUND (TRUST)
-------------------
Management Fees.................................... None
Other Expenses (after fee waivers)
(includes administration, custody
and transfer agency, and miscellaneous
other charges)................................ .22%
Total Fund Operating Expenses (after ---
fee waivers).................................. .22%
===
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return (a hypothetical return required by SEC regulations for
this calculation) and (2) redemption at the end of the following time periods:
1 Year................................................................. $2
3 Years................................................................ $7
5 Years................................................................ $12
10 Years............................................................... $28
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATES OF RETURN MAY BE MORE OR
LESS THAN THOSE SHOWN.
The purpose of this Expense Summary is to assist investors in understanding
the various costs and expenses that investors in the Fund will bear indirectly
as shareholders. The Expense Summary is based on the expenses the Tax-Exempt
Money Market Fund (Trust) incurred during the fiscal year ended May 31, 1998.
Absent fee waivers, Other Expenses and Total Fund Operating Expenses, stated as
a percentage of average daily net assets, would have been .27% and .27%,
respectively.
The investment adviser and administrator are under no obligation to waive
fees or reimburse expenses, but have informed the Company that they expect to
waive fees and/or reimburse expenses during the current fiscal year as necessary
to maintain the Fund's total operating expenses at the level set forth in the
above table. Any fees that are charged by the
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<PAGE>
investment adviser, its affiliates or other institutions directly to their
customer accounts for services related to an investment in the Fund are in
addition to, and are not reflected in, the fees and expenses described above.
For more complete descriptions of the Fund's operating expenses, see
"Management of the Company" in this Prospectus.
FINANCIAL HIGHLIGHTS
The following Financial Highlights, which have been derived from the Fund's
financial statements, have been audited by PricewaterhouseCoopers LLP, the
Fund's independent accountants, whose unqualified report on the financial
statements containing such information for the five years in the period ended
May 31, 1998 is incorporated by reference into the Statement of Additional
Information. The Financial Highlights should be read in conjunction with the
financial statements and related notes, which are also incorporated by reference
into the Statement of Additional Information. Further information about the
performance of the Fund is available in the Company's Annual Report to
Shareholders for the fiscal year ended May 31, 1998. For a free copy of the
Statement of Additional Information or the Annual Report to Shareholders,
contact the Company at the address or telephone number on the first page of this
Prospectus.
-3-
<PAGE>
Financial Highlights for a share of the Tax-Exempt Money Market Fund
(Trust) outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
5/31/98 5/31/97 5/31/96 5/31/95 5/31/94
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Income From Investment Operations:
Net Investment Income.............................................. 0.0338 0.0325 0.0340 0.0320 0.0219
Net Realized Gain on Investments.................................... -- -- -- -- 0.0003
-------- -------- -------- -------- --------
Total From Investment
Operations........................................................ 0.0338 0.0325 0.0340 0.0320 0.0222
-------- -------- -------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income............................................. (0.0338) (0.0325) (0.0340) (0.0320) (0.0219)
Net Capital Gains................................................. -- -- -- -- (0.0003)
-------- -------- -------- -------- --------
Total Distributions.............................................. (0.0338) (0.0325) (0.0340) (0.0320) (0.0222)
-------- -------- -------- -------- --------
Net Asset Value, End of Period...................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return........................................................ 3.43% 3.30% 3.45% 3.25% 2.24%
Ratios/Supplemental Data
Net Assets, End of Period (000).................................... $ 58,222 $ 49,544 $ 46,541 $ 55,043 $ 73,230
Ratio of Expenses to Average
Net Assets
After Expense Waiver......................................... 0.22% 0.22% 0.22% 0.22% 0.20%
Before Expense Waiver........................................ 0.27% 0.28% 0.27% 0.28% 0.26%
Ratio of Net Investment Income to
Average Net Assets............................................... 3.37% 3.24% 3.40% 3.14% 2.19%
<CAPTION>
YEAR YEAR YEAR 7/25/89/1/
ENDED ENDED ENDED TO
5/31/93 5/31/92 5/31/91 5/31/90
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ---------
Income From Investment Operations:
Net Investment Income.............................................. 0.0238 0.0362 0.0512 0.0491
Net Realized Gain on Investments.................................... -- -- -- --
-------- -------- -------- ---------
Total From Investment
Operations........................................................ 0.0238 0.0362 0.0512 0.0491
-------- -------- -------- ---------
Less Distributions to Shareholders from:
Net Investment Income............................................. (0.0238) (0.0362) (0.0512) (0.0491)
Net Capital Gains................................................. -- -- -- --
-------- -------- -------- ---------
Total Distributions.............................................. (0.0238) (0.0362) (0.0512) (0.0491)
-------- -------- -------- ---------
Net Asset Value, End of Period...................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== =========
Total Return........................................................ 2.40% 3.68% 5.24% 5.92%/2/
Ratios/Supplemental Data
Net Assets, End of Period (000).................................... $ 55,975 $ 62,502 $ 91,315 $ 81,055
Ratio of Expenses to Average
Net Assets
After Expense Waiver......................................... 0.20% 0.20% 0.20% 0.20%/2/
Before Expense Waiver........................................ 0.21% 0.21% 0.21% 0.21%/2/
Ratio of Net Investment Income to
Average Net Assets............................................... 2.38% 3.63% 5.08% 5.76%
</TABLE>
______________________________________
/1/ Commencement of operations.
/2/ Annualized.
-4-
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Fund's investment adviser (the "Adviser") uses a range of different
investments and investment techniques in seeking to achieve the Fund's
investment objective. These investments and investment techniques, which
involve various risks, are described in the following sections. The Adviser
will use its best efforts to achieve the Fund's investment objective, although
its achievement cannot be assured. An investor should not consider an
investment in the Fund to be a complete investment program.
GENERAL
The Fund's investment objective is to seek as high a level of current
income exempt from Federal income tax as is consistent with liquidity and
stability of principal by investing substantially all of its assets in a
diversified portfolio of short-term obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their political subdivisions, agencies, instrumentalities and
authorities the interest on which, in the opinion of counsel to the issuer or
bond counsel, is exempt from regular Federal income tax ("municipal
obligations"). The Fund seeks to achieve its investment objective by investing
primarily in:
. municipal notes, including variable rate demand notes, rated at the
time of purchase within the highest rating category assigned by one or
more unaffiliated nationally recognized statistical rating
organizations (each a "Rating Agency");
. tax-exempt commercial paper rated at the time of purchase within the
highest rating category assigned by one or more Rating Agencies;
. municipal bonds rated at the time of purchase within one of the two
highest rating categories assigned by one or more Rating Agencies; and
. unrated municipal notes, tax-exempt commercial paper, municipal bonds
and other instruments that are of comparable quality as determined by
the Adviser pursuant to guidelines approved by the Company's Board of
Directors.
As a matter of fundamental policy, during normal market conditions at least
80% of the Fund's total assets will be invested in municipal obligations the
interest on which is exempt from regular Federal income tax and is not treated
as a specific tax preference item under the Federal alternative minimum tax for
either individuals or corporations. Up to 20% of the Fund's total assets may be
invested in private activity bonds that are subject to the Federal alternative
minimum tax or taxable money market instruments, although the Fund does not
intend to invest in such instruments on a regular basis. The Fund may hold
uninvested cash reserves during temporary defensive periods or if, in the
opinion of the Adviser, suitable municipal obligations are not available.
-5-
<PAGE>
QUALITY, MATURITY AND DIVERSIFICATION
All securities acquired by the Fund will be determined at the time of
purchase by the Adviser, pursuant to guidelines approved by the Company's Board
of Directors, to present minimal credit risks and will be "Eligible Securities"
as defined by the SEC. Eligible Securities are (a) securities that either (i)
have short-term debt ratings at the time of acquisition in the two highest
rating categories assigned by at least two Rating Agencies (or one Rating Agency
if the security is rated by only one Rating Agency), or (ii) are comparable in
priority and security with an instrument issued by an issuer which has such
ratings, and (b) securities that are unrated (including securities of issuers
that have long-term but not short-term ratings) but are of comparable quality as
determined in accordance with guidelines approved by the Company's Board of
Directors. See the Statement of Additional Information for a description of the
Rating Agencies' various rating categories.
The Fund is managed so that the average dollar-weighted maturity of all
instruments held by it will not exceed 90 days. In no event will the Fund
purchase securities which mature more than 397 days from the date of purchase
(except for certain variable and floating rate instruments). Securities in
which the Fund invests may not earn as high a level of income as longer-term or
lower quality securities, which generally have greater market risk and more
fluctuation in market value.
The Fund is classified as a diversified portfolio under the Investment
Company Act.
OTHER INVESTMENT POLICIES AND RELATED RISKS
. Municipal Obligations. The Fund invests primarily in municipal
obligations. The two main types of municipal obligations are "general
obligation" securities (which are secured by the issuer's full faith, credit and
taxing power) and "revenue" securities (which are payable only from revenues
received from the operation of a particular facility or other revenue source).
A third type of municipal obligation, normally issued by special purpose public
authorities, is known as a "moral obligation" security because if the issuer
cannot meet its obligations it draws on a reserve fund, the restoration of which
is not a legal requirement. Private activity bonds (which are a type of
obligation that, although exempt from regular Federal income tax, may be subject
to the Federal alternative minimum tax) are usually revenue securities issued by
or for public authorities to finance a privately operated facility.
In many cases, the Internal Revenue Service has not ruled on whether the
interest received on a municipal obligation is tax-exempt and, accordingly, the
purchase of such securities is based on the opinion of bond counsel or counsel
to the issuers of such instruments. The Company and the Adviser rely on these
opinions and do not intend to review the basis for them.
Municipal obligations purchased by the Fund in some cases may be insured as
to the timely payment of principal and interest. There is no guarantee,
however, that the insurer will meet its obligations in the event of a default in
payment by the issuer. In other cases, municipal obligations may be backed by
letters of credit or guarantees issued by domestic or foreign banks
-6-
<PAGE>
or other financial institutions which are not subject to federal deposit
insurance. Adverse developments affecting the banking industry generally or a
particular bank or financial institution that has provided its credit or
guarantee with respect to a municipal obligation held by the Fund, including a
change in the credit quality of any such bank or financial institution, could
result in a loss to the Fund and adversely affect the value of its shares.
Foreign letters of credit and guarantees involve certain risks in addition to
those of domestic obligations. The institutions issuing such foreign letters of
credit and guarantees may be subject, for example, to less stringent reserve
requirements and to different accounting, auditing and recordkeeping
requirements.
. Variable and Floating Rate Instruments. The Fund may purchase variable
and floating rate instruments, which may have a maturity in excess of 397 days
but will, in any event, permit the Fund to demand payment of the principal of
the instrument at least once every 397 days upon not more than 30 days' notice
(unless the instrument is guaranteed by the U.S. Government or an agency or
instrumentality thereof). Such instruments may include variable rate demand
notes that permit the indebtedness thereunder to vary in addition to providing
for periodic adjustments in the interest rate. There may be no active secondary
market with respect to a particular variable or floating rate instrument.
Nevertheless, the periodic readjustments of their interest rates tend to ensure
that their value to the Fund will approximate their par value. Variable and
floating rate obligations that cannot be disposed of promptly within seven
business days and in the usual course of business without taking a reduced price
will be considered illiquid and subject to the Fund's limitation on illiquid
investments described below under "Managing Liquidity."
. Reverse Repurchase Agreements. The Fund may borrow money for temporary
purposes by entering into reverse repurchase agreements. Under these
agreements, the Fund sells portfolio securities to a financial institution and
agrees to buy them back at an agreed upon date and price. Reverse repurchase
agreements may be used to meet redemption requests without selling portfolio
securities. Reverse repurchase agreements involve the risk of counterparty
default and possible loss of collateral held by the counterparty. Reverse
repurchase agreements are considered to be borrowings under the Investment
Company Act.
. When-Issued Purchases. The Fund may purchase securities on a "when-
issued" basis. These transactions, which involve a commitment by the Fund to
purchase particular securities with payment and delivery taking place at a
future date, permit the Fund to lock in a price or yield on a security it
intends to purchase, regardless of future changes in interest rates. The Fund
will bear the risk, however, that the price or yield obtained in a transaction
may be less favorable than the price or yield available in the market when the
delivery takes place. When-issued transactions are not expected to exceed 25%
of the value of the Fund's total assets under normal circumstances. Because the
Fund is required to set aside cash or liquid securities 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 total assets. The Fund does not intend to engage in when-issued
transactions for speculative purposes.
. Stand-By Commitments. The Fund may acquire stand-by commitments under
which a dealer agrees to purchase certain municipal obligations at the Fund's
option at a price equal to
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<PAGE>
their amortized cost value plus interest. These commitments will be used only to
assist in maintaining the Fund's liquidity and not for trading purposes.
. Other Investment Companies. The Fund may invest in securities issued by
other investment companies which invest in eligible quality, short-term debt
securities and which seek to maintain a $1.00 net asset value per share, i.e.,
"money market" funds. Such investments will be made by the Fund in connection
with the management of its daily cash position and will be subject to the
requirements of applicable securities laws. When the Fund invests in another
investment company, it pays a pro rata portion of the advisory and other
expenses of that company as 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, as a matter of fundamental policy the Fund will not
knowingly invest more than 10% of the value of its net assets in illiquid
securities. Illiquid securities include restricted securities and other
securities for which market securities are not readily available.
. Other Risk Considerations. As with an investment in any mutual fund, an
investment in the Fund entails market and economic risks associated with
investments generally. However, there are certain specific risks of which you
should be aware.
Although the Fund does not presently intend to do so on a regular basis, it
may invest 25% or more of its total assets in industrial development bonds
issued before August 7, 1986 that are not subject to the Federal alternative
minimum tax, and in municipal obligations the interest on which is paid solely
from revenues of similar projects. When the Fund's assets are concentrated in
obligations payable from revenues on similar projects or in industrial
development bonds, the Fund will be subject to the particular risks (including
legal and economic conditions) presented by such securities to a greater extent
than it would be if its assets were not so concentrated. Furthermore, payment
of municipal obligations held by the Fund relating to certain projects may be
secured by mortgages or deeds of trust. In the event of a default, enforcement
of a mortgage or deed of trust may be delayed and the amount of the proceeds
received may not be enough to pay the principal and accrued interest on the
defaulted municipal obligations.
FUNDAMENTAL LIMITATIONS
The Fund's investment objective discussed above is "fundamental," which
means that it may not be changed without the approval of a majority of the
Fund's outstanding shares. Except as otherwise noted, the Fund's investment
policies discussed above are not fundamental and may be changed by the Company's
Board of Directors without shareholder approval. However, the Fund also has in
place certain "fundamental" limitations that also cannot be changed without the
approval of a majority of the Fund's outstanding shares. Some of these
fundamental limitations
-8-
<PAGE>
are summarized below, and all of the Fund's fundamental limitations are set out
in full in the Statement of Additional Information.
1. The Fund may not purchase securities (with certain exceptions,
including U.S. Government securities) if more than 5% of its total assets will
be invested in the securities of any one issuer, except that up to 25% of the
total assets of the Fund can be invested without regard to this 5% limitation.
2. The Fund may not invest 25% or more of its total assets in one or more
issuers conducting their principal business activities in the same industry,
subject to certain exceptions.
3. The Fund may not borrow money except for temporary purposes in amounts
up to 10% of its total assets at the time of such borrowing. Whenever any
borrowings are outstanding, the Fund will not make any further investments.
4. The Fund may not knowingly invest more than 10% of its net assets in
illiquid securities.
As a matter of non-fundamental policy and in accordance with current
regulations of the SEC, the Fund intends to subject its entire investment
portfolio, other than U.S. Government securities, to the 5% limitation described
in Fundamental Limitation No. 1 above. However, in accordance with such
regulations, the Fund may invest more than 5% (but no more than 25%) of its
total assets in the securities of a single issuer for a period of up to three
business days, provided the securities are rated at the time of purchase in the
highest rating category assigned by one or more Rating Agencies or are
determined by the Adviser to be of comparable quality. The Fund may not hold
more than one such investment at any one time.
If a percentage limitation is met at the time an investment is made, a
subsequent change in that percentage resulting from a change in value of the
Fund's portfolio securities does not mean that the limitation has been violated.
HOW TO PURCHASE AND REDEEM SHARES
DISTRIBUTOR
Shares of the Fund are sold on a continuous basis without a sales load by
the Company's distributor, BISYS Fund Services Limited Partnership (the
"Distributor"). The Distributor acts as agent for the Fund in the distribution
of its shares and, in such capacity, has agreed to use appropriate efforts to
promote the Fund and to solicit orders for the purchase of the Fund's shares.
The Distributor's principal offices are located at 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
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<PAGE>
PURCHASE OF SHARES
Shares of the Fund are sold only to qualifying trust accounts maintained by
Mercantile-Safe Deposit and Trust Company and its affiliated and correspondent
banks (referred to herein individually as a "Bank" and collectively as the
"Banks"). The Company's shares will normally be held of record by the Banks.
Shareholders purchasing shares of the Fund may also include officers, directors,
or employees of the Banks. Shares may be purchased through procedures
established by the Banks in connection with their customer accounts, including
specialized procedures for the purchase or redemption of Fund shares, such as
pre-authorized or automatic purchase and redemption programs. The Company
imposes no minimum on initial or subsequent investments, although the Banks have
established a $100 minimum initial and subsequent investment requirement for
shares purchased on behalf of their customers. The Company will send
confirmations of share purchases and redemptions to the Banks. Beneficial
ownership of the Company's shares will be recorded by the Banks and reflected in
the account statements they provide to their customers. Information relating to
specific purchase procedures is available from the Banks.
Shares are sold at the net asset value per share next determined after
receipt of a purchase order by the Fund's transfer agent, State Street Bank and
Trust Company (the "Transfer Agent"). Purchase orders for shares will be
accepted only on a day on which the Distributor, the Fund's custodian, The Fifth
Third Bank (the "Custodian"), the Transfer Agent and the purchasing Bank are
open for business ("Business Days"), and must be transmitted by telephone to the
Transfer Agent. Orders received before 11:00 A.M. Eastern Time will be executed
at 11:00 A.M. if the Custodian has received payment by the close of regular
trading hours (currently 4:00 P.M. Eastern Time) on the New York Stock Exchange
(the "Exchange"). Orders received after 11:00 A.M. but before the close of
regular trading hours on the Exchange will be executed at 11:00 A.M. the
following Business Day if the Custodian receives payment by the close of regular
trading hours on the Exchange on the following Business Day. Orders received at
other times, and orders for which payment has not been received by the close of
regular trading hours on the Exchange, will not be accepted and notice thereof
will be given promptly to the Bank that submitted the order. Payments for
orders which are not received or accepted will be returned after prompt inquiry
to the sending Bank. If a Bank accepts a purchase order from its customer on a
non-Business Day, the order will not be executed until it is received and
accepted on a Business Day in accordance with the foregoing procedures.
On a Business Day when the Exchange closes early due to a partial holiday
or otherwise, the Company reserves the right to advance the times at which
purchase orders must be received in order to be processed on that Business Day.
It is the Banks' responsibility to transmit their customers' orders for the
purchase of shares to the Transfer Agent and to wire the required funds in
payment on a timely basis to the Custodian. The Company reserves the right to
reject any purchase order.
Payment for Fund shares may be made only in Federal funds or other funds
immediately available to the Custodian.
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<PAGE>
REDEMPTION OF SHARES
A customer may redeem all or part of his or her shares in accordance with
the procedures, instructions and limitations pertaining to his or her account at
a Bank. The Banks are responsible for transmitting redemption orders to the
Transfer Agent and crediting their customers' accounts with the redemption
proceeds on a timely basis. No charge for wiring redemption payments is imposed
by the Company, although the Banks may charge their customers' accounts directly
for redemption and other services. Information relating to such services and
charges, if any, is available from the Banks. Absent instructions to the
contrary, customers for whose accounts automatic purchases and redemptions are
made may receive monthly confirmations of share transactions from their Bank.
Redemption orders must be transmitted to the Transfer Agent by telephone in
the manner described under "Purchase of Shares." Shares are redeemed at the net
asset value per share next determined after receipt of the redemption order.
Payment for redemption orders received before 11:00 A.M. Eastern Time on a
day that the Distributor, the Custodian, the Transfer Agent and the redeeming
Bank are open for business is normally made in Federal funds wired the same
Business Day to the Bank. Payment for redemption orders which are received
between 11:00 A.M. Eastern Time and the close of regular trading hours
(currently 4:00 p.m. Eastern Time) on the Exchange or on a non-Business Day is
normally wired to the Bank in Federal funds on the next Business Day. However,
in both cases the Company reserves the right to wire redemption proceeds within
seven days after receiving the redemption order if, in the judgment of the
Adviser, an earlier payment could adversely affect the Company.
On a Business Day when the Exchange closes early due to a partial holiday
or otherwise, the Company reserves the right to advance the times at which
redemption orders must be received in order to be processed on that Business
Day.
If a customer has agreed with a Bank to maintain a minimum cash balance in
the account he or she maintains with the Bank and the balance falls below this
minimum, the customer may be obliged to redeem all or a part of the shares held
in his or her account to the extent necessary to maintain the required minimum
balance.
The Company may also redeem shares involuntarily or pay redemption proceeds
in readily marketable portfolio securities if it appears appropriate to do so in
light of its responsibilities under the Investment Company Act. See the
Statement of Additional Information under "Additional Purchase and Redemption
Information."
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<PAGE>
PRICING OF SHARES
The net asset value of the Fund is determined and its shares are priced as
of 11:00 A.M. Eastern Time and as of the close of regular trading hours
(currently 4:00 P.M. Eastern Time) each weekday, with the exception of those
holidays on which the Federal Reserve Bank of Cleveland, the Fund's Adviser or
the Exchange is closed, which currently include: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day. Net
asset value per share for purposes of pricing sales and redemptions is
calculated by dividing the value of all securities and other assets belonging to
the Fund, less its liabilities, by the number of the Fund's outstanding shares.
The assets in the Fund are valued based upon the amortized cost method.
Although the Fund seeks to maintain its net asset value per share at $1.00,
there can be no assurance that the net asset value per share will not vary.
Further information about the Company's valuation policies is contained in the
Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
The net investment income of the Fund is declared daily and paid monthly as
a dividend to its shareholders. Shares in the Fund begin earning dividends on
the day the purchase order is executed and continue earning dividends through
and including the day before the redemption order for the shares is executed.
Dividends are paid by wire transfer to the Banks within five Business Days after
the end of each calendar month. Shareholders may elect to have their dividends
reinvested in additional shares of the Fund at the net asset value of such
shares on the last Business Day of the month in which such dividend is declared.
Such election, or any revocation thereof, must be made in writing to the
shareholder's Bank and will become effective with respect to dividends paid
after its receipt. The crediting of any payment of dividends to customers of
the Banks or the reinvestment of such dividends will be in accordance with the
procedures governing their customer accounts. Reinvested dividends receive the
same tax treatment as those paid in cash.
TAX INFORMATION
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), so long as such
qualification is in the best interest of the Fund's shareholders. Such
qualification relieves the Fund of liability for Federal income taxes to the
extent its earnings are distributed as required by the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that the Fund distribute to its shareholders an amount equal
to at least the sum of 90% of its investment company taxable income and 90% of
its exempt-interest income net of certain deductions for a taxable year. In
general, the Fund's investment company taxable income will be
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<PAGE>
its taxable income, including interest, subject to certain adjustments and
excluding the excess of any net long-term capital gain for the taxable year over
the net short-term capital loss, if any, for such year.
The Fund intends to distribute as exempt-interest dividends substantially
all of its municipal obligations interest income net of certain deductions each
year. Exempt-interest dividends may be treated by shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code
unless, under the circumstances applicable to the particular shareholder, the
exclusion would be disallowed. (See the Statement of Additional Information
under "Additional Information Concerning Taxes.") Exempt-interest dividends
generally will be exempt from state and local taxes as well. However, in some
situations, distributions of net income may be taxable to investors under state
or local law as dividend income even though a substantial portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes.
If the Fund should hold certain private activity bonds issued after August
7, 1986, shareholders must include, as an item of tax preference, the portion of
dividends paid by the Fund that is attributable to interest on such bonds in
their Federal alternative minimum taxable income for purposes of determining
liability (if any) for the 26% alternative minimum tax applicable to individuals
(28% for adjusted alternative minimum taxable income in excess of $175,000) and
the 20% alternative minimum tax applicable to corporations. In addition,
corporate shareholders will need to take into account all exempt-interest
dividends paid by the Fund in determining certain adjustments for the Federal
alternative minimum tax. Shareholders receiving Social Security benefits should
note that all exempt-interest dividends will be taken into account in
determining the taxability of such benefits.
To the extent, if any, dividends paid by the Fund are derived from taxable
income (for example, from interest on certificates of deposit, commercial paper
or U.S. Government obligations), such dividends will be subject to Federal
income tax (whether such dividends are paid in cash or additional shares) and
may also be subject to state and local taxes.
Dividends declared in December of any year which are payable to
shareholders of record on a specified date in such month will be deemed to have
been received by the shareholders and paid by the Fund on December 31 of such
year in the event such dividends are actually paid during January of the
following year.
Shareholders of the Fund will be advised at least annually as to the
Federal income tax consequences of distributions made to them each year.
The Company may be subject to state or local taxes in jurisdictions in
which the Company may be deemed to be doing business. In addition, in those
states or localities that have income tax laws, the treatment of the Company and
its shareholders under such laws may differ from treatment under Federal income
tax laws. Shareholders should consult their own tax advisers concerning these
matters.
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<PAGE>
The foregoing summarizes some of the important Federal tax considerations
generally affecting the Fund and its shareholders but is not intended as a
substitute for careful tax planning. Potential investors in the Fund should
consult their tax advisers with specific reference to their own tax situation.
In addition, this discussion is based on tax laws and regulations in effect on
the date of this Prospectus and which are subject to change by legislative or
administrative action.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The business of the Company is managed under the general supervision of the
Company's Board of Directors. The Statement of Additional Information contains
the name of each Director and other background information.
INVESTMENT ADVISER AND ADMINISTRATOR
Mercantile-Safe Deposit and Trust Company ("Mercantile") serves as the
Fund's investment adviser. Mercantile is the lead bank of Mercantile Bankshares
Corporation, a multi-bank holding company organized in Maryland in 1969.
Mercantile manages the Fund's portfolio and is responsible for all purchases and
sales of its portfolio securities. Mercantile is not entitled to any
compensation under its Advisory Agreement with respect to the Fund for the
services provided and expenses assumed thereunder. Mercantile has acted as
investment adviser to the Fund since its commencement of operations. In
addition, Mercantile and its predecessors have been in the business of managing
the investments of fiduciary and other accounts in the Baltimore area since
1864. As of July 20, 1998, Mercantile had approximately $13 billion in assets
under active management. Mercantile's principal business address is Two Hopkins
Plaza, Baltimore, Maryland 21201.
Mercantile also serves as the Fund's administrator and generally assists in
all aspects of its operation and administration. For the services provided and
expenses assumed as administrator, Mercantile is entitled to receive
administration fees, computed daily and paid monthly, at the annual rate of
.125% of the average daily net assets of the Fund.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company (the "Transfer Agent") serves as the
Fund's transfer and dividend disbursing agent. Communications to the Transfer
Agent should be directed to Two Heritage Drive, North Quincy, Massachusetts
02171. The Fifth Third Bank (the "Custodian"), located at 38 Fountain Square
Plaza, Cincinnati, Ohio 45263, serves as custodian of the Fund's assets.
-14-
<PAGE>
EXPENSES
The Fund incurs expenses in order to support the services described above,
as well as other matters essential to the operation of the Funds. In addition
to the administration fees set forth above, the Fund also bears other operating
expenses which are described in more detail in the Statement of Additional
Information.
FEE WAIVERS
Expenses can be reduced by voluntary fee waivers and expense reimbursements
by Mercantile and the Fund's other service providers. The amount of the fee
waivers may be changed at any time at the sole discretion of Mercantile with
respect to administration fees, and by the Fund's other service providers with
respect to all other fees. As to any amounts voluntarily waived or reimbursed,
the service providers retain the ability to be reimbursed by the Fund for such
amounts prior to fiscal year-end. Such waivers and reimbursements would
increase the return to investors when made but would decrease the return if the
Fund were required to reimburse a service provider.
OTHER INFORMATION CONCERNING THE COMPANY AND ITS SHARES
The Company was incorporated in Maryland on March 7, 1989 as an "open-end
management investment company." The Company's Charter authorizes the Board of
Directors to issue up to 10,000,000,000 full and fractional shares of capital
stock ($.001 par value per share) and to classify or reclassify any unissued
shares into one or more classes of shares. Pursuant to such authorization, the
Board of Directors has authorized the issuance of one class of shares in the
Tax-Exempt Money Market Fund (Trust). The Board of Directors has also
authorized the issuance of additional classes of shares representing interests
in other investment portfolios of the Company. For more information regarding
these other portfolios, call 1-800-551-2145.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shares of all
portfolios of the Company vote together and not by portfolio or class, unless
otherwise required by law or permitted by the Board of Directors. The Company
does not currently intend to hold annual shareholder meetings unless it is
required to do so by the Investment Company Act or other applicable law.
As of July 20, 1998, Mercantile held of record, in a fiduciary or other
representative capacity for beneficial owners, a majority of the outstanding
shares of the Company. Mercantile does not, however, have any economic interest
in such shares which are held solely for the benefit of its customers.
Mercantile may be deemed to be a controlling person of the Company within the
meaning of the Investment Company Act by reason of its record ownership of such
shares.
-15-
<PAGE>
PERFORMANCE REPORTING
From time to time the Fund may quote its "yield," "effective yield," "tax-
equivalent yield" and "monthly yield" in advertisements, sales literature or in
reports to shareholders. These yield figures are based on historical earnings
and are not intended to indicate future performance. The "yield" quoted in
advertisements refers to the income generated by an investment in the Fund over
a seven-day period identified in the advertisement. This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of the assumed reinvestment. The
"tax-equivalent yield" shows the level of taxable yield necessary to produce an
after-tax yield equivalent to the Fund's tax-free yield. This is calculated by
increasing the Fund's yield (calculated as above) by the amount necessary to
reflect the payment of Federal income tax at a stated tax rate. The tax-
equivalent yield will always be higher than the Fund's yield. The "monthly
yield" refers to income generated by an investment in the Fund over the calendar
month period identified in the advertisement. This income is then "annualized."
That is, the amount of income generated by the investment during that month is
assumed to be generated each month over a twelve-month period and is shown as a
percentage of the investment. In addition, the Fund may from time to time quote
yields relating to time periods other than those described above. Such yields
will be computed in a manner which is similar to those computations described
above.
IT IS IMPORTANT TO NOTE THAT PERFORMANCE FIGURES ARE BASED ON HISTORICAL
EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The Fund's yields
may not provide a basis for comparison with bank deposits and other investments
which provide a fixed yield for a stated period of time. Yield will be affected
by portfolio quality, composition, maturity, market conditions and the level of
the Fund's operating expenses. From time to time, the Company's service
contractors may voluntarily waive all or a portion of their compensation in
order to assist the Fund in maintaining a competitive expense ratio. Fees paid
by shareholders to Banks for automatic investment or other cash management
services, if any, would reduce the Fund's effective yield from that stated.
MISCELLANEOUS
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of the Fund, with respect to the approval of the Fund's
investment advisory agreement or a change in the Fund's investment objective or
a fundamental investment policy, means 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.
Investors with inquiries regarding the Company or the Fund should call 1-
800-551-2145.
-16-
<PAGE>
YEAR 2000 RISKS. Like other investment companies, financial and business
organizations and individuals around the world, the Company could be adversely
affected if the computer systems used by Mercantile and the Company's other
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Problem." Mercantile is taking steps to address the Year 2000 Problem with
respect to the computer systems that it uses and to obtain assurance that
comparable steps are being taken by the Company's other major service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Company as a result of the Year
2000 Problem.
______________________
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 THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE COMPANY, THE FUND OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-17-
<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 & 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 Limited Partnership
Columbus, Ohio
In considering an investment in the Fund, please read this Prospectus
carefully.
SHARES OF THE FUND ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR
GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUND INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THERE CAN
BE NO GUARANTEE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE
OF $1.00 PER SHARE.
-18-
<PAGE>
M.S.D. & T. FUNDS, INC.
ALL FUNDS
CROSS REFERENCE SHEET
Pursuant to Rule 495
under the Securities Act of 1933
FORM N-1A ITEM NUMBER LOCATION
- --------------------- --------
Part B Statement of Additional
- ------ -----------------------
Information Caption
-----------------------
10. Cover Page.......................... Cover Page
11. Table of Contents................... Table of Contents
12. General Information and History..... M.S.D. & T Funds, Inc;
Management of the Company;
Additional Information
Concerning Shares
13. Investment Objectives and
Policies.......................... Investment Objectives and
Policies; Fundamental
Limitations
14. Management of the Fund.............. Management of the Company
15. Control Persons and Principal
Holders of Securities............. Additional Information
Concerning Shares;
Miscellaneous
16. Investment Advisory and Other
Services.......................... Management of the Company
17. Brokerage Allocation and
Other Practices................... Investment Objectives and
Policies; Management of the
Company
18. Capital Stock and Other
Securities........................ Additional Purchase and
Redemption Information;
Net Asset Value; Additional
Information Concerning Shares
19. Purchase, Redemption and Pricing
of Securities Being Offered....... Additional Purchase and
Redemption Information;
Net Asset Value
20. Tax Status.......................... Additional Information
Concerning Taxes
21. Underwriters........................ Management of the Company
22. Calculation of Performance Data..... Additional Performance Information
23. Financial Statements................ Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
M.S.D. & T. FUNDS, INC.
Statement of Additional Information
September __, 1998
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies.............. 3
Fundamental Limitations......................... 22
Additional Purchase and Redemption Information.. 24
Net Asset Value................................. 25
Additional Information concerning Taxes......... 27
Management of the Company....................... 32
Independent Accountants......................... 40
Counsel......................................... 40
Additional Information concerning Shares........ 40
Additional Performance Information.............. 42
Miscellaneous................................... 51
Financial Statements............................ 51
Appendix A...................................... A-1
Appendix B...................................... B-1
</TABLE>
This Statement of Additional Information is meant to be read in
conjunction with the Prospectuses dated September __, 1998 for the Prime Money
Market Fund, Government Money Market Fund, Tax-Exempt Money Market Fund, Tax-
Exempt Money Market Fund (Trust), Growth & Income Fund, Equity Income Fund,
Equity Growth Fund, International Equity Fund, Diversified Real Estate Fund,
Limited Maturity Bond Fund, Total Return Bond Fund, Maryland Tax-Exempt Bond
Fund, Intermediate Tax-Exempt Bond Fund and National Tax-Exempt Bond Fund of
M.S.D. & T. Funds, Inc. This Statement of Additional Information is
incorporated by reference in its entirety into the Prospectuses. Because this
Statement of Additional Information is not itself a prospectus, no investment in
shares of any Fund should be made solely upon the information contained herein.
Copies of the Prospectuses may be obtained by calling 1-800-551-2145 or by
writing M.S.D. & T. Funds, Inc., c/o BISYS Fund Services, 3435 Stelzer Road,
Columbus, OH 43219-3035. Capitalized terms used but not defined herein have the
same meanings as in the Prospectuses.
<PAGE>
SHARES OF THE FUNDS ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
ITS PARENT COMPANY OR ITS AFFILIATES, AND SUCH SHARES ARE NOT FEDERALLY INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENT IN THE
FUNDS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. WHILE THE
PRIME MONEY MARKET FUND, GOVERNMENT MONEY MARKET FUND, TAX-EXEMPT MONEY MARKET
FUND AND TAX-EXEMPT MONEY MARKET FUND (TRUST) WILL ATTEMPT TO MAINTAIN THEIR NET
ASSET VALUE AT $1.00 PER SHARE, THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE
ABLE TO DO SO ON A CONTINUOUS BASIS. IN ADDITION, THE DIVIDENDS PAID BY A FUND
WILL GO UP AND DOWN. MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY SERVES AS
INVESTMENT ADVISER AND ADMINISTRATOR TO THE FUNDS, IS PAID FEES FOR ITS
SERVICES, AND IS NOT AFFILIATED WITH BISYS FUND SERVICES LIMITED PARTNERSHIP,
THE FUNDS' DISTRIBUTOR.
-2-
<PAGE>
M.S.D. & T. FUNDS, INC.
M.S.D. & T. Funds, Inc. (the "Company") is a Maryland corporation
which commenced operations on July 21, 1989 as a no-load, open-end,
professionally managed investment company. The Company currently offers shares
in four short-term money market portfolios (the Prime Money Market Fund,
Government Money Market Fund, Tax-Exempt Money Market Fund and Tax-Exempt Money
Market Fund (Trust), also referred to herein as the "Money Market Funds"); five
equity portfolios (the Growth & Income Fund, Equity Income Fund, Equity Growth
Fund, International Equity Fund and Diversified Real Estate Fund); and five bond
portfolios (the Limited Maturity Bond Fund, Total Return Bond Fund, Maryland
Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and National Tax-Exempt
Bond Fund). These portfolios may also be referred to herein individually as a
"Fund" and collectively as the "Funds." The Growth & Income Fund, Equity Income
Fund, Equity Growth Fund, International Equity Fund, Diversified Real Estate
Fund, Limited Maturity Bond Fund, Total Return Bond Fund, Maryland Tax-Exempt
Bond Fund, Intermediate Tax-Exempt Bond Fund and National Tax-Exempt Bond Fund
may at times be referred to herein as the "Non-Money Market Funds."
INVESTMENT OBJECTIVES AND POLICIES
- ----------------------------------
The investment objective of each Fund is described in the Prospectus
for that Fund. The following information supplements the description of the
Funds' investment objectives and policies as set forth in the Prospectuses.
Portfolio Transactions and Turnover
- -----------------------------------
Subject to the general supervision and approval of the Company's Board
of Directors, Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for each Fund other
than the International Equity Fund. BlackRock International Ltd. ("BlackRock or
the "Sub-Adviser") is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for the
International Equity Fund in accordance with the investment policies and
requirements established by the Adviser.
Portfolio securities for the Money Market Funds are generally
purchased and sold either directly from the issuer or from dealers who
specialize in money market instruments. Such purchases are usually effected as
principal transactions and therefore do not involve the payment of brokerage
commissions. No brokerage commissions were paid with respect to the Money
Market Funds during the fiscal years ended May 31, 1996, May 31, 1997 and May
31, 1998.
-3-
<PAGE>
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed. During the fiscal years ended May 31, 1996, May 31, 1997 and May 31,
1998, brokerage commissions of $131,775, $95,896 and $89,596, respectively, were
paid by the Growth & Income Fund and brokerage commissions of $205,568, $315,827
and $239,061, respectively, were paid by the International Equity Fund. During
the fiscal period August 1, 1997 (commencement of operations) through May 31,
1998, brokerage commissions of $14,747 were paid by the Diversified Real Estate
Fund. During the fiscal period March 1, 1998 (commencement of operations)
through May 31, 1998, brokerage commissions of $34,028 and $11,412 were paid by
the Equity Income Fund and Equity Growth Fund, respectively. During such
periods no brokerage commissions were paid to any affiliated person of the Fund.
Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Adviser (or Sub-Adviser in the
case of the International Equity Fund), where possible, will deal directly with
dealers who make a market in the securities involved except in those
circumstances in which better prices and execution are available elsewhere.
Securities purchased and sold by the Limited Maturity Bond, Total
Return Bond, Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National
Tax-Exempt Bond Funds are generally traded on a net basis (i.e., without
commission) through dealers, or otherwise involve transactions directly with the
issuer of an instrument. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down. No brokerage commissions were paid with respect to (i) the Limited
Maturity Bond Fund or Maryland Tax-Exempt Bond Fund during the fiscal years
ended May 31, 1996, May 31, 1997 and May 31, 1998, or (ii) the Total Return Bond
Fund, Intermediate Tax-Exempt Bond Fund or National Tax-Exempt Bond Fund during
the fiscal period March 1, 1998 (commencement of operations) through May 31,
1998.
The Tax-Exempt Money Market Fund, Tax-Exempt Money Market Fund (Trust)
(the "Tax-Exempt Money Market Funds") and each of the Non-Money Market Funds may
participate, if and when practicable, in bidding for the purchase of portfolio
securities directly from an issuer in order to take advantage of the lower
purchase price available to members of a bidding group. A Fund will engage in
this practice, however, only when the Adviser (or Sub-Adviser in the case of the
International Equity Fund), in its sole discretion, believes such practice to be
otherwise in the Fund's interests.
In making portfolio investments, the Adviser (or Sub-Adviser in the
case of the International Equity Fund) seeks to obtain the best net price and
the most favorable execution of orders. The Adviser (or Sub-Adviser) may, in
its discretion, effect transactions in portfolio securities with dealers who
provide research advice or other services to the Funds or the Adviser
-4-
<PAGE>
(or Sub-Adviser). The Adviser (or Sub-Adviser) is authorized to pay a broker or
dealer who provides such brokerage and research services a commission for
executing a portfolio transaction for any Fund which is in excess of the amount
of commission another broker or dealer would have charged for effecting that
transaction if the Adviser (or Sub-Adviser) determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's (or Sub-Adviser's) overall
responsibilities to the particular Fund and to the Company. Such brokerage and
research services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received (if any) is in addition
to, and not in lieu of, services required to be performed by the Adviser (or
Sub-Adviser in the case of the International Equity Fund) and does not reduce
the advisory fees payable by the Funds or the sub-advisory fees payable by the
Adviser. The Board of Directors will periodically review the commissions paid
by the Funds to consider whether the commissions paid over representative
periods of time appear to be reasonable in relation to the benefits inuring to
the Funds. It is possible that certain of the supplementary research or other
services received will primarily benefit one or more other investment companies
or other accounts for which investment discretion is exercised. Conversely, a
Fund may be the primary beneficiary of the research or services received as a
result of portfolio transactions effected for such other account or investment
company.
With respect to the Money Market Funds, the Adviser may seek to obtain
an undertaking from issuers of commercial paper or dealers selling commercial
paper to consider the repurchase of such securities from the Money Market Funds
prior to their maturity at their original cost plus interest (interest may
sometimes be adjusted to reflect the actual maturity of the securities) if it
believes that the Funds' anticipated need for liquidity makes such action
desirable. Certain dealers (but not issuers) have charged, and may in the future
charge, a higher price for commercial paper where they undertake to repurchase
it prior to maturity. The payment of a higher price in order to obtain such an
undertaking reduces the yield which might otherwise be received by the Funds on
the commercial paper. The Adviser may pay a higher price for commercial paper
where it secures such an undertaking if the Adviser believes that the prepayment
privilege is desirable to assure the Funds' liquidity and such an undertaking
cannot otherwise be obtained.
Investment decisions for the Funds are made independently from those
for other accounts advised or managed by the Adviser (or Sub-Adviser in the case
of the International Equity Fund). Such other accounts may also invest in the
same securities as the Funds. When a purchase or sale of the same security is
made at substantially the same time on behalf of a Fund and such other accounts,
the transaction will be averaged as to price, and available investments
allocated as to amount, in a manner which the Adviser (or Sub-Adviser) believes
to be equitable to the Fund and such other accounts. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtainable or sold
-5-
<PAGE>
for the Fund. To the extent permitted by law, the Adviser (or Sub-Adviser) may
aggregate the securities to be sold or purchased for the Funds with those to be
sold or purchased for such other accounts in order to obtain the best execution.
The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with the Adviser, Sub-Adviser, BISYS Fund Services Limited
Partnership ("BISYS") or any affiliated person (as such term is defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of any of them,
except to the extent permitted by the 1940 Act or the Securities and Exchange
Commission (the "SEC"). Under certain circumstances, the Funds may be at a
disadvantage because of these limitations in comparison with other investment
companies which have similar investment objectives but are not subject to such
limitations.
The Funds may from time to time purchase securities issued by the
Company's regular broker/dealers. At the close of the Company's most recent
fiscal year, no such securities were held.
The ratings assigned by each unaffiliated nationally recognized
statistical rating agency (each a "Rating Agency") represent their opinions as
to the quality of debt securities. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and debt
securities with the same maturity, interest rate and rating may have different
yields while debt securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by a
Fund, a rated security may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Fund. The Board of Directors or
the Adviser (or Sub-Adviser in the case of the International Equity Fund), when
authorized, will consider such an event in determining whether the Fund should
continue to hold the security in accordance with the interests of the Fund and
applicable regulations of the SEC.
The portfolio turnover rate for each Fund is calculated by dividing
the lesser of purchases or sales of portfolio securities for the reporting
period by the monthly average value of the portfolio securities owned during the
reporting period. The calculation excludes all securities, including options,
whose maturities or expiration dates at the time of acquisition are one year or
less.
The Money Market Funds do not intend to seek profits through short-
term trading. The Money Market Funds' annual portfolio turnover rates will be
relatively high but portfolio turnover is not expected to have a material effect
on their net income. The Money Market Funds' portfolio turnover rates are
expected to be zero for regulatory reporting purposes.
Under certain market conditions, the Non-Money Market Funds may
experience high portfolio turnover rates as a result of their investment
strategies. Portfolio investments may be sold for a variety of reasons, such as
a more favorable investment opportunity or other circumstances bearing on the
desirability of continuing to hold such investments. Higher portfolio turnover
rates (100% or more) can result in corresponding increases in brokerage
-6-
<PAGE>
commissions and other transaction costs which must be borne by the Fund involved
and ultimately by its shareholders.
Portfolio turnover rates for the Non-Money Market Funds may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the Funds to receive favorable tax treatment. Portfolio turnover will
not be a limiting factor in making portfolio decisions for the Non-Money Market
Funds, and each of those Funds may engage in short-term trading to achieve its
investment objective.
Additional Information on Investment Policies
- ---------------------------------------------
Government Obligations
----------------------
Examples of the types of U.S. Government obligations that may be
acquired by each Fund (except the International Equity Fund) include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, Federal Financing Bank,
General Services Administration, Student Loan Marketing Association, Central
Bank for Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Federal Farm
Credit Banks, Maritime Administration, Tennessee Valley Authority, Washington
D.C. Armory Board, International Bank for Reconstruction and Development (the
"World Bank"), and Resolution Trust Corporation.
Certain U.S. Government obligations held by the Money Market Funds may
have remaining maturities exceeding 397 days if such securities provide for
adjustments in their interest rates not less frequently than every 397 days and
the adjustments are sufficient to cause the securities to have market values,
after adjustment, which approximate their par value.
Variable and Floating Rate Instruments
--------------------------------------
With respect to the variable and floating rate instruments described
in the Prospectuses for each Fund, the Adviser (or Sub-Adviser in the case of
the International Equity Fund) will consider the earning power, cash flows, and
other liquidity ratios of the issuers and guarantors of such obligations and, if
the obligation is subject to a demand feature, will monitor their financial
ability to meet payment on demand. In determining average weighted portfolio
maturity, a variable rate instrument will usually be deemed to have a maturity
equal to the longer of the period remaining to the next 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
-7-
<PAGE>
recovered through demand. An instrument that is issued or guaranteed by the U.S.
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 397 days will generally be deemed to
have a maturity equal to the period remaining until the next readjustment of the
interest rate or earlier maturity.
Variable and floating rate demand instruments acquired by the Tax-
Exempt Money Market, Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and
National Tax-Exempt Bond Funds may include participations in municipal
obligations purchased from and owned by financial institutions, primarily banks.
Participation interests provide the Fund with a specified undivided interest (up
to 100%) in the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the participation interest
from the institution upon a specified number of days' notice, not to exceed
thirty days. Each participation interest is backed by an irrevocable letter of
credit or guarantee of a bank that the Adviser has determined meets the
prescribed quality standards for the Fund involved. The bank typically retains
fees out of the interest paid on the obligation for servicing the obligation,
providing the letter of credit, and issuing the repurchase commitment.
Bank Obligations
----------------
With respect to the investment policies of each Fund (other than the
Government Money Market Fund) relating to bank obligations, the assets of a bank
or savings institution will be deemed to include the assets of its domestic and
foreign branches. The Funds' investments in the obligations of foreign banks
and foreign branches of U.S. banks may subject the Funds to investment risks
that are different in some respects from those of investments in obligations of
U.S. domestic issuers. Such risks include future political and economic
developments, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations. In addition, foreign banks and foreign
branches of U.S. banks may be subject to less stringent reserve requirements and
to different accounting, auditing, reporting and recordkeeping standards than
those applicable to U.S. banks. The Funds will acquire securities issued by
foreign banks and foreign branches of U.S. banks only when the Adviser believes
that the risks associated with such instruments are minimal.
Municipal Obligations
---------------------
Municipal obligations which may be acquired by the Prime Money Market,
Tax-Exempt Money Market, Equity Income, Equity Growth, Limited Maturity Bond,
Total Return Bond, Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and
National Tax-Exempt Bond Funds include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities.
The two principal classifications of municipal obligations consist of
"general obligation" and "revenue" issues. The Funds may also hold "moral
obligation" issues, which are
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<PAGE>
typically issued by special purpose authorities. There are, of course,
variations in the quality of municipal obligations, both within a particular
classification and between classifications, and the yields on municipal
obligations depend upon a variety of factors, including market conditions
generally and the municipal bond market in particular, the financial condition
of the issuer, the size of a particular offering, the maturity of the
obligation, and the rating of the issue.
Municipal obligations acquired by the Funds may include general
obligation notes, tax anticipation notes, bond anticipation notes, revenue
anticipation notes, tax-exempt commercial paper, construction loan notes, and
other forms of short-term tax-exempt loans. Such instruments are issued in
anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues. In addition, the Funds may invest in bonds and other types of
longer-term tax-exempt instruments provided that, in the case of the Prime Money
Market and Tax-Exempt Money Market Funds, they have remaining maturities of 397
days or less at the time of purchase.
Certain types of municipal obligations (private activity bonds) have
been or are issued to obtain funds to provide privately operated housing
facilities, pollution control facilities, convention or trade show facilities,
mass transit, airport, port or parking facilities and certain local facilities
for water supply, gas, electricity or sewage or solid waste disposal. Private
activity bonds are also issued to privately held or publicly owned corporations
in the financing of commercial or industrial facilities. State and local
governments are authorized in most states to issue private activity bonds for
such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable
from the general revenues of the users of such facilities. The Tax-Exempt Money
Market Funds will not invest in such bonds where the payment of principal and
interest are the responsibility of a company (including predecessors) with less
than three years of continuous operation.
The payment of principal and interest on most securities purchased by
a Fund will depend upon the ability of the issuers to meet their obligations.
The District of Columbia, each state, each of their political subdivisions,
agencies, instrumentalities, and authorities and each multi-state agency of
which a state is a member, as well as the Commonwealth of Puerto Rico, Guam and
the Virgin Islands, is a separate "issuer" as that term is used in the
Prospectuses and this Statement of Additional Information. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on, and principal of, its municipal obligations may be
materially adversely affected by litigation or other conditions.
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<PAGE>
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. For example, under federal tax legislation
enacted in 1986, interest on certain private activity bonds must be included in
an investor's federal alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference (see
"Additional Information Concerning Taxes"). Moreover, with respect to Maryland
municipal obligations, the Maryland Tax-Exempt Bond Fund cannot predict what
legislation, if any, may be proposed in the Maryland legislature concerning the
Maryland income tax status of interest on such obligations, or what proposals,
if any, might be enacted. Such proposals, while pending or if enacted, might
materially and adversely affect the availability of municipal obligations
generally, or Maryland municipal obligations specifically, for investment by a
Fund and the liquidity and value of a Fund's portfolio. In such an event, the
Company would reevaluate the investment objectives and policies of such Funds.
Stand-By Commitments
--------------------
The Tax-Exempt Money Market, Equity Income, Equity Growth, Limited
Maturity Bond, Total Return Bond, Maryland Tax-Exempt Bond, Intermediate Tax-
Exempt Bond and National Tax-Exempt Bond Funds may acquire "stand-by
commitments" with respect to municipal obligations held in their portfolios.
Under a stand-by commitment, a dealer or bank agrees to purchase from a Fund, at
the Fund's option, specified municipal obligations at a specified price. Stand-
by commitments may be exercisable by the Fund involved at any time before the
maturity of the underlying municipal obligations, and may be sold, transferred
or assigned only with the instruments involved.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held by the particular Fund will not
exceed 1/2 of 1% of the value of such Fund's total assets calculated immediately
after each stand-by commitment is acquired.
The Funds intend to enter into stand-by commitments only with banks,
brokers or dealers which, in the Adviser's opinion, present minimal credit
risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information. Each
Fund's reliance upon the credit of these banks, brokers and dealers will be
secured by the value of the underlying municipal obligations that are subject to
the commitment.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying municipal obligations. Stand-by
commitments acquired by a Fund would be valued
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<PAGE>
at zero in determining net asset value. Where a Fund paid any consideration
directly or indirectly for a stand-by commitment, its cost would be reflected as
unrealized depreciation for the period during which the commitment was held by
the Fund.
Convertible Securities
----------------------
Convertible securities which may be purchased by the Growth & Income,
Equity Income, Equity Growth, International Equity, Diversified Real Estate and
Total Return Bond Funds entitle the holder to receive interest paid or accrued
on debt or the dividend paid on preferred stock until the securities mature or
are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities in that they
normally provide a stable stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure and therefore
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in large measure upon the degree to
which the convertible security sells above its value as a fixed income security.
In selecting convertible securities, the Adviser (or the Sub-Adviser)
will consider, among other factors, the creditworthiness of the issuers of the
securities; the interest or dividend income generated by the securities; the
potential for capital appreciation of the securities and the underlying common
stocks; the prices of the securities relative to other comparable securities and
to the underlying common stocks; whether the securities are entitled to the
benefits of sinking funds or other protective conditions; diversification of a
Fund's portfolio as to issuers; and the ratings of the securities. Since credit
rating agencies may fail to timely change the credit ratings of securities to
reflect subsequent events, the Adviser (or Sub-Adviser) will consider whether
such issuers will have sufficient cash flow and profits to meet required
principal and interest payments.
Asset-Backed Securities
-----------------------
Asset-backed securities which may be purchased by the Prime Money
Market, Limited Maturity Bond and Total Return Bond Funds represent a
participation in, or are secured by and payable from, a stream of payments
generally consisting of both interest and principal generated by particular
assets, most often a pool of assets similar to one another. Asset-backed
securities are generally issued as pass-through certificates, which represent
undivided fractional ownership interests in the underlying pool of assets, or as
debt instruments, which are also known as collateralized obligations, and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. Payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the entities issuing
the securities.
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<PAGE>
The estimated life of an asset-backed security varies with the
prepayment experience of the underlying debt instruments. The rate of such
prepayments, and hence the life of the asset-backed security, will be primarily
a function of current market interest rates, although other economic and
demographic factors may be involved.
Non-mortgage asset-backed securities involve certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
Mortgage-Related Securities
---------------------------
The Diversified Real Estate, Limited Maturity Bond and Total Return
Bond Funds may invest in 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
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<PAGE>
mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC
may remit the amount due on account of its guarantee of ultimate payment of
principal at any time after default on an underlying mortgage, but in no event
later than one year after it becomes payable.
Although certain mortgage-related securities are guaranteed by a third
party or are otherwise similarly secured as described above, the market value of
the security, which may fluctuate, is not secured. To the extent that a 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.
Lower Quality Debt Securities ("Junk Bonds").
--------------------------------------------
As stated in the Prospectuses, the Growth & Income, Equity Income and
Equity Growth Fund may purchase lower quality debt securities convertible into
common stock and the Total Return Bond Fund may invest up to 10% of its net
assets in lower quality debt securities. Such securities, while generally
offering higher yields than investment grade securities with similar maturities,
involve greater risks, including the possibility of (or actual) default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal.
Issuers of low rated or non-rated securities ("high yield" securities,
commonly known as "junk bonds") may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of lower-rated securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
Lower-rated securities frequently have call or redemption features
which would permit an issuer to repurchase the security from a Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
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<PAGE>
A Fund may have difficulty disposing of certain lower-rated securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market
liquidity may have an adverse impact on market price and a Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of lower-rated
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of lower-rated securities are likely to adversely affect a
Fund's net asset value. In addition, a Fund may incur additional expenses to
the extent it is required to seek recovery upon a default on a portfolio holding
or participate in the restructuring of the obligation.
Brady Bonds
-----------
The Total Return Bond Fund may invest in so-called "Brady Bonds,"
which are securities created through the exchange of existing commercial bank
loans to Latin American public and private entities for new bonds in connection
with debt restructurings under a debt restructuring plan announced by former
U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan"). Brady
Bonds may be collateralized or uncollateralized, are issued in various
currencies (primarily the U.S. dollar) and are currently actively traded in the
over-the-counter secondary market for Latin American debt instruments.
Dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter.
All Mexican Brady Bonds issued to date, except New Money Bonds, have
principal repayments at final maturity fully collateralized by U.S. Treasury
zero coupon bonds (or comparable collateral in other currencies) and interest
coupon payments collateralized on an 18-month rolling-forward basis by funds
held in escrow by an agent for the bondholders. Approximately half of the
Venezuelan Brady Bonds issued to date have principal repayments at final
maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral in other currencies), while slightly more than half have interest
coupon payments collateralized on a 14-month rolling-forward basis by securities
held by the Federal Reserve Bank of New York as collateral agent.
Brady Bonds are often viewed as having three or four valuation
components: the collateralized repayment of principal at final maturity; the
collateralized interest payments; the
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<PAGE>
uncollateralized interest payments; and any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constituting the "residual
risk").
Repurchase Agreements
---------------------
As described in their Prospectuses, each Fund (other than the Tax-
Exempt Money Market Funds) may enter into repurchase agreements. The repurchase
price under repurchase agreements generally is equal to the price paid by a Fund
plus interest negotiated on the basis of current short-term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements will be held by the
Funds' Custodian or registered in the name of the Fund involved on the Federal
Reserve/Treasury book-entry system. The seller under a repurchase agreement
will be required to maintain the value of the securities subject to the
agreement at not less than the repurchase price (including accrued interest).
Default by the seller would, however, expose the Fund to possible loss because
of adverse market action or delays in connection with the disposition of the
underlying obligations. The Adviser (or Sub-Adviser in the case of the
International Equity Fund) will enter into repurchase agreements only with
financial institutions it deems creditworthy, pursuant to guidelines established
by the Board of Directors, and during the term of any repurchase agreement, the
Adviser (or Sub-Adviser) will continue to monitor the creditworthiness of the
seller. Repurchase agreements are considered to be loans by the Funds under the
1940 Act.
Reverse Repurchase Agreements
-----------------------------
Whenever a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account cash or liquid portfolio securities
having a value equal to the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure that such value is maintained.
The Funds would consider entering into reverse repurchase agreements to avoid
otherwise selling securities during unfavorable market conditions to meet
redemptions. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities sold by a Fund may decline below the price of
the securities the Fund is obligated to repurchase. Reverse repurchase
agreements are considered to be borrowings by the Fund under the 1940 Act.
When-Issued Purchases and Forward Commitments
---------------------------------------------
As stated in their Prospectuses, each Fund (other than the Growth &
Income and International Equity Funds) may purchase securities on a "when-
issued" basis and each Fund (other than the Tax-Exempt Money Market (Trust),
Growth & Income and International Equity Funds) may enter into a "forward
commitment" to purchase or sell securities. When a Fund agrees to purchase
securities on a when-issued basis or enters into a forward commitment to
purchase securities, the Custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the Custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such case a Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that a
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<PAGE>
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 a Fund's liquidity and ability to manage its portfolio might be
affected when it sets aside cash or portfolio securities to cover such purchase
commitments, the Funds expect that their commitments to purchase securities on a
when-issued or forward commitment basis will not exceed 25% of the value of
their total assets. In the case of a forward commitment to sell portfolio
securities, the Custodian will hold the portfolio securities themselves in a
segregated account while the commitment is outstanding.
A Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
securities. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund involved
may realize a capital gain or loss.
When a Fund engages in when-issued or forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining a Fund's net asset value
starting on the day the Fund agrees to purchase the securities. A Fund does not
earn interest on the securities it has committed to purchase until they are paid
for and delivered on the settlement date. When a Fund makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in such Fund's assets, and fluctuations in the value of
the underlying securities are not reflected in such Fund's net asset value as
long as the commitment remains in effect.
Other Investment Companies
--------------------------
In accordance with their respective investment objectives and
policies, each Fund (other than the International Equity Fund) may invest in
securities issued by other investment companies within the limits prescribed by
the 1940 Act. Each Fund currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Company as a whole. As a
shareholder of another investment company, a Fund would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that a Fund bears in connection with its own operations.
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<PAGE>
Lending Portfolio Securities
----------------------------
Each Fund except the Tax-Exempt Money Market Funds may lend its
portfolio securities. When a 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 a Fund in connection with such loans
will be invested in short-term money market obligations. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted if a material event affecting the investment occurs.
Loans will be made only to borrowers deemed by the Adviser (or Sub-Adviser in
the case of the International Equity Fund) to be of good standing and only when,
in the Adviser's (or Sub-Adviser's) judgment, the income to be earned from the
loans justifies the attendant risks. While there is no limit on the amount of
securities which the Funds may loan, fees attributable to securities lending
activities are subject to certain limits under the Internal Revenue Code of
1986, as amended.
Foreign Currency Exchange Contracts
-----------------------------------
The Growth & Income, Equity Income, Equity Growth, International
Equity, Limited Maturity Bond and Total Return Bond Funds are authorized to
enter into forward foreign currency exchange contracts. These contracts involve
an obligation to purchase or sell a specified currency at a future date at a
price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow
the Fund involved to establish a rate of exchange for a future point in time. A
Fund may enter into forward foreign currency exchange contracts when deemed
advisable by the Adviser (or Sub-Adviser in the case of the International Equity
Fund) under two circumstances.
First, when entering into a contract for the purchase or sale of a
security, a Fund may enter into a forward foreign currency exchange contract for
the amount of the purchase or sale price to protect against variations in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency between the date the security is purchased or sold and the date on
which payment is made or received. This is sometimes referred to as
"transaction hedging".
Second, when the Adviser (or Sub-Adviser) anticipates that a
particular foreign currency may decline substantially relative to the U.S.
dollar or other leading currencies, in order to reduce risk, a Fund may enter
into a forward contract to sell, for a fixed amount, the amount of foreign
currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency. This is sometimes referred to as
"position hedging". The Funds do not intend to enter into forward contracts for
position hedging purposes on a regular or continuing basis.
None of the Funds will enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate such Fund to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in that currency.
While forward contracts may offer protection from losses
-17-
<PAGE>
resulting from declines in the value of a particular foreign currency, they also
limit potential gains which might result from increases in the value of such
currency. In addition, the Funds will incur costs in connection with forward
foreign currency exchange contracts and conversions of foreign currencies and
U.S. dollars.
A Fund's Custodian will place in a separate account cash or liquid
portfolio securities in an amount equal to the value of such Fund's assets that
could be required to consummate forward contracts entered into under the second
circumstance, as set forth above. For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund.
At the maturity of a forward contract, a Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. If the Fund engages in
an offsetting transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline between the date
the Fund enters into a forward contract for the sale of a foreign currency and
the date it enters into an offsetting contract for the purchase of the foreign
currency, it will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. For a discussion of the federal tax treatment
of forward contracts, see "Additional Information Concerning Taxes - Growth &
Income, Equity Income, Equity Growth, International Equity, Diversified Real
Estate, Limited Maturity Bond and Total Return Bond Funds."
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Options Trading
---------------
Equity Income, Equity Growth, Total Return Bond, Intermediate Tax-
Exempt Bond and National Tax-Exempt Bond Funds. The Equity Income, Equity
Growth, Total Return Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt
Bond Funds may purchase put and call options listed on a national securities
exchange and issued by the Options Clearing Corporation. Such purchases would
be in an amount not exceeding 5% of a Fund's net assets. Such options may
relate to particular securities or to various indices. This is a highly
specialized activity which entails greater than ordinary investment risks.
Regardless of how much the market price of the underlying security or index
increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be
more volatile than the underlying instruments, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying instruments themselves. Put and call options
purchased by the Funds will be valued at the last sale price or, in the absence
of such a price, at the mean between bid and asked prices.
A listed call option for a particular security gives the purchaser of
the option the right to buy from a clearing corporation, and a writer has the
obligation to sell to the clearing corporation, the underlying security at the
stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is in consideration for undertaking the obligations under the option contract.
A listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. In contrast to an option on a particular security, an option on
an index provides the holder with the right to make or receive a cash settlement
upon exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
When a Fund writes a call option on a security, the option is
"covered" if the Fund involved owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or liquid
portfolio securities in such amount are held in a segregated account by its
Custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if the Fund involved maintains
with its Custodian cash or liquid portfolio securities equal to the contract
value. A call option is also covered if the Fund involved holds a call on the
same security or index as the call written where the exercise price of the call
held is (i) equal to or less than the exercise price of the call written, or
(ii) greater than the exercise price of the call written provided the difference
is maintained by the Fund in cash or liquid portfolio securities in a segregated
account with its Custodian. A secured put option written by a Fund means that
the Fund maintains in a segregated account with the Custodian cash or U.S.
Government securities in an amount not less than the exercise price of the
option at all times during the option period.
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<PAGE>
The principal reason for writing call options on a securities
portfolio is the attempt to realize, through the receipt of premiums, a greater
current return than would be realized on the securities alone. In return for
the premium, the covered option writer gives up the opportunity for profit from
a price increase in the underlying security above the exercise price so long as
its obligation as a writer continues, but retains the risk of loss should the
price of the security decline. Unlike a party who owns securities not subject
to an option, the covered option writer has no control over when it may be
required to sell its securities, since it may be assigned an exercise notice at
any time prior to the expiration of its obligation as a writer.
A Fund's obligation to sell a security subject to a covered call
option written by it, or to purchase a security subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund's executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
option containing different terms on such underlying security. The cost of such
a liquidation purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Fund will have incurred a
loss in the transaction. An option position may be closed out only on an
exchange which provides a secondary market for an option of the same series.
There is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered call option writer, unable to effect a
closing purchase transaction, will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise
with the result that the writer in such circumstances will be subject to the
risk of market decline in the underlying security during such period. A Fund
will write an option on a particular security only if the Adviser believes that
a liquid secondary market will exist on an exchange for options of the same
series which will permit the Fund to make a closing purchase transaction in
order to close out its position.
When a Fund writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked-
to-market to reflect the current value of the option written. The current value
of the traded option is the last sale price or, in the absence of a sale, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. Any gain on a
covered call option may be offset by a decline in the market price of the
underlying security during the option period. If a covered call option is
exercised, the Fund involved may deliver the underlying security held by it or
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received
and the Fund will realize a gain or loss. If a secured put option is exercised,
the amount paid by the Fund for the underlying security will be partially offset
by the amount of the premium previously paid to the Fund. Premiums from
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<PAGE>
expired options written by a Fund and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. For example, there are
significant differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, whether traded over-the-counter or on a national
securities exchange may be absent for reasons which include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; the facilities of an exchange or the Options Clearing Corporation may
not at all times be adequate to handle current trading volume; or one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
International Equity Fund. The International Equity Fund may purchase
foreign currency put options on U.S. exchanges or U.S. over-the-counter markets.
A put option gives the Fund, upon payment of a premium, the right to sell a
currency at the exercise price until the expiration of the option and serves to
insure against adverse currency price movements in the underlying portfolio
assets denominated in that currency. In conjunction with the purchase of a put
option, the Fund may write a call option, which gives the purchaser, upon
payment of a premium, the right to purchase from the Fund a currency at the
exercise price until the expiration of the option. Exchange listed options
markets in the United States include seven major currencies, and trading may be
thin and illiquid. The seven major currencies are Australian dollars, British
pounds, Canadian dollars, German marks, French francs, Japanese yen and Swiss
francs.
Rights and Warrants
-------------------
The Equity Income, Equity Growth, International Equity, Diversified
Real Estate and Total Return Bond Funds 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
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<PAGE>
warrants involves the risk that the purchaser could lose the purchase value of
the right or warrant if the right to subscribe to additional shares is not
exercised prior to the warrant's expiration. Also, the purchase of rights and
warrants involves the risk that the effective price paid for the right or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price, such as when there is no
movement in the level of the underlying security. No Fund intends to invest more
than 5% of its net assets in rights and warrants during the current fiscal year.
FUNDAMENTAL LIMITATIONS
- -----------------------
Each Fund is subject to the following fundamental limitations, which
may be changed with respect to a particular Fund only by a vote of the holders
of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous").
No Fund may:
1. Purchase securities of any one issuer (other than securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities)
if, immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in the securities of such issuer, or, with
respect to each Fund other than the International Equity Fund, more than 10% of
the issuer's outstanding voting securities would be owned by the Fund, except
that (i) up to 25% of the value of the total assets of each Fund other than the
Maryland Tax-Exempt Bond Fund may be invested without regard to these
limitations; and (ii) up to 50% of the value of the Maryland Tax-Exempt Bond
Fund's total assets may be invested without regard to these limitations,
provided that no more than 25% of the Maryland Tax-Exempt Bond Fund's total
assets may be invested in the securities of any one issuer. For purposes of
these limitations, a security is considered to be issued by the entity (or
entities) whose assets and revenues back the security. A guarantee of a security
will not be deemed to be a security issued by the guarantor when the value of
all securities issued and guaranteed by the guarantor, and owned by a Fund, does
not exceed 10% of the value of the Fund's total assets.
2. Purchase any securities which would cause 25% or more of the
value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that the Diversified Real Estate 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; (ii) with respect to the Money Market Funds only, obligations
issued by domestic branches of U.S. banks; and (iii) repurchase agreements
secured by any such obligations; (b) wholly-owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents; and (c) utilities
will be classified according to their services (for example, gas, gas
transmission, electric and gas, and electric and telephone each will be
considered a separate industry).
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<PAGE>
3. Borrow money or, with respect to the Non-Money Market Funds,
issue senior securities, except that each Fund may borrow from banks and enter
into reverse repurchase agreements for temporary purposes and then in amounts
not in excess of 10% of the value of its total assets at the time of such
borrowing; or pledge any assets except in connection with any such borrowing and
in amounts not in excess of the lesser of the dollar amounts borrowed or 10% (5%
in the case of the International Equity Fund) of the value of its total assets
at the time of such borrowing. A Fund (other than the Tax-Exempt Money Market
Funds) will not purchase portfolio securities while borrowings (including
reverse repurchase agreements and borrowings from banks) in excess of 5% of such
Fund's total assets are outstanding. The Tax-Exempt Money Market Funds will not
purchase portfolio securities while any borrowings (including reverse repurchase
agreements and borrowings from banks) are outstanding. Securities held by a Non-
Money Market Fund in escrow or separate accounts in connection with the Fund's
investment practices are not deemed to be pledged for purposes of this
limitation.
4. Purchase or sell real estate, except that (a) each Fund may
purchase securities of issuers which deal in real estate; (b) the Tax-Exempt
Money Market, Equity Income, Equity Growth, Limited Maturity Bond, Total Return
Bond, Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National Tax-
Exempt Bond Funds may invest in municipal obligations secured by real estate or
interests therein; (c) the Non-Money Market Funds may purchase securities which
are secured by real estate or interests therein; (d) the Limited Maturity Bond,
Total Return Bond and Diversified Real Estate Funds may invest in mortgage-
related securities, including collateralized mortgage obligations and mortgage-
backed securities which are issued or guaranteed by the United States, its
agencies or its instrumentalities; and (e) the Diversified Real Estate 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 (a) the Tax-Exempt Money Market Funds may
purchase put options on municipal obligations; and (b) the Non-Money Market
Funds may engage in transactions in options on securities, securities indices,
futures contracts and options on futures contracts.
7. Purchase securities of companies for the purpose of exercising
control.
8. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that (a) this investment limitation shall not
apply to transactions in options, futures contracts and related options, if any;
and (b) each Non-Money Market 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 (a) each
Fund may, to the extent
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<PAGE>
appropriate to its investment objective, purchase publicly traded securities of
companies engaging in whole or in part in such activities; and (b) each Non-
Money Market Fund may enter into futures contracts and related options.
10. Make loans, except that (a) each Fund may purchase and hold debt
instruments in accordance with its investment objective and policies; (b) each
Fund except the Tax-Exempt Money Market Funds may enter into repurchase
agreements with respect to portfolio securities; (c) each Fund except the Tax-
Exempt Money Market Funds may lend portfolio securities against collateral
consisting of cash or securities which is consistent with the Fund's permitted
investments and is equal at all times to at least 100% of the value of the
securities loaned; and (d) the Maryland Tax-Exempt Bond, Intermediate Tax-Exempt
Bond and National Tax-Exempt Bond Funds may invest in privately arranged loans
in accordance with their investment objectives and policies.
In addition, no Money Market Fund may:
11. Knowingly invest more than 10% of the value of its net assets in
securities that are illiquid because of restrictions on transferability or other
reasons.
12. Issue senior securities, except that, subject to the percentage
limitations set forth in Investment Limitation No. 3 above, each Fund may borrow
money from banks and enter into reverse repurchase agreements for temporary
purposes and pledge assets in connection with any such borrowing.
As a matter of non-fundamental policy and in accordance with current
regulations of the SEC, the Prime Money Market Fund and each of the Tax-Exempt
Money Market Funds intends to subject its entire investment portfolio, other
than U.S. Government securities, to the 5% limitation described in Fundamental
Limitation No. 1 above. However, in accordance with such regulations, a Fund
may invest more than 5% (but no more than 25%) of its total assets in the
securities of a single issuer for a period of up to three business days,
provided the securities are rated at the time of purchase in the highest rating
category assigned by one or more Rating Agencies or are determined by the
Adviser to be of comparable quality. A Fund may not hold more than one such
investment at any one time.
Although the foregoing investment limitations would permit the Growth
& Income, Diversified Real Estate, Limited Maturity Bond and Maryland Tax-Exempt
Bond Funds to invest in options, futures contracts and related options, as
specified above, such Funds do not currently intend to engage in such
transactions. Prior to engaging in such transactions, such Funds would add
appropriate disclosure concerning the Funds' investment in such instruments to
the relevant Prospectuses and this Statement of Additional Information.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
- ----------------------------------------------
Information on how to purchase and redeem a Fund's shares is included
in the Funds' Prospectuses. Shares of each Fund are sold on a continuous basis
by BISYS, which has
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<PAGE>
agreed to use appropriate efforts to promote the Company and to solicit orders
for the purchase of such shares.
If any portion of the shares to be redeemed represents an investment
made by check, the Funds may delay the payment of the redemption proceeds until
the Transfer Agent is reasonably satisfied that the check has been collected,
which could take up to fifteen days from the purchase date. This procedure does
not apply to shares purchased by money order or wire payment. During the period
prior to the time the shares are redeemed, dividends on such shares will accrue
and be payable.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Funds may
also suspend or postpone the recordation of the transfer of their shares upon
the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses, the
Company may redeem shares involuntarily to reimburse the Funds for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Prospectuses from time to time.
The Company reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of a
Fund's shares by making payment in whole or in part in readily marketable
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing the Fund's net asset value (a "redemption in-
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting the securities into cash. The Company has elected, however,
to be governed by Rule 18f-1 under the 1940 Act as a result of which the Company
is obligated to redeem shares, with respect to any one shareholder during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of the period.
NET ASSET VALUE
- ---------------
All Funds
- ---------
The net asset value per share of a Fund is calculated by dividing the
total value of the assets belonging to the Fund, less the liabilities of the
Fund, by the number of outstanding shares of the Fund. "Assets belonging to" a
Fund consist of the consideration received upon the issuance of shares of the
particular Fund together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments,
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<PAGE>
any funds or payments derived from any reinvestment of such proceeds, and a
portion of any general assets of the Company not belonging to a particular
investment portfolio. Assets belonging to a particular Fund are reduced by the
direct liabilities of that Fund and by a share of the general liabilities of the
Company allocated daily in proportion to the relative net asset values of all of
the Funds at the time of allocation. Subject to the provisions of the Company's
Articles of Incorporation, determinations by the Board of Directors as to the
direct and allocable liabilities, and the allocable portion of any general
assets, with respect to a particular Fund are conclusive.
Money Market Funds - Use of Amortized Cost Method
- -------------------------------------------------
The Company uses the amortized cost method of valuation to value each
Money Market Fund's portfolio securities. Pursuant to this method, an
instrument is initially valued at cost and, thereafter, a constant amortization
to maturity of any discount or premium is assumed, regardless of the impact of
fluctuating interest rates on the market value of the instrument. This method
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price a Money Market Fund would receive if it sold the
instrument. The market value of portfolio securities held by a Money Market
Fund can be expected to vary inversely with changes in prevailing interest
rates.
In connection with its use of amortized cost valuation, the Company
limits the dollar-weighted average maturity of each Money Market Fund's
portfolio to not more than 90 days and does not purchase any instrument with a
remaining maturity of more than 397 days (with certain exceptions). The Board
of Directors has also established procedures that are intended to stabilize the
net asset value per share of each Money Market Fund for purposes of sales and
redemptions at $1.00. These procedures include the determination, at such
intervals as the Directors deem appropriate, of the extent, if any, to which the
net asset value per share of each Money Market Fund, calculated by using
available market quotations, deviates from $1.00 per share. In the event such
deviation exceeds 1/2 of 1%, the Board will promptly consider what action, if
any, should be initiated. If the Board believes that the extent of any
deviation from a $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing investors, it will take such
steps as it considers appropriate to eliminate or reduce to the extent
reasonably practicable any such dilution or unfair results. These steps may
include selling portfolio instruments prior to maturity; shortening the average
portfolio maturity; withholding or reducing dividends; redeeming shares in kind;
reducing the number of outstanding shares without monetary consideration; or
utilizing a net asset value per share determined by using available market
quotations.
Non-Money Market Funds
- ----------------------
As stated in their Prospectuses, the Growth & Income, Equity Income,
Equity Growth, International Equity and Diversified Real Estate Funds'
investments are valued at market value or, in the absence of a market value with
respect to any portfolio securities, at fair value as determined by or under the
direction of the Company's Board of Directors. A security that is primarily
traded on a domestic securities exchange (including securities traded through
the
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<PAGE>
National Market System) is valued at the last sale price on that exchange
or, if there were no sales during the day, at the current quoted bid price.
Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the closing values of such securities on their respective
exchanges, provided that if such securities are not traded on the valuation
date, they will be valued at the preceding closing values and provided further,
that when an occurrence subsequent to the time of valuation is likely to have
changed the value, then the fair value of those securities will be determined
through consideration of other factors by or under the direction of the
Company's Board of Directors. Over-the-counter securities and securities listed
or traded on foreign exchanges with operations similar to the U.S. over-the-
counter market are valued at the mean of the most recent available quoted bid
and asked prices in the over-the-counter market.
As stated in their Prospectuses, the Limited Maturity Bond, Total
Return Bond, Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National
Tax-Exempt Bond Funds' investments are valued at market value or, in the absence
of a market value with respect to any portfolio securities, at fair value as
determined by or under the direction of the Company's Board of Directors.
Portfolio securities for which market quotations are readily available (other
than securities with remaining maturities of 60 days or less) are valued at the
mean of the most recent bid and asked prices.
For each Non-Money Market Fund, market or fair value may be determined
on the basis of valuations provided by one or more recognized pricing services
approved by the Board of Directors, which may rely on matrix pricing systems,
electronic data processing techniques, and/or quoted bid and asked prices
provided by investment dealers. Short-term investments that mature in 60 days
or less are valued at amortized cost unless the Board of Directors determines
that this does not constitute fair value.
ADDITIONAL INFORMATION CONCERNING TAXES
- ---------------------------------------
The following summarizes certain additional considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectuses are not intended as a substitute for careful tax planning.
Investors are advised to consult their tax advisers with specific reference to
their own tax situations.
Tax-Exempt Money Market, Tax-Exempt Money Market (Trust), Maryland Tax-Exempt
- -----------------------------------------------------------------------------
Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds
- ---------------------------------------------------------------------
For purposes of this discussion regarding additional information
concerning taxes, the Tax-Exempt Money Market, Tax-Exempt Money Market (Trust),
Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt
Bond Funds may be collectively referred to as the "Tax-Exempt Funds."
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<PAGE>
As described above and in their Prospectuses, the Tax-Exempt Funds are
designed to provide investors with income exempt from regular federal income tax
and, with respect to the Maryland Tax-Exempt Bond Fund, Maryland state and local
income tax. These Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation. The
Tax-Exempt Money Market Funds are not designed for investors seeking maximum
tax-exempt income irrespective of fluctuations in principal. Shares of the
Funds may not be suitable for tax-exempt institutions, or for retirement plans
qualified under Section 401 of the Internal Revenue Code of 1986, as amended
(the "Code"), H.R. 10 plans and individual retirement accounts since such plans
and accounts are generally tax-exempt and, therefore, not only would not gain
any additional benefit from the Funds' dividends being tax-exempt, but such
dividends would be ultimately taxable to the beneficiaries when distributed to
them. In addition, the Funds may not be appropriate investments for entities
which are "substantial users" of facilities financed by private activity bonds
or "related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities or who occupies more
than 5% of the usable area of such facilities or for whom such facilities or a
part thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
The percentage of total dividends paid by a Tax-Exempt Fund with
respect to any taxable year which qualify as federal exempt-interest dividends
will be the same for all shareholders receiving dividends for such year. In
order for a Tax-Exempt Fund to pay exempt-interest dividends for any taxable
year, at the close of each taxable quarter at least 50% of the aggregate value
of such Fund's portfolio must consist of exempt-interest obligations. In
addition, each Tax-Exempt Fund must distribute an amount equal to at least the
sum of 90% of its net exempt-interest income, if any, and 90% of its investment
company taxable income, if any, with respect to each taxable year. After the
close of the taxable year, each Tax-Exempt Fund will notify shareholders of the
portion of the dividends paid by the Fund which constitutes an exempt-interest
dividend with respect to such taxable year. However, the aggregate amount of
dividends so designated cannot exceed the excess of the amount of interest
exempt from tax under Section 103 of the Code received by the Fund for the
taxable year over any amounts disallowed as deductions under Sections 265 and
171(a)(2) of the Code.
Interest on indebtedness incurred by a shareholder to purchase or
carry shares of a Tax-Exempt Fund generally is not deductible for federal income
tax purposes. If a shareholder holds shares of a Tax-Exempt Fund for six months
or less, any loss on the sale of those shares will be disallowed to the extent
of the amount of exempt-interest dividends received with respect to the shares.
The Treasury Department, however, is authorized to issue regulations reducing
the six-month holding requirement to a period of not less than the greater of 31
days or the period between regular dividend distributions where the investment
company regularly distributes at least 90% of its net tax-exempt interest. No
such regulations had been issued as of the date of this Statement of Additional
Information.
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<PAGE>
Income itself exempt from federal income taxation will be considered
in addition to adjusted gross income when determining whether Social Security
payments received by a shareholder are subject to federal income taxation.
Each Tax-Exempt Fund intends to distribute to shareholders any taxable
income earned by it, which will be taxable to shareholders as ordinary income
(whether paid in cash or additional shares).
Growth & Income, Equity Income, Equity Growth, International Equity, Limited
- ----------------------------------------------------------------------------
Maturity Bond and Total Return Bond Funds
- -----------------------------------------
With respect to the Growth & Income, Equity Income, Equity Growth,
International Equity, Limited Maturity Bond and Total Return Bond Funds, some
investments may be subject to special rules which govern the federal income tax
treatment of certain transactions denominated in terms of a currency other than
the U.S. dollar or determined by reference to the value of one or more
currencies other than the U.S. dollar. The types of transactions covered by the
special rules include the following: (1) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, preferred stock); (2) the accruing of certain
trade receivables and payables; and (3) the entering into or acquisition of any
forward contract, futures contract, option and similar financial instrument, if
such instrument is not subject to the mark-to-market rules under the Code. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules.
With respect to transactions covered by the special rules, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A Fund
may elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts that are capital assets in the hands
of the Fund and which are not part of a straddle ("Capital Asset Election").
The Treasury Department has issued regulations under which certain transactions
with respect to which a Fund has not made the Capital Asset Election and that
are part of a "section 988 hedging transaction" (as defined in the Code and
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. It is anticipated that some of the non-U.S. dollar-denominated
investments that the Funds may make (such as non-U.S. dollar-denominated debt
securities and obligations and certain preferred stocks) and some of the foreign
currency contracts the Funds may enter into will be subject to the special
currency rules described above. Gain or loss attributable to the foreign
currency component of transactions engaged in by a Fund which are not subject to
the special currency rules (such as foreign equity investments other than
certain preferred stocks) will be treated as capital gain or loss and will not
be segregated from the gain or loss on the underlying transaction.
In addition, certain foreign currency contracts held by a Fund at the
close of such Fund's taxable year will be treated for federal income tax
purposes as sold for their full market value on the last business day of such
year, a process known as "mark-to-market." If a Fund
-29-
<PAGE>
makes the Capital Asset Election with respect to such contracts, 40% of any gain
or loss resulting from such constructive sale will be treated as short-term
capital gain or loss and 60% of such gain or loss will be treated as long-term
capital gain or loss without regard to the length of time the Fund holds the
contract (the "40-60 rule"). Otherwise, such gain or loss will be ordinary in
nature. The amount of any gain or loss actually realized by the Fund in a
subsequent sale or other disposition of those contracts will be adjusted to
reflect any gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale of the contracts. To receive such federal income
tax treatment, a foreign currency contract must meet the following conditions:
(1) the contract must require delivery of, or the settlement value of the
contract must depend on the value of, a foreign currency of a type in which
regulated futures contracts are traded; (2) the contract must be entered into at
arm's length at a price determined by reference to the price in the interbank
market; and (3) the contract must be traded in the interbank market. The
Treasury Department has broad authority to issue regulations under these
provisions respecting foreign currency contracts. As of the date of this
Statement of Additional Information, the Treasury has not issued any such
regulations. Forward foreign currency contracts may also result in the creation
of one or more straddles for federal income tax purposes, in which case certain
loss deferral, short sales, and wash sales rules and requirements to capitalize
interest and carrying charges may apply.
Diversified Real Estate Fund
- ----------------------------
The Diversified Real Estate Fund may invest in real estate investment
trusts ("REITs") that hold residual interests in real estate mortgage investment
conduits ("REMICs"). Under Treasury regulations that have not yet been issued,
but may apply retroactively, a portion of the Fund's income from a REIT that is
attributable to the REIT's residual interest in a REMIC (referred to in the Code
as an "excess inclusion") will be subject to federal income tax in all events.
These regulations are also expected to provide that excess inclusion income of a
regulated investment company, such as the Fund, will be allocated to
shareholders of the regulated investment company in proportion to the dividends
received by such shareholders, with the same consequences as if the shareholders
held the related REMIC residual interest directly. In general, excess inclusion
income allocated to shareholders (i) cannot be offset by net operating losses
(subject to a limited exception for certain thrift institutions), (ii) will
constitute unrelated business taxable income to entities (including a qualified
pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or
other tax-exempt entity) subject to tax on unrelated business income, thereby
potentially requiring such an entity that is allocated excess inclusion income,
and otherwise might not be required to file a tax return, to file a tax return
and pay tax on such income, and (iii) in the case of a foreign shareholder, will
not qualify for any reduction in U.S. federal withholding tax. In addition, if
at any time during any taxable year a "disqualified organization" (as defined in
the Code) is a record holder of a share in a regulated investment company, then
the regulated investment company will be subject to a tax equal to that portion
of its excess inclusion income for the taxable year that is allocable to the
disqualified 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.
-30-
<PAGE>
All Funds
- ---------
Net realized long-term capital gains, if any, will be distributed to
shareholders at least annually. (Generally, however, the Money Market Funds do
not expect to realize long-term capital gains.) The Funds will generally have
no tax liability with respect to such gains and the distributions (whether paid
in cash or additional shares) will be taxable to shareholders as long-term
capital gains, regardless of how long a shareholder has held Fund shares. Such
distributions will be designated as capital gain dividends in a written notice
mailed by the Company to shareholders not later than 60 days after the close of
each Fund'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 and short-term capital gains of individuals is taxable
at a maximum nominal rate of 39.6%, but because of limitations on itemized
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. The
maximum tax rate for long-term capital gain of individuals is 20%. For
corporations, 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 distribute with respect to each calendar year at least
98% of their ordinary taxable income and capital gain net income (excess of
capital gains over capital losses) for the one-year period ending on October 31
of such calendar year. The balance of such income must be distributed during
the next calendar year. Each Fund intends to make sufficient distributions or
deemed distributions of any ordinary taxable income and any capital gain net
income to avoid liability for this excise tax.
Each Fund is treated as a separate entity under the Code. During the
most recent taxable year, each Fund qualified as a "regulated investment
company." Although each Fund expects to qualify as a regulated investment
company in subsequent years and to be relieved of all or substantially all
federal income taxes, and in the case of the Maryland Tax-Exempt Bond Fund,
Maryland state and local income taxes, depending upon the extent of the
Company's activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, the Funds may be subject
to the tax laws of such states or localities. In addition, in those states and
localities which have income tax laws, the treatment of the Funds and their
shareholders under such laws may differ from their treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes.
If for any taxable year a Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
without any deduction for distributions to its shareholders. In such event,
dividend distributions (whether or not derived from interest on municipal
obligations in the case of the Tax-Exempt Funds) would be taxable as ordinary
income
-31-
<PAGE>
shareholders to the extent of the Fund's current and accumulated earnings and
profits, and would be eligible for the dividends received deduction allowed to
corporations under the Code.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to backup withholding when required to do so or that they
are "exempt recipients."
MANAGEMENT OF THE COMPANY
- -------------------------
Directors and Officers
- ----------------------
The Directors and officers of the Company, their addresses, principal
occupations during the past five years, and other affiliations are as follows
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ---------------- ------------- ----------------------
<S> <C> <C>
LESLIE B. DISHAROON* Chairman of the Retired; Director, Baltimore Gas &
11321 John Carroll Road Board and President Electric Company; Director, Travelers
Owings Mills, MD 21117 Inc. (diversified financial
Age: 65 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 Chairman
26 Whitfield Road Treasurer of the law firm of Piper & Marbury,
Baltimore, MD 21201 Baltimore, Maryland until 1995.
Age: 65
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ---------------- ----------- ----------------------
<S> <C> <C>
EDWARD D. MILLER Director Dean/Chief Executive Officer, Johns
Johns Hopkins Medicine Hopkins Medicine, January 1997 to
720 Rutland Street date; Interim Dean, Johns Hopkins
Baltimore, MD 21205-2196 Medicine, March 1996 to January 1997;
Age: 55 Chairman, Department of
Anesthesiology and Critical Care
Medicine, Johns Hopkins University,
July 1994 to date; Chairman,
Department of Anesthesiology,
Columbia Presbyterian Hospital, March
1993 to June 1994.
JOHN R. MURPHY Director Vice Chairman, National Geographic
3115 Blendon Road Society, March 1998 to date;
Owings Mills, MD 21117 President and Chief Executive
Age: 64 Officer, National Geographic Society
May 1996 to March 1998; Director,
Provant, Inc.; Director, Omnicom
Group, Inc. (holding company -
advertising); Director, Monarch
Avalon Inc. (games, graphic arts,
envelope manufacturing) until 1994.
GEORGE R. PACKARD, III Director President, U.S. - Japan Foundation,
4425 Garfield Street, N.W. July 1998 to date; Visiting
Washington, DC 20007 President, International University
Age: 66 of Japan, 1994 to date; Former Dean,
School of Advanced International
Studies at The Johns Hopkins
University; Director, Offitbank
(private bank).
W. BRUCE McCONNEL, III Secretary Partner of the law firm of
1345 Chestnut Street Drinker Biddle & Reath LLP,
Philadelphia, PA 19107-3496 Philadelphia, Pennsylvania.
Age: 54
</TABLE>
___________________
* Messrs. Disharoon and Miller are considered to be "interested persons" of
the Company as defined in the 1940 Act.
_________________________
Effective June 1, 1998, each Director of the Company receives an
annual fee of $9,500 plus $2,000 for each Board meeting attended and
reimbursement for expenses incurred as
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<PAGE>
a Director. Additionally, the Chairman of the Board and President of the Company
receives an additional annual fee of $7,500 for his services in such capacities.
Prior to June 1, 1998, each Director received an annual fee of $3,500 plus
$1,625 for each Board meeting attended, as well as reimbursement of expenses
incurred as a Director. For the fiscal year ended May 31, 1998, the Company paid
or accrued for the account of its Directors as a group, for services in all
capacities, a total of $45,125. Drinker Biddle & Reath LLP, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Company. As of the
date of this Statement of Additional Information, the Directors and officers of
the Company, as a group, owned less than 1% of the outstanding shares of each
Fund.
The following chart provides certain information about the fees
received by the Company's Directors for their services as members of the Board
of Directors and as officers of the Company for the fiscal year ended May 31,
1998:
<TABLE>
<CAPTION>
========================================================================================
PENSION OR
RETIREMENT
BENEFITS TOTAL COMPENSATION
AGGREGATE ACCRUED AS FROM THE COMPANY AND
COMPENSATION PART OF FUND COMPLEX*
NAME OF FROM THE COMPANY PAID TO
PERSON/POSITION COMPANY EXPENSES DIRECTORS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Leslie B. Disharoon $10,000 N/A $10,000
Chairman of the Board of
Directors and President
- ----------------------------------------------------------------------------------------
Decatur H. Miller $ 8,375 N/A $ 8,375
Director and Treasurer
- ----------------------------------------------------------------------------------------
John R. Murphy $10,000 N/A $10,000
Director
- ----------------------------------------------------------------------------------------
George R. Packard, III $ 8,375 N/A $ 8,375
Director
- ----------------------------------------------------------------------------------------
J. Stevenson Peck** $ 8,375 N/A $ 8,375
Director
========================================================================================
</TABLE>
* The "Fund Complex" consists solely of the Company.
** Mr. Peck resigned as a Director of the Company on March 2, 1998.
Advisory and Sub-Advisory Services
- ----------------------------------
Mercantile-Safe Deposit and Trust Company (the "Adviser" or
"Mercantile") serves as investment adviser to the Funds pursuant to two Advisory
Agreements, one with respect to the Tax-Exempt Money Market Fund (Trust) dated
July 21, 1989, and one with respect to the Prime Money Market, Government Money
Market, Tax-Exempt Money Market, Growth
-34-
<PAGE>
& Income, International Equity, Limited Maturity Bond, Maryland Tax-Exempt Bond,
Diversified Real Estate, Equity Income, Equity Growth, Total Return Bond,
Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds dated July 24,
1998. BlackRock International Ltd. (the "Sub-Adviser" or "BlackRock") provides
sub-advisory services with respect to the International Equity Fund pursuant to
a Sub-Advisory Agreement dated March 19, 1996. Each of the Adviser and Sub-
Adviser has agreed to pay all expenses incurred by it in connection with its
activities. For advisory services provided by it, the Adviser is entitled to
receive a fee from each Fund except the Tax-Exempt Money Market Fund (Trust),
computed daily and payable monthly, based on the average net assets of each of
the Funds. For sub-advisory services provided by it, the Sub-Adviser is entitled
to receive a fee from the Adviser based on the International Equity Fund's
average daily net assets. (See "Management of the Company -- Expenses" in the
Prospectuses relating to those Funds for the fee schedule.) The Adviser does not
receive a fee for advisory services provided with respect to the Tax-Exempt
Money Market Fund (Trust).
For the fiscal ears ended May 31, 1998, May 31, 1997 and May 31,
1996, (i) the Company paid advisory fees, net of waivers, of $962,316, $858,617
and $861,899, respectively, with respect to the Prime Money Market Fund;
$825,313, $697,746 and $685,707, respectively, with respect to the Government
Money Market Fund; and $198,496, $143,084 and $155,912, respectively, with
respect to the Tax-Exempt Money Market Fund; and (ii) the Adviser voluntarily
waived fees of $40,097, $35,776 and $35,912, respectively, with respect to the
Prime Money Market Fund; $71,766, $60,674 and $59,626, respectively, with
respect to the Government Money Market Fund; and $17,260, $12,442 and $13,558,
respectively, with respect to the Tax-Exempt Money Market Fund.
For the fiscal years ended May 31, 1998, May 31, 1997 and May 31,
1996, (i) the Company paid advisory fees, net of waivers, of $767,215, $541,891
and $441,361, respectively, with respect to the Growth & Income Fund; $610,879,
$571,056 and $535,892, respectively, with respect to the International Equity
Fund; $63,788, $93,699 and $108,093, respectively, with respect to the Limited
Maturity Bond Fund; and $6,676, $3,693 and $17,211, respectively, with respect
to the Maryland Tax-Exempt Bond Fund; and (ii) the Adviser voluntarily waived
fees of $297,277, $175,151 and $159,038, respectively, with respect to the
Growth & Income Fund; $50,027, $44,785 and $49,092, respectively, with respect
to the International Equity Fund; $88,067, $60,993 and $43,278, respectively,
with respect to the Limited Maturity Bond Fund; and $44,200, $41,084 and
$40,159, respectively, with respect to the Maryland Tax-Exempt Bond Fund.
For the fiscal period August 1, 1997 (commencement of operations)
through May 31, 1998 (i) the Company paid advisory fees, net of waivers, of $0
with respect to the Diversified Real Estate Fund; and (ii) the Adviser
voluntarily waived fees of $39,899 with respect to the Diversified Real Estate
Fund.
For the fiscal period March 1, 1998 (commencement of operations)
through May 31, 1998, (i) the Company paid advisory fees, net of waivers, of
$372,016 with respect to the Equity Income Fund; $27,570 with respect to the
Equity Growth Fund; $50,019 with respect
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<PAGE>
to the Total Return Bond Fund; $48,852 with respect to the Intermediate Tax-
Exempt Bond Fund; and $91,231 with respect to the National Tax-Exempt Bond Fund;
and (ii) the Adviser voluntarily waived fees of $129,579 with respect to the
Equity Income Fund; $26,666 with respect to the Equity Growth Fund; $38,983 with
respect to the Total Return Bond Fund; $73,932 with respect to the Intermediate
Tax-Exempt Bond Fund; and $130,803 with respect to the National Tax-Exempt Bond
Fund.
For the fiscal years ended May 31, 1998, May 31, 1997 and May 31,
1996, (i) the Adviser paid the Sub-Adviser (including the predecessor sub-
adviser for periods prior to March 19, 1996) sub-advisory fees, net of waivers,
of $343,620, $321,217 and $312,682, respectively, and (ii) the Sub-Adviser
(including the predecessor sub-adviser for periods prior to March 19, 1996)
waived sub-advisory fees of $28,140, $25,193 and $16,372, respectively.
Under the Advisory Agreements, the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Company in
connection with the performance of such Agreements, and the Company has agreed
to indemnify the Adviser against any claims or other liabilities arising out of
any such error of judgment or mistake or loss. The Adviser shall remain
liable, however, for any loss resulting from willful misfeasance, bad faith, or
negligence (gross negligence with respect to the Advisory Agreement for the Tax-
Exempt Money Market Fund (Trust)) on the part of the Adviser in the performance
of its duties or from its reckless disregard of its obligations and duties under
the Advisory Agreements.
Unless sooner terminated, the Advisory and Sub-Advisory Agreements
will continue in effect through July 20, 1999 (July 31, 1999 with respect to the
Advisory Agreement for the Prime Money Market, Government Money Market, Tax-
Exempt Money Market, Growth & Income, International Equity, Limited Maturity
Bond, Maryland Tax-Exempt Bond, Diversified Real Estate, Equity Income, Equity
Growth, Total Return Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt
Bond Funds). Each Advisory or Sub-Advisory Agreement will continue from year to
year after its anticipated termination date if such continuance is approved at
least annually by the Company's Board of Directors or by the affirmative vote of
a majority of the outstanding shares of each Fund, provided that in either event
such Agreement's continuance also is approved by a majority of the Company's
Directors who are not parties to such Agreement, or "interested persons" (as
defined in the 1940 Act) of any such party, by votes cast in person at a meeting
called for the purpose of voting on such approval. Each Advisory or Sub-
Advisory Agreement may be terminated by the Company or the Adviser (or the Sub-
Adviser in the case of the Sub-Advisory Agreement) on 60 days written notice,
and will terminate immediately in the event of its assignment. Upon termination
of the Advisory Agreements, the Company would be required, at the request of the
Adviser, to change its name to a name not including "M.S.D. & T." or
"Mercantile-Safe Deposit and Trust Company."
Administrator
- -------------
Mercantile serves as the Company's administrator pursuant to an
Administration Agreement dated as of May 28, 1993 (the "Administration
Agreement"). Mercantile has agreed
-36-
<PAGE>
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.
Custodians and Transfer Agent
- -----------------------------
The Fifth Third Bank ("Fifth Third") serves as custodian of the assets
of each Fund except the International Equity Fund, and State Street Bank and
Trust Company ("State Street") serves as custodian of the assets of the
International Equity Fund, pursuant to separate Custody Agreements, under which
each custodian has agreed, among other things, to (i) maintain a separate
account in the name of each Fund; (ii) hold and disburse portfolio securities on
account of each Fund; (iii) collect and receive all income and other payments
and distributions on account of each Fund's portfolio investments; and (iv) make
periodic reports to the Company concerning each Fund's operations. Each
Custodian is authorized to select one or more banks or trust companies to serve
as sub-custodian on behalf of the Funds, provided that the Custodian shall
remain liable for the performance of all of its duties under its respective
Custody Agreement and will hold the Fund or Funds harmless from losses caused by
the negligence or willful misconduct of any bank or trust company serving as
sub-custodian.
State Street also serves as transfer agent and dividend disbursing
agent for the Funds. Under its Transfer Agency and Service Agreement, State
Street has agreed, among other things, to (i) receive purchase orders and
redemption requests for shares of the Funds; (ii) issue and redeem shares of the
Funds; (iii) effect transfers of shares of the Funds; (iv) prepare and transmit
payments for dividends and distributions declared by the Funds; (v) maintain
records of account for the Funds and shareholders and advise each as to the
foregoing; (vi) record the issuance of shares of each Fund and maintain a record
of and provide the Fund on a regular basis with the total number of shares of
each Fund which are authorized, issued and outstanding; (vii) perform the
customary services of a transfer agent, dividend disbursing agent and custodian
of certain retirement plans and, as relevant, agent in connection with
accumulation, open account or similar plans; and (viii) provide a system
enabling the Funds to monitor the total number of shares sold in each state.
Distributor and Fund Accountant
- -------------------------------
Shares of the Funds are distributed continuously and without a sales
load by BISYS (the "Distributor"). The Distributor has agreed to use
appropriate efforts to solicit orders for the purchase of shares. No
compensation is payable by the Funds to the Distributor for distribution
services provided.
-37-
<PAGE>
Unless otherwise terminated, the Distribution Agreement will remain in
effect until July 20, 1999, and thereafter will continue automatically with
respect to each Fund from year to year if approved at least annually by the
Company's Board of Directors, or by the vote of a majority of the outstanding
voting securities of the Fund, and by the vote of a majority of the Directors of
the Company who are not parties to the Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement will terminate in the event of its
assignment, as defined in the 1940 Act.
BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an affiliate of the
Distributor, provides fund accounting services for the Company, including the
computation of each Fund's net asset value, net income and realized capital
gains, if any.
Compensation of Administrator, Custodians, Transfer Agent and Fund Accountant
- -----------------------------------------------------------------------------
Mercantile, the Custodians and BISYS Ohio are entitled to receive fees
based on the aggregate average daily net assets per Fund of the Company. As
compensation for transfer agency services provided, State Street is entitled to
receive an annual fee based on the number of Funds of the Company, plus a
transaction charge for certain transactions and out-of-pocket expenses, and
additional fees as compensation for sub-accounting services provided.
For the fiscal years ended May 31, 1998, May 31, 1997 and May 31,
1996, (i) the Company paid fees, net of waivers, of $1,186,121, $842,744 and
$885,838, respectively, to Mercantile for administrative services provided to
the Funds; and (ii) Mercantile voluntarily waived fees of $573,843, $435,208 and
$370,441, respectively.
Banking Laws
- ------------
The Glass-Steagall Act, among other things, prohibits banks from
engaging to any extent in the business of underwriting securities, although
national and state-chartered banks generally are permitted to purchase and sell
securities upon the order and for the account of their customers. In 1971, the
United States Supreme Court held in Investment Company Institute v. Camp that
------------------------------------
the Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
--------------------------------------------------------------
Company Institute that the Board did not exceed its authority under the Holding
- -----------------
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
-38-
<PAGE>
The Adviser believes, with respect to its activities as required by
the Advisory and Administration Agreements and as contemplated by the
Prospectuses and this Statement of Additional Information, and the Sub-Adviser
believe, with respect to its activities as required by the Sub-Advisory
Agreement and as contemplated by the Prospectus for the International Equity
Fund and this Statement of Additional Information, that, if the question were
properly presented, a court should hold that the Adviser or Sub-Adviser, as the
case may be, may each perform such activities without violation of the Glass-
Steagall Act or other applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether banks may perform
services comparable to those performed by the Adviser and Sub-Adviser and that
future changes in either federal or state statutes and regulations relating to
permissible activities of banks or trust companies and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
the Adviser and Sub-Adviser from continuing to perform such services for the
Funds. If the Adviser or Sub-Adviser were prohibited from continuing to perform
advisory/administration and sub-advisory services for the Funds, it is expected
that the Board of Directors would recommend that the Funds affected enter into
new agreements or would consider the possible termination of such Funds. Any
new advisory or sub-advisory agreement would be subject to shareholder approval.
If current restrictions under the Glass-Steagall Act preventing a bank
from sponsoring, organizing, controlling, or distributing shares of an
investment company were relaxed, the Funds expect that the Adviser, or an
affiliate of the Adviser, would consider the possibility of offering to perform
additional services for the Funds. Legislation modifying such restrictions has
been introduced in past sessions of Congress. It is not possible, of course, to
predict whether or in what form such legislation might be enacted or the terms
upon which the Adviser or such an affiliate, might offer to provide such
services.
Expenses
- --------
Except as noted below, the Adviser bears all expenses in connection
with the performance of its advisory and administrative services and the Sub-
Adviser bears all expenses in connection with the performance of its sub-
advisory services. The Company bears its owns expenses incurred in its
operations, including: organizational costs; taxes; interest; fees (including
fees paid to its directors and officers); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; advisory fees;
administration fees and expenses; charges of the custodians, transfer agent and
fund accountant; certain insurance premiums; 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.
-39-
<PAGE>
INDEPENDENT ACCOUNTANTS
- -----------------------
PricewaterhouseCoopers LLP, 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103, serve as independent accountants for the Company. The
financial statements which are incorporated by reference into this Statement of
Additional Information have been audited by PricewaterhouseCoopers LLP, whose
report thereon is also incorporated by reference into this Statement of
Additional Information, and have been incorporated by reference herein in
reliance on the report of PricewaterhouseCoopers LLP given upon their authority
as experts in accounting and auditing.
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.
ADDITIONAL INFORMATION CONCERNING SHARES
- ----------------------------------------
The Company was incorporated in Maryland on March 7, 1989. The
Company's Articles of Incorporation authorize the Board of Directors to issue up
to 10,000,000,000 full and fractional shares of capital stock, $.001 par value
per share. The Company's Articles of Incorporation further authorize the Board
of Directors to classify and reclassify any unissued shares into any number of
additional classes of shares. Of these authorized shares, 700,000,000 shares
are classified as Class A Common Stock representing shares of the Prime Money
Market Fund, 700,000,000 shares are classified as Class B Common Stock
representing shares of the Government Money Market Fund, 600,000,000 shares are
classified as Class C Common Stock representing shares of the Tax-Exempt Money
Market Fund, 600,000,000 shares are classified as Class D Common Stock
representing shares of the Tax-Exempt Money Market Fund (Trust), 500,000,000
shares are classified as Class E Common Stock representing shares of the Growth
& Income Fund, 500,000,000 shares are classified as Class F Common Stock
representing shares of the Limited Maturity Bond Fund, 400,000,000 shares are
classified as Class G Common Stock representing shares of the Maryland Tax-
Exempt Bond Fund, 400,000,000 shares are classified as Class H Common Stock
representing shares of the International Equity Fund, 400,000,000 shares are
classified as Class I Common Stock representing shares of the International Bond
Portfolio, 400,000,000 shares are classified as Class J Common Stock
representing shares of the Diversified Real Estate Fund, 400,000,000 shares are
classified as Class K Common Stock representing shares of the National Tax-
Exempt Bond Fund, 400,000,000 shares are classified as Class L Common Stock
representing shares of the Total Return Bond Fund, 400,000,000 shares are
classified as Class M Common Stock representing shares of the Equity Growth
Fund, 400,000,000 shares are classified as Class N Common Stock representing
shares of the Equity Income Fund and 400,000,000 shares are classified as Class
O Common Stock representing shares of the Intermediate Tax-Exempt Bond Fund. As
of the date of this Statement of Additional Information, the International Bond
Fund had not commenced operations.
-40-
<PAGE>
In the event of a liquidation or dissolution of the Company or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund, and a
proportionate distribution, based upon the relative net asset values of the
Company's respective investment portfolios, of any general assets not belonging
to any particular portfolio which are available for distribution. Shareholders
of a Fund are entitled to participate equally in the net distributable assets of
the particular Fund involved on liquidation, based on the number of shares of
the Fund that are held by each shareholder.
Shareholders of the Funds, as well as those of any other investment
portfolio offered by the Company in the future, will vote in the aggregate and
not by portfolio or class on all matters, except as otherwise required by law or
when the Board of Directors determines that the matter to be voted upon affects
only the interests of the shareholders of a particular portfolio or class. Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Company shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each Fund
affected by the matter. A Fund is affected by a matter unless it is clear that
the interests of each Fund in the matter are substantially identical or that the
matter does not affect any interest of the Fund. Under the Rule, the approval
of an investment advisory agreement or any change in a fundamental investment
objective or investment policy would be effectively acted upon with respect to a
Fund only if approved by a majority of the outstanding shares of such Fund.
However, the Rule also provides that the ratification of the appointment of
independent public accountants, the approval of principal underwriting
contracts, and the election of directors may be effectively acted upon by
shareholders of all Funds voting together in the aggregate without regard to
particular Funds.
Notwithstanding any provision of Maryland law requiring a greater vote
of shares of the Company's Common Stock (or of any class voting as a class) in
connection with any corporate action, unless otherwise provided by law (for
example by Rule 18f-2 discussed above) or by the Company's Articles of
Incorporation, the Company may take or authorize such action upon the favorable
vote of the holders of more than 50% of all of the outstanding shares of Common
Stock voting without regard to class (or portfolio). The Company's Bylaws
enable shareholders to call for a meeting to vote on the removal of one or more
directors; the affirmative vote of a majority of the Company's outstanding
shares is required to remove a director. Meetings of the Company's shareholders
shall be called by the Board of Directors upon the written request of
shareholders owning at least 10% of the outstanding shares entitled to vote.
The Company's Articles of Incorporation authorize the Board of
Directors, without shareholder approval (unless otherwise required by applicable
law), to: (a) sell and convey a Fund's assets to another management investment
company for consideration which may include securities issued by the purchaser
and, in connection therewith, to cause all outstanding shares of such Fund to be
redeemed at a price equal to their net asset value which may be paid in cash or
by distribution of the securities or other consideration received from the sale
and conveyance; (b) sell and convert a Fund's assets into money and, in
connection therewith, to cause all outstanding shares of such Fund to be
redeemed at their net asset value; or (c) combine
-41-
<PAGE>
a Fund's assets with the assets belonging to one or more other Funds if the
Board of Directors reasonably determines that such combination will not have a
material adverse effect on the shareholders of any Fund participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such Fund to be redeemed or converted into shares of another Fund at their net
asset value. The exercise of such authority may be subject to certain
restrictions under the 1940 Act.
ADDITIONAL PERFORMANCE INFORMATION
- ----------------------------------
Money Market Funds
- ------------------
The "yield" and "effective yield" of each Money Market Fund described
in the Prospectuses relating to those Funds are calculated according to formulas
prescribed by the SEC. The standardized seven-day yield for each Money Market
Fund is computed separately by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the particular
Fund involved having a balance of one share at the beginning of the period,
dividing the net change in account value by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by (365/7). The net change in the value of an account in
a Fund includes the value of additional shares purchased with dividends from the
original share, and dividends declared on both the original share and any such
additional shares and all fees, other than nonrecurring account sales charges,
that are charged to all shareholder accounts in proportion to the length of the
base period and the Fund's average account size. The capital changes to be
excluded from the calculation of the net change in account value are realized
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The effective annualized yield for each Fund is computed by
compounding a particular Fund's unannualized base period return (calculated as
above) by adding 1 to the base period return, raising the sum to a power equal
to 365 divided by 7, and subtracting one from the result. For those
shareholders who pay Banks a fee for automatic investment or other cash
management services, the Funds' effective yields will be lower than for
shareholders who do not. For the seven-day period ended May 31, 1998, the yield
for each of the Money Market Funds was as follows: Prime Money Market Fund,
5.19%; Government Money Market Fund, 5.13%; Tax-Exempt Money Market Fund, 3.29%;
Tax-Exempt Money Market Fund (Trust), 3.51%. For the seven-day period ended May
31, 1998, the effective yield for each of the Money Market Funds was as follows:
Prime Money Market Fund, 5.33%; Government Money Market Fund, 5.26%; Tax-Exempt
Money Market Fund, 3.35%; and Tax-Exempt Money Market Fund (Trust), 3.57%.
In addition, the Tax-Exempt Money Market Funds may quote their
standardized "tax-equivalent yield," which is computed by: (a) dividing the
portion of a Tax-Exempt Money Market Fund's yield (as calculated above) that is
exempt from federal income tax by one minus a stated federal income tax rate;
and (b) adding the figure resulting from (a) above to that portion, if any, of
the Fund's yield that is not exempt from federal income tax. For the seven-day
period ended May 31, 1998, the tax-equivalent yields for the Tax-Exempt Money
Market Fund and the
-42-
<PAGE>
Tax-Exempt Money Market Fund (Trust) were 5.45% and 5.81%, respectively
(assuming a federal income tax rate of 39.6%).
The "monthly yield" of each Money Market Fund described in the
Prospectuses relating to those Funds is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account in the particular Fund involved having a balance of one share at the
beginning of the period, dividing the net change in the account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by (365/number of days in
the month). The annualized effective monthly yield for each Fund is computed by
compounding a particular Fund's unannualized monthly base period return
(calculated as just described) by adding 1 to the base period return, raising
the sum to a power equal to 365 divided by the number of days in the month, and
subtracting one from the result.
The Money Market Funds may from time to time quote yields relating to
time periods other than those described above and in the Prospectuses relating
to the Money Market Funds. Such yields will be computed in a manner which is
similar to those computations described.
A Money Market Fund's quoted yield is not indicative of future yields
and will depend upon factors such as portfolio maturity, its expenses and the
types of instruments it holds.
Non-Money Market Funds
- ----------------------
Yield Calculations. From time to time the Non-Money Market Funds may
------------------
quote their yields in advertisements, sales literature or in reports to
shareholders. The yield for a Fund is calculated by dividing the net investment
income per share (as described below) earned during a 30-day period by its net
asset value per share on the last day of the period and annualizing the result
on a semi-annual basis by adding one to the quotient, raising the sum to the
power of six, subtracting one from the result and then doubling the difference.
A Fund's net investment income per share earned during the period in the Fund is
based on the average daily number of shares outstanding in the Fund during the
period entitled to 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.
-43-
<PAGE>
d = net asset value per share on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. Each Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30-day period, or, with respect to obligations
purchased during the 30-day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30-day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations. The Maryland Tax-Exempt Bond, Intermediate Tax-Exempt
Bond and National Tax-Exempt Bond Funds calculate interest earned on tax-exempt
obligations issued without original issue discount and having a current market
discount by using the coupon rate of interest instead of the yield to maturity.
In the case of tax-exempt obligations that are issued with original issue
discount, where the discount based on the current market value exceeds the then-
remaining portion of original issue discount, the yield to maturity is the
imputed rate based on the original issue discount calculation. Conversely,
where the discount based on the current market value is less than the remaining
portion of the original issue discount, the yield to maturity is based on the
market value.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), (a) gain or loss attributable
to actual monthly pay downs is accounted for as an increase or decrease to
interest income during the period; and (b) a Fund may elect either (i) to
amortize the discount and premium on the remaining security, based on the cost
of the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize discount or premium on
the remaining security.
Undeclared earned income may be subtracted from the net asset value
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
The Intermediate Tax-Exempt Bond Fund's and National Tax-Exempt Bond
Fund's "tax-equivalent" yield is computed by (a) dividing the portion of a
Fund's yield that is exempt from federal income taxes by one minus a stated
federal income tax rate; and (b) adding
-44-
<PAGE>
the figure resulting from (a) above to that portion, if any, of such yield that
is not exempt from federal income tax. The Maryland Tax-Exempt Bond Fund's "tax-
equivalent" yield is computed by: (a) dividing the portion of the Fund's yield
that is exempt from both federal and Maryland state income taxes by one minus a
stated combined federal and Maryland state income tax rate; (b) dividing the
portion of the Fund's yield that is exempt from federal income tax only by one
minus a stated federal income tax rate, and (c) adding the figures resulting
from (a) and (b) above to that portion, if any, of such yield that is not exempt
from Federal income tax.
For the 30-day period ended May 31, 1998, the yield for the Growth &
Income Fund was 0.85%; for the Equity Income Fund was 1.43%; for the Equity
Growth Fund was 0.63%; for the Diversified Real Estate Fund was 4.94%; for the
Limited Maturity Bond Fund was 5.54%; for the Total Return Bond Fund was 5.78%;
for the Maryland Tax-Exempt Bond Fund was 4.23% and the tax-equivalent yield was
7.00%; for the Intermediate Tax-Exempt Bond Fund was 3.74% and the tax-
equivalent yield was 6.19%; and for the National Tax-Exempt Bond Fund was 3.78%
and the tax-equivalent yield was 6.26%.
Total Return Calculations. The Non-Money Market Funds compute their
-------------------------
average annual total returns by determining the average annual compounded rates
of return during specified periods that equate the initial amount invested in a
particular Fund to the ending redeemable value of such investment in the Fund.
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 Non-Money Market Funds compute their aggregate total returns by
determining the aggregate rates of return during specified periods that likewise
equate the initial amount invested in a particular Fund to the ending redeemable
value of such investment in the Fund. The formula for calculating aggregate
total return is as follows:
-45-
<PAGE>
ERV
T = [(-------) - 1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
Based on the foregoing calculations, the average annual total returns
for the Growth & Income Fund, Limited Maturity Bond Fund and Maryland Tax-Exempt
Bond Fund for the twelve months ended May 31, 1998 were 29.40%, 8.15% and 9.03%,
respectively; for the five years ended May 31, 1998 were 18.48%, 5.70% and
5.39%, respectively; and for the period from the commencement of operations
through May 31, 1998 were 16.79%, 6.52% and 6.24%, respectively. The average
annual total returns for the International Equity Fund for the twelve months
ended May 31, 1998 and for the period from the commencement of operations
through May 31, 1998 were 12.77% and 11.37%, respectively. The aggregate total
returns for the Growth & Income Fund, Limited Maturity Bond Fund and Maryland
Tax-Exempt Bond Fund for the one-year period ended May 31, 1998 were 29.40%,
8.15% and 9.03%, respectively, for the five-year period ended May 31, 1998 were
133.45%, 31.92% and 30.04%, respectively; and for the period from the
commencement of operations to May 31, 1998 were 208.45%, 57.76% and 43.77%,
respectively. The aggregate total return for the International Equity Fund for
the one-year period ended May 31, 1998 was 12.77% and for the period from
commencement of operations to May 31, 1998 was 69.74%.
Based on the foregoing calculations, the average annual total return
and the aggregate total return for the Diversified Real Estate Fund for the
period from August 1, 1997 (commencement of operations) through May 31, 1998
were 5.22% and 4.31%, respectively. The average annual total returns for the
Equity Income Fund, Equity Growth Fund, Total Return Bond Fund, Intermediate
Tax-Exempt Bond Fund and National Tax-Exempt Bond Fund for the period from March
1, 1998 (commencement of operations) through May 31, 1998 were 9.47%, 12.10%,
6.97%, 4.38% and 6.75%, respectively, and the aggregate total return for such
Funds for the above period were 2.28%, 2.89%, 1.69%, 1.07% and 1.64%,
respectively.
Since performance will fluctuate, performance data for the Funds
cannot necessarily be used to compare an investment in the Funds' shares with
bank deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
-46-
<PAGE>
Hypothetical Performance Information
------------------------------------
In addition to providing performance information that demonstrates the
actual yield or return of a particular Fund over a particular period of
time, the Tax-Exempt Money Market Funds, Maryland Tax-Exempt Bond Fund,
Intermediate Tax-Exempt Bond Fund or National Tax Exempt Bond Fund may
provide certain other information demonstrating hypothetical yields or
returns. For example, the table below illustrates the approximate yield
that a taxable investment must earn at various income brackets to produce
after-tax yields equivalent to those of tax-exempt investments yielding
from 4.00% to 6.50%. The yields below are for illustration purposes only
and are not intended to represent current or future yields for the Tax-
Exempt Money Market Funds, Maryland Tax-Exempt Bond Fund, Intermediate Tax-
Exempt Bond Fund or National Tax-Exempt Bond Fund, which may be higher or
lower than those shown. A Fund's yield will fluctuate as market conditions
change. For investors in a low tax bracket, investing in a tax-exempt
investment may not be beneficial if a higher yield after taxes could be
received from a taxable investment. Investors should be aware that tax
brackets may change over time and they should consult their own tax adviser
with specific reference to their own tax situation.
For the Tax-Exempt Money Market Funds:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Federal
Marginal
Taxable Income Tax Tax-Exempt Yields
Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- --------------------------------------------------------------------------------------
Single Return Joint Return Equivalent Taxable Yields
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,650 $ 0-$ 41,200 15% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 24,651-$ 59,750 $ 41,201-$ 99,600 28% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 59,751-$124,650 $ 99,601-$151,750 31% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$124,651-$271,050 $151,751-$271,050 36% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
Over $271,050 Over $271,050 39.6% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
- --------------------------------------------------------------------------------------
</TABLE>
THE TAX-EXEMPT YIELDS USED HERE ARE HYPOTHETICAL AND NO ASSURANCE CAN BE MADE
THAT THE FUNDS WILL OBTAIN ANY PARTICULAR YIELDS. A FUND'S YIELD FLUCTUATES AS
MARKET CONDITIONS CHANGE. THE TAX BRACKETS AND RELATED YIELD CALCULATIONS ARE
BASED ON THE 1998 FEDERAL MARGINAL TAX RATES INDICATED IN THE TABLE. THE TABLE
DOES NOT REFLECT THE PHASE OUT OF PERSONAL EXEMPTIONS AND ITEMIZED DEDUCTIONS
WHICH WILL APPLY TO CERTAIN HIGHER INCOME TAXPAYERS.
- --------------------------------------------------------------------------------
-47-
<PAGE>
For the Maryland Tax-Exempt Bond Fund:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Combined
Federal
and
Maryland
Marginal
Tax Tax-Exempt Yields
Taxable Income Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- -------------------------------------------------------------------------------------------
Single Return Joint Return Equivalent Taxable Yields
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,000-$ 24,650 $ 3,000-$ 41,200 21.38% 5.09% 5.72% 6.36% 6.99% 7.63% 8.27%
$ 24,651-$ 59,750 $ 41,201-$ 99,600 33.4% 6.01% 6.76% 7.51% 8.26% 9.01% 9.76%
$ 59,751-$124,650 $ 99,601-$151,750 36.18% 6.27% 7.05% 7.84% 8.62% 9.40% 0.18%
$124,651-$271,050 $151,751-$271,050 40.76% 6.75% 7.60% 8.44% 9.28% 10.13% 0.97%
Over $271,050 Over $271,050 44.04% 7.15% 8.04% 8.93% 9.83% 10.72% 11.62%
- -------------------------------------------------------------------------------------------
</TABLE>
The tax-exempt yields used here are hypothetical and no assurance can the made
that the Fund will obtain any particular yield. A fund's yield fluctuates as
market conditions change. The tax brackets and related yield calculations are
based on the 1998 federal marginal tax rates, and assume a federal tax benefit
for state and local taxes. For 1998, the Maryland state tax rate is 5%. The
Maryland county tax is assumed to be at least one-half the state rate which is
applicable in all counties except Worcester County and Maryland and Federal
taxable income are assumed to be the same. The table does not reflect the phase
out of personal exemptions and itemized deductions which will apply to certain
higher income taxpayers.
- --------------------------------------------------------------------------------
-48-
<PAGE>
For the Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Federal
Marginal
Taxable Income Tax Tax-Exempt Yields
Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
- -------------------------------------------------------------------------------------
Single Return Joint Return Equivalent Taxable Yields
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-$ 24,650 $ 0-$ 41,200 15% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 24,651-$ 59,750 $ 41,201-$ 99,600 28% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 59,751-$124,650 $ 99,601-$151,750 31% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$124,651-$271,050 $151,751-$271,050 36% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
Over $271,050 Over $271,050 39.6% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
- -------------------------------------------------------------------------------------
</TABLE>
THE TAX-EXEMPT YIELDS USED HERE ARE HYPOTHETICAL AND NO ASSURANCE CAN BE MADE
THAT THE FUNDS WILL OBTAIN ANY PARTICULAR YIELDS. A FUND'S YIELD FLUCTUATES AS
MARKET CONDITIONS CHANGE. THE TAX BRACKETS AND RELATED YIELD CALCULATIONS ARE
BASED ON THE 1998 FEDERAL MARGINAL TAX RATES INDICATED IN THE TABLE. THE TABLE
DOES NOT REFLECT THE PHASE OUT OF PERSONAL EXEMPTIONS AND ITEMIZED DEDUCTIONS
WHICH WILL APPLY TO CERTAIN HIGHER INCOME TAXPAYERS.
Distribution Rates
- ------------------
The Limited Maturity Bond Fund, Total Return Bond Fund, Maryland Tax-
Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and National Tax-Exempt
Bond Fund may also quote from time to time distribution rates in reports to
shareholders and in sales literature. The distribution rate for a specified
period is calculated by annualizing the daily distributions of net
investment income and dividing this amount by the daily ending net asset
value, and then adding all the daily numbers and dividing by the number of
days in the specified period. Distribution rates do not reflect realized
and unrealized capital gains and losses. The distribution rates for the
Limited Maturity Bond Fund, Total Return Bond Fund, Maryland Tax-Exempt
Bond Fund, Intermediate Tax-Exempt Bond Fund and National Tax-Exempt Bond
Fund for the month ended May 31, 1998 were 5.83%, 5.88%, 4.59%, 3.85% and
4.48%, respectively.
Performance Comparisons
-----------------------
From time to time, in advertisements or in reports to shareholders, a
Fund's yield or total return may be quoted and compared to that of other
mutual funds with similar investment objectives and to stock or other
relevant indices. For example, a Money Market Fund's yield may be compared
to the Donoghue's Money Fund Average, which is an average compiled by
Donoghue's MONEY FUND REPORT(R), a widely recognized independent
publication that monitors the performance of money market funds, or to the
average yields reported by the Bank Rate Monitor from money market deposit
accounts offered by the 50 leading banks and thrift institutions in the top
five standard metropolitan statistical areas. The total return and yield
(i) of
-49-
<PAGE>
institutions in the top five standard metropolitan statistical areas. The total
return and yield (i) of the Non-Money Market Funds may be compared to the
Consumer Price Index, (ii) of the Growth & Income, Equity Income and Equity
Growth Funds may be compared to the Standard & Poor's 500 Index, an index of
unmanaged groups of common stocks, or the Dow Jones Industrial Average, a
recognized unmanaged index of common stocks of 30 industrial companies listed on
the New York Stock Exchange, (iii) of the Limited Maturity Bond and Total Return
Bond Funds may be compared to the Salomon Brothers Broad Investment Grade Index,
the Lehman Government/Corporate Bond Index or the Lehman Aggregate Bond Index,
(iv) of the Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National
Tax-Exempt Bond Funds may be compared to the Lehman Municipal Bond Index, (v) of
the International Equity Fund may be compared to the Morgan Stanley Capital
International ("MSCI") All World ex U.S. Index, and (vi) of the Diversified Real
Estate Fund may be compared to 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 a Fund. The total return and yield of a Fund may also be
compared to data prepared by Lipper Analytical Services, Inc.
From time to time, the Company may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more of the
Funds within the Company; (5) descriptions of investment strategies for one or
more of such Funds; (6) descriptions or comparisons of various savings and
investment products (including but not limited to insured bank products,
annuities, qualified retirement plans and individual stocks and bonds) which may
or may not include the Funds; (7) comparisons of investment products (including
the Funds) with relevant market or industry indices or other appropriate
benchmarks; and (8) discussions of Fund rankings or ratings by recognized rating
organizations. The Company may also include calculations, such as hypothetical
compounding examples, which describe hypothetical investment results in such
communications. Such performance examples will be based on an express set of
assumptions and are not indicative of the performance of any of the Funds.
Information concerning the current yield and performance of the Funds
may be obtained by calling 1-800-551-2145.
-50-
<PAGE>
MISCELLANEOUS
- -------------
As used in this Statement of Additional Information and in the
Prospectuses, a "majority of the outstanding shares" of a Fund means, with
respect to the approval of an investment advisory agreement or change in an
investment objective (if fundamental) or a fundamental investment policy, the
lesser of (a) 67% of the shares of the particular Fund represented at a meeting
at which the holders of more than 50% of the outstanding shares of such Fund are
present in person or by proxy, or (b) more than 50% of the outstanding shares of
such Fund.
As of July 20, 1998, Mercantile-Safe Deposit and Trust Company, MSDT
Funds, Attn: Income Collection Department, P.O. Box 1101, Baltimore, Maryland
21203, owned of record a majority of the outstanding shares of the Company.
Mercantile Safe Deposit and Trust Company ("Mercantile") is a wholly-owned
subsidiary of Mercantile Bankshares Corporation and is a Maryland trust company.
The Company believes that substantially all of the shares held of record by
Mercantile were beneficially owned by its customers.
As of July 20, 1998, the name, address and percentage ownership of
each person, in addition to Mercantile, that beneficially owned 5% or more of
the outstanding shares of the Company was as follows:
Prime Money Market Fund The Johns Hopkins Hospital, 600 North Wolfe
Street, Baltimore, MD 21287, 61,018,427.00 shares, 13.00%; Abell Foundation,
Attn: Frances Keenan, Treasurer, 111 S. Calvert Street, Suite 2300, Baltimore,
MD 21202-6174, 29,880,183.00 shares, 6.37%; Tax-Exempt Money Market Fund Fred
Hittman, 3211 Keyser Road, Baltimore, MD 21208, 6,216,257.00 shares, 6.19%; Tax-
Exempt Money Market (Trust) Robert H. Levi Marital Trust, c/o Mercantile-Safe
Deposit and Trust Company, Two Hopkins Plaza, Baltimore, MD 21201, 3,665,063.00
shares, 5.98; Betty Washington Whiting Deed of Trust, c/o Mercantile-Safe
Deposit and Trust Company, Two Hopkins Plaza, Baltimore, MD 21201, 4,125,165.00
shares, 6.73%; and Maryland Tax-Exempt Bond Fund Mr. Kenneth H, Roberts, 6287
Firethorn Drive, Clarksville, MD 21029, 169,825.430 shares, 10.49%; Chelton
Communications Systems, Inc., c/o Milton C. Barnard, 8821 Copenhaver Drive,
Potomac, MD 20854, 100,925.926 shares, 6.23%.
FINANCIAL STATEMENTS
- --------------------
The audited financial statements and related report of
PricewaterhouseCoopers LLP, independent accountants, contained in the Funds'
annual report to shareholders for the fiscal year ended May 31, 1998 (the
"Annual Report") are hereby incorporated herein by reference. No other parts of
the Annual Report are incorporated by reference. Copies of the Annual Report
may be obtained by calling 1-800-551-2145 or by writing M.S.D. & T. Funds, Inc.,
c/o BISYS Fund Services, 3435 Stelzer Roadm Columbus, Ohio 43219-3035.
-51-
<PAGE>
APPENDIX A
----------
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 senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. 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 senior short-term promissory obligations. Prime-1
repayment capacity will often be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers or related supporting institutions have a strong
ability for repayment of senior 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
A-1
<PAGE>
ratios, while sound, may 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 ability for repayment of senior short-term promissory obligations.
The effects of industry characteristics and market compositions 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 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:
A-2
<PAGE>
"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 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.
A-3
<PAGE>
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit feature
are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.
"A3" - Obligations are supported by an adequate 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.
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.
A-4
<PAGE>
"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.
"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 and is currently highly
vulnerable to nonpayment.
"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.
A-5
<PAGE>
"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 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 are considered as 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 speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
A-6
<PAGE>
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
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 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.
A-7
<PAGE>
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - 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.
"BB" - Bonds considered to be speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
"B" - Bonds are considered highly speculative. While securities in
this class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the instrument.
"CCC" - Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
"CC" - Bonds are minimally protected. Default in payments of interest
seems probable over time.
"C" - Bonds are in imminent default in payment of interest or
principal.
"DDD," "DD" and "D" - Bonds are in default on interest and/or
principal payments. Such securities are extremely speculative and should be
valued on the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest potential for
recovery on these securities, and "D" represents the lowest potential for
recovery.
A-8
<PAGE>
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"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:
A-9
<PAGE>
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
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 a strong
capacity to pay principal and interest. Those issues determined to possess very
strong 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.
A-10
<PAGE>
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality,
with margins of protection ample although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"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-11
<PAGE>
APPENDIX B
----------
As stated in the Prospectuses, the Equity Income, Equity Growth, Total
Return Bond, International Equity, Intermediate Tax-Exempt Bond and National
Tax-Exempt Bond Funds may enter into futures contracts and options in an effort
to have fuller exposure to price movements in securities markets pending
investment of purchase orders or while maintaining liquidity to meet potential
shareholder redemptions and for other hedging and investment purposes. Such
transactions are described in this Appendix.
I. Interest Rate Futures Contracts.
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund might use interest rate futures
as a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by a Fund, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date
B-1
<PAGE>
without the making or taking of delivery of securities. Closing out a futures
contract sale is effected by the Fund's entering into a futures contract
purchase for the same aggregate amount of the specific type of financial
instrument and the same delivery date. If the price in the sale exceeds the
price in the offsetting purchase, the Fund is paid the difference and thus
realizes a gain. If the offsetting purchase price exceeds the sale price, the
Fund pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Fund's entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price exceeds the offsetting sale price,
the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges - principally, the Chicago Board of Trade and
the Chicago Mercantile Exchange. The Funds would deal only in standardized
contracts on recognized exchanges. Each exchange guarantees performance under
contract provisions through a clearing corporation, a nonprofit organization
managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury bonds and
notes; Government National Mortgage Association (GNMA) modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and
ninety-day commercial paper. A Fund may trade in any futures contract for which
there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. A Fund might engage in an interest
---------------------------------
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security in a Fund tends to
move in concert with the futures market prices of long-term United States
Treasury bonds ("Treasury bonds"). The Adviser (or Sub-Adviser in the case of
the International Equity Fund) wishes to fix the current market value of this
portfolio security until some point in the future. Assume the portfolio
security has a market value of 100, and the Adviser or Sub-Adviser believes
that, because of an anticipated rise in interest rates, the value will decline
to 95. The Fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the portfolio
security would be offset by the five-point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The Adviser or Sub-Adviser could be wrong in its forecast of interest
rates and the equivalent futures market price could rise above 98. In this
case, the market value of the
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portfolio securities, including the portfolio security being protected, would
increase. The benefit of this increase would be reduced by the loss realized on
closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an off-setting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Examples of Futures Contract Purchase. A Fund might engage in an
-------------------------------------
interest rate futures contract purchase when it is not fully invested in long-
term bonds but wishes to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter-
term securities whose yields are greater than those available on long-term
bonds. The Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that a
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Adviser or Sub-Adviser wishes to fix the
current market price (and thus 10% yield) of the long-term bond until the time
(four months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the Adviser or Sub-Adviser
believes that, because of an anticipated fall in interest rates, the price will
have risen to 105 (and the yield will have dropped to about 9 1/2%) in four
months. The Fund might enter into futures contracts purchases of Treasury bonds
for an equivalent price of 98. At the same time, the Fund would assign a pool
of investments in short-term securities that are either maturing in four months
or earmarked for sale in four months, for purchase of the long-term bond at an
assumed market price of 100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from 100 to
105, the equivalent futures market price for Treasury bonds might also rise from
98 to 103. In that case, the 5-point increase in the price that the Fund pays
for the long-term bond would be offset by the 5-point gain realized by closing
out the futures contract purchase.
The Adviser or Sub-Adviser could be wrong in its forecast of interest
rates; long-term interest rates might rise to above 10%; and the equivalent
futures market price could fall below 98. If short-term rates at the same time
fall to 10% or below, it is possible that the Fund would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term bond, would
remain higher than yields on long-term bonds. The benefit of
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this continued incremental income will be reduced by the loss realized on
closing out the futures contract purchase. In each transaction, expenses would
also be incurred.
II. Index Futures Contracts.
-----------------------
A stock or bond index assigns relative values to the stocks or bonds
included in the index and the index fluctuates with changes in the market values
of the stocks or bonds included. A stock or bond index futures contract is a
bilateral agreement pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value (which assigns relative values to the common
stocks or bonds included in the index) at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the underlying stocks in the index is made. Some stock
index futures contracts are based on broad market indices, such as the Standard
& Poor's 500 or the New York Stock Exchange Composite Index. In contrast,
certain exchanges offer futures contracts on narrower market indices, such as
the Standard & Poor's 100 or indices based on an industry or market segment,
such as oil and gas stocks. Futures contracts are traded on organized exchanges
regulated by the Commodity Futures Trading Commission. Transactions on such
exchanges are cleared through a clearing corporation, which guarantees the
performance of the parties to each contract.
A Fund will sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. In a
substantial majority of these transactions, a Fund will purchase such securities
upon termination of the long futures position, but a long futures position may
be terminated without a corresponding purchase of securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of its portfolio will decline prior to the time of
sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Equity Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
Portfolio Futures
--------- --------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Fund Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is,
market value decreased and a Fund had entered into an anticipatory purchase
hedge, or market value increased and a Fund had hedged its stock portfolio, the
results of the Fund's transactions in stock index futures would be as set forth
below.
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<PAGE>
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Fund
Factors:
Value of Stock Fund = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Fund Beta Relative to the Index = 1.0
Portfolio Futures
---------- --------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Fund Value = $40,000 Loss of Futures = $40,000
III. Futures Contracts on Foreign Currencies.
---------------------------------------
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a foreign currency, for an amount fixed in
U.S. dollars. Foreign currency futures may be used by a Fund to hedge against
exposure to fluctuations in exchange rates between the U.S. dollar and other
currencies arising from multinational transactions.
IV. Margin Payments.
---------------
Unlike when a Fund purchases or sells a security, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
a Fund will be required to deposit with the broker or in a segregated account
with the Fund's Custodian an amount of cash or liquid portfolio securities, the
value of which may vary but is generally equal to 10% or less of the
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value of the contract. This amount is known as initial margin. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied. Subsequent
payments, called variation margin, to and from the broker, will be made on a
daily basis as the price of the underlying instruments fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. For example, when a Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where a Fund has purchased a
futures contract and the price of the futures contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Adviser (or Sub-
Adviser) may elect to close the position by taking an opposite position, subject
to the availability of a secondary market, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or gain.
V. Risks of Transactions in Futures Contracts.
------------------------------------------
There are several risks in connection with the use of futures by a
Fund. One risk arises because of the imperfect correlation between movements in
the price of the future and movements in the price of the securities which are
the subject of a hedge. The price of the future may move more than or less than
the price of the securities being hedged. If the price of the future moves less
than the price of the securities which are the subject of the hedge, the hedge
will not be fully effective but, if the price of the securities being hedged has
moved in an unfavorable direction, the Fund would be in a better position than
if it had not hedged at all. If the price of the securities being hedged has
moved in a favorable direction, this advantage will be partially offset by the
loss on the future. If the price of the future moves more than the price of the
hedged securities, the Fund will experience either a loss or gain on the future
which will not be completely offset by movements in the price of the securities
which are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of securities being hedged and movements in the price
of futures contracts, a Fund may buy or sell futures contracts in a greater
dollar amount than the dollar amount of securities being hedged if the
volatility over a particular time period of the prices of such securities has
been greater than the volatility over such time period of the future, or if
otherwise deemed to be appropriate by the investment adviser. Conversely, a
Fund may buy or sell fewer futures contracts if the volatility over a particular
time period of the prices of the securities being hedged is less than the
volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by the adviser. It is also possible that,
where a Fund has sold futures to hedge its portfolio against a
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<PAGE>
decline in the market, the market may advance and the value of securities held
in the Fund may decline. If this occurred, the Fund would lose money on the
future and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Fund then concludes not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, the Fund will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash or liquid portfolio securities, equal to the market value of the
futures contracts, will be deposited in a segregated account with the Fund's
Custodian and/or in a margin account with a broker to collateralize the position
and thereby reduce the leverage effect resulting from the use of such futures.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and any
securities being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser or Sub-Adviser
may still not result in a successful hedging transaction over a short time
frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will normally not be sold until the
futures contract can be terminated. In such circumstances, an in-
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<PAGE>
crease in the price of the securities, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities will in fact correlate with the price
movements in the futures contract and thus provide an offset on a futures
contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by the Funds is also subject to the
Adviser's or Sub-Adviser's ability to predict correctly movements in the
direction of the market. For example, if a Fund has hedged against the
possibility of a decline in the market adversely affecting securities held in
its portfolio and securities prices increase instead, the Fund will lose part or
all of the benefit to the increased value of its securities which it has hedged
because it will have offsetting losses in its futures positions. In addition,
in such situations, if the Fund has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Fund may have to sell securities at a time when it
may be disadvantageous to do so.
VI. Options on Futures Contracts.
----------------------------
The Funds may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing, an option of the same series, at which time the
person entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to a Fund because the maximum amount at risk is the
premium paid for the options (plus transaction costs).
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<PAGE>
VII. Other Transactions
------------------
The Funds are authorized to enter into transactions in any other
futures or options contracts which are currently traded or which may
subsequently become available for trading. Such instruments may be employed in
connection with the Funds' hedging and other investment strategies if, in the
judgment of the Adviser or Sub-Adviser, transactions therein are necessary or
advisable.
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<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
(1) (a) Included in Part A: Financial Highlights for the Prime
Money Market Fund, Government Money Market Fund and
Tax-Exempt Money Market Fund for the fiscal years ended
May 31, 1998, 1997, 1996, 1995, 1994, 1993, 1992 and
1991 and for the period from July 21, 1989
(commencement of operations) to May 31, 1990; for the
Tax-Exempt Money Market Fund (Trust) for the fiscal
years ended May 31, 1998, 1997, 1996, 1995, 1994, 1993,
1992 and 1991 and for the period from July 25, 1989
(commencement of operations) to May 31, 1990; for the
Growth & Income Fund for the fiscal years ended May 31,
1998, 1997, 1996, 1995, 1994, 1993 and 1992 and for the
period from February 28, 1991 (commencement of
operations) to May 31, 1991; for the Limited Maturity
Bond Fund for the fiscal years ended May 31, 1998,
1997, 1996, 1995, 1994, 1993 and 1992 and for the
period from March 14, 1991 (commencement of operations)
to May 31, 1991; for the Maryland Tax-Exempt Bond Fund
for the fiscal years ended May 31, 1998, 1997, 1996,
1995 and 1994 and for the period from June 2, 1992
(commencement of operations) to May 31, 1993; for the
International Equity Fund for the fiscal years ended
May 31, 1998, 1997, 1996 and 1995 and for the period
from July 2, 1993 (commencement of operations) to May
31, 1994; for the Diversified Real Estate Fund for the
period from August 1, 1997 (commencement of operations)
to May 31, 1998; and for the Total Return Bond Fund,
Intermediate Tax-Exempt Bond Fund, National Tax-Exempt
Bond Fund, Equity Income Fund and Equity Growth Fund
for the period from March 1, 1998 (commencement of
operations) to May 31, 1998.
(b) Included in Part B: Financial Statements included in
Registrant's Annual Report to Shareholders for the
fiscal year ended May 31, 1998, as previously filed
with the Commission, are incorporated herein by
reference.
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<PAGE>
(2) All required Financial Statements are included in or
incorporated by reference into Parts A and B hereof.
All other financial statements and schedules are
inapplicable.
(b) Exhibits:
(1) (a) Articles of Incorporation of Registrant dated February
23, 1989 and recorded in the State of Maryland on March
7, 1989 are incorporated herein by reference to Exhibit
(1)(a) of Post-Effective Amendment No. 19 to the
Registrant's Registration Statement filed on September
26, 1997.
(b) Notice of Change of Resident Agent and Principal Office
Address, dated May 17, 1989 is incorporated herein by
reference to Exhibit (1)(b) of Post-Effective Amendment
No. 19 to the Registrant's Registration Statement filed
on September 26, 1997.
(c) Articles Supplementary dated October 15, 1990 and
recorded in the State of Maryland on October 30, 1990
are incorporated herein by reference to Exhibit (1)(c)
of Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(d) Articles Supplementary dated January 16, 1992 and
recorded in the State of Maryland on January 28, 1992
are incorporated herein by reference to Exhibit (1)(d)
of Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(e) Articles Supplementary dated June 23, 1993 and recorded
in the State of Maryland on June 25, 1993 are
incorporated herein by reference to Exhibit (1)(e) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(f) Articles Supplementary dated May 31, 1994 and recorded
in the State of Maryland on June 23, 1994 are
incorporated herein by reference to Exhibit (1)(f) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
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<PAGE>
(g) Articles Supplementary dated November 22, 1995 and
recorded in the State of Maryland on November 27, 1995
are incorporated herein by reference to Exhibit (1)(g)
of Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(h) Articles Supplementary dated June 8, 1997 and recorded
in the State of Maryland on June 19, 1997 are
incorporated herein by reference to Exhibit (1)(h) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(i) Articles Supplementary dated February 13, 1998 and
recorded in the State of Maryland on February 23, 1998
relating to the Equity Income, Equity Growth, Total
Return Bond, National Tax-Exempt Bond and Intermediate
Tax-Exempt Bond Funds.
(2) (a) Bylaws of Registrant are incorporated herein by
reference to Exhibit (2)(a) of Post-Effective Amendment
No. 19 to the Registrant's Registration Statement filed
on September 26, 1997.
(b) Amendment to Bylaws adopted April 23, 1990 is
incorporated herein by reference to Exhibit (2)(b) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(c) Amendment to Bylaws adopted July 17, 1991 is
incorporated herein by reference to Exhibit (2)(c) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(d) Amendment to Bylaws adopted January 22, 1996 is
incorporated herein by reference to Exhibit (2)(d) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(3) None.
(4) (a) See Article VI, Section 7.2 of Article VII, Article
VIII and Section 10.2 and 10.4 of Article X of the
Registrant's Articles of Incorporation incorporated
herein by reference to Exhibit (1)(a) of Post-Effective
Amendment No. 19 to
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<PAGE>
the Registrant's Registration Statement filed on
September 26, 1997.
(b) See Article I, Section 2.1 and 2.11 of Article II,
Article IV and Section 6.1 of Article VI of the
Registrant's Bylaws, as amended, incorporated herein by
reference to Exhibits (2)(a), (2)(b), (2)(c) and (2)(d)
of Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(5) (a) Advisory Agreement between Registrant and Mercantile-
Safe Deposit and Trust Company with respect to the Tax-
Exempt Money Market Fund (Trust), dated July 21, 1989
is incorporated herein by reference to Exhibit (5)(b)
of Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(b) Advisory Agreement dated as of July 24, 1998 between
Registrant and Mercantile-Safe Deposit and Trust
Company with respect to the Equity Income, Equity
Growth, Total Return Bond, National Tax-Exempt Bond and
Intermediate Tax-Exempt Bond Funds is incorporated
herein by reference to Exhibit (5)(h) of Post-Effective
Amendment No. 20 to the Registrant's Registration
Statement filed on December 5, 1997.1997.
(c) Sub-Advisory Agreement dated as of March 19, 1996
between Mercantile-Safe Deposit and Trust Company and
CastleInternational Asset Management Limited (now
BlackRock International Ltd.) with respect to the
International Equity Fund is incorporated herein by
reference to Exhibit (5)(f) of Post-Effective Amendment
No. 19 to the Registrant's Registration Statement filed
on September 26, 1997.
(6) (a) Distribution Agreement between Registrant and The
Winsbury Company, dated October 1, 1993 is incorporated
herein by reference to Exhibit (6)(a) of Post-Effective
Amendment No. 19 to the Registrant's Registration
Statement filed on September 26, 1997.
(b) Amendment dated July 28, 1997 to Schedule A of
Distribution Agreement between Registrant and BISYS
Fund Services (f/k/a The Winsbury Company) is
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<PAGE>
incorporated herein by reference to Exhibit (6)(b) of
Post-Effective Amendment No. 20 to the Registrant's
Registration Statement filed on December 5, 1997.
(c) Amendment dated February 27, 1998 to Schedule A of
Distribution Agreement between Registrant and BISYS
Fund Services (f/k/a The Winsbury Company) with respect
to the Equity Income, Equity Growth, Total Return Bond,
National Tax-Exempt Bond and Intermediate Tax-Exempt
Bond Funds.
(7) None.
(8) (a) Custody Agreement between Registrant and Fifth Third
Bank, dated May 28, 1993 is incorporated herein by
reference to Exhibit (8)(a) of Post-Effective Amendment
No. 19 to the Registrant's Registration Statement filed
on September 26, 1997.
(b) Letter Agreement dated July 28, 1997 supplementing the
Custody Agreement between Registrant and Fifth Third
Bank is incorporated herein by reference to Exhibit
(8)(b) of Post-Effective Amendment No. 19 to the
Registrant's Registration Statement filed on September
26, 1997.
(c) Letter Agreement dated February 27, 1998 supplementing
the Custody Agreement between Registrant and Fifth
Third Bank.
(d) Custodian Contract dated June 29, 1993 between
Registrant and State Street Bank and Trust Company with
respect to the International Equity Fund is
incorporated herein by reference to Exhibit (8)(c) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(9) (a) Transfer Agency and Service Agreement dated as of
November 1, 1992 between Registrant and State Street
Bank and Trust Company is incorporated herein by
reference to Exhibit (9)(a) of Post-Effective Amendment
No. 19 to the Registrant's Registration Statement filed
on September 26, 1997.
(b) Letter Agreement dated June 29, 1993 supplementing the
Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company is
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<PAGE>
incorporated herein by reference to Exhibit (9)(b) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(c) Amendment No. 1 dated as of May 1, 1995 to Transfer
Agency and Service Agreement between Registrant and
State Street Bank and Trust Company is incorporated
herein by reference to Exhibit (9)(c) of Post-Effective
Amendment No. 19 to the Registrant's Registration
Statement filed on September 26, 1997.
(d) Letter Agreement dated July 28, 1997 supplementing the
Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company is
incorporated herein by reference to Exhibit (9)(d) of
Post-Effective Amendment No. 20 to the Registrant's
Registration Statement filed on December 5, 1997.
(e) Letter Agreement dated February 27, 1998 supplementing
the Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company.
(f) Administration Agreement between Registrant and
Mercantile-Safe Deposit & Trust Company, dated May 28,
1993 is incorporated herein by reference to Exhibit
(9)(e) of Post-Effective Amendment No. 19 to the
Registrant's Registration Statement filed on September
26, 1997.
(g) Amendment dated July 10, 1997 to Schedule A of
Administration Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company is
incorporated herein by reference to Exhibit (9)(g) of
Post-Effective Amendment No. 20 to the Registrant's
Registration Statement filed on December 5, 1997.
(h) Amendment dated February 27, 1998 to Schedule A of
Administration Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company.
(i) Fund Accounting Agreement between Registrant and The
Winsbury Service Corporation, dated October 1, 1993 is
incorporated herein by reference to Exhibit (9)(g) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
C-6
<PAGE>
(j) Amendment dated July 28, 1997 to Schedules A and B of
the Fund Accounting Agreement between Registrant and
BISYS Fund Services Ohio, Inc. (f/k/a The Winsbury
Service Corporation) is incorporated herein by
reference to Exhibit (9)(j) of Post-Effective Amendment
No. 20 to the Registrant's Registration Statement filed
on December 5, 1997.
(k) Amendment dated March 3, 1998 to Schedules A and B of
the Fund Accounting Agreement between Registrant and
BISYS Fund Services, Ohio, Inc. (f/k/a The Winsbury
Service Corporation).
(10) Opinion and Consent of counsel.
(11) (a) Consent of PricewaterhouseCoopers LLP.
(b) Consent of Drinker Biddle & Reath LLP
(12) None.
(13) (a) Purchase Agreement between Registrant and The Winsbury
Company dated May 28, 1993 is incorporated herein by
reference to Exhibit (13)(a) of Post-Effective
Amendment No. 19 to the Registrant's Registration
Statement filed on September 26, 1997.
(b) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated July 31, 1997 is incorporated
herein by reference to Exhibit (13)(b) of Post-
Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(c) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the Equity Income Fund.
(d) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the Equity Growth Fund.
(e) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the Total Return Bond Fund.
C-7
<PAGE>
(f) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the National Tax-Exempt Bond Fund.
(g) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the Intermediate Tax-Exempt Bond Fund.
(14) None.
(15) None.
(16) (a) Schedule for Computation of Performance Quotations with
respect to the Prime, Government and Tax-Exempt Money
Market Funds and the Tax-Exempt Money Market Fund
(Trust) is incorporated herein by reference to Exhibit
(16) of Post-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form N-1A, filed
on November 21, 1990.
(b) Schedule for Computation of Performance Quotations with
respect to the Growth & Income (formerly Value Equity)
and Limited Maturity Bond (formerly Intermediate Fixed
Income) Funds is incorporated herein by reference to
Exhibit (16)(b) of Post-Effective Amendment No. 5 to
the Registrant's Registration Statement on Form N-1A,
filed on August 12, 1991.
(c) Schedule for Computation of Performance Quotations with
respect to the Maryland Tax-Exempt Bond Fund and
Limited Maturity Bond (formerly Intermediate Fixed
Income) Fund is incorporated herein by reference to
Exhibit 16(c) of Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A, filed
on October 1, 1992.
(d) Schedule for Computation of Performance Quotations with
respect to the International Equity Fund is
incorporated herein by reference to Exhibit 16(d) of
Post-Effective Amendment No. 11 to the Registrant's
Registration Statement on Form N-1A, filed on December
30, 1993.
(e) Schedule for Computation of Performance Quotations with
respect to the Diversified Real Estate Fund is
incorporated by reference to Exhibit 16 (e) of Post-
Effective Amendment
C-8
<PAGE>
No. 21 to the Registrant's Registration Statement on
Form N-1A, filed on February 17, 1998.
(f) Schedule for Computation of Performance Quotations with
respect to the Equity Income, Equity Growth, Total
Return Bond, Intermediate Tax-Exempt Bond and National
Tax-Exempt Bond Funds.
(18) None.
(27) Financial Data Schedules.
Item 25. Persons Controlled by or under Common Control
with Registrant.
---------------------------------------------
Inapplicable.
Item 26. Number of Holders of Securities.
--------------------------------
C-9
<PAGE>
The following information is as of July 20, 1998.
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Class A Common Stock 3,126
Class B Common Stock 4,134
Class C Common Stock 412
Class D Common Stock 358
Class E Common Stock 4,613
Class F Common Stock 3,735
Class G Common Stock 192
Class H Common Stock 2,589
Class I Common Stock 0
Class J Common Stock 48
Class K Common Stock 1,461
Class L Common Stock 1,500
Class M Common Stock 398
Class N Common Stock 1,973
Class O Common Stock 1,160
</TABLE>
Item 27. Indemnification.
Indemnification of Registrant's Adviser against certain losses is
provided for in Section 6 of the Advisory Agreement with respect to the Tax-
Exempt Money Market Fund (Trust) incorporated herein by reference as Exhibit
(5)(a) and Section 6 of the Advisory Agreement with respect to the Prime Money
Market, Government Money Market, Tax-Exempt Money Market, Growth & Income,
International Equity, Limited Maturity Bond, Maryland Tax-Exempt Bond,
Diversified Real Estate, Equity Income, Equity Growth, Total Return Bond,
National Tax-Exempt Bond and Intermediate Tax-Exempt Bond Funds filed herein as
Exhibit (5)(b). Indemnification of the Registrant's Administrator is provided
for in Section 4 of the Administration Agreement incorporated herein by
reference as Exhibit (9)(f); and indemnification of Registrant's principal
underwriter is provided for in Section 1.11 of the Distribution Agreement
incorporated herein by reference as Exhibit (6)(a). Section 7.3 of the
Registrant's Articles of Incorporation incorporated herein by reference as
Exhibit (1)(a) provides as follows:
(a) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General
Corporation Law, no director or officer of the Corporation shall have
any liability to the Corporation or its stockholders for damages. This
limitation on liability applies to events occurring at the time a
person serves as a director or officer of the Corporation whether or
not such person is a director or officer at the time of any proceeding
in which liability is asserted.
C-10
<PAGE>
(b) The Corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent
permitted by the Maryland General Corporation Law. The Corporation
shall indemnify and advance expenses to its officers to the same
extent as its directors and to such further extent as is consistent
with law. The Board of Directors may by Bylaw, resolution, or
agreement make further provision for indemnification of directors,
officers, employees, and agents to the fullest extent permitted by the
Maryland General Corporation Law.
(c) No provision of this Article shall be effective to protect or
purport to protect any director or officer of the Corporation against
any liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved
in the conduct of his office.
(d) References to the Maryland General Corporation Law in this
Article are to the law as from time to time amended. No further
amendment to the Articles of Incorporation of the Corporation shall
affect any right of any person under this Article based on any event,
omission, or proceeding prior to such amendment.
Section 6.2 of the Registrant's Bylaws incorporated herein by
reference as Exhibit (2)(a) provides further as follows:
Indemnification of Directors and Officers.
-----------------------------------------
(a) Indemnification. The Corporation shall indemnify its directors to
---------------
the fullest extent permitted by the Maryland General Corporation Law.
The Corporation shall indemnify its officers to the same extent as its
directors and to such further extent as is consistent with law. The
Corporation shall indemnify its directors and officers who while
serving as directors or officers also serve at the request of the
Corporation as a director, officer, partner, trustee, employee, agent,
or fiduciary of another corporation, partnership, joint venture,
trust, other enterprise, or employee benefit plan to the same extent
as its directors and, in the case of officers, to such further extent
as is consistent with law. This Article shall not protect any such
person against any liability to the Corporation or any stockholder
thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office
("disabling conduct").
(b) Advances. Any current or former director or officer of the
--------
Corporation claiming indemnification within the scope of this Section
6.2 shall be entitled to advances from the Corporation for payment of
the reasonable expenses incurred by him in connection with the
proceedings to which he is a party in the manner and to the full
extent permissible under applicable state corporation laws, the
C-11
<PAGE>
Securities Act of 1933 and the Investment Company Act of 1940, as such
statutes are now or hereafter in force.
(c) Procedures. On the request of any current or former director or
----------
officer requesting indemnification or an advance under this Section
6.2, the Board of Directors shall determine, or cause to be
determined, in a manner consistent with applicable state corporation
law, the Securities Act of 1933 and the Investment Company Act of
1940, as such statutes are now or hereafter in force, whether the
standards required by this Section 6.2 have been met.
(d) Other Rights. The indemnification provided by this Section 6.2
------------
shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such
indemnification may be entitled under any insurance or other
agreement, vote of stockholders or disinterested directors or
otherwise, both as to action by a director or officer of the
Corporation in his official capacity and as to action by such person
in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators
of such a person.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of
Investment Adviser.
---------------------------------
(a) Mercantile-Safe Deposit and Trust Company ("Merc-Safe"), the
Adviser, is a Maryland trust company providing a wide range of banking, trust,
and investment services.
To the knowledge of the Registrant, none of the directors or executive
officers of Merc-Safe, except those described below, are or have been, at any
time during the past two years, engaged in any other business, profession,
vocation, or employment of a substantial nature, except that certain directors
and executive officers of Merc-Safe also hold or have held various positions
with the bank and non-bank affiliates of Merc-Safe, including its parent,
Mercantile Bankshares Corporation. Set forth below are the names and principal
business of each director
C-12
<PAGE>
and officer of Merc-Safe who is, or at any time during the past two fiscal years
has been, engaged in any other business, profession, vocation, or employment of
a substantial nature.
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
- ------------ -------------- ------------------ ----------------
<S> <C> <C> <C>
H. Furlong Director, Director, Chairman Bank Holding
Baldwin Chairman of of the Board, and Company
the Board, and Chief Executive
Chief Executive Officer
Officer Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director Electricity &
Baltimore Gas & Natural Gas
Electric Company
P.O. Box 1475
Baltimore, MD 21203
Director Freight Trans-
Consolidated Rail portation
Corporation
(CONRAIL)
6 Penn Center Plaza
Philadelphia, PA 19103
Director Manufacturing
GRC International, Inc.
1900 Gallows Road
Plaza 1900
Vienna, VA 22182
Director Insurance
U.S.F.& G. Corp., Inc.
P.O. Box 1138
Baltimore, MD 21203
Director Private Bank
OFFITBANK
Manhattan Tower
101 East 52nd Street
New York, NY 10022
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Director Holding
Wills Group, Inc. Company
P.O. Box E Wholesale &
LaPlata, MD 20646 Retail
Petroleum
Products &
Convenience
Stores
Cynthia A. Director Senior Vice President,
Archer Intermodel Service Group,
Consolidated Rail Corp.
And Conrail
2001 Market Street
Philadelphia, PA 19101
Thomas M. Director Director Bank Holding
Bancroft, Jr. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Former Chairman of the Racecourse
Board and Chief Management
Executive Officer
The New York Racing
Association, Inc.
P.O. Box 90
Jamaica, NY 11417
(prior to January 1990)
Director Manufacturing
VCOA and Distri-
P.O. Box 31 bution
Easton, PA 18042
Richard O. Berndt Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C-14
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Partner Law Firm
Gallagher, Evelius
& Jones
The Park Charles Building
Suite 400
218 North Charles Street
Baltimore, MD 21201
Director Financing
Municipal Mortgage & Housing
Equity LLC Projects
Suite 500
218 N. Charles St.
Baltimore, MD 21201
James A. Block, Director Director Bank Holding
M.D. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Former President Health Services
and Chief
Executive Officer
Johns Hopkins Health
System and The Johns
Hopkins Hospital
600 N. Wolfe Street
Baltimore, MD 21287
Director Insurance
MMI Companies, Inc.
540 Lake Cook Road
Deerfield, IL 60015-5290
William R. Brody, Director Director Bank Holding
M.D. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President University
The Johns Hopkins
University
Charles & 34th St.
Baltimore, MD 21218
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Director Medical
ALZA Corporation Instruments
950 Page Mill Rd.
Palo Alto, CA
94303-0802
George L. Bunting, Director Director Bank Holding
Jr. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President & Chief Private Financial
Executive Officer Management
Company
Bunting Management
Group
Suite 350
9690 Deereco Road
Timonium, MD 21093
(Since July 1991)
Director Medical/Drugs
Guilford
Pharmaceaticals, Inc.
6611 Tributary St.
Baltimore, MD 21224
Director Insurance
U.S.F.& G. Corp., Inc.
P.O. Box 1138
Baltimore, MD 21203
Director Business Services
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
Director Oil Industry
Crown Central
Petroleum corp.
1 N. Charles Street
Baltimore, MD 21203
</TABLE>
C-16
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Martin L. Grass Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman & Chief Drug Store
Executive Officer Chain
Rite-Aid Corporation
Camp Hill, PA
Director Wireless
Tessco Technologies, Equipment
Inc.
34 Loveton Circle
Sparks, MD 21152
Freeman A. Director Director Bank Holding
Hrabowski, III Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President University
University of
Maryland
Baltimore County
1000 Hilltop Circle
Baltimore, MD 21250
Director Electricity &
Baltimore Gas & Natural Gas
Electric Company
P.O. Box 1475
Baltimore, MD 21203
Director Insurance
Baltimore Equitable
Society
21 N. Eutaw St.
Baltimore, MD 21201
Director Specialty Foods/
McCormick & Company Spices
18 Loveton Circle
Sparks, MD 21152-6000
</TABLE>
C-17
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Director Aerospace/Defense
UNC, Inc. Equipment
175 Admiral Cochran Dr.
Annapolis, MD 21401
B. Larry Jenkins Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director, Chairman Insurance
of the Board,
President and CEO
Monumental Life
Insurance Company
2 East Chase Street
Baltimore, MD 21202
Senior Vice President Insurance
of AEGON USA Inc.
2 East Chase Street
Baltimore, MD 21202
Mary Junck Director President, Times Mirror
Eastern Newspapers,
Executive Vice President
Times Mirror
501 North Calvert Street
Baltimore , MD 21278
Robert A. Kinsley Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chief Executive Construction
Officer
Kinsley Construction
2700 Water St.
York, PA 17403-9306
</TABLE>
C-18
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Partner Construction
Various Construction
Ventures
Robert D. Director Director Bank Holding
Kunisch Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director, Chairman
of the Board, Business
President and Chief Services
Executive Officer
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
Director Transportation
CSX Corporation
1 James Center
901 East Carey Street
Richmond, VA 23219
Director Manufacturing
GenCorp Inc.
175 Ghent Rd.
Fairlawn, OH 44333
William J. Director Director Bank Holding
McCarthy Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Principal, William J. Law Firm
McCarthy, P.C., a
Partner, Venable,
Baetjer and Howard
Two Hopkins Plaza
Baltimore, MD 21201
Director, Chairman of Real Estate
the Board Development
Riparius Corporation and Services
375 Padonia Road West
Timonium, MD 21093
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Director Distributor of
CRW Parts, Inc. Auto Parts
7601 Pulaski Highway
Baltimore, MD 21237
Morris W. Offit Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director Medical
Cantel Industries, Products
Inc.
1135 Broad Street
Clifton, NJ 07013
Chairman of the Board Private Bank
and Chief Executive
Officer
OFFITBANK
Manhattan Tower
101 East 52nd Street
New York, NY 10022
Director Toy
Hasbro, Inc. Manufacturer
P.O. Box 1059
1027 Newport Ave.
Pawtucket, RI 02862-1059
Martin B. Director Chairman,
Plant Keywell Corporation
7600 Rolling Mill Road
Baltimore, MD 21224
Christian H. Director Director Bank Holding
Poindexter Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C-20
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Director and Chairman Electricity &
of the Board and Natural Gas
Chief Executive
Officer
Baltimore Gas &
Electric Company
and Subsidiaries
P.O. Box 1475
Baltimore, MD 21203
J. Marshall Reid Director, None
President &
Chief Operating
Officer
William C. Director Director Bank Holding
Richardson Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President and Chief Foundation
Executive Officer
W.K. Kellogg Foundation
One Michigan Avenue, East
Battle Creek, MI 49017
Director Transportation
CSX
1 James Center
901 East Carey Street
Richmond, VA 23219
Donald J. Shepard Director Director Bank Holding
Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman of the Board, Insurance
President and Chief
Executive Officer
AEGON USA Inc.
2 East Chase Street
Baltimore, MD 21202
</TABLE>
C-21
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Member of the Insurance
Executive Board
AEGON, N.V.
2 East Chase Street
Baltimore, MD 21202
Director Business Services
PHH Corporation
11333 McCormick Road
Hunt Valley, MD 21031
Director Insurance
Health Insurance
Association of
America
555 13th Street, N.W.
Washington, DC 20004
Director Insurance
Scottish Equitable PLC
28 St. Andrews Square
Edinborough, Scotland
EH21YF
Brian B. Topping Director and Director Insurance
Vice Chairman Fidelity & Deposit Co.
of the Board of Maryland
300 St. Paul Place
Baltimore, MD 21202
Calman J. Director Director Bank Holding
Zamoiski, Jr. Mercantile Bankshares Company
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman of the Board Wholesale
Independent Distribu- Distributor
tors, Incorporated
3000 Waterview Avenue
Baltimore, MD 21230
</TABLE>
C-22
<PAGE>
<TABLE>
<CAPTION>
Position
with Other Business
Name Merc-Safe Connections Type of Business
---- --------- ----------- ----------------
<S> <C> <C> <C>
Kenneth A. Executive Director Bank
Bourne, Jr. Vice President Potomac Valley Bank
702 Russell Avenue
Gaithersburg, MD 20877
Hugh W. Mohler Executive Vice Director Bank
President The Citizens National
Bank
4th & Main Street
Laurel, MD 20707
Jack K. Steil Chairman of None
Credit Policy
Terry L. Troupe Executive Vice Executive Bank Holding
President Vice President Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Malcolm C. Wilson Executive None
Vice President
Frederica B. Vice President None
Baxter and Treasurer
Alan D. Yarbro General Counsel General Counsel Bank Holding
and Secretary and Secretary Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
(b) BlackRock International Ltd. ("BlackRock") serves as sub-adviser
to the International Equity Fund. BlackRock (a wholly owned subsidiary of
BlackRock, Inc., a U.S. Corporation) is a U.K. Corporation and a member of the
Investment Management Regulatory Organization ("IMRO") and regulated by IMRO in
the conduct of its affairs. The information required by this Item 28 with
respect to each director and officer of BlackRock is incorporated herein by
reference to Form ADV and Schedules A and D filed by BlackRock with the
Securities and Exchange Commission (File No. 801-51087).
C-23
<PAGE>
Item 29. Principal Underwriter.
----------------------
(a) BISYS Fund Services Limited Partnership ("BISYS") acts as
distributor for Registrant. BISYS and its affiliates currently serve as
distributor of American Performance Funds, AmSouth Mutual Funds, The ARCH Fund,
Inc., The BB&T Mutual Funds Group, The Coventry Group, Empire Builder Tax-Free
Bond Fund, The Eureka Funds, Fountain Square Funds, Hirtle Callaghan Trust, HSBC
Family of Funds, The Infinity Mutual Funds, Inc., Intrust Funds, The Kent Funds,
Magna Funds, Marketwatch Funds, Meyers Investment Trust, MMA Praxis Mutual
Funds, Pacific Capital Funds, Parkstone Group of Funds, The Parkstone Advantage
Funds, Pegasus Funds, ProFunds, The Republic Funds Trust, The Republic Advisors
Funds Trust, The Riverfront Funds, Inc., SBSF Funds, Inc. dba Key Mutual Funds,
Sefton Funds, The Sessions Group, Summit Investment Trust, Variable Insurance
Funds and The Victory Portfolios, each of which is a management investment
company.
(b) To the best of Registrant's knowledge, the partners of BISYS are
as follows:
<TABLE>
<CAPTION>
Name and Principal Positions and
Business Positions and Offices with
Address Offices with BISYS Registrant
- ------------------ ------------------ -----------
<S> <C> <C>
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, OH 43219-3035
WC Subsidiary Corporation Sole Limited Partner None
3435 Stelzer Road
Columbus, OH 43219-3035
</TABLE>
(c) None.
Item 30. Location of Accounts and Records.
---------------------------------
All accounts, books, and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules thereunder
will be maintained at the offices of:
Mercantile-Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21201
(records relating to its functions as investment adviser and as
administrator)
C-24
<PAGE>
BlackRock International Ltd.
345 Park Avenue
New York, NY 10137
and
7 Castle Street
Edinburgh, Scotland EH3 3AM
(records relating to its functions as sub-adviser to
Registrant's International Equity Fund)
Fifth Third Bank
Fifth Third Center
Cincinnati, Ohio 45263
(records relating to its functions as custodian)
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
(records relating to its functions as transfer agent and dividend
disbursing agent)
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
(records relating to its functions as fund accounting agent)
State Street Bank and Trust Company
One Heritage Drive, P4N
North Quincy, MA 02171
(records relating to its functions as custodian with respect to the
International Equity Fund)
BISYS Fund Services Limited Partnership
3435 Stelzer Road
Columbus, Ohio 43219-3035
(records relating to its functions as distributor)
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Suite 1100
Philadelphia, Pennsylvania 19107-3496
(registrant's Articles of Incorporation, Bylaws and
minute books)
C-25
<PAGE>
Item 31. Management Services.
--------------------
None.
Item 32. Undertakings.
-------------
Registrant hereby undertakes to provide its Annual Report to
Shareholders upon request and without charge to any person to whom a Prospectus
for any of its Funds is delivered.
C-26
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Post-Effective Amendment No. 23 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Baltimore and the State of Maryland, on the 31st day of July, 1998.
M.S.D. & T. FUNDS, INC.
(Registrant)
/s/* Leslie B. Disharoon
------------------------
Leslie B. Disharoon
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 23 to Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/* Leslie B. Disharoon Chairman of the July 31, 1998
- -----------------------------
Leslie B. Disharoon Board and President
/s/* Decatur H. Miller Director and Treasurer July 31, 1998
- -----------------------------
Decatur H. Miller (Principal Financial
and Accounting Officer)
Director July __, 1998
_____________________________
Edward D. Miller
/s/* John R. Murphy Director July 31, 1998
- -----------------------------
John R. Murphy
/s/* George R. Packard, III Director July 31, 1998
- -----------------------------
George R. Packard, III
</TABLE>
*By: /s/ Linda A. Durkin
------------------------
Linda A. Durkin
Attorney-in-fact
<PAGE>
M.S.D & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
Leslie B. Disharoon, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda
A. Durkin, jointly and severally, his true and lawful attorneys and agents, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which each said attorney and agent may deem
necessary or advisable or which may be required to enable M.S.D. & T. Funds,
Inc. (the "Company") to comply with the Investment Company Act of 1940, as
amended, the Securities Act of 1933, as amended ("Acts"), or the Internal
Revenue Code of 1986, as amended, and any rules, regulations, or requirements of
the Securities and Exchange Commission with respect to the Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a director
and/or officer of the Company any and all amendments (including post-effective
amendments) to the Company's Registration Statement(s) pursuant to the Acts
filed with the Securities and Exchange Commission, and any other instruments or
documents related thereto; and each said attorney and agent shall have full
power and authority to do and perform in the name and on behalf of the
undersigned director and/or officer of the Company, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as the undersigned director and/or officer of
the Company might or could do in person; and the undersigned does hereby ratify
and confirm all that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ Leslie B. Disharoon
------------------------
Leslie B. Disharoon
Date: April 29, 1994
<PAGE>
M.S.D & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
George R. Packard, III, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda
A. Durkin, jointly and severally, his true and lawful attorneys and agents, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which each said attorney and agent may deem
necessary or advisable or which may be required to enable M.S.D. & T. Funds,
Inc. (the "Company") to comply with the Investment Company Act of 1940, as
amended, the Securities Act of 1933, as amended ("Acts"), or the Internal
Revenue Code of 1986, as amended, and any rules, regulations, or requirements of
the Securities and Exchange Commission with respect to the Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a director
and/or officer of the Company any and all amendments (including post-effective
amendments) to the Company's Registration Statement(s) pursuant to the Acts
filed with the Securities and Exchange Commission, and any other instruments or
documents related thereto; and each said attorney and agent shall have full
power and authority to do and perform in the name and on behalf of the
undersigned director and/or officer of the Company, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as the undersigned director and/or officer of
the Company might or could do in person; and the undersigned does hereby ratify
and confirm all that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ George R. Packard
----------------------
George R. Packard, III
Date: April 29, 1994
<PAGE>
M.S.D & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
John R. Murphy, whose signature appears below, does hereby constitute
and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda A. Durkin,
jointly and severally, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which each said attorney and agent may deem necessary or
advisable or which may be required to enable M.S.D. & T. Funds, Inc. (the
"Company") to comply with the Investment Company Act of 1940, as amended, the
Securities Act of 1933, as amended ("Acts"), or the Internal Revenue Code of
1986, as amended, and any rules, regulations, or requirements of the Securities
and Exchange Commission with respect to the Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Company any and all amendments (including post-effective amendments) to
the Company's Registration Statement(s) pursuant to the Acts filed with the
Securities and Exchange Commission, and any other instruments or documents
related thereto; and each said attorney and agent shall have full power and
authority to do and perform in the name and on behalf of the undersigned
director and/or officer of the Company, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned director and/or officer of the
Company might or could do in person; and the undersigned does hereby ratify and
confirm all that each said attorney and agent shall do or cause to be done by
virtue hereof.
/s/ John R. Murphy
----------------------
John R. Murphy
Date: April 29, 1994
<PAGE>
M.S.D & T. FUNDS, INC.
POWER OF ATTORNEY
-----------------
Decatur H. Miller, whose signature appears below, does hereby
constitute and appoint W. Bruce McConnel, III, George C. Earle, Jr. and Linda A.
Durkin, jointly and severally, his true and lawful attorneys and agents, with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which each said attorney and agent may deem
necessary or advisable or which may be required to enable M.S.D. & T. Funds,
Inc. (the "Company") to comply with the Investment Company Act of 1940, as
amended, the Securities Act of 1933, as amended ("Acts"), or the Internal
Revenue Code of 1986, as amended, and any rules, regulations, or requirements of
the Securities and Exchange Commission with respect to the Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a director
and/or officer of the Company any and all amendments (including post-effective
amendments) to the Company's Registration Statement(s) pursuant to the Acts
filed with the Securities and Exchange Commission, and any other instruments or
documents related thereto; and each said attorney and agent shall have full
power and authority to do and perform in the name and on behalf of the
undersigned director and/or officer of the Company, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as the undersigned director and/or officer of
the Company might or could do in person; and the undersigned does hereby ratify
and confirm all that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ Decatur H. Miller
----------------------
Decatur H. Miller
Date: April 29, 1994
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
1(i) Articles Supplementary dated February 13, 1998
and recorded in the State of Maryland on February
23, 1998 relating to the Equity Income, Equity
Growth, Total Return Bond, National Tax-Exempt
Bond and Intermediate Tax-Exempt Bond Funds.
5(b) Advisory Agreement dated as of July 24, 1998
between Registrant and Mercantile Safe-Deposit and
Trust Company with respect to the Prime Money
Market Fund, Government Money Market Fund, Tax-
Exempt Money Market Fund, Growth & Income Fund,
International Equity Fund, Limited Maturity Bond
Fund, Maryland Tax-Exempt Bond Fund, Diversified
Real Estate Fund, Equity Income Fund, Equity
Growth Fund, Total Return Bond Fund, National Tax-
Exempt Bond Fund and Intermediate Tax-Exempt Bond
Fund.
6(c) Amendment dated February 27, 1998 to Schedule A
of Distribution Agreement between Registrant and
BISYS Fund Services (f/k/a The Winsbury Company)
with respect to the Equity Income, Equity Growth,
Total Return Bond, National Tax-Exempt Bond and
Intermediate Tax-Exempt Bond Funds.
8(c) Letter Agreement dated February 27, 1998
supplementing the Custody Agreement between
Registrant and Fifth Third Bank.
9(e) Letter Agreement dated February 27, 1998
supplementing the Transfer Agency and Service
Agreement between Registrant and State Street Bank
and Trust Company.
9(h) Amendment dated February 27, 1998 to Schedule A of
Administration Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company.
9(k) Amendment dated March 3, 1998 to Schedules A and
B of the Fund Accounting Agreement between
<PAGE>
Registrant and BISYS Fund Services, Ohio, Inc.
(f/k/a The Winsbury Services Corporation).
10 Opinion and Consent of Counsel.
11(a) Consent of PricewaterhouseCoopers LLP.
11(b) Consent of Drinker Biddle & Reath LLP
13(c) Purchase Agreement between Registrant and BISYS
Fund Services, Ohio, Inc. dated February 27, 1998
with respect to the Equity Income Fund.
13(d) Purchase Agreement between Registrant and BISYS
Fund Services, Ohio, Inc. dated February 27, 1998
with respect to the Equity Growth Fund.
13(e) Purchase Agreement between Registrant and BISYS
Fund Services, Ohio, Inc. dated February 27, 1998
with respect to the Total Return Bond Fund.
13(f) Purchase Agreement between Registrant and BISYS
Fund Services, Ohio, Inc. dated February 27, 1998
with respect to the National Tax-Exempt Bond Fund.
13(g) Purchase Agreement between Registrant and BISYS
Fund Services, Ohio, Inc. dated February 27, 1998
with respect to the Intermediate Tax-Exempt Bond
Fund.
16(e) Schedule for Computation of Performance
Quotations with respect to the Equity Income,
Equity Growth, Total Return Bond, Intermediate
Tax-Exempt Bond and National Tax-Exempt Bond
Funds.
27 Financial Data Schedules.
-2-
<PAGE>
Exhibit 1(i)
ARTICLES SUPPLEMENTARY
OF
M.S.D. & T. FUNDS, INC.
M.S.D. & T. FUNDS, INC., a Maryland corporation having its principal
office in the City of Baltimore, Maryland and registered as an open-end
investment company under the Investment Company Act of 1940, as amended
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland that:
FIRST: Pursuant to Section 2-208 of the Maryland General Corporation
Law, the Board of Directors of the Corporation has classified Four Hundred
Million (400,000,000) shares of the Corporation's authorized but unissued and
unclassified shares of capital stock, of the par value of One Mill ($.001) per
share, as Class K Common Stock, of the par value of One Mill ($.001) per share;
Four Hundred Million (400,000,000) shares of the Corporation's authorized but
unissued and unclassified shares of capital stock, of the par value of One Mill
($.001) per share, as Class L Common Stock, of the par value of One Mill ($.001)
per share; Four Hundred Million (400,000,000) shares of the Corporation's
authorized but unissued and unclassified shares of capital stock, of the par
value of One Mill ($.001) per share, as Class M Common Stock, of the par value
of One Mill ($.001) per share; Four Hundred Million (400,000,000) shares of the
Corporation's authorized but unissued and unclassified shares of capital stock,
of the par value of One Mill ($.001) per share, as Class N Common Stock, of the
par value of One Mill ($.001) per share; and Four Hundred Million (400,000,000)
shares of the Corporation's authorized but unissued and unclassified shares of
capital stock, of the par value of One Mill ($.001) per share, as Class O Common
Stock, of the par value of One Mill ($.001) per share, pursuant to the following
resolutions adopted by Unanimous Consent of the Board of Directors of the
Corporation dated September 24, 1997:
RESOLVED, that pursuant to the authority expressly given to the Board
of Directors in Article VI, Section 6.4 of the Company's Articles of
Incorporation, the Board hereby classifies (i) Four Hundred Million
(400,000,000) of the Company's authorized but unissued and unclassified
shares as Class K Common Stock (with an aggregate par value of Four Hundred
Thousand Dollars ($400,000)); (ii) Four Hundred Million (400,000,000) of
the Company's authorized but unissued and unclassified shares as Class L
Common Stock (with an aggregate par value of Four Hundred Thousand Dollars
($400,000)); (ii) Four Hundred Million (400,000,000) of the Company's
authorized but unissued and unclassified shares as Class M Common Stock
(with an aggregate par value of Four Hundred Thousand Dollars ($400,000));
(iv) Four Hundred Million (400,000,000) of the Company's authorized but
unissued and unclassified shares as Class N Common Stock (with an aggregate
par value of Four Hundred Thousand Dollars ($400,000)); and (v) Four
Hundred Million (400,000,000) of the Company's authorized but unissued and
unclassified shares as Class O Common Stock (with an aggregate par value of
Four Hundred Thousand Dollars ($400,000));
<PAGE>
FURTHER RESOLVED, that (i) shares of Class K Common Stock shall
represent interests in the National Tax-Exempt Bond Fund; (ii) shares of
Class L Common Stock shall represent interests in the Total Return Bond
Fund; (iii) shares of Class M Common Stock shall represent interests in the
Equity Growth Fund; (iv) shares of Class N Common Stock shall represent
interests in the Equity Income Fund; and (v) shares of Class O Common Stock
shall represent interests in the Intermediate Tax-Exempt Bond Fund;
FURTHER RESOLVED, that each share of Class K Common Stock, Class L
Common Stock, Class M Common Stock, Class N Common Stock and Class O Common
Stock shall have the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms
and conditions of redemption as set forth in the Articles of Incorporation;
and
FURTHER RESOLVED, that the officers of the Company be, and each of
them hereby is, authorized and empowered to execute, seal, deliver and file
any and all documents, instruments, papers and writings, including but not
limited to filing Articles Supplementary with the State Department of
Assessments and Taxation of Maryland, and to do any and all other acts,
including but not limited to changing the foregoing resolutions upon advice
of the Company's counsel prior to filing said Articles Supplementary, in
the name of the Company and on its behalf, as may be necessary or desirable
in connection with or in furtherance of the foregoing resolutions, such
determination to be conclusively evidenced by said officer taking any such
actions.
SECOND: The shares of Common Stock of the Corporation classified
pursuant to the resolutions set forth herein have been classified by the
Corporation's Board of Directors under the authority contained in the
Corporation's Articles of Incorporation.
THIRD: The total number of shares of capital stock which the
Corporation is presently authorized to issue remains Ten Billion
(10,000,000,000) shares of Common Stock, of which Seven Hundred Million
(700,000,000) shares of the par value of One Mill ($.001) per share each are
Class A Common Stock; Seven Hundred Million (700,000,000) shares of the par
value of One Mill ($.001) per share each are Class B Common Stock; Six Hundred
Million (600,000,000) shares of the par value of One Mill ($.001) per share each
are Class C Common Stock; Six Hundred Million (600,000,000) shares of the par
value of One Mill ($.001) per share each are Class D Common Stock; Five Hundred
Million (500,000,000) shares of the par value of One Mill ($.001) per share each
are Class E Common Stock; Five Hundred Million (500,000,000) shares of the par
value of One Mill ($.001) per share each are Class E - Special Series 1 Common
Stock; Five Hundred Million (500,000,000) shares of the par value of One Mill
($.001) per share each are Class F Common Stock; Five Hundred Million
(500,000,000) shares of the par value of One Mill ($.001) per share each are
Class F - Special Series 1 Common Stock; Four Hundred Million (400,000,000)
shares of the par value of One Mill ($.001) per share each are Class G Common
Stock; Four Hundred Million (400,000,000) shares of the par value of One Mill
($.001) per share each are Class H Common Stock; Four Hundred Million
<PAGE>
(400,000,000) shares of the par value of One Mill ($.001) per share each are
Class I Common Stock; Four Hundred Million (400,000,000) shares of the par value
of One Mill ($ .001) per share each are Class J Common Stock, Four Hundred
Million (400,000,000) shares of the par value of One Mill ($.001) per share each
are Class K Common Stock; Four Hundred Million (400,000,000) shares of the par
value of One Mill ($.001) per share each are Class L Common Stock; Four Hundred
Million (400,000,000) shares of the par value of One Mill ($.001) per share each
are Class M Common Stock; Four Hundred Million (400,000,000) shares of the par
value of One Mill ($.001) per share each are Class N Common Stock; and Four
Hundred Million (400,000,000) shares of the par value of One Mill ($.001) per
share each are Class O Common Stock. The aggregate par value of all Common Stock
having par value is unchanged at Ten Million Dollars ($10,000,000).
The total number of authorized and unclassified shares of capital
stock of the Company remaining after the actions described above is One Billion
Eight Hundred Million (1,800,000,000) shares of capital stock of the par value
of One Mill ($0.001) per share and of the aggregate par value of One Million
Eight Hundred Thousand Dollars ($1,800,000).
IN WITNESS WHEREOF, M.S.D. & T. FUNDS, INC. has caused these presents
to be signed in its name and on its behalf by its President and its corporate
seal to be hereunto affixed and attested by its Secretary as of this 13th day of
February, 1998.
[CORPORATE SEAL] M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
------------------------
Leslie B. Disharoon
President
Attest:
/s/ W. Bruce McConnel, III
- --------------------------
W. Bruce McConnel, III
Secretary
<PAGE>
CERTIFICATE
-----------
THE UNDERSIGNED, President of M.S.D. & T. FUNDS, INC., who executed on
behalf of said Corporation the attached Articles Supplementary of said
Corporation, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said Corporation, the attached Articles Supplementary
to be the corporate act of said Corporation, and certifies that to the best of
his knowledge, information and belief the matters and facts set forth in the
attached Articles Supplementary with respect to authorization and approval are
true in all material respects, under the penalties for perjury.
/s/ Leslie B Disharoon
----------------------
Dated as of February 13, 1998 Leslie B. Disharoon
President
<PAGE>
Exhibit 5(b)
ADVISORY AGREEMENT
M.S.D.& T. FUNDS, INC.
Two Hopkins Plaza
Baltimore, Maryland 21201
July 24, 1998
Mercantile-Safe Deposit & Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21201
Dear Sirs:
This will confirm the agreement, entered into in consideration of the
premises and mutual covenants herein contained, and for other good and valuable
consideration, between the undersigned (the "Company") and you as follows:
1. General. The Company is an open-end investment company. This Agreement
-------
relates to thirteen of the Company's portfolios -- the Prime Money Market Fund,
the Government Money Market Fund, the Tax-Exempt Money Market Fund, the Growth &
Income Fund, the International Equity Fund, the Limited Maturity Bond Fund, the
Maryland Tax-Exempt Bond Fund, the Diversified Real Estate Fund, the Equity
Income Fund, the Equity Growth Fund, the Total Return Bond Fund, the National
Tax-Exempt Bond Fund and the Intermediate Tax-Exempt Bond Fund (individually, a
"Fund" and collectively, the "Funds"). The Company proposes to engage in the
business of investing and reinvesting the assets of each Fund in the manner and
in accordance with the investment objective, policies and limitations specified
with respect to each Fund in the Company's Prospectuses and Statements of
Additional Information relating to the Funds (the "Prospectus") included in the
Company's Registration Statement on Form N-1A, as amended from time to time,
filed under the Investment Company Act of 1940, as amended (the "1940 Act"), and
the Securities Act of 1933, as amended. Copies of the Prospectus have been
furnished to you. Any amendments to the Prospectus shall be furnished to you
promptly.
2. Advisory Services. Subject to the supervision and approval of the
-----------------
Company's Board of Directors, you will provide investment management of each
Fund's portfolio in accordance with
<PAGE>
such Fund's investment objective, policies and limitations as stated in the
Prospectus as from time to time in effect, and resolutions of the Company's
Board of Directors of which you will be advised. In connection therewith, you
will obtain and provide investment research and will supervise each Fund's
investments and conduct a continuous program of investment, evaluation and, if
appropriate, sale and reinvestment of such Fund's assets.
In the event that the Company establishes one or more portfolios other than
the Funds with respect to which it desires to retain you as investment adviser
hereunder, it shall notify you in writing. If you are willing to render such
services under this Agreement you shall notify the Company in writing, whereupon
such portfolio shall become a Fund hereunder and shall be subject to the
provisions of this Agreement to the same extent as the other Funds except to the
extent that said provisions (including those relating to compensation payable by
such additional Fund to you as investment adviser) are modified with respect to
such additional Fund in writing by you and the Company at the time.
You will comply with all rules and regulations of the Securities and
Exchange Commission applicable to you in connection with your performance of
this Agreement, and will in addition conduct your activities under this
Agreement in accordance with other law, including banking law, applicable to
you.
You will not make loans for the purpose of purchasing or carrying Fund
shares, or make interest-bearing loans to the Company.
You will place orders for the purchase and sale of portfolio securities and
will solicit broker-dealers to execute transactions in accordance with the
Funds' policies and restrictions regarding brokerage allocations. You will place
orders pursuant to your investment determination for the Funds either directly
with the issuer or with any broker or dealer selected by you. In executing
portfolio transactions and selecting brokers or dealers, you will use your
reasonable best efforts to seek the most favorable execution of orders, after
taking into account all factors you deem relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
Consistent with this obligation, you may, to the extent permitted by law,
purchase and sell portfolio securities to and from brokers and dealers who
provide brokerage and research services (within the meaning of Section 28(e) of
the Securities Exchange Act of 1934, as amended) to or for the benefit of the
Funds and/or other accounts over which you or any of your affiliates
-2-
<PAGE>
exercises investment discretion. You are authorized to pay to a broker or dealer
who provides such brokerage and research services a commission for executing a
portfolio transaction for any Fund which is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if you determine in good faith that such commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker or dealer, viewed in terms of either that particular transaction or your
overall responsibilities to the particular Fund and to the Company. In no
instance will portfolio securities be purchased from or sold to you, or the
Funds' principal underwriter, or any affiliated person thereof except as
permitted by the Securities and Exchange Commission.
3. Assistance. You may employ or contract with other persons to assist
----------
you in the performance of this Agreement including, without limitation, one or
more sub-advisers who may perform under your supervision any or all of the
services described under Section 2 for one or more of the Funds; provided,
however, that the retention of any sub-adviser shall be approved as may be
required by the 1940 Act. Such other persons and/or sub-advisers may include
other investment advisory or management firms and officers or employees who are
employed by both you and the Company. The fees or other compensation of any such
other persons or sub-advisers shall be paid by you and no obligation may be
incurred on the Company's behalf to any such person or sub-adviser.
In the event that you appoint a sub-adviser for one or more of the Funds,
you will review, monitor, and report to the Company's Board of Directors on the
performance and investment procedures of any such sub-adviser; assist and
consult with any sub-adviser in connection with such Fund's or Funds' continuous
investment program; and, if applicable, approve lists of foreign countries which
may be recommended by any sub-adviser for investment by such Fund or Funds.
4. Fees. In consideration of the advisory services rendered pursuant to
----
this Agreement, (a) the Prime Money Market Fund, the Government Money Market
Fund and the Tax-Exempt Money Market Fund each will pay you on the first
business day of each month a fee at the annual rate of .25% of the first $1
billion of such Fund's average daily net assets during the preceding month plus
.20% of such Fund's average daily net assets in excess of $1 billion during the
preceding month, (b) the Growth & Income Fund, the Equity Income Fund and the
Equity Growth Fund each will pay you on the first business day of each month a
fee at the annual rate of .60% of the first $1 billion of such Fund's average
daily net assets during the preceding month plus .40% of such Fund's average
daily net assets in excess of $1 billion during the
-3-
<PAGE>
preceding month, (c) the Limited Maturity Bond Fund and the Total Return Bond
Fund each will pay you on the first business day of each month a fee at the
annual rate of .35% of the first $1 billion of such Fund's average daily net
assets during the preceding month plus .20% of such Fund's average daily net
assets in excess of $1 billion during the preceding month, (d) the Maryland Tax-
Exempt Bond Fund, the National Tax-Exempt Bond Fund and the Intermediate Tax-
Exempt Bond Fund each will pay you on the first business day of each month a fee
at the annual rate of .50% of the first $1 billion of such Fund's average daily
net assets during the preceding month plus .25% of such Fund's average daily net
assets in excess of $1 billion during the preceding month, (e) the International
Equity Fund will pay you a fee on the first business day of each month at the
annual rate of .80% of the first $1 billion of such Fund's average daily net
assets during the preceding month plus .70% of such Fund's average daily net
assets in excess of $1 billion during the preceding month, and (f) the
Diversified Real Estate Fund shall pay you a fee on the first business day of
each month at the annual rate of .80% of the first $1 billion of such Fund's
average daily net assets during the preceding month plus .60% of such Fund's
average daily net assets in excess of $1 billion during the preceding month. Net
asset value shall be computed in the manner, on such days and at such time or
times as described in the Funds' Prospectus from time to time. The fee for the
period from the date of commencement of operations of any Fund to the end of the
first month thereafter shall be prorated according to the proportion which such
period bears to the full monthly period, and upon any termination of this
Agreement with respect to any Fund before the end of any month, the fee for such
part of a month shall be prorated according to the proportion which such period
bears to the full monthly period and shall be payable upon the date of
termination of this Agreement with respect to such Fund.
5. Expenses. You will bear all of your own expenses in connection with
--------
the performance of your services under this Agreement, provided that such
expenses will not include the expenses to be borne by the Funds, as set forth
below. The expenses to be borne by the Funds include, without limitation, the
following: organizational costs; taxes; interest; brokerage fees and commissions
and other expenses in any way related to the execution, recording and settlement
of portfolio security transactions; fees of Directors who are not also your
officers; Securities and Exchange Commission fees; state Blue Sky qualification
fees; charges of custodians and transfer and dividend paying agents; premiums
for directors and officers liability insurance; costs of fidelity bonds;
industry association fees; outside auditing and legal expenses; costs of
maintaining corporate existence; costs of maintaining required books and
accounts; cost of office facilities and supplies; data
-4-
<PAGE>
processing, clerical, accounting and bookkeeping services and other
administrative expenses; costs attributable to investor services (including,
without limitation, telephone and personnel expenses); costs of Securities and
Exchange Commission regulatory reports; costs of shareholders' reports and
meetings; costs of preparing, printing and mailing prospectuses for regulatory
purposes and for distribution to existing shareholders; and any extraordinary
expenses.
6. Liability. You shall exercise your best judgment in rendering the
---------
services to be provided to each Fund. You shall remit to the particular Fund or
Funds the amount of any recovery you obtain for the benefit of such Fund or
Funds from any person or sub-adviser whom you have employed or with whom you
have contracted pursuant to Section 3 of this Agreement, for the acts and
omissions of such person or sub-adviser. Subject to the foregoing, each Fund
agrees as an inducement to you and others who may assist you in providing
services to such Fund that you and such other persons shall not be liable for
any alleged or actual error of judgment or mistake of law or for any alleged or
actual loss suffered by such Fund or the Company and each Fund and the Company
agree to indemnify and hold harmless you and such other persons against and from
any claims, liabilities, actions, suits, proceedings, judgments or damages (and
expenses as and when incurred in connection therewith, including the reasonable
cost of investigating or defending same, including, but not limited to
attorneys' fees) arising out of any such alleged or actual error of judgment or
mistake of law or loss; provided, however, that nothing herein shall be deemed
-------- -------
to protect or purport to protect you or any such other persons against any
liability to any Fund or to its shareholders to which you or they would
otherwise be subject by reason of willful misfeasance, bad faith or negligence
in the performance of duties hereunder, or by reason of reckless disregard of
the obligations and duties hereunder; and provided further, that this sentence
-------- -------
shall not inure to the benefit of any person or sub-adviser (or others who may
assist any such person or sub-adviser) whom you have employed or with whom you
have contracted pursuant to Section 3 of this Agreement.
7. Other Accounts. The Company understands that you and other persons
--------------
with whom you contract to provide the services hereunder may from time to time
act as investment adviser to one or more other investment companies and
fiduciary or other managed accounts, and the Company has no objection to your or
their so acting. When the purchase or sale of securities of the same issuer is
suitable for the investment objectives of two or more companies or accounts
managed by you or such other persons which have available funds for investment,
the available securities may be allocated in a manner believed by you and such
other persons to be equitable to each company or account. It is recognized
-5-
<PAGE>
that in some cases this procedure may adversely affect the price paid or
received by a Fund or the size of the position obtainable for or disposed of by
a Fund.
In addition, it is understood that you and the persons with whom you
contract to assist in the performance of your duties hereunder will not devote
their full time to such service and nothing contained herein shall be deemed to
limit or restrict your or their right to engage in and devote time and attention
to similar or other businesses.
8. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, you agree that all records which you maintain for the
Company are the property of the Company and you further agree to surrender
promptly to the Company any of such records upon the Company's request. You
further agree to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act such records that you, as investment adviser, are required to maintain
by Rule 31a-1 under the 1940 Act.
9. Term. This Agreement shall continue with respect to each Fund until
----
July 31, 1999 and thereafter shall continue automatically for successive 12-
month periods, provided such continuance with respect to each Fund is
specifically approved at least annually by the Company's Board of Directors or
by vote of the lesser of (a) 67% of the shares of such Fund represented at a
meeting if the holders of more than 50% of the outstanding shares of the Fund
are present in person or by proxy or (b) more than 50% of the outstanding shares
of such Fund, provided that in either event its continuance also is approved by
a majority of the Company's Directors who are not "interested persons" (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval. This Agreement
is terminable with respect to any Fund without penalty, on 60 days' notice, by
you or by the Company's Board of Directors or by vote of the lesser of (a) 67%
of the shares of such Fund represented at a meeting if the holders of more than
50% of the outstanding shares of the Fund are present in person or by proxy or
(b) more than 50% of the outstanding shares of such Fund. This Agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
10. Amendment. This Agreement may be amended only by an instrument in
---------
writing signed by the party against which enforcement of the amendment is
sought. No amendment of this Agreement shall be effective with respect to a
particular Fund until approved by vote of a majority of such Fund's outstanding
voting securities.
-6-
<PAGE>
11. M.S.D.& T. or Mercantile-Safe Deposit & Trust Company. The Company
-----------------------------------------------------
recognizes that from time to time your directors, officers and employees may
serve as directors, trustees, partners, officers and employees of other
corporations, business trusts, partnerships or other entities (including other
investment companies) and that such other entities may include the name "M.S.D.&
T." or "Mercantile-Safe Deposit & Trust Company" as part of their name. You or
your affiliates may enter into investment advisory or other agreements with such
other entities. If you cease to act as the Company's investment adviser, the
Company agrees that, at your request, the Company will take all necessary action
to change the name of the Company and its Funds to a name not including "M.S.D.&
T." or "Mercantile-Safe Deposit & Trust Company" in any form or combination of
words.
12. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule, or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Maryland law; provided, that nothing herein shall be construed in a
manner inconsistent with the 1940 Act, the Investment Advisers Act of 1940, as
amended, or any rule or regulation of the Securities and Exchange Commission
thereunder.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
M.S.D.& T. FUNDS, INC.
By: /s/Leslie B. Disharoon
----------------------
President
Accepted:
MERCANTILE-SAFE DEPOSIT &
TRUST COMPANY
By: /s/Kevin J. Dachille
--------------------
-7-
<PAGE>
EXHIBIT 6(c)
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BETWEEN M.S.D. & T. FUNDS, INC. AND BISYS FUND SERVICES
(FORMERLY KNOWN AS THE WINSBURY COMPANY LIMITED PARTNERSHIP)
DATED OCTOBER 1, 1993
NAME OF FUND NAME OF FUND
- ------------ ------------
Prime Money Market Fund International Equity Fund
Government Money Market Fund Diversified Real Estate Fund
Tax-Exempt Money Market Fund Equity Income Fund
Tax-Exempt Money Market Fund (Trust) Equity Growth Fund
Growth & Income Fund Total Return Bond Fund
Limited Maturity Bond Fund National Tax-Exempt Bond Fund
Maryland Tax-Exempt Bond Fund Intermediate Tax-Exempt Bond Fund
M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
------------------------
Title: President
Date: February 27, 1998
BISYS FUND SERVICES
By: /s/ J. David Huber
-------------------
Title: President
Date: March 3, 1998
<PAGE>
EXHIBIT 8(c)
CUSTODY AGREEMENT
(Equity Income, Equity Growth,
Total Return Bond, National Tax-Exempt Bond and
Intermediate Tax-Exempt Bond Funds)
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, OH 45265
Gentlemen:
Pursuant to Article XIV, Paragraph 14.4, of the Custody Agreement dated May
28, 1993 that you and we have entered into, we are writing to request that you
render custody services under the terms of said agreement with respect to the
Equity Income Fund, Equity Growth Fund, Total Return Bond Fund, National Tax-
Exempt Bond Fund and Intermediate Tax-Exempt Bond Fund, five additional
portfolios which we are establishing. Your compensation for the services
provided under said agreement for said additional portfolios shall be determined
in accordance with the Exhibit C attached to said agreement. Please execute a
copy of this letter where indicated to signify your agreement to provide said
services.
Sincerely,
Dated: February 27, 1998 M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
-----------------------
Title: President
ACKNOWLEDGED AND AGREED:
THE FIFTH THIRD BANK
By: /s/ Kenneth D. Bane Dated: March 24, 1998
--------------------
Title: Vice President
<PAGE>
Exhibit 9(e)
TRANSFER AGENCY AND SERVICE AGREEMENT
(Equity Income, Equity Growth,
Total Return Bond, National Tax-Exempt Bond and
Intermediate Tax-Exempt Bond Funds)
State Street Bank and Trust Company
2 Heritage Drive
North Quincy, MA 02171
Gentlemen:
Pursuant to Article 10, Paragraph 10.01, of the Transfer Agency and
Service Agreement dated November 1, 1992 that you and we have entered into, we
are writing to request that you render transfer agency services under the terms
of said agreement with respect to the Equity Income Fund, Equity Growth Fund,
Total Return Bond Fund, National Tax-Exempt Bond Fund and Intermediate Tax-
Exempt Bond Fund, five additional portfolios which we are establishing. Your
compensation for the services provided under said agreement for said additional
portfolios shall be determined in accordance with the Fee Schedules attached to
said agreement. Please execute a copy of this letter where indicated to signify
your agreement to provide said services.
Sincerely,
Dated: February 27, 1998 M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
-----------------------
Title: President
ACKNOWLEDGED AND AGREED:
STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logue Dated: April 21, 1998
-------------------
Title: Executive Vice President
<PAGE>
Exhibit 9(h)
Schedule A
TO THE ADMINISTRATION AGREEMENT
BETWEEN MERCANTILE-SAFE DEPOSIT & TRUST COMPANY
AND M.S.D. & T. FUNDS, INC.
DATED MAY 28, 1993
NAME OF FUND NAME OF FUND
- -------------------------------------- --------------------------------------
Prime Money Market Fund International Equity Fund
Government Money Market Fund Diversified Real Estate Fund
Tax-Exempt Money Market Fund Equity Income Fund
Tax-Exempt Money Market Fund (Trust) Equity Growth Fund
Growth & Income Fund Total Return Bond Fund
Limited Maturity Bond Fund National Tax-Exempt Bond Fund
Maryland Tax-Exempt Bond Fund Intermediate Tax-Exempt Bond Fund
M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
---------------------------
Title: President
Date: February 27, 1998
MERCANTILE-SAFE DEPOSIT & TRUST COMPANY
By: /s/ Linda A. Durkin
----------------------------
Title: Vice President
Date: February 27, 1998
<PAGE>
Exhibit 9(k)
SCHEDULE A
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN BISYS FUND SERVICES OHIO, INC.
(FORMERLY KNOWN AS THE WINSBURY SERVICE CORPORATION)
AND M.S.D. & T. FUNDS, INC.
DATED OCTOBER 1, 1993
NAME OF FUND NAME OF FUND
- ------------ ------------
Prime Money Market Fund Equity Fund
Government Money Market Fund Diversified Real Estate Fund
Tax-Exempt Money Market Fund Equity Income Fund
Tax-Exempt Money Market Fund (Trust) Equity Growth Fund
Growth & Income Fund Total Return Bond Fund
Limited Maturity Bond Fund National Tax-Exempt Bond Fund
Maryland Tax-Exempt Bond Fund Intermediate Tax-Exempt Bond Fund
M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B Disharoon
-----------------------
Title: President
Date: March 1, 1998
<PAGE>
BISYS FUND SERVICES OHIO, INC.
By: /s/ J. David Huber
-------------------
Title: President
Date: March 3, 1998
-2-
<PAGE>
SCHEDULE B
TO THE FUND ACCOUNTING AGREEMENT
BETWEEN BISYS FUND SERVICES OHIO, INC.
(FORMERLY KNOWN AS THE WINSBURY SERVICE CORPORATION)
AND M.S.D. & T. FUNDS, INC.
DATED OCTOBER 1, 1993
NAME OF FUND COMPENSATION
- ------------ ------------
Prime Money Market Fund Annual rate of two one-hundredths of
one percent (.02%) of the Prime Money
Market Fund's average daily net assets.
Government Money Market Fund Annual rate of two one-hundredths of
one percent (.02%) of the Government
Money Market Fund's average daily net
assets.
Tax-Exempt Money Market Fund Annual rate of three one-hundredths of
one percent (.03%) of the Tax-Exempt
Money Market Fund's average daily net
assets.
Tax-Exempt Money Market Fund (Trust) Annual rate of three one-hundredths of
one percent (.03%) of the Tax-Exempt
Money Market Fund's (Trust) average
daily net assets.
Growth & Income Fund Annual rate of three one-hundredths of
one percent (.03%) of the Growth &
Income Equity Fund's average daily net
assets.
Limited Maturity Bond Fund Annual rate of three one-hundredths of
one percent (.03%) of the Limited
Maturity Bond Fund's average daily net
assets.
Maryland Tax-Exempt Bond Fund Annual rate of four one-hundredths of
one percent (.04%) of the Maryland Tax
Exempt Bond Fund's average daily net
assets.
B-1
<PAGE>
International Equity Fund Annual rate of five one-hundredths of
one percent (.05%) of the International
Equity Fund's average daily net assets.
Diversified Real Estate Fund Annual rate of three one- hundredths of
one percent (.03%) of the Diversified
Real Estate Fund's average daily net
assets.
Equity Income Fund Annual rate of three one-hundredths of
one percent (.03%) of the Equity Income
Fund's average daily net assets.
Equity Growth Fund Annual rate of three one-hundredths of
one percent (.03%) of the Equity Growth
Fund's average daily net assets.
Total Return Bond Fund Annual rate of three one-hundredths of
one percent (.03%) of the Total Return
Bond Fund's average daily net assets.
National Tax-Exempt Bond Fund Annual rate of four one-hundredths of
one percent (.04%) of the National Tax-
Exempt Bond Fund's average daily net
assets.
Intermediate Tax-Exempt Bond Fund Annual rate of four one-hundredths of
one percent (.04%) of the Intermediate
Tax-Exempt Bond Fund's average daily
net assets.
B-2
<PAGE>
MULTIPLE CLASSES OF SHARES:
- --------------------------
Each class of shares within a Fund that maintains multiple classes of shares
having different net asset values or paying different daily dividends are
subject to a minimum annual fee of $10,000 per additional class.
M.S.D.& T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
--------------------------
Title: President
Date: March 1, 1998
BISYS FUND SERVICES OHIO, INC.
By: /s/ J. David Huber
-------------------
Title: President
Date: March 3, 1998
B-3
<PAGE>
Exhibit 10
Law Offices
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
July 28, 1998
M.S.D. & T. Funds, Inc
Two Hopkins Plaza
Baltimore, Maryland 21201
Re: M.S.D. & T. Funds, Inc. - Shares of Common Stock
------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to M.S.D. & T. Funds, Inc., a Maryland corporation
(the "Company"), in connection with the registration by the Company of its
shares of common stock, par value $.001 per share, under the Securities Act of
1933, as amended.
The Articles of Incorporation of the Company authorize the issuance of ten
billion (10,000,000,000) shares of common stock. The Board of Directors of the
Company has the power to classify or reclassify any authorized shares of common
stock into one or more classes of shares and to divide and classify shares of
any class into one or more series of such class. Pursuant to such authority,
the Board of Directors (i) has previously classified eight billion two hundred
million (8,200,000,000) of such authorized shares into fifteen classes (the
"Classes"), each Class representing interests in a separate portfolio of
investments (the "Funds"), and (ii) has classified two Classes of shares (Class
E and Class F) into two series of shares, known as Institutional Shares and AFBA
Five Star Shares (the "Series"). The Classes and Series are referred to herein
as the "Shares". The Board has previously authorized the issuance of Shares to
the public. Currently, the Company is authorized to issue Shares of the
following Classes and Series:
<PAGE>
M.S.D. & T. Funds, Inc.
July 28, 1998
Page 2
Fund Authorized Shares
- ------------------------------------------------ -----------------
Prime Money Market (Class A)............... 700,000,000
Government Money Market (Class B).......... 700,000,000
Tax-Exempt Money Market (Class C).......... 600,000,000
Tax-Exempt Money Market (Trust) (Class D).. 600,000,000
Growth & Income (Class E)..................
Institutional Shares.................. 500,000,000
AFBA Five Star Shares................. 500,000,000
Limited Maturity Bond (Class F)
Institutional Shares.................. 500,000,000
AFBA Five Star Shares................. 500,000,000
Maryland Tax-Exempt Bond (Class G)......... 400,000,000
International Equity (Class H)............. 400,000,000
International Bond (Class I)............... 400,000,000
Diversified Real Estate (Class J).......... 400,000,000
National Tax-Exempt Bond (Class K)......... 400,000,000
Total Return Bond (Class L)................ 400,000,000
Equity Growth (Class M).................... 400,000,000
Equity Income (Class N).................... 400,000,000
Intermediate Tax-Exempt Bond (Class O)..... 400,000,000
Unclassified Shares........................ 1,800,000,000
--------------
Total................................. 10,000,000,000
We have reviewed the Company's Articles of Incorporation, as supplemented (the
"Articles of Incorporation"), its Bylaws, as amended (the "Bylaws"), resolutions
of its Board of Directors and shareholders, and such other legal and factual
matters as we have deemed appropriate.
This opinion is based exclusively on the Maryland General Corporation Law and
the federal law of the United States of America.
We have also assumed the following for this opinion:
1. The Shares have been, and will continue to be, issued in
accordance with the Company's Articles of Incorporation and Bylaws and
resolutions of the Company's Board of Directors and shareholders relating to the
creation, authorization and issuance of the Shares.
2. The Shares have been, or will be, issued against consideration
therefor as described in the Company's prospectuses relating thereto, and such
consideration was, or will have been, in each case at least equal to the
applicable net asset value and the applicable par value.
<PAGE>
M.S.D. & T. Funds, Inc.
July 28, 1998
Page 3
3. The number of outstanding Shares has not and will not exceed the
number of Shares authorized for the particular Class or Series.
On the basis of the foregoing, it is our opinion that (i) the Shares
outstanding on the date hereof have been validly and legally issued and are
fully paid and non-assessable by the Company and (ii) any Shares issued and sold
after the date hereof will be validly and legally issued, fully paid and non-
assessable by the Company.
We hereby consent to the filing of this opinion as an exhibit to Post-
Effective Amendment No. 22 to the Company's Registration Statement on Form N-1A.
Very truly yours,
/s/Drinker Biddle & Reath LLP
-----------------------------------
DRINKER BIDDLE & REATH LLP
<PAGE>
Exhibit 11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 22
pursuant to the Securities Act of 1933 and the Amendment No. 23 to the
Investment Company Act of 1940, as amended, to the Registration Statement of
M.S.D.&T. Funds, Inc. on Form N-1A (File Nos. 33-27491 and 811-5782) of our
report dated July 17, 1998 on our audits of the financial statements and
financial highlights of the Funds, which report is included in the Annual Report
to Shareholders for the year ended May 31, 1998 which is incorporated by
reference in the Post-Effective Amendment Registration Statement. We also
consent to the reference to our Firm under the Captions "Independent
Accountants" and "Financial Statements" in the Statement of Additional
Information.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
2400 Eleven Penn Center
Philadelphia, PA
July 31, 1998
<PAGE>
Exhibit 11(b)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the captions "Management of the Company" and "Counsel" in the
Statement of Additional Information included in Post-Effective Amendment No. 23
to the Registration Statement (File Nos. 33-27491 and 811-5782) on Form N-1A of
M.S.D. & T. Funds, Inc. under the Securities Act of 1933 and the Investment
Company Act of 1940. This consent does not constitute a consent under Section 7
of the Securities Act of 1933, and in consenting to the use of our name and the
references to our firm under such captions we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under Section 7 or the rules and regulations
of the Securities and Exchange Commission thereunder.
/s/Drinker Biddle & Reath LLP
-----------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
July 31, 1998
<PAGE>
Exhibit 13(c)
PURCHASE AGREEMENT
------------------
M.S.D. & T. Funds, Inc. (the "Company"), a Maryland corporation, and BISYS
Fund Services Ohio, Inc. ("BISYS"), an Ohio corporation, hereby agree as
follows:
1. The Company hereby offers BISYS and BISYS hereby purchases one (1)
share of Class N Common Stock at $10.00 per share (such share of Common Stock in
the Company representing an interest in the Company's Equity Income Fund (the
"Fund") and being hereinafter known as the "Share"). BISYS hereby acknowledges
purchase of the Share and the Company hereby acknowledges receipt from BISYS of
funds in the amount of $10.00 in full payment for the Share.
2. BISYS represents and warrants to the Company that the Share is being
acquired for investment purposes and not for the purpose of distribution.
3. BISYS agrees that if it or any direct or indirect transferee of the
Share redeems the Share prior to the fifth anniversary of the date the Fund
begins investment activities, BISYS will pay to the Company an amount equal to
the number resulting from multiplying the Fund's total unamortized
organizational expenses by a fraction, the numerator of which is equal to the
number of shares redeemed by BISYS or such transferee and the denominator of
which is equal to the number of shares outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
4. All persons dealing with any class of shares of the Company must look
solely to the net assets belonging to such class for enforcement of any claims
against the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 27th day of February, 1998.
M.S.D. & T. FUNDS, INC.
By:/s/ Leslie B. Disharoon
-----------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ J. David Huber
------------------
Title: President
<PAGE>
Exhibit 13(d)
PURCHASE AGREEMENT
------------------
M.S.D. & T. Funds, Inc. (the "Company"), a Maryland corporation, and BISYS
Fund Services Ohio, Inc. ("BISYS"), an Ohio corporation, hereby agree as
follows:
1. The Company hereby offers BISYS and BISYS hereby purchases one (1)
share of Class M Common Stock at $10.00 per share (such share of Common Stock in
the Company representing an interest in the Company's Equity Growth Fund (the
"Fund") and being hereinafter known as the "Share"). BISYS hereby acknowledges
purchase of the Share and the Company hereby acknowledges receipt from BISYS of
funds in the amount of $10.00 in full payment for the Share.
2. BISYS represents and warrants to the Company that the Share is being
acquired for investment purposes and not for the purpose of distribution.
3. BISYS agrees that if it or any direct or indirect transferee of the
Share redeems the Share prior to the fifth anniversary of the date the Fund
begins investment activities, BISYS will pay to the Company an amount equal to
the number resulting from multiplying the Fund's total unamortized
organizational expenses by a fraction, the numerator of which is equal to the
number of shares redeemed by BISYS or such transferee and the denominator of
which is equal to the number of shares outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
4. All persons dealing with any class of shares of the Company must look
solely to the net assets belonging to such class for enforcement of any claims
against the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 27th day of February, 1998.
M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
-----------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ J. David Huber
------------------
Title: President
<PAGE>
Exhibit 13(e)
PURCHASE AGREEMENT
------------------
M.S.D. & T. Funds, Inc. (the "Company"), a Maryland corporation, and BISYS
Fund Services Ohio, Inc. ("BISYS"), an Ohio corporation, hereby agree as
follows:
1. The Company hereby offers BISYS and BISYS hereby purchases one (1)
share of Class L Common Stock at $10.00 per share (such share of Common Stock in
the Company representing an interest in the Company's Total Return Bond Fund
(the "Fund") and being hereinafter known as the "Share"). BISYS hereby
acknowledges purchase of the Share and the Company hereby acknowledges receipt
from BISYS of funds in the amount of $10.00 in full payment for the Share.
2. BISYS represents and warrants to the Company that the Share is being
acquired for investment purposes and not for the purpose of distribution.
3. BISYS agrees that if it or any direct or indirect transferee of the
Share redeems the Share prior to the fifth anniversary of the date the Fund
begins investment activities, BISYS will pay to the Company an amount equal to
the number resulting from multiplying the Fund's total unamortized
organizational expenses by a fraction, the numerator of which is equal to the
number of shares redeemed by BISYS or such transferee and the denominator of
which is equal to the number of shares outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
4. All persons dealing with any class of shares of the Company must look
solely to the net assets belonging to such class for enforcement of any claims
against the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 27th day of February, 1998.
M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
-----------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ J. David Huber
------------------
Title: President
<PAGE>
Exhibit 13(f)
PURCHASE AGREEMENT
------------------
M.S.D. & T. Funds, Inc. (the "Company"), a Maryland corporation, and BISYS
Fund Services Ohio, Inc. ("BISYS"), an Ohio corporation, hereby agree as
follows:
1. The Company hereby offers BISYS and BISYS hereby purchases one (1) share
of Class K Common Stock at $10.00 per share (such share of Common Stock in the
Company representing an interest in the Company's National Tax-Exempt Bond Fund
(the "Fund") and being hereinafter known as the "Share"). BISYS hereby
acknowledges purchase of the Share and the Company hereby acknowledges receipt
from BISYS of funds in the amount of $10.00 in full payment for the Share.
2. BISYS represents and warrants to the Company that the Share is being
acquired for investment purposes and not for the purpose of distribution.
3. BISYS agrees that if it or any direct or indirect transferee of the Share
redeems the Share prior to the fifth anniversary of the date the Fund begins
investment activities, BISYS will pay to the Company an amount equal to the
number resulting from multiplying the Fund's total unamortized organizational
expenses by a fraction, the numerator of which is equal to the number of shares
redeemed by BISYS or such transferee and the denominator of which is equal to
the number of shares outstanding as of the date of such redemption, as long as
the administrative position of the staff of the Securities and Exchange
Commission requires such reimbursement.
4. All persons dealing with any class of shares of the Company must look
solely to the net assets belonging to such class for enforcement of any claims
against the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
27th day of February, 1998.
M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
------------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/ J. David Huber
------------------
Title: President
<PAGE>
Exhibit 13(g)
PURCHASE AGREEMENT
------------------
M.S.D. & T. Funds, Inc. (the "Company"), a Maryland corporation, and BISYS
Fund Services Ohio, Inc. ("BISYS"), an Ohio corporation, hereby agree as
follows:
1. The Company hereby offers BISYS and BISYS hereby purchases one (1)
share of Class O Common Stock at $10.00 per share (such share of Common Stock in
the Company representing an interest in the Company's Intermediate Tax-Exempt
Bond Fund (the "Fund") and being hereinafter known as the "Share"). BISYS hereby
acknowledges purchase of the Share and the Company hereby acknowledges receipt
from BISYS of funds in the amount of $10.00 in full payment for the Share.
2. BISYS represents and warrants to the Company that the Share is being
acquired for investment purposes and not for the purpose of distribution.
3. BISYS agrees that if it or any direct or indirect transferee of the
Share redeems the Share prior to the fifth anniversary of the date the Fund
begins investment activities, BISYS will pay to the Company an amount equal to
the number resulting from multiplying the Fund's total unamortized
organizational expenses by a fraction, the numerator of which is equal to the
number of shares redeemed by BISYS or such transferee and the denominator of
which is equal to the number of shares outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
4. All persons dealing with any class of shares of the Company must look
solely to the net assets belonging to such class for enforcement of any claims
against the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 27th day of February, 1998.
M.S.D. & T. FUNDS, INC.
By: /s/Leslie B. Disharoon
------------------------
Title: President
BISYS FUND SERVICES OHIO, INC.
By: /s/J. David Huber
-------------------
Title: President
<PAGE>
Exhibit 16(e)
M.S.D. & T. FUNDS, INC.
TOTAL RETURN BOND FUND
YIELD CALCULATION FOR THE 30-DAY PERIOD
ENDED MAY 31, 1998
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
ACTUALS:
A= $ 521,623.58
B= $ 37,657.60
C= $10,197,269.64
D= $ 10.02
A-B
YIELD = 2[_______________ + 1]/6/ - 1]
CD
YIELD = 2[(521,623.58 - 37,657.60 + 1]/6/ - 1]
----------------------
10,197,269.64 x 10.02
YIELD = 5.78%
AGGREGATE ANNUAL TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
TAVG= 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 corporation, expressed in terms of years.
<PAGE>
ACTUALS:
ERV= 1,016.94
P= 1,000
n= 92
--
365
TAVG= [( ERV )/1/n/ -1]
----------
P
TAVG= [( 1,016.94 )/365/92/ -1] = 6.97%
----------
1,000
AGGREGATE TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
T= AGGREGATE 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
T= [ERV/P - 1]
T= [( 1,016.94 ) - 1] = 1.69%
------------
1,000
<PAGE>
M.S.D. & T. FUNDS, INC.
INTERMEDIATE TAX-EXEMPT FUND
YIELD CALCULATION FOR THE 30-DAY PERIOD
ENDED MAY 31, 1998
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
ACTUALS:
A= $ 330,854.81
B= $ 35,353.14
C= $9,545,698.13
D= $ 10.01
A-B
YIELD = 2[_______________ + 1]/6/ - 1]
CD
YIELD = 2[(330,854.81 - 35,353.14 + 1]/6/ - 1]
----------------------
9,545,698.13 x 10.01
YIELD = 3.74%
TAX EQUIVALENT YIELD CALCULATION FOR THE
30-DAY PERIOD ENDED MAY 31, 1998
Exempt Yield = the portion of the Fund's yield which is exempt from
federal income taxes.
Non-Exempt Yield = the portion, if any, of the Fund's yield which is not
exempt from federal income taxes.
Tax Rate = stated tax rate
<PAGE>
ACTUALS:
Exempt Yield = 3.74%
Non-Exempt Yield = 0.0%
Tax Rate = 39.6%
Tax-Equivalent Yield = (Exempt Yield) + Non-Exempt Yield
------------
(1 - Tax Rate)
Tax-Equivalent Yield = ( 0.0374 ) + 0.0
-------------
(1 - 0.396)
Tax Equivalent Yield = 6.19%
AGGREGATE ANNUAL TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
TAVG= 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 corporation, expressed in terms of years.
ACTUALS:
ERV= 1,010.74
P= 1,000
n= 92
--
365
TAVG= [( ERV )/1/n/ -1]
--------------
P
TAVG= [( 1,010.74 )/365/92/ -1] = 4.38%
----------
1,000
AGGREGATE TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
T= AGGREGATE 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
<PAGE>
T= [ERV/P - 1]
T= [( 1,010.75 ) - 1] = 1.07%
------------
1,000
<PAGE>
M.S.D. & T. FUNDS, INC.
NATIONAL TAX-EXEMPT BOND FUND
YIELD CALCULATION FOR THE 30-DAY PERIOD
ENDED MAY 31, 1998
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
ACTUALS:
A= $ 620,021.32
B= $ 65,173.38
C= $17,642,069.44
D= $ 10.05
A-B
YIELD = 2[_______________ + 1]/6/ - 1]
CD
YIELD = 2[(620,021.32 - 65,173.38 + 1]/6/ - 1]
----------------------
17,642,069.14 x 10.05
YIELD = 3.78%
TAX EQUIVALENT YIELD CALCULATION FOR THE
30-DAY PERIOD ENDED MAY 31, 1998
Exempt Yield = the portion of the Fund's yield which is exempt from
federal income taxes.
Non-Exempt Yield = the portion, if any, of the Fund's yield which is not
exempt from federal income taxes.
Tax Rate = stated tax rate
<PAGE>
ACTUALS:
Exempt Yield = 3.78%
Non-Exempt Yield = 0.0%
Tax Rate = 39.6%
Tax-Equivalent Yield = (Exempt Yield) + Non-Exempt Yield
--------------
(1 - Tax Rate)
Tax-Equivalent Yield = ( 0.0378 ) + 0.0
-------------
(1 - 0.396)
Tax Equivalent Yield = 6.26
AGGREGATE ANNUAL TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
TAVG= 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 corporation, expressed in terms of years.
ACTUALS:
ERV= 1,061.42
P= 1,000
n= 92
--
365
TAVG= [( ERV )/1/n/ -1]
--------------
P
TAVG= [( 1,016.42 )/365/92/ -1] = 6.75%
----------
1,000
AGGREGATE TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
T= AGGREGATE 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
<PAGE>
T= [ERV/P - 1]
T = [( 1,016.42 ) - 1] = 1.64%
------------
1,000
<PAGE>
M.S.D. & T. FUNDS, INC.
EQUITY INCOME FUND
YIELD CALCULATION FOR THE 30-DAY PERIOD
ENDED MAY 31, 1998
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
ACTUALS:
A= $ 571,903.43
B= $ 189,151.81
C= $31,544,471.37
D= $ 10.21
A-B
YIELD = 2[_______________ + 1]/6/ - 1]
CD
YIELD = 2[(571,903.43 - 189,151.81 + 1]/6/ - 1]
-----------------------
31,544,471.43 x 10.21
YIELD = 1.43%
AGGREGATE ANNUAL TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
TAVG= 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 corporation, expressed in terms of years.
<PAGE>
ACTUALS:
ERV = 1,022.81
P = 1,000
n = 92
--
365
TAVG= [( ERV )/1/n/ -1]
--------------
P
TAVG= [( 1,022.81 )/365/92/ -1] = 9.47%
----------
1,000
AGGREGATE TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
T= AGGREGATE 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
T= [ERV/P - 1]
T = [( 1,022.81 ) - 1] = 2.28%
------------
1,000
<PAGE>
M.S.D. & T. FUNDS, INC.
EQUITY GROWTH FUND
YIELD CALCULATION FOR THE 30-DAY PERIOD
ENDED MAY 31, 1998
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
ACTUALS:
A= $ 39,086.94
B= $ 20,701.92
C= $3,435,510.69
D= $ 10.28
A-B
YIELD = 2[_______________ + 1]/6/ - 1]
CD
YIELD = 2[(39,086.94 - 20,701.92 + 1]/6/ - 1]
---------------------
3,435,510.69 x 10.28
YIELD = 0.63%
AGGREGATE ANNUAL TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
TAVG= 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 corporation, expressed in terms of years.
<PAGE>
ACTUALS:
ERV = 1,028.89
P = 1,000
n = 92
--
365
TAVG= [( ERV )/1/n/ -1]
--------------
P
TAVG= [( 1,028.89 )/365/92/ -1] = 12.10%
----------
1,000
AGGREGATE TOTAL RETURN FOR THE PERIOD FROM
MARCH 1, 1998 TO MAY 31, 1998
T= AGGREGATE 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
T= [ERV/P - 1]
T = [( 1,028.89 ) - 1] = 2.89%
------------
1,000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 010
<NAME> PRIME MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 449,026
<INVESTMENTS-AT-VALUE> 449,026
<RECEIVABLES> 1,888
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 450,914
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,164
<TOTAL-LIABILITIES> 2,164
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 448,859
<SHARES-COMMON-STOCK> 448,859
<SHARES-COMMON-PRIOR> 368,932
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (109)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 448,750
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,570
<OTHER-INCOME> 0
<EXPENSES-NET> 1,684
<NET-INVESTMENT-INCOME> 20,886
<REALIZED-GAINS-CURRENT> (30)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 20,856
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 20,886
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 576,075
<NUMBER-OF-SHARES-REDEEMED> (497,024)
<SHARES-REINVESTED> 876
<NET-CHANGE-IN-ASSETS> 79,898
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (79)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,002
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,874
<AVERAGE-NET-ASSETS> 400,965
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
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<PER-SHARE-NAV-END> 1.00
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 020
<NAME> GOVERNMENT MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
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<INVESTMENTS-AT-VALUE> 392,140
<RECEIVABLES> 892
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 393,032
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<OTHER-ITEMS-LIABILITIES> 1,899
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<PAID-IN-CAPITAL-COMMON> 391,259
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<SHARES-COMMON-PRIOR> 340,935
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<ACCUMULATED-NET-GAINS> (126)
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<INTEREST-INCOME> 19,979
<OTHER-INCOME> 0
<EXPENSES-NET> 1,507
<NET-INVESTMENT-INCOME> 18,472
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<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 18,472
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18,472
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 565,932
<NUMBER-OF-SHARES-REDEEMED> (516,413)
<SHARES-REINVESTED> 805
<NET-CHANGE-IN-ASSETS> 50,324
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (126)
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<GROSS-EXPENSE> 1,663
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<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
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<PER-SHARE-DIVIDEND> (.05)
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<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 030
<NAME> TAX-EXEMPT MONEY MARKET FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
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<INVESTMENTS-AT-VALUE> 89,546
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<REALIZED-GAINS-CURRENT> (1)
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<ACCUMULATED-GAINS-PRIOR> (7)
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<GROSS-EXPENSE> 432
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<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .03
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<PER-SHARE-DIVIDEND> (.03)
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<PER-SHARE-NAV-END> 1.00
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 040
<NAME> TAX-EXEMPT MONEY MARKET FUND (TRUST)
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
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<SENIOR-EQUITY> 0
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<NET-INVESTMENT-INCOME> 1,895
<REALIZED-GAINS-CURRENT> (1)
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<NET-CHANGE-FROM-OPS> 1,894
<EQUALIZATION> 0
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<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 57,910
<NUMBER-OF-SHARES-REDEEMED> (49,231)
<SHARES-REINVESTED> 0
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<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 152
<AVERAGE-NET-ASSETS> 56,264
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.03)
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 050
<NAME> GROWTH & INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 225,362
<INVESTMENTS-AT-VALUE> 372,795
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<OTHER-ITEMS-ASSETS> 0
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<OTHER-ITEMS-LIABILITIES> 267
<TOTAL-LIABILITIES> 267
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 301,950
<SHARES-COMMON-STOCK> 17,497
<SHARES-COMMON-PRIOR> 7,904
<ACCUMULATED-NII-CURRENT> 153
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 609
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 71,153
<NET-ASSETS> 373,865
<DIVIDEND-INCOME> 2,788
<INTEREST-INCOME> 237
<OTHER-INCOME> 0
<EXPENSES-NET> 1,261
<NET-INVESTMENT-INCOME> 1,764
<REALIZED-GAINS-CURRENT> 14,390
<APPREC-INCREASE-CURRENT> 24,785
<NET-CHANGE-FROM-OPS> 40,939
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,933
<DISTRIBUTIONS-OF-GAINS> 15,671
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,855
<NUMBER-OF-SHARES-REDEEMED> (1,774)
<SHARES-REINVESTED> 512
<NET-CHANGE-IN-ASSETS> 229,619
<ACCUMULATED-NII-PRIOR> 322
<ACCUMULATED-GAINS-PRIOR> 1,889
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,064
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,558
<AVERAGE-NET-ASSETS> 187,151
<PER-SHARE-NAV-BEGIN> 18.25
<PER-SHARE-NII> .20
<PER-SHARE-GAIN-APPREC> 5.01
<PER-SHARE-DIVIDEND> (.23)
<PER-SHARE-DISTRIBUTIONS> (1.86)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.37
<EXPENSE-RATIO> .71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 060
<NAME> LIMITED MATURITY BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 148,813
<INVESTMENTS-AT-VALUE> 150,373
<RECEIVABLES> 1,917
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 152,290
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 368
<TOTAL-LIABILITIES> 368
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 151,316
<SHARES-COMMON-STOCK> 14,543
<SHARES-COMMON-PRIOR> 4,253
<ACCUMULATED-NII-CURRENT> 8
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 595
<NET-ASSETS> 151,922
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,694
<OTHER-INCOME> 0
<EXPENSES-NET> 218
<NET-INVESTMENT-INCOME> 2,476
<REALIZED-GAINS-CURRENT> 415
<APPREC-INCREASE-CURRENT> 653
<NET-CHANGE-FROM-OPS> 3,544
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,476
<DISTRIBUTIONS-OF-GAINS> 328
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,509
<NUMBER-OF-SHARES-REDEEMED> (1,362)
<SHARES-REINVESTED> 143
<NET-CHANGE-IN-ASSETS> 108,074
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (80)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 152
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 337
<AVERAGE-NET-ASSETS> 50,156
<PER-SHARE-NAV-BEGIN> 10.31
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> .22
<PER-SHARE-DIVIDEND> (.60)
<PER-SHARE-DISTRIBUTIONS> (.08)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.45
<EXPENSE-RATIO> .50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 070
<NAME> MARYLAND TAX-EXEMPT BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 14,828
<INVESTMENTS-AT-VALUE> 15,239
<RECEIVABLES> 303
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,542
<PAYABLE-FOR-SECURITIES> 493
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 69
<TOTAL-LIABILITIES> 562
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,020
<SHARES-COMMON-STOCK> 1,384
<SHARES-COMMON-PRIOR> 799
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (450)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 410
<NET-ASSETS> 14,980
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 507
<OTHER-INCOME> 0
<EXPENSES-NET> 50
<NET-INVESTMENT-INCOME> 457
<REALIZED-GAINS-CURRENT> 115
<APPREC-INCREASE-CURRENT> 267
<NET-CHANGE-FROM-OPS> 839
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 457
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 653
<NUMBER-OF-SHARES-REDEEMED> (77)
<SHARES-REINVESTED> 9
<NET-CHANGE-IN-ASSETS> 6,683
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (565)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 51
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 105
<AVERAGE-NET-ASSETS> 10,342
<PER-SHARE-NAV-BEGIN> 10.38
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .44
<PER-SHARE-DIVIDEND> (.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.82
<EXPENSE-RATIO> .49
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 080
<NAME> INTERNATIONAL EQUITY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 66,104
<INVESTMENTS-AT-VALUE> 82,859
<RECEIVABLES> 6,929
<ASSETS-OTHER> 433
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 90,221
<PAYABLE-FOR-SECURITIES> 1,301
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,518
<TOTAL-LIABILITIES> 4,819
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 68,538
<SHARES-COMMON-STOCK> 6,145
<SHARES-COMMON-PRIOR> 6,320
<ACCUMULATED-NII-CURRENT> 168
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (202)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,898
<NET-ASSETS> 85,402
<DIVIDEND-INCOME> 1,526
<INTEREST-INCOME> 88
<OTHER-INCOME> 0
<EXPENSES-NET> 851
<NET-INVESTMENT-INCOME> 763
<REALIZED-GAINS-CURRENT> 3,708
<APPREC-INCREASE-CURRENT> 4,894
<NET-CHANGE-FROM-OPS> 9,365
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 940
<DISTRIBUTIONS-OF-GAINS> 3,971
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 899
<NUMBER-OF-SHARES-REDEEMED> (1,136)
<SHARES-REINVESTED> 62
<NET-CHANGE-IN-ASSETS> 2,089
<ACCUMULATED-NII-PRIOR> 14
<ACCUMULATED-GAINS-PRIOR> 392
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 661
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 942
<AVERAGE-NET-ASSETS> 82,485
<PER-SHARE-NAV-BEGIN> 13.18
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> 1.42
<PER-SHARE-DIVIDEND> (.15)
<PER-SHARE-DISTRIBUTIONS> (.67)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.90
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 090
<NAME> DIVERSIFIED REAL ESTATE FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 6,666
<INVESTMENTS-AT-VALUE> 6,672
<RECEIVABLES> 11
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,683
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6
<TOTAL-LIABILITIES> 6
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,640
<SHARES-COMMON-STOCK> 659
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 29
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6
<NET-ASSETS> 6,677
<DIVIDEND-INCOME> 234
<INTEREST-INCOME> 24
<OTHER-INCOME> 0
<EXPENSES-NET> 50
<NET-INVESTMENT-INCOME> 208
<REALIZED-GAINS-CURRENT> 2
<APPREC-INCREASE-CURRENT> 6
<NET-CHANGE-FROM-OPS> 216
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 157
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 22
<NUMBER-OF-SHARES-SOLD> 680
<NUMBER-OF-SHARES-REDEEMED> (21)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 6,677
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 112
<AVERAGE-NET-ASSETS> 5,974
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> .12
<PER-SHARE-DIVIDEND> (.28)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (.03)
<PER-SHARE-NAV-END> 10.13
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 100
<NAME> NATIONAL TAX-EXEMPT BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 167,598
<INVESTMENTS-AT-VALUE> 175,953
<RECEIVABLES> 2,910
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 178,863
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 747
<TOTAL-LIABILITIES> 747
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 177,166
<SHARES-COMMON-STOCK> 17,716
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 438
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 512
<NET-ASSETS> 178,116
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,196
<OTHER-INCOME> 0
<EXPENSES-NET> 200
<NET-INVESTMENT-INCOME> 1,996
<REALIZED-GAINS-CURRENT> 437
<APPREC-INCREASE-CURRENT> 512
<NET-CHANGE-FROM-OPS> 2,945
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,996
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,087
<NUMBER-OF-SHARES-REDEEMED> (371)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 178,116
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 222
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 382
<AVERAGE-NET-ASSETS> 176,580
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> .05
<PER-SHARE-DIVIDEND> (.11)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.05
<EXPENSE-RATIO> .45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 110
<NAME> TOTAL RETURN BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 98,626
<INVESTMENTS-AT-VALUE> 100,932
<RECEIVABLES> 984
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 101,916
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 553
<TOTAL-LIABILITIES> 553
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,196
<SHARES-COMMON-STOCK> 10,120
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 6
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 158
<NET-ASSETS> 101,363
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,612
<OTHER-INCOME> 0
<EXPENSES-NET> 114
<NET-INVESTMENT-INCOME> 1,498
<REALIZED-GAINS-CURRENT> 9
<APPREC-INCREASE-CURRENT> 158
<NET-CHANGE-FROM-OPS> 1,665
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,498
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,575
<NUMBER-OF-SHARES-REDEEMED> (455)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 101,363
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 89
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 185
<AVERAGE-NET-ASSETS> 100,829
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .15
<PER-SHARE-GAIN-APPREC> .02
<PER-SHARE-DIVIDEND> (.15)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.02
<EXPENSE-RATIO> .45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 120
<NAME> EQUITY GROWTH FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 23,429
<INVESTMENTS-AT-VALUE> 34,856
<RECEIVABLES> 50
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 34,906
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 30
<TOTAL-LIABILITIES> 30
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 33,880
<SHARES-COMMON-STOCK> 3,392
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 30
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,420
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,454)
<NET-ASSETS> 34,876
<DIVIDEND-INCOME> 113
<INTEREST-INCOME> 12
<OTHER-INCOME> 0
<EXPENSES-NET> 63
<NET-INVESTMENT-INCOME> 62
<REALIZED-GAINS-CURRENT> 2,420
<APPREC-INCREASE-CURRENT> (1,455)
<NET-CHANGE-FROM-OPS> 1,027
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 32
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,556
<NUMBER-OF-SHARES-REDEEMED> (164)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 34,876
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 54
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 92
<AVERAGE-NET-ASSETS> 35,673
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> .27
<PER-SHARE-DIVIDEND> (.01)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.28
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 130
<NAME> EQUITY INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 161,323
<INVESTMENTS-AT-VALUE> 318,579
<RECEIVABLES> 2,142
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 320,721
<PAYABLE-FOR-SECURITIES> 426
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 324
<TOTAL-LIABILITIES> 750
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 312,783
<SHARES-COMMON-STOCK> 31,332
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 618
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13,571
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,001)
<NET-ASSETS> 319,971
<DIVIDEND-INCOME> 1,636
<INTEREST-INCOME> 162
<OTHER-INCOME> 0
<EXPENSES-NET> 585
<NET-INVESTMENT-INCOME> 1,213
<REALIZED-GAINS-CURRENT> 13,571
<APPREC-INCREASE-CURRENT> (7,001)
<NET-CHANGE-FROM-OPS> 7,783
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 595
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 32,901
<NUMBER-OF-SHARES-REDEEMED> (1,569)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 319,971
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 502
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 777
<AVERAGE-NET-ASSETS> 329,546
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> .19
<PER-SHARE-DIVIDEND> (.02)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.21
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 140
<NAME> INTERMEDIATE TAX-EXEMPT BOND FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 91,685
<INVESTMENTS-AT-VALUE> 92,594
<RECEIVABLES> 6,153
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 98,747
<PAYABLE-FOR-SECURITIES> 4,317
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 438
<TOTAL-LIABILITIES> 4,755
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 93,915
<SHARES-COMMON-STOCK> 9,391
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 44
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 33
<NET-ASSETS> 93,992
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,054
<OTHER-INCOME> 0
<EXPENSES-NET> 110
<NET-INVESTMENT-INCOME> 944
<REALIZED-GAINS-CURRENT> 44
<APPREC-INCREASE-CURRENT> 33
<NET-CHANGE-FROM-OPS> 1,021
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 944
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,058
<NUMBER-OF-SHARES-REDEEMED> (667)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 93,992
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 123
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 215
<AVERAGE-NET-ASSETS> 97,146
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> .01
<PER-SHARE-DIVIDEND> (.10)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.01
<EXPENSE-RATIO> .45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
