<PAGE>
As filed with the Securities and Exchange Commission on July 30, 1999
Registration Nos. 33-27491
811-5782
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [_]
Post-Effective Amendment No. 23 [X]
and
REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24 [X]
(Check appropriate box or boxes)
____________________
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
One Logan Square
18th and Cherry Streets
Philadelphia, Pennsylvania 19103-6996
(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) of Rule 485
[_] 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
PROSPECTUS
September 30, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these Funds or determined if this
prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RISK/RETURN SUMMARY........................................................ 1
Introduction............................................................. 1
Growth & Income Fund..................................................... 2
Equity Income Fund....................................................... 4
Equity Growth Fund....................................................... 5
International Equity Fund................................................ 6
Diversified Real Estate Fund............................................. 8
Fees and Expenses........................................................ 11
Additional Information about Risk........................................ 11
INVESTING IN THE FUNDS..................................................... 12
Getting Your Investment Started.......................................... 12
How To Buy Fund Shares................................................... 12
How To Sell Fund Shares.................................................. 14
Other Purchase and Redemption Information................................ 16
SHAREHOLDER SERVICES....................................................... 16
Retirement Plans......................................................... 16
Exchange Privilege....................................................... 17
Automatic Investment Plan................................................ 17
Systematic Withdrawals................................................... 17
Directed Reinvestments................................................... 17
DIVIDENDS AND DISTRIBUTIONS................................................ 18
TAX INFORMATION............................................................ 18
MANAGEMENT OF THE COMPANY.................................................. 19
Investment Adviser....................................................... 19
Sub-Adviser.............................................................. 19
FINANCIAL HIGHLIGHTS....................................................... 20
</TABLE>
If You Have Questions
For current yield, purchase and redemption information, call 1-800-551-2145.
<PAGE>
RISK/RETURN SUMMARY
Introduction
This Prospectus describes the M.S.D.&T. Equity Funds (the "Funds"), five
investment portfolios offered by M.S.D.&T. Funds, Inc. (the "Company"). On the
following pages, you will find important information about each Fund,
including:
. The Fund's investment objective and the principal investment strategies
used by the Fund's investment adviser in trying to achieve that
objective;
. The principal risks associated with an investment in the Fund;
. The Fund's past performance measured on both a year-by-year and long-term
basis; and
. The fees and expenses you will pay as an investor in the Fund.
The M.S.D.&T. Equity Funds may be appropriate for investors seeking growth
of their investment over time and who are willing to accept the risks
associated with stock markets. Equity funds have the potential for higher
returns than other funds, such as bond funds or money market funds, but also
carry more risk. The Funds may not be appropriate for investors who are
investing for short-term goals or are mainly seeking current income.
Before investing in a Fund, you should carefully consider:
. Your investment goals;
. Your investment time horizon; and
. Your tolerance for risk.
The Investment Adviser
Mercantile-Safe Deposit and Trust Company ("Mercantile" or the "Adviser") is
the investment adviser for each Fund. Mercantile, which has its main office at
Two Hopkins Plaza, Baltimore, Maryland 21201, is the lead bank of Mercantile
Bankshares Corporation, a multi-bank holding company organized in 1969.
Mercantile and its predecessors have been in the business of managing the
investments of fiduciary and other accounts in the Baltimore area since 1864.
As of June 30, 1999, Mercantile had approximately $15 billion in assets under
management, of which approximately $856 million represented the assets of an
institutional real estate pension fund.
An investment in the Funds is not a deposit of Mercantile-Safe Deposit and
Trust Company and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. You could lose money by
investing in the Funds.
<PAGE>
Growth & Income Fund
Investment Objective
The Fund's investment objective is to seek long-term capital appreciation,
with income as a secondary objective.
Principal Investment Strategies
The Fund follows both a value and growth oriented investment strategy. It
invests primarily in common stocks of companies the Adviser believes possess
above average growth prospects at attractive relative valuations. In
evaluating an investment, the Adviser focuses on companies which appear to be
financially strong with leadership positions in their industries. These
companies will generally have what the Adviser believes to be a superior track
record of growth in sales, earnings and dividends.
[Sidebar:]
Value Stocks
Value stocks are those that appear to be underpriced based on valuation
measures, such as lower price to earnings and price to book value ratios.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in common stock, preferred stock and securities
convertible into common stock. These securities will generally be publicly-
traded common stocks of U.S. companies. However, 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, European Depository Receipts
and Global Depository Receipts.
The Fund follows a disciplined buy/sell process. The Adviser may perform
quantitative analysis of financial statements, industry and economic trends.
This is complemented by qualitative analysis such as understanding a company's
products and management; judging growth prospects and assessing risks.
Finally, an appropriate valuation level is emphasized. The Fund will likely
sell an investment which has become relatively overvalued in relation to other
issues or when the underlying fundamentals deteriorate and analysis indicates
no improvement in the visible future, as determined by the Adviser.
Principal Risks of Investing in the Fund
The value of common stocks and other equity securities may decline in
response to changes in the U.S. or foreign markets. Such declines may take
place over short or extended periods of time. Equity markets tend to move in
cycles, with periods of rising prices and periods of falling prices. The value
of your investment in the Fund will fluctuate with the value of the securities
the Fund holds. In addition, the Fund is subject to the additional risk that
the value stocks it typically holds may not perform as well as other types of
stocks, such as growth stocks, even in times of rising markets.
Foreign investments may be riskier than U.S. investments because of factors
such as foreign government restrictions, changes in currency exchange rates,
incomplete financial information about the issuers of securities, and
political or economic instability. Foreign stocks may be more volatile and
less liquid than U.S. stocks.
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they further the Fund's investment objective. It
is possible, however, that these evaluations will prove to be inaccurate.
2
<PAGE>
[Sidebar:]
Portfolio Manager
The 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. Mr. Govil has managed the Fund since
April 1996.
Fund Performance
The bar chart and table below show the Fund's annual returns and long-term
performance, thereby giving some indication of the risk of investing in the
Fund. The bar chart shows how the performance of the Fund has varied from year
to year. The table shows how the Fund's average annual total returns for one
year, five years and since inception compared to those of a broad-based market
index. Both the bar chart and the table assume reinvestment of all dividends
and distributions. The Fund's past performance does not necessarily indicate
how it will perform in the future.
[Bar Chart]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
[Sidebar:] Calendar Year Total Returns
-----------------------------------------
1992 1993 1994 1995 1996 1997 1998
----- ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Best quarter: 8.14% 10.33% 2.41% 24.14% 20.09% 34.15% 26.20%
22.18% for the
quarter ended
December 31,
1998
<CAPTION>
-----------------------------------------
Worst quarter:
(9.81)% for the Year-to-date total return for the six
quarter ended months ended June 30, 1999: 9.95%
September 30,
1998
</TABLE>
- --------------------------------------------------------------------------------
Average Annual Total Returns (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth & Income Fund......................... 26.20% 20.91% 17.22%
S&P 500 Index................................ 28.58% 24.06% 19.58%
- ---------------------------------------------------------------------------------
</TABLE>
*February 28, 1991
[Sidebar:]
The S&P 500 Index is an unmanaged index comprised of 500 widely held common
stocks listed on the New York Stock Exchange, the American Stock Exchange and
NASDAQ.
3
<PAGE>
Equity Income Fund
Investment Objective
The Fund's investment objective is to seek current income and long-term
capital appreciation consistent with reasonable risk.
The Fund's investment objective can be changed by the Company's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
[Sidebar:]
Current Income
Current income includes both dividends from stocks and interest income from
fixed income securities less Fund expenses.
Principal Investment Strategies
The Fund invests primarily in common stocks that the Adviser believes are
likely to produce higher than average dividend yields and which appear to
represent good relative values with the potential appreciate in price. In
evaluating whether or not to purchase a particular stock, the Adviser may
consider that stock's price to earnings ratio, price to sales ratio, price to
cash flow ratio, price to book value ratio, historic earnings trend and
dividend growth rate.
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 securities convertible into common stock.
These securities will generally be publicly-traded common stocks of U.S.
companies. However, 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, European Depository Receipts and Global Depository
Receipts.
The Fund will likely sell a portfolio security when it has met established
price targets or has become relatively overvalued compared to other issues, as
determined by the Adviser. A security may also be sold as a result of a
deterioration in the performance of the security or in the financial condition
of the issuer of the security.
Principal Risks of Investing in the Fund
The value of common stocks and other equity securities may decline in
response to changes in the U.S. or foreign markets. Such declines may take
place over short or extended periods of time. Equity markets tend to move in
cycles, with periods of rising prices and periods of falling prices. The value
of your investment in the Fund will fluctuate with the value of the securities
the Fund holds. In addition, the Fund is subject to the additional risk that
the securities it holds may not perform as well as other securities, even in
times of rising markets.
Foreign investments may be riskier than U.S. investments because of factors
such as foreign government restrictions, changes in currency exchange rates,
incomplete financial information about the issuers of securities, and
political or economic instability. Foreign stocks may be more volatile and
less liquid than U.S. stocks.
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they further the Fund's investment objective. It
is possible, however, that these evaluations will prove to be inaccurate.
4
<PAGE>
[Sidebar:]
Portfolio Manager
The Fund is managed by Charles W. Brooks Jr., C.F.A. Mr. Brooks, Senior Vice
President and Director of Equity Research of Mercantile, is responsible for
the management of equity selection at Mercantile. Mr. Brooks has been with
Mercantile since 1993 and has managed the Fund since it commenced operations
in 1998. Mr. Brooks has thirty-six years of investment experience.
Fund Performance
The Fund commenced operations on March 1, 1998. As a result, the Fund has a
performance record of less than one full calendar year.
Equity Growth Fund
Investment Objective
The Fund's investment objective is to seek long-term capital appreciation.
The Fund's investment objective can be changed by the Company's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
[Sidebar:]
Growth Stocks
Growth stocks offer strong revenue and earnings potential and accompanying
capital growth, with less dividend income than value stocks.
Principal Investment Strategies
The Fund invests primarily in common stock which the Adviser believes to
represent good growth potential and seem likely to appreciate in price. In
selecting securities for the Fund, the Adviser evaluates a company's earnings
history and the risk and volatility of the company's business. The Adviser
also evaluates other factors, such as technological advances, good product
development and strong management, which support future growth.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in growth-oriented equity securities, including common
stock, preferred stock and securities convertible into common stock. These
securities will generally be publicly-traded common stocks of U.S. companies.
However, 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, European Depository Receipts and Global Depository Receipts.
The Fund will sell a security if there is an adverse change in the projected
earnings growth of the company issuing the security. The Fund will also sell a
portfolio security when, as a result of changes in the economy or the
performance of the security or other circumstances, the Adviser believes that
holding the security is no longer consistent with the Fund's investment
objective.
Principal Risks of Investing in the Fund
The value of common stocks and other equity securities may decline in
response to changes in the U.S. or foreign markets. Such declines may take
place over short or extended periods of time. Equity markets tend to move in
cycles, with periods of rising prices and periods of falling prices. The value
of your investment in the Fund will fluctuate with the value of the securities
the Fund holds. In addition, the Fund is subject to the additional risk that
the growth stocks which it typically holds may not perform as well as other
types of stocks, such as value stocks, even in times of rising markets.
5
<PAGE>
Foreign investments may be riskier than U.S. investments because of factors
such as foreign government restrictions, changes in currency exchange rates,
incomplete financial information about the issuers of securities, and
political or economic instability. Foreign stocks may be more volatile and
less liquid than U.S. stocks.
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they further the Fund's investment objective. It
is possible, however, that these evaluations will prove to be inaccurate.
[Sidebar:]
Portfolio Manager
The Fund is co-managed by Charles W. Brooks, Jr., C.F.A., Senior Vice
President and Director of Equity Research, in conjunction with Christopher G.
Frink. Mr. Brooks has been with Mercantile since 1993 and has co-managed the
Fund since September 1999. Mr. Brooks has thirty-six years of investment
research. Mr. Frink, Assistant Vice President of Mercantile, is responsible
for equity management of endowment and pension funds and has been with
Mercantile since 1997. Mr. Fink has co-managed the Fund since September 1999.
Prior to joining Mercantile, he was a portfolio manager at Oxford Capital
Management until 1995. Mr. Frink has eight years investment experience.
Fund Performance
The Fund commenced operations on March 1, 1998. As a result, the Fund has a
performance record of less than one full calendar year.
International Equity Fund
Investment Objective
The Fund's investment objective is to seek 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.
Principal Investment Strategies
[Sidebar:]
Sub-Adviser/Portfolio Manager
Mercantile has appointed BlackRock International Ltd. ("BlackRock" or the
"Sub-Adviser") as sub-adviser to assist in the day to day management of the
Fund. The organizational arrangements of BlackRock's international equity team
require that all investment decisions with respect to the 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 Fund invests primarily in foreign common stocks, warrants and rights.
The Fund will generally acquire stocks with relatively low ratios of market
values to earnings and to book values.
Under normal market and economic conditions, the Fund will invest at least
65% of its total assets in the equity securities of issuers in at least three
different foreign countries. There are no limitations on the amount of the
Fund's assets which may be invested in securities of issuers in any one
country. However, under normal market and economic conditions, no more than
25% of the Fund's net assets will be invested in the securities of issuers
located in countries with emerging economies or securities markets.
In determining how much to invest in each country and region, the Sub-
Adviser looks at factors such as prospects for economic growth, expected
inflation levels, government policies and the range of investment
6
<PAGE>
opportunities available. In selecting stocks, the Sub-Adviser determines which
companies represent the best values relative to their long-term growth
prospects and local markets. Decisions as to particular investments are made
by the Sub-Adviser under the supervision of the Adviser.
The Fund will sell a security if, as a result of changes in the economy of a
particular country or region, the Sub-Adviser believes that holding the
security is no longer consistent with the Fund's investment objective. A
security may also be sold as a result of a deterioration in the performance of
the security or in the financial condition of the company that issued the
security.
Principal Risks of Investing in the Fund
The value of common stock and other equity securities may decline in
response to changes in the U.S. or foreign markets. Such declines may take
place over short or extended periods of time. Equity markets tend to move in
cycles, with periods of rising prices and periods of falling prices. The value
of your investment in the Fund will fluctuate with the value of the securities
the Fund holds. In addition, the Fund is subject to the additional risk that
the securities it holds may not perform as well as other securities, even in
times of rising markets.
Investing in securities of foreign issuers may be riskier than investing in
securities of U.S. issuers due to factors such as foreign government
restrictions, changes in currency exchange rates, different accounting
standards and political or economic instability. Foreign stocks may be more
volatile and less liquid than U.S. stocks.
The risks associated with foreign investments are heightened when investing
in emerging markets. The governments and economies of emerging market
countries feature greater instability than those of more developed countries.
Such investments tend to fluctuate in price more widely and to be less liquid
than other foreign investments.
There are no limitations on the amount of the Fund's assets which may be
invested in securities of issuers in any one country. When the Fund invests a
high percentage of its assets in a particular country, the Fund will be
especially susceptible to factors affecting that country.
Although the Fund usually makes investments that are sold in foreign
currencies, it values its holdings in U.S. dollars. If the U.S. dollar rises
compared to a foreign currency, the Fund loses on the currency exchange.
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they further the Fund's investment objective. It
is possible, however, that these evaluations will prove to be inaccurate.
7
<PAGE>
Fund Performance
The bar chart and table below show the Fund's annual returns and long-term
performance, thereby giving some indication of the risk of investing in the
Fund. The bar chart shows how the performance of the Fund has varied from year
to year. The table shows how the Fund's average annual total returns for one
year, five years and since inception compared to those of a broad-based market
index. Both the bar chart and the table assume reinvestment of all dividends
and distributions. The Fund's past performance does not necessarily indicate
how it will perform in the future.
[Bar Chart]
<TABLE>
<CAPTION>
Calendar Year Total Returns
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
[Sidebar:]
Best quarter:
16.22% for the quarter
ended March 31, 1998
<CAPTION>
1994 1995 1996 1997 1998
----- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
4.66% 7.97% 10.19% 4.08% 11.98%
Worst quarter:
(15.44)% for the quarter
ended September 30, 1998
---------------------------------------------------------------
Year-to-date total return for the six
months ended June 30, 1999: 8.10%
</TABLE>
Average Annual Total Returns (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
-------------------------------------------------------------
<S> <C> <C> <C>
International Equity Fund 11.98% 7.73% 9.48%
MSCI ALL COUNTRY World
ex-US Index 14.18% 7.56% 8.84%
Morgan Stanley EAFE Index 20.00% 9.19% 9.77%
-------------------------------------------------------------
*July 2, 1993 for the Fund; June 30, 1993 for the MSCI
World ex-U.S. Index.
</TABLE>
[Sidebar:]
The Morgan Stanley Capital International ("MSCI") All Country World ex-US
Index is an unmanaged index of foreign securities that reflects a strategic
emerging market allocation.
The Morgan Stanley Europe, Australia and Far East EAFE Index is an unmanaged
index comprised of more than 900 securities issued by foreign companies and is
weighted according to the total market value of each security.
Diversified Real Estate Fund
Investment Objective
The Fund's investment objective is to seek current income and capital
growth.
8
<PAGE>
Principal Investment Strategies
[Sidebar:]
REITS
REITs pool investors' funds for investment primarily in real estate or
related loans. REITs are usually classified as either equity REITs, mortgage
REITs or hybrid REITs. Equity REITs invest directly in real estate and derive
most of their income from rental and lease payments, although they can also
realize capital gains by selling real estate that has appreciated in value.
Mortgage REITs make loans to commercial real estate developers and derive most
of their income from interest payments on the loans. Hybrid REITs combine the
characteristics of both equity REITs and mortgage REITs.
The Fund invests in the equity securities, primarily common stock, of
companies principally engaged in the real estate business. Under normal market
and economic conditions, at least 65% of the Fund's total assets will be
invested in such securities.
It is expected that the Fund will invest a majority of its assets in shares
of real estate investment trusts ("REITs") during normal market and economic
conditions. The Fund expects that a substantial portion of its investments in
REITs will be in equity and hybrid REITs.
In selecting portfolio securities for the Fund, the Advisor focuses on total
return, emphasizing those companies that offer both strong earnings growth and
an above-average dividend yield. The Fund's holdings are diversified across
several geographic regions and types of real estate.
The Fund will sell a portfolio security when, as a result of changes in the
economy, the Adviser believes that holding the security is no longer
consistent with the Fund's investment objective. A security may also be sold
as a result of a deterioration in the performance of the security or in the
financial condition of the issuer of the security or when the Adviser
determines that the security is overvalued.
Principal Risks of Investing in the Fund
The value of common socks and other equity securities may decline in
response to changes in the U.S. or foreign markets. Such declines may take
place over short or extended periods of time. Equity markets tend to move in
cycles, with periods of rising prices and periods of falling prices. The value
of your investment in the Fund will fluctuate with the value of the securities
the Fund holds. In addition, the Fund is subject to the additional risk that
the securities it holds may not perform as well as other securities, even in
times of rising markets.
Although the Fund will not invest in real estate directly, it may be subject
to risks similar to those associated with the direct ownership of real estate
because of its policy of concentrating in the securities of companies in the
real estate industry. These risks include declines in the value of real
estate, possible lack of availability of mortgage funds, overbuilding,
extended vacancies of properties, increases in property taxes and operating
expenses, changes in zoning laws, changes in neighborhood values, and changes
in interest rates. These risks may be more significant to the extent the
Fund's investments are concentrated in a particular geographic region.
REITs are also subject to the risks associated with direct ownership of real
estate. Generally, an increase in interest rates will decrease the value of
high yielding securities and increase the cost of obtaining financing, which
could decrease the value of a REIT's investments. Equity REITs may be affected
by changes in the value of the underlying property owned by the REITs, while
mortgage REITs may be affected by the quality of any credit extended. REITs
are dependent upon management skills, may not be diversified and are subject
to heavy cash flow dependency and defaults of borrowers. In addition, because
REITs pay dividends to their shareholders based upon available funds from
operations, it is quite common for a portion of these dividends to be
designated as a return of capital. Since the Fund includes dividends from
REITs in its distributions to shareholders, a portion of the Fund's dividends
may also be designated as a return of capital.
9
<PAGE>
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they further the Fund's investment objective. It
is possible, however, that these evaluations will prove to be inaccurate.
[Sidebar:]
Portfolio Manager
The Fund is co-managed by Robert M. Law and David E. Ferguson, C.F.A. 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. Mr. Law has
managed the Fund since it commenced operations in 1997. Mr. Ferguson,
Assistant Vice President of Mercantile, is responsible for equity security
analysis and has co-managed the Fund since September 1999. Before joining
Mercantile in 1998, Mr. Ferguson was Director of Financial Analysis for USF&G
Realty Advisors. Mr. Fergerson has fifteen years of investment experience.
Fund Performance
The bar chart and table below show the Fund's annual returns and long-term
performance, thereby giving some indication of the risk of investing in the
Fund. The bar chart shows the performance of the Fund during the last calendar
year. The table shows how the Fund's average annual total returns for one year
and since inception compared to those of a broad-based market index. Both the
bar chart and the table assume reinvestment of all dividends and
distributions. The Fund's past performance does not necessarily indicate how
it will perform in the future.
[Bar Chart]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Calendar Year Total Return
------------------------------------------------------
<S> <C>
[Sidebar:]
Best quarter:
0.39% for the quarter
ended December 31, 1997
1998
----
(13.57)%
Worst quarter:
(9.32)% for the quarter ended
September 30, 1998
------------------------------------------------------
Year-to-date total return for the six
Months ended June 30, 1999: 8.27%
- ------------------------------------------------------------------------------
</TABLE>
Average Annual Total Returns (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year Since Inception*
-------------------------------------------------------------------------
<S> <C> <C>
Diversified Real Estate Fund.................. (13.57)% (4.48)%
Wilshire Real Estate Index.................... (17.11)% (6.32)%
-------------------------------------------------------------------------
*August 1, 1997 for the Fund; July 31, 1997 for the Wilshire Real
Estate Index.
</TABLE>
10
<PAGE>
[Sidebar:]
The Wilshire Real Estate Index is an unmanaged index generally
representative of the U.S. REIT market.
Fees and Expenses
The following table shows the fees and expenses you may pay when you buy and
hold shares of the Funds.
<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 net
assets)
Management Fees/1/........... 0.60% 0.60% 0.60% 0.80% 0.80%
Distribution (12b-1) Fees.... None None None None None
Other Expenses/1/............ 0.21% 0.22% 0.31% 0.34% 0.67%
Total Fund Operating
Expenses/1/................. 0.81% 0.82% 0.91% 1.14% 1.47%
</TABLE>
Example
This example is intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 for the time periods shown, reinvest all of your
dividends and distributions, and then sell all of your shares at the end of
those periods. The example also assumes that your investment has a 5% return
each year and the Funds' operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Growth & Income Fund............................ $ 81 $255 $448 $1,019
Equity Income Fund.............................. $ 82 $259 $453 $1,031
Equity Growth Fund.............................. $ 91 $287 $503 $1,045
International Equity Fund....................... $114 $359 $630 $1,434
Diversified Real Estate Fund.................... $147 $463 $812 $1,849
</TABLE>
- --------
/1/ Management Fees, Other Expenses (for all Funds other than the Growth &
Income Fund) and Total Fund Operating Expenses for the Funds for the current
fiscal year are expected to be less than the amounts shown above because the
Adviser and the Administrator are voluntarily waiving a portion of their fees.
These fee waivers are being made in order to keep the annual fees and expenses
for the Funds at a certain level. Management Fees for the Growth & Income,
Equity Income, Equity Growth, International Equity and Diversified Real Estate
Funds, after taking these fee waivers into account, are expected to be 0.50%,
0.48%, 0.41%, 0.71% and 0.35%, respectively. Other Expenses for the Equity
Income, Equity Growth, International Equity and Diversified Real Estate Funds,
after taking these fee waivers into account, are expected to be 0.20%, 0.22%,
0.29%, 0.29% and 0.65%, respectively. Total Fund Operating Expenses for the
Growth & Income, Equity Income, Equity Growth, International Equity and
Diversified Real Estate Funds, after taking these fee waivers into account,
are expected to be 0.70%, 0.70%, 0.70%, 1.00% and 1.00%, respectively. These
fee waivers may be revised or cancelled at any time.
Additional Information about Risk
The principal risks of investing in each of the Funds have been described
above. The following supplements that discussion.
Temporary Defensive Positions
Each Fund may temporarily hold up to 100% of its total assets in investments
that are not part of its principal investment strategy to try to avoid losses
during unfavorable market conditions. With respect to the
11
<PAGE>
Growth & Income, Equity Income and Equity Growth Funds, these investments may
include high quality short-term money market instruments and high quality
corporate debt securities and debt securities issued by the U.S. Government,
its agencies and instrumentalities. With respect to the International Equity
Fund, these investments may include cash (which will not earn any income) and
short-term money market instruments. With respect to the Diversified Real
Estate Fund, these investments may include 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. This strategy could
prevent a Fund from achieving its investment objective and could reduce the
Fund's return and affect its performance during a market upswing.
Other Types of Investments
This prospectus describes each Fund's principal investment strategies and
the particular types of securities in which each Fund principally invests.
Each Fund may from time to time pursue other investment strategies and make
other types of investments in support of its investment objective. These
supplemental investment strategies and the risks involved are described in
detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
As with other mutual funds, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by Mercantile and the Funds' other service providers
don't properly process and calculate date-related information and data from
and after January 1, 2000. This possibility is commonly known as the "Year
2000" or "Y2K" problem. Mercantile is taking steps to address the Y2K problem
with respect to the computer systems that it uses and to obtain assurances
that comparable steps are being taken by the Funds' 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 Funds. The Y2K problem
could have a negative impact on the issuers of securities in which the Funds
invest, which could hurt the Funds' investment returns.
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.
Customers of Mercantile-Safe Deposit and Trust Company and its affiliated
and correspondent banks (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.
12
<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.
To Open an Account To Add to an Account
By Mail .Complete a New Account .Make your check payable to
Application and mail it M.S.D. & T. Funds, Inc. and
along with a check payable mail it to the address on
to M.S.D. & T. Funds, Inc. the left.
to:
.Please indicate the
M.S.D. & T. Funds, Inc. P.O. particular Fund in which
Box 182028 Columbus, OH you are investing.
43218-2028
.Please include your account
To obtain a New Account number on your check.
Application, call 1-800-551-
2145
- -------------------------------------------------------------------------------
By Wire .Before wiring funds, please
call 1-800-551-2145 for .Instruct your bank to wire
complete wiring Federal funds to:
instructions. Huntington Bank, Columbus,
OH 43219, Bank Routing
#044000024, M.S.D. & T.
Concentration A/C
#01899622436.
.Promptly complete a New
Account Application and
forward it to:
Be sure to include your
M.S.D. & T. Funds, Inc. P.O. name and your Fund account
Box 182028 Columbus, OH number.
43218-2028
.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.
- -------------------------------------------------------------------------------
. Explanation of Sales Price. The public offering price for shares of a Fund
is based upon net asset value. A Fund will calculate its net asset value per
share by adding the value of the Fund's investments, cash and other assets,
subtracting the Fund's liabilities, and then dividing the result by the number
of shares of the Fund that are outstanding. This process is sometimes referred
to as "pricing" a Fund's shares.
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.
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 Exchange, the
Federal Reserve Bank of Cleveland, the purchasing Bank (if applicable) or the
Funds' Adviser, transfer agent or custodian is closed. The Funds currently
observe the following holidays: New Year's Day,
13
<PAGE>
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 BISYS Fund Services Ohio, Inc.,
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.
To Redeem Shares
By Mail . Send a written request to M.S.D. & T. Funds,
Inc., P.O. Box 182028, Columbus, Ohio 43218-
2028.
. 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.
- -------------------------------------------------------------------------------
14
<PAGE>
By Wire
(available only if you checked the appropriate box on the New Account
Application)
. Call 1-800-551-2145. You will need to provide
the account name, account number, name of
Fund and amount of redemption ($1,000 minimum
per transaction).
. If you have already opened your account and
would like to have the wire redemption
feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 182028, Columbus,
Ohio 43218-2028. 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
(available only if you checked the appropriate box on the New Account
Application)
. Call 1-800-551-2145. You will need to provide
the account name, account number, name of
Fund and amount of redemption.
. If you have already opened your account and
would like to add the telephone redemption
feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 182028, Columbus,
Ohio 43218-2028. 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.
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.
15
<PAGE>
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.
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.
16
<PAGE>
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 mailing your request to M.S.D. & T. Funds, Inc., P.O. Box 182028, Columbus,
Ohio 43218-2028, or by telephoning your request to 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.
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
fifteenth day of each month 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.
17
<PAGE>
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.
Distribution Schedule
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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 Eq- Declared and paid semi-annually Declared and paid annually
uity
Diversified Real Declared and paid quarterly Declared and paid annually
Estate
</TABLE>
TAX INFORMATION
Federal taxes. Each Fund contemplates declaring as dividends each year all
or substantially all of its taxable income, including its net capital gain
(the excess of long-term capital gain over short-term capital loss).
Distributions attributable to the net capital gain of a Fund will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares. Other Fund distributions will generally be taxable as ordinary income.
(However, if a Fund's distributions exceed its net income and gain--as may be
the case for the Diversified Real Estate Fund because REIT distributions often
include a non-taxable return of capital--that excess will generally result in
a non-taxable return of capital to you.)
You will be subject to income tax on Fund distributions regardless whether
they are paid in cash or reinvested in additional shares. You will be notified
annually of the tax status of distributions to you.
You should note that if you purchase shares just before a distribution, the
purchase price will reflect the amount of the upcoming distribution, but you
will be taxed on the entire amount of the distribution received, even though,
as an economic matter, the distribution simply constitutes a return of
capital. This is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption of
your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares).
Any loss realized on shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
18
<PAGE>
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemptions of, shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
It is expected that the International Equity Fund will be subject to foreign
withholding taxes with respect to dividends or interest received from sources
in foreign countries. The International Equity Fund may make an election to
treat a proportionate amount of such taxes as constituting a distribution to
each shareholder, which would allow each shareholder either (1) to credit such
proportionate amount of taxes against U.S. federal income tax liability or (2)
to take such amount as an itemized deduction.
REITs often do not provide complete tax information to the Diversified Real
Estate Fund until after the calendar year-end. Consequently, because of the
delay, it may be necessary for the Fund to request permission to extend the
deadline for issuance of Forms 1099-DIV beyond January 31.
State and local taxes. Shareholders may also be subject to state and local
taxes on distributions and redemptions. State income taxes may not apply
however to the portions of each Fund's distributions, if any, that are
attributable to interest on U.S. Government securities.
Miscellaneous. The foregoing is only a summary of certain tax considerations
under current law, which may be subject to change in the future. Shareholders
who are nonresident aliens, foreign estates or trusts, or foreign corporations
or partnerships may be subject to different U.S. federal income tax
consequences. You should consult your tax adviser for further information
regarding federal, state, local and/or foreign tax consequences relevant to
your specific situation.
MANAGEMENT OF THE COMPANY
Investment Adviser
Mercantile, subject to the general supervision of the Company's Board of
Directors, manages the investment portfolio of each Fund in accordance with
its investment objective and policies. This includes selecting portfolio
investments and placing purchase and sale orders for each Fund.
In exchange for these services, Mercantile is entitled to investment
advisory fees from the Funds that are calculated daily and paid monthly. For
the fiscal year ended May 31, 1999, the Funds paid Mercantile advisory fees as
follows:
<TABLE>
<CAPTION>
Investment Advisory Fees
Fund as a% of net assets
---- ------------------------
<S> <C>
Growth & Income Fund................................... 0.495%
Equity Income Fund..................................... 0.484%
Equity Growth Fund..................................... 0.406%
International Equity Fund.............................. 0.713%
Diversified Real Estate Fund........................... 0.353%
</TABLE>
Sub-Adviser
BlackRock serves as sub-adviser to the International Equity Fund and is
responsible for the management of the Fund's assets. BlackRock manages the
investment portfolio of the International Equity Fund in accordance with the
investment requirements and policies established by Mercantile. BlackRock
receives a quarterly fee from Mercantile based on the Fund's average daily net
assets.
BlackRock has its principal office at 345 Park Avenue, New York, New York
10137. 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 billion in
international equity assets under management at June 30, 1999, with total
assets under management of approximately $142 billion. BlackRock (or its
predecessor) has served as sub-adviser to the International Equity Fund since
1996.
19
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables shown below are intended to help you
understand the Funds' financial performance for the past five years (or, if
shorter, the period since a particular Fund began operations). Certain
information reflects the financial performance for a single Fund share. The
total returns in the tables represent the rate that an investor would have
earned (or lost) on an investment in each Fund, assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the Funds' financial statements, are included in the Company's Annual Report
to Shareholders and are incorporated by reference into the SAI. The Annual
Report to Shareholders and SAI are available free of charge upon request.
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
Ended Ended Ended Ended End ed
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 21.37 $ 18.25 $ 14.58 $ 13.42 $ 12.14
-------- -------- -------- -------- -------
Income From Investment
Operations:
Net Investment Income....... 0.18 0.20 0.23 0.33 0.35
Net Realized and Unrealized
Gain (Loss)
on Investments............. 3.62 5.01 4.19 1.89 1.55
-------- -------- -------- -------- -------
Total From Investment
Operations................. 3.80 5.21 4.42 2.22 1.90
-------- -------- -------- -------- -------
Less Distributions to
Shareholders from:
Net Investment Income....... (0.14) (0.23) (0.25) (0.35) (0.34)
Net Capital Gains........... (0.60) (1.86) (0.50) (0.71) (0.28)
-------- -------- -------- -------- -------
Total Distributions......... (0.74) (2.09) (0.75) (1.06) (0.62)
-------- -------- -------- -------- -------
Net Asset Value, End of
Period...................... $ 24.43 $ 21.37 $ 18.25 $ 14.58 $ 13.42
======== ======== ======== ======== =======
Total Return................. 18.20% 29.40% 31.26% 17.24% 16.22%
Ratios/Supplemental Data
Net Assets, End of Period
(000)...................... $427,038 $373,864 $142,452 $107,233 $91,277
Ratio of Expenses to Average
Net Assets
After Expense Waiver........ 0.70% 0.71% 0.73% 0.73% 0.73%
Before Expense Waiver....... 0.81% 0.88% 0.89% 0.89% 0.89%
Ratio of Net Investment
Income to
Average Net Assets.......... 0.80% 0.99% 1.52% 2.38% 2.99%
Portfolio turnover rate...... 26.48% 24.09% 27.10% 45.15% 33.26%
</TABLE>
20
<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 each of the
periods indicated:
<TABLE>
<CAPTION>
DIVERSIFIED REAL
EQUITY INCOME FUND EQUITY GROWTH FUND ESTATE FUND
--------------------- --------------------- ---------------------
3/1/98/1/ 3/1/98/1/ 8/1/97/1/
Year Ended Year Ended Year Ended
5/31/99 to 5/31/98 5/31/99 to 5/31/98 5/31/99 to 5/31/98
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 10.21 $ 10.00 $ 10.28 $ 10.00 $10.13 $10.00
-------- -------- ------- ------- ------ ------
Income From Investment
Operations:
Net Investment Income.. 0.17 0.04 0.04 0.02 0.53 0.32
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.23 0.19 2.23 0.27 (0.76) 0.12
-------- -------- ------- ------- ------ ------
Total From Investment
Operations............ 1.40 0.23 2.27 0.29 (0.23) 0.44
-------- -------- ------- ------- ------ ------
Less Distributions to
Shareholders from:
Net Investment Income.. (0.17) (0.02) (0.05) (0.01) (0.52) (0.28)
Return of Capital...... -- -- -- -- (0.01) (0.03)
Net Capital Gains...... (1.19) -- (1.02) -- -- --
-------- -------- ------- ------- ------ ------
Total Distributions.... (1.36) (0.02) (1.07) (0.01) (0.53) (0.31)
-------- -------- ------- ------- ------ ------
Net Asset Value, End of
Period................. $ 10.25 $ 10.21 $ 11.48 $ 10.28 $ 9.37 $10.13
======== ======== ======= ======= ====== ======
Total Return............ 15.30% 2.28% 23.13% 2.89% (1.80)% 4.31%
Ratios/Supplemental Data
Net Assets, End of
Period (000).......... $314,306 $319,971 $47,521 $34,876 $7,829 $6,677
Ratio of Expenses to
Average Net Assets
After Expense Waiver.. 0.70% 0.70%/2/ 0.70% 0.70%/2/ 1.00% 1.00%/2/
Before Expense Waiver. 0.82% 0.93%/2/ 0.91% 1.02%/2/ 1.47% 2.25%/2/
Ratio of Net Investment
Income to
Average Net Assets..... 1.77% 1.45%/2/ 0.38% 0.68%/2/ 6.03% 4.17%/2/
Portfolio turnover
rate................... 24.47% 2.00% 62.49% 7.99% 14.35% 0.84%
</TABLE>
- --------
/1/ Commencement of operations.
/2/ Annualized.
21
<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 Year
Ended Ended Ended Ended End ed
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 13.90 $ 13.18 $ 12.47 $ 11.60 $ 11.81
------- ------- ------- ------- -------
Income From Investment
Operations:
Net Investment Income.......... 0.11 0.12 0.31 0.09 0.03
Net Realized and Unrealized Gain
(Loss)
on Investments and Foreign
Currency....................... (0.27) 1.42 0.88 1.51 0.08
------- ------- ------- ------- -------
Total From Investment
Operations.................... (0.16) 1.54 1.19 1.60 0.11
------- ------- ------- ------- -------
Less Distributions to
Shareholders from:
Net Investment Income.......... (0.08) (0.15) (0.24) (0.07) (0.04)
Net Capital Gains.............. (0.31) (0.67) (0.24) (0.66) (0.28)
------- ------- ------- ------- -------
Total Distributions............ (0.39) (0.82) (0.48) (0.73) (0.32)
------- ------- ------- ------- -------
Net Asset Value, End of Period.. $ 13.35 $ 13.90 $ 13.18 $ 12.47 $ 11.60
======= ======= ======= ======= =======
Total Return.................... (1.02)% 12.77% 9.81% 14.27% 0.82%
Ratios/Supplemental Data
Net Assets, End of Period
(000)......................... $81,301 $85,402 $83,313 $75,676 $69,172
Ratio of Expenses to Average
Net Assets
After Expense Waivers........ 1.00% 1.03% 1.05% 1.05% 1.05%
Before Expense Waiver........ 1.14% 1.14% 1.16% 1.17% 1.16%
Ratio of Net Investments
Income to Average Net
Assets...................... 0.82% 0.92% 0.97% 0.78% 0.06%
Portfolio turnover rate......... 67.33% 55.55% 74.15% 53.58% 42.15%
</TABLE>
22
<PAGE>
For More Information
You'll find more information about the Funds in the following documents:
Annual and semi-annual reports
The Company's annual and semi-annual reports contain more information about
each Fund and a discussion about the market conditions and investment
strategies that had a significant effect on each Fund's performance during the
last fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Funds and their policies. By
law, it is incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about
the Funds and make shareholder inquiries by calling 1-800-551-2145 or writing
to:
M.S.D. & T. Funds, Inc.
Mutual Fund Administration
20 South Charles Street
Fifth Floor
Baltimore, Maryland 21201
If you buy your shares through a financial institution, you may contact your
institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public
Reference Section and ask them to mail you information about the Funds,
including the SAI. They will charge you a fee for this service. You can also
visit the SEC Public Reference Room and copy the documents while you are
there. For information about the operation of the Public Reference Room, call
the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Funds are also available on the
SEC's website at http://www.sec.gov.
The Company's Investment Company Act File No. is 811-5782.
<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 30, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these Funds or determined if this
prospectus is accurate or complete. Anyone who tells you otherwise is committing
a crime.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RISK/RETURN SUMMARY....................................................... 1
Prime Money Market Fund................................................. 2
Government Money Market Fund............................................ 4
Limited Maturity Bond Fund.............................................. 6
Total Return Bond Fund.................................................. 8
Fees and Expenses....................................................... 9
Additional Information about Risk....................................... 10
INVESTING IN THE FUNDS.................................................... 11
Getting Your Investment Started......................................... 11
How To Buy Fund Shares.................................................. 11
How To Sell Fund Shares................................................. 13
Other Purchase and Redemption Information............................... 14
SHAREHOLDER SERVICES...................................................... 15
Retirement Plans........................................................ 15
Exchange Privilege...................................................... 15
Automatic Investment Plan............................................... 16
Systematic Withdrawals.................................................. 16
Directed Reinvestments.................................................. 16
DIVIDENDS AND DISTRIBUTIONS............................................... 16
TAX INFORMATION........................................................... 17
MANAGEMENT OF THE COMPANY................................................. 18
Investment Adviser...................................................... 18
FINANCIAL HIGHLIGHTS...................................................... 18
</TABLE>
If You Have Questions
For current yield, purchase and redemption information, call 1-800-551-2145.
<PAGE>
RISK/RETURN SUMMARY
Introduction
This Prospectus describes the M.S.D.&T. Taxable Fixed Income Funds (the
"Funds"), four investment portfolios offered by M.S.D.&T. Funds, Inc. (the
"Company"). On the following pages, you will find important information about
each Fund, including:
. The Fund's investment objective and the principal investment
strategies used by the Fund's investment adviser in trying to
achieve that objective;
. The principal risks associated with an investment in the Fund;
. The Fund's past performance measured on both a year-by-year and
long-term basis; and
. The fees and expenses you will pay as an investor in the Fund.
The Prime Money Market Fund may be appropriate for investors who want a
flexible and convenient way to manage cash while earning money market returns.
The Government Money Market Fund may be appropriate for investors who want to
earn money market returns with the extra margin of safety associated with U.S.
Government obligations. The Limited Maturity Bond and Total Return Bond Funds
may be appropriate for investors who seek current income from their
investments greater than that normally available from a money market fund and
can accept fluctuations in price and yield. The Limited Maturity Bond and
Total Return Bond Funds may not be appropriate for investors who are investing
for long-term capital appreciation.
Before investing in a Fund, you should carefully consider:
. Your investment goals;
. Your investment time horizon; and
. Your tolerance for risk.
The Investment Adviser
Mercantile-Safe Deposit and Trust Company ("Mercantile" or the "Adviser")
is the investment adviser for each Fund. Mercantile, which has its main office
at Two Hopkins Plaza, Baltimore, Maryland 21201, is the lead bank of
Mercantile Bankshares Corporation, a multi-bank holding company organized in
1969. Mercantile and its predecessors have been in the business of managing
the investments of fiduciary and other accounts in the Baltimore area since
1864. As of June 30, 1999, Mercantile had approximately $15 billion in assets
under management.
An investment in the Funds is not a deposit of Mercantile-Safe Deposit and
Trust Company and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Prime Money
Market and Government Money Market Funds seek to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in
the Funds. You could also lose money by investing in the other Taxable Fixed
Income Funds.
<PAGE>
Prime Money Market Fund
Investment Objective
The Fund's investment objective 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.
Principal Investment Strategies
The Fund invests substantially all of its assets in a broad range of U.S.
dollar-denominated money market instruments, including commercial paper, notes
and bonds issued by U.S. and foreign corporations, obligations issued by the
U.S. Government and its agencies and instrumentalities, and obligations issued
by U.S. and foreign banks, such as certificates of deposit and bankers'
acceptances. The Fund also invests in repurchase agreements backed by U.S.
Government obligations.
Because the Fund is a "money market fund," securities purchased by it must
meet strict requirements as to investment quality, maturity and
diversification. The Fund will only buy a security if it has the highest
rating (or one of the two highest ratings if the security is a corporate bond)
from at least two nationally recognized statistical rating organizations, such
as Standard & Poor's Ratings Group or Moody's Investors Service, Inc., or only
one such rating if only one organization has rated the instrument. If the
security is not rated, the Adviser must determine that it is of comparable
quality to eligible rated securities. The Fund generally does not invest in
securities with maturities of more than 397 days (subject to certain
exceptions) and the average maturity of all securities held by the Fund must
be 90 days or less. Prior to purchasing a security for the Fund, the Adviser
must determine that the security carries very little credit risk.
[sidebar:]
Repurchase agreements
Repurchase agreements are transactions in which a Fund buys securities from a
seller (usually a bank or broker-dealer) who agrees to buy them back from the
Fund on a certain date and at a certain price.
Principal Risks of Investing in the Fund
The yield paid by the Fund will vary with changes in short-term interest
rates.
Although credit risk is very low because the Fund only invests in high
quality obligations, if an issuer fails to pay interest or repay principal,
the value of your investment could decline.
Repurchase agreements carry the risk that the other party may not fulfill
its obligations under the agreement. This could cause the value of your
investment to decline.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Fund and how they may advance the Fund's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Fund will be able to preserve the value of your
investment at $1.00 per share.
2
<PAGE>
Fund Performance
The bar chart and table below show the Fund's annual returns and long-term
performance, thereby giving some indication of the risk of investing in the
Fund. The bar chart shows how the performance of the Fund has varied from year
to year. The table shows the Fund's average annual total returns for one year,
five years and since inception. Both the bar chart and the table assume
reinvestment of all dividends and distributions. The Fund's past performance
does not necessarily indicate how it will perform in the future.
[Bar Chart]
- -------------------------------------------------------------------------------
[sidebar:]
Best quarter: Calendar Year Total Returns
2.11% for the ------------------------------------------------------
quarter ended 1990 1991 1992 1993 1994 1995 1996 1997 1998
December 31, ----- ----- ----- ----- ----- ----- ----- ----- -----
1989
8.09% 5.83% 3.45% 2.83% 3.96% 5.71% 5.11% 5.26% 5.24%
Worst quarter:
0.69% for the
quarter ended
June 30, 1999 --------------------------------------------------------
Year-to-date total return for the six
months ended June 30, 1999: 2.28%
-------------------------------------------------------------------------------
Average Annual Total Returns (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Prime Money Market Fund......................... 5.24% 5.05% 5.21%
- --------------------------------------------------------------------------------
</TABLE>
* July 21, 1989
To obtain the Fund's current 7-day yield please call 1-800-551-2145.
3
<PAGE>
Government Money Market Fund
Investment Objective
The Fund's investment objective 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.
Principal Investment Strategies
The Fund invests primarily in U.S. Government obligations, including U.S.
Treasury obligations and obligations of U.S. Government agencies and
instrumentalities. The Fund also invests in repurchase agreements backed by
these obligations.
[sidebar:]
U.S. Government obligations
U.S. Government obligations are debt obligations issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities. U.S. Government
obligations generally have less credit risk than other debt obligations.
Because the Fund is a "money market fund," the securities purchased by it
must meet strict requirements as to investment quality, maturity and
diversification. The Fund generally does not invest in securities with
maturities of more than 397 days (subject to certain exceptions) and the
average maturity of all securities held by the Fund must be 90 days or less.
Prior to purchasing a security for the Fund, the Adviser must determine that
the security carries very little credit risk.
Principal Risks of Investing in the Fund
The yield paid by the Fund will vary with changes in short-term interest
rates.
Although U.S. Government securities have historically involved little
credit risk, if an issuer fails to pay interest or repay principal, the value
of your investment could decline.
Repurchase agreements carry the risk that the other party may not fulfill
its obligations under the agreement. This could cause the value of your
investment to decline.
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they advance the Fund's investment objective.
It's possible, however, that these evaluations will prove to be inaccurate.
There's no guarantee the Fund will be able to preserve the value of your
investment at $1.00 per share.
4
<PAGE>
Fund Performance
The bar chart and table below show the Fund's annual returns and long-term
performance, thereby giving some indication of the risk of investing in the
Fund. The bar chart shows how the performance of the Fund has varied from year
to year. The table shows the Fund's average annual total returns for one year,
five years and since inception. Both the bar chart and the table assume
reinvestment of all dividends and distributions. The Fund's past performance
does not necessarily indicate how it will perform in the future.
[Bar Chart]
- --------------------------------------------------------------------------------
[sidebar:]
Best quarter: Calendar Year Total Returns
2.08% for the ------------------------------------------------------
quarter ended 1990 1991 1992 1993 1994 1995 1996 1997 1998
December 31, ----- ----- ----- ----- ----- ----- ----- ----- -----
1989
7.95% 5.78% 3.42% 2.80% 3.92% 5.63% 5.09% 5.19% 5.16%
Worst quarter:
0.68% for the
quarter ended
June 30, 1993 -------------------------------------------------------
Year-to-date total return for the six
months ended June 30, 1999: 2.27%
- --------------------------------------------------------------------------------
Average Annual Total Returns (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Money Market Fund.................... 5.16% 4.99% 5.15%
- --------------------------------------------------------------------------------
</TABLE>
* July 21, 1989
To obtain the Fund's current 7-day yield please call 1-800-551-2145.
5
<PAGE>
Limited Maturity Bond Fund
Investment Objective
The Fund's investment objective is to seek as high a level of current
income as is consistent with protection of capital.
Principal Investment Strategies
The Fund invests substantially all of its assets (at least 65% of total
assets under normal market and economic conditions) in a broad range of debt
obligations, including corporate obligations, U.S. Government obligations and
mortgage-backed securities. Corporate obligations may include bonds, notes and
debentures. U.S. Government obligations may include U.S. Treasury obligations
and obligations of certain U.S. Government agencies. Mortgage-backed
securities may include Ginnie Maes, Fannie Maes and Freddie Macs. The Fund may
also invest in asset-backed securities and in repurchase agreements backed by
U.S. Government obligations. Although the Fund invests primarily in the debt
obligations of U.S. issuers, it may invest up to 25% of its total assets in
the debt obligations of foreign corporations and governments.
[sidebar:]
Mortgage-backed securities are certificates representing ownership interests
in a pool of mortgage loans, and include those issued by the Government
National Mortgage Association ("Ginnie Maes"), the Federal National Mortgage
Association ("Fannie Maes") and the Federal Home Loan Mortgage Corporation
("Freddie Macs").
The Fund will invest only in investment grade debt obligations. These are
obligations which have one of the four highest ratings assigned by a
nationally recognized statistical rating organization, such as Standard &
Poor's Ratings Group or Moody's Investors Service, Inc., or are unrated
securities determined by the Adviser to be of comparable quality.
Occasionally, the rating of a security held by the Fund may be downgraded
below investment grade. If that happens, the Fund does not have to sell the
security unless the Adviser determines that under the circumstances the
security is no longer an appropriate investment for the Fund.
In selecting portfolio securities for the Fund, the Adviser monitors and
evaluates economic trends, including anticipated changes in interest rates.
The Adviser also considers a number of other factors, including credit
quality, the price of a security relative to that of other securities in its
sector, current yield, maturity, yield to maturity, liquidity and the overall
quality of the investment. The Adviser expects that under normal market
conditions the Fund's portfolio securities will have an average weighted
maturity of two to five years.
[sidebar:]
Average weighted maturity gives you the average time until all debt securities
in a Fund come due or mature. It is calculated by averaging the time to
maturity of all debt securities held by a Fund with each maturity "weighted"
according to the percentage of assets it represents.
The Fund will sell a portfolio security when, as a result of changes in
the economy or the performance of the security or other circumstances, the
Adviser believes that holding the security is no longer consistent with the
Fund's investment objective.
Principal Risks of Investing in the Fund
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
Changes in interest rates also may cause certain debt securities held by
the Fund, particularly asset-backed and mortgage-backed securities, to be paid
off much sooner or later than expected, which could adversely affect the
Fund's value. In the event that a security is paid off sooner than expected
because of a decline in interest rates, the Fund may be unable to recoup all
of its initial investment, and may also suffer from having to reinvest in
lower-yielding securities. In the event of a later than expected payment
because of a rise in interest rates, the value of the obligation will
decrease, and the Fund may suffer from the inability to invest in higher-
yielding securities.
6
<PAGE>
The value of debt securities also depends on the ability of issuers to
make principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. Debt securities which have the lowest of the top four
ratings assigned by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. have speculative characteristics. Changes in the economy are
more likely to affect the ability of issuers of these securities to make
payments of principal and interest than is the case for higher rated
securities.
Foreign investments may be riskier than U.S. investments because of
factors such as foreign government restrictions, changes in currency exchange
rates, incomplete financial information about issuers of securities, and
political or economic instability. Foreign securities may be more volatile and
less liquid than U.S. securities.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Fund and how they may advance the Fund's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
[Sidebar:]
Portfolio Manager
Mark G. McGlone, Senior Vice President of Mercantile, has managed the Limited
Maturity Bond Fund since June 1992. During the past eighteen years, Mr.
McGlone has managed institutional fixed income portfolios at Mercantile,
including pension plans, endowment funds and self-insurance funds.
Fund Performance
The bar chart and table below show the Fund's annual returns and long-term
performance, thereby giving some indication of the risk of investing in the
Fund. The bar chart shows how the performance of the Fund has varied from year
to year. The table shows how the Fund's average annual total returns for one
year, five years and since inception compared to those of a broad-based market
index. Both the bar chart and the table assume reinvestment of all dividends
and distributions. The Fund's past performance does not necessarily indicate
how it will perform in the future.
[Bar Chart]
- --------------------------------------------------------------------------------
[Sidebar:]
Best quarter: Calendar Year Total Returns
4.52% for the ----------------------------------------------------------
quarter ended 1992 1993 1994 1995 1996 1997 1998
June 30, 1995 ---- ---- ---- ---- ---- ---- ----
Worst quarter: 6.06% 6.33% (1.26)% 14.41% 3.10% 7.15% 7.11%
(1.53)% for the
quarter ended
March 31, 1994 -----------------------------------------------------------
Year-to-date total return for the six
months ended June 30, 1999: 0.32%
- --------------------------------------------------------------------------------
Average Annual Total Returns (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Limited Maturity Bond Fund.................... 7.11% 5.98% 6.59%
Lehman Brothers Mutual Fund Short 1-5 Year
Government/ Corporate Bond Index............. 7.64% 6.25% 7.18%
- ------------------------------------------------------------------------------
</TABLE>
* March 14, 1991 for the Fund; February 28, 1991 for the Lehman Brothers
Mutual Fund Short 1-5 Year Government/Corporate Bond Index.
[Sidebar:]
The Lehman Brothers Mutual Fund Short 1-5 Year Government/Corporate Bond
Index is an unmanaged index generally representative of the performance of
government and corporate bonds with remaining maturities of between one and
five years.
7
<PAGE>
Total Return Bond Fund
Investment Objective
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 considers the total rate of
return on portfolio securities in managing the Fund.
The Fund's investment objective may be changed by the Company's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
[Sidebar:]
Total Return
Total return consists of net income (interest and/or dividend income from
portfolio securities, less expenses of the Fund) and capital gains and losses,
both realized and unrealized, from portfolio securities.
Principal Investment Strategies
The Fund invests substantially all of its assets (at least 65% of its
total assets under normal market and economic conditions) in a broad range of
debt obligations, including corporate obligations, U.S. Government obligations
and mortgage-backed securities. Corporate obligations may include bonds, notes
and debentures. U.S. Government obligations may include U.S. Treasury
obligations and obligations of certain U.S. Government agencies. Mortgage-
backed securities may include Ginnie Maes, Fannie Maes and Freddie Macs. The
Fund may also invest in asset-backed securities and in repurchase agreements
backed by U.S. Government obligations. Although the Fund invests primarily in
the debt obligations of U.S. issuers, it may invest up to 25% of its total
assets in the debt obligations of foreign corporations and governments.
The Fund will generally only purchase investment grade debt obligations.
These are obligations which have one of the four highest ratings assigned by a
nationally recognized statistical rating organization, such as Standard &
Poor's Ratings Group or Moody's Investors Service, Inc., or will be unrated
securities determined by the Adviser to be of comparable quality. When deemed
appropriate by the Adviser, however, the Fund may invest up to 10% of its net
assets in non-investment grade debt securities, also known as "junk bonds."
In selecting portfolio securities for the Fund, the Adviser monitors and
evaluates economic trends, including anticipated changes in interest rates.
The Adviser also evaluates the effect of a particular security on the total
rate of return of all of the securities in the Fund's portfolio.
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.
[Sidebar:]
Average weighted maturity gives you the average time until all debt securities
in a Fund come due or mature. It is calculated by averaging the time to
maturity of all debt securities held by a Fund with each maturity "weighted"
according to the percentage of assets it represents.
The Fund will sell a portfolio security when, as a result of changes in
the economy or the performance of the security or other circumstances, the
Adviser believes that holding the security is no longer consistent with the
Fund's investment objective.
Principal Risks of Investing in the Fund
The prices of debt securities tend to move in the opposite direction to
interest rates. When rates are rising, the prices of debt securities tend to
fall. When rates are falling, the prices of debt securities tend to rise.
Generally, the longer the time until maturity, the more sensitive the price of
a debt security is to interest rate changes.
8
<PAGE>
Changes in interest rates also may cause certain debt securities held by
the Fund, particularly asset-backed and mortgage-backed securities, to be paid
off much sooner or later than expected, which could adversely affect the
Fund's value. In the event that a security is paid off sooner than expected
because of a decline in interest rates, the Fund may be unable to recoup all
of its initial investment, and may also suffer from having to reinvest in
lower-yielding securities. In the event of a later than expected payment
because of a rise in interest rates, the value of the obligation will
decrease, and the Fund may suffer from the inability to invest in higher-
yielding securities.
The value of debt securities also depends on the ability of issuers to
make principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. Debt securities which have the lowest of the top four
ratings assigned by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. have speculative characteristics. Changes in the economy are
more likely to affect the ability of issuers of these securities to make
payments of principal and interest than is the case for higher rated
securities. Generally, non-investment grade securities, i.e. junk bonds, are
subject to greater credit risk, price volatility and risk of loss than
investment grade securities. In addition, there may be less of a market for
such securities, which could make it harder to sell them at an acceptable
price.
Foreign investments may be riskier than U.S. investments because of
factors such as foreign government restrictions, changes in currency exchange
rates, incomplete financial information about issuers of securities, and
political or economic instability. Foreign securities may be more volatile and
less liquid than U.S. securities.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Fund and how they may advance the Fund's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
[sidebar:]
Portfolio Manager
Kevin J. Dachille, Senior Vice President of Mercantile, has managed the Total
Return Bond Fund since it began operations in 1998. During the past twenty
years, Mr. Dachille has managed institutional fixed income portfolios at
Mercantile, including pension plans, endowment funds and self-insurance funds.
Fund Performance
The Fund commenced operations on March 1, 1998. As a result, the Fund has
a performance record of less than one full calendar year.
Fees and Expenses
The following table shows the fees and expenses you may pay when you buy
and hold shares of the Funds.
<TABLE>
<CAPTION>
Prime Government Limited
Money Money Maturity Total Return
Market Market Bond Bond
Fund Fund Fund Fund
------ ---------- -------- ------------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses:
(as a percentage of net assets)
Management Fees/1/ .................... 0.25% 0.25% 0.35% 0.35%
Distribution (12b-1) Fees.............. None None None None
Other Expenses/1/ ..................... 0.20% 0.20% 0.23% 0.27%
Total Fund Operating Expenses/1/ ...... 0.45% 0.45% 0.58% 0.62%
</TABLE>
9
<PAGE>
Example
This example is intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 for the time periods shown, reinvest all of your
dividends and distributions, and then sell all of your shares at the end of
those periods. The example also assumes that your investment has a 5% return
each year and the Funds' operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Prime Money Market Fund......................... $45 $142 $249 $566
Government Money Market Fund.................... $45 $142 $249 $566
Limited Maturity Bond Fund...................... $58 $183 $320 $730
Total Return Bond Fund.......................... $62 $195 $343 $780
</TABLE>
- -------------------
/1/Management Fees, Other Expenses and Total Fund Operating Expenses for the
Funds for the current fiscal year are expected to be less than the amounts
shown above because the Adviser and the Administrator are voluntarily waiving
a portion of their fees. These fee waivers are being made in order to keep the
annual fees and expenses for the Funds at a certain level. Management Fees for
the Prime Money Market, Government Money Market, Limited Maturity Bond and
Total Return Bond Funds, after taking these fee waivers into account, are
expected to be 0.23%, 0.22%, 0.24% and 0.22%, respectively. Other Expenses for
the Prime Money Market, Government Money Market, Limited Maturity Bond and
Total Return Bond Funds, after taking these fee waivers into account, are
expected to be 0.145%, 0.155%, 0.21% and 0.23%, respectively. Total Fund
Operating Expenses for the Prime Money Market, Government Money Market,
Limited Maturity Bond and Total Return Bond Funds, after taking these fee
waivers into account, are expected to be 0.375%, 0.375%, 0.45% and 0.45%,
respectively. These fee waivers may be revised or cancelled at any time.
Additional Information about Risk
The principal risks of investing in each of the Funds have been described
above. The following supplements that discussion.
Temporary Defensive Positions
Each Fund may temporarily hold investments that are not part of its
principal investment strategy to try to avoid losses during unfavorable
conditions. These investments may include cash (which will not earn any
income). In addition, the Limited Maturity Bond and Total Return Bond Funds
may temporarily hold high quality short-term money market instruments. This
strategy could prevent a Fund from achieving its investment objective.
Other Types of Investments
This prospectus describes each Fund's main investment strategies and the
particular types of securities in which each Fund principally invests. Each
Fund may, from time to time pursue other investment strategies and make other
types of investments in support of its investment objective. These
supplemental investment strategies and the risks involved are described in
detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
As with other mutual funds, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by Mercantile and the Funds' other service providers
don't properly process and calculate date-related information and data from
and after January 1, 2000. This possibility is commonly known as the "Year
2000" or "Y2K" problem. Mercantile is taking steps to address the Y2K problem
with respect to the computer systems that it uses and to obtain assurances
that comparable steps are being taken by the Funds' 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 Funds. The Y2K problem
10
<PAGE>
could have a negative impact on the issuers of securities in which the Funds
invest, which could hurt the Funds' investment returns.
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.
Customers of Mercantile-Safe Deposit and Trust Company and its affiliated
and correspondent banks (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.
To Open an Account To Add to an Account
By Mail . Complete a New Account . Make your check payable to
Application and mail it M.S.D. & T. Funds, Inc.
along with a check payable and mail it to the address
to M.S.D. & T. Funds, Inc. on the left.
to:
. Please indicate the
M.S.D. & T. Funds, Inc. particular Fund in which
P.O. Box 18208 Columbus, you are investing.
Ohio 43218-2028
. Please include your
To obtain a New Account account number on your
Application, call 1-800- check.
551-2145
- -------------------------------------------------------------------------------
By Wire . Before wiring funds, . Instruct your bank to wire
please call 1-800-551-2145 Federal funds to:
for complete wiring Huntington Bank, Columbus,
instructions. OH 43219, Bank Routing
#044000024, M.S.D. & T.
. Promptly complete a New Concentration A/C #
Account Application and 01892024109.
forward it to:
. Be sure to include your
M.S.D. & T. Funds, Inc. name and your Fund account
P.O. Box 182028 Columbus, number.
Ohio 43218-2028
. The wire should indicate
that you are making a
subsequent purchase as
opposed to opening a new
account.
11
<PAGE>
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.
- -------------------------------------------------------------------------------
. Explanation of Sales Price. The public offering price for shares of a
Fund is based upon net asset value. A Fund will calculate its net asset value
per share by adding the value of the Fund's investments, cash and other
assets, subtracting the Fund's liabilities, and then dividing the result by
the number of shares of the Fund that are outstanding. This process is
sometimes referred to as "pricing" a Fund's shares.
The assets of the 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 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.
Net asset value is computed (i) with respect to each 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 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
Exchange, the Federal Reserve Bank of Cleveland, the purchasing Bank (if
applicable) or the Funds' Adviser, transfer agent or custodian 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 BISYS Fund Services Ohio, Inc., the
Funds' transfer agent (the "Transfer Agent"), only on a day on which 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 the Transfer
12
<PAGE>
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 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 182028, Columbus, Ohio 43218-
2028.
. Your written request must
--be signed by each account holder;
--state the number or dollar amount of shares
to be redeemed and identify the specific
Fund;
-- include your account number.
. Signature guarantees are required
--for all redemption requests over $100,000;
--for any redemption request where the
proceeds are to be sent to someone other
than the shareholder of record or to an
address other than the address of record.
- -------------------------------------------------------------------------------
By Wire . Call 1-800-551-2145. You will need to provide
(available only the account name, account number, name of
if you checked Fund and amount of redemption ($1,000 minimum
the appropriate per transaction).
box on the 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 182028, Columbus,
Ohio 43218-2028. 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.
- -------------------------------------------------------------------------------
13
<PAGE>
By Telephone . Call 1-800-551-2145. You will need to provide
(available only the account name, account number, name of
if you checked Fund and amount of redemption.
the appropriate
box on the New . If you have already opened your account and
Account would like to add the telephone redemption
Application) feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 182028, Columbus,
Ohio 43218-2028. 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 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
14
<PAGE>
change the minimum amount per transaction for redemption of shares by wire or
to no longer permit wire redemptions.
You may choose to initiate certain transactions by telephone. The Company
and its agents will not be responsible for any losses resulting from
unauthorized transactions when reasonable procedures to verify the identity of
the caller are followed. To the extent that the Company does not follow such
procedures, it and/or its agents may be responsible for any unauthorized
transactions.
The Company reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for redeeming shares by
telephone may be modified or terminated by the Company at any time. It may be
difficult to reach the Company by telephone during periods of unusual market
activity. If this happens, you may redeem your shares by mail as described
above.
The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
its shares) for such periods as permitted under the Investment Company Act.
Certain redemption requests and other communications with the Company
require a signature guarantee. Signature guarantees are designed to protect
both you and the Company from fraud. To obtain a signature guarantee you
should visit a financial institution that participates in the Stock Transfer
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 mailing your request to M.S.D.&T. Funds, Inc., P.O. Box 182028, Columbus,
Ohio 43218-2028 or by telephoning your request to 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
15
<PAGE>
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 Limited Maturity Bond and Total Return
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
fifteenth day of each month 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 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
16
<PAGE>
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
Federal taxes. Each Fund contemplates declaring as dividends each year all
or substantially all of its taxable income, including its net capital gain
(the excess of long-term capital gain over short term capital loss).
Distributions attributable to the net capital gain of a Fund will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares. Other Fund distributions (including all anticipated distributions of
the Prime Money Market Fund and the Government Money Market Fund) will
generally be taxable as ordinary income. You will be subject to income tax on
Fund distributions regardless of whether they are paid in cash or reinvested
in additional shares. You will be notified annually of the tax status of
distributions to you.
In case of the Limited Maturity Bond and Total Return Bond Funds, you
should note that if you purchase shares before a distribution, the purchase
price will reflect the amount of the upcoming distribution, but you will be
taxed on the entire amount of the distribution received, even though, as an
economic matter, the distribution simply constitutes a return of capital. This
is known as "buying into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption
of your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.)
Any loss realized on shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends that were
received on the shares.
The one major exception to these tax principles is that distributions on,
and sales, exchanges and redemption's of, shares held in an IRA (or other tax-
qualified plan) will not be currently taxable.
State and local taxes. Shareholders may also be subject to state and local
taxes on distributions and redemptions. State income taxes may not apply
however to the portions of each Fund's distributions, if any, that are
attributable to interest on U.S. Government securities.
Miscellaneous. The foregoing is only a summary of certain tax
considerations under current law, which may be subject to change in the
future. Shareholders who are nonresident aliens, foreign entities or trusts,
or foreign corporations or partnerships, may be subject to different U.S.
federal income tax consequences. You should consult your tax adviser for
further information regarding federal, state, local and/or foreign tax
consequences relevant to your specific situation.
17
<PAGE>
MANAGEMENT OF THE COMPANY
Investment Adviser
Mercantile, subject to the general supervision of the Company's Board of
Directors, manages the investment portfolio of each Fund in accordance with
its investment objective and policies. This includes selecting portfolio
investments and placing purchase and sale orders for each Fund.
In exchange for these services, Mercantile is entitled to investment
advisory fees from the Funds that are calculated daily and paid monthly. For
the fiscal year ended May 31, 1999, the Funds paid Mercantile advisory fees as
follows:
<TABLE>
<CAPTION>
Investment Advisory Fees
Fund as a % of net assets
---- ------------------------
<S> <C>
Prime Money Market Fund........................... 0.230%
Government Money Market Fund...................... 0.220%
Limited Maturity Bond Fund........................ 0.242%
Total Return Bond Fund............................ 0.220%
</TABLE>
FINANCIAL HIGHLIGHTS
The financial highlights tables shown below are intended to help you
understand the Funds' financial performance for the past five years (or, if
shorter, the period since a particular Fund began operations). Certain
information reflects the financial performance of a single Fund share. The
total returns in the tables represent the rate that an investor would have
earned (or lost) on an investment in each Fund, assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the Funds' financial statements, are included in the Company's Annual Report
to Shareholders and are incorporated by reference into the SAI. The Annual
Report to Shareholders and SAI are available free of charge upon request.
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
Ended Ended Ended Ended Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
-------- -------- -------- -------- --------
<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....... 0.0486 0.0521 0.0498 0.0532 0.0491
-------- -------- -------- -------- --------
Total From Investment
Operations................. 0.0486 0.0521 0.0498 0.0532 0.0491
-------- -------- -------- -------- --------
Less Distributions to
Shareholders from:
Net Investment Income....... (0.0486) (0.0521) (0.0498) (0.0532) (0.0491)
-------- -------- -------- -------- --------
Total Distributions......... (0.0486) (0.0521) (0.0498) (0.0532) (0.0491)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return................. 4.97% 5.33% 5.10% 5.45% 5.02%
Ratios/Supplemental Data
Net Assets, End of Period
(000)...................... $530,835 $448,751 $368,853 $326,878 $382,059
Ratio of Expenses to Average
Net Assets
After Expense Waiver........ 0.38% 0.42% 0.43% 0.43% 0.43%
Before Expense Waiver....... 0.45% 0.47% 0.48% 0.48% 0.48%
Ratio of Net Investment
Income to Average Net
Assets..................... 4.84% 5.21% 4.98% 5.33% 4.92%
</TABLE>
18
<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
Ended Ended Ended Ended Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
-------- -------- -------- -------- --------
<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....... 0.0478 0.0515 0.0495 0.0526 0.0485
-------- -------- -------- -------- --------
Total From Investment
Operations................. 0.0478 0.0515 0.0495 0.0526 0.0485
-------- -------- -------- -------- --------
Less Distributions to
Shareholders from:
Net Investment Income....... (0.0478) (0.0515) (0.0495) (0.0526) (0.0485)
-------- -------- -------- -------- --------
Total Distributions......... (0.0478) (0.0515) (0.0495) (0.0526) (0.0485)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return................. 4.89% 5.27% 5.06% 5.39% 4.95%
Ratios/Supplemental Data
Net Assets, End of Period
(000)...................... $445,522 $391,133 $340,809 $264,725 $263,752
Ratio of Expenses to Average
Net Assets
After Expense Waiver........ 0.38% 0.42% 0.43% 0.43% 0.43%
Before Expense Waiver....... 0.45% 0.46% 0.49% 0.48% 0.48%
Ratio of Net Investment
Income to Average Net
Assets..................... 4.76% 5.15% 4.95% 5.27% 4.85%
</TABLE>
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
Ended Ended Ended Ended Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period......................... $ 10.45 $ 10.31 $ 10.19 $ 10.43 $ 10.10
-------- -------- ------- ------- -------
Income From Investment
Operations:
Net Investment Income.......... 0.58 0.60 0.59 0.59 0.56
Net Realized and Unrealized
Gain (Loss) On Investments.... (0.10) 0.22 0.12 (0.24) 0.33
-------- -------- ------- ------- -------
Total From Investment
Operations.................... 0.48 0.82 0.71 0.35 0.89
-------- -------- ------- ------- -------
Less Distributions to
Shareholders from:
Net Investment Income.......... (0.58) (0.60) (0.59) (0.59) (0.56)
Net Capital Gains.............. (0.03) (0.08) -- -- --
-------- -------- ------- ------- -------
Total Distributions............ (0.61) (0.68) (0.59) (0.59) (0.56)
-------- -------- ------- ------- -------
Net Asset Value, End of Period.. $ 10.32 $ 10.45 $ 10.31 $ 10.19 $ 10.43
======== ======== ======= ======= =======
Total Return.................... 4.63% 8.15% 7.12% 3.38% 9.13%
Ratios/Supplemental Data
Net Assets, End of Period
(000)......................... $166,257 $151,922 $43,010 $44,102 $44,652
Ratio of Expenses to Average
Net Assets
After Expense Waiver........... 0.45% 0.50% 0.60% 0.60% 0.60%
Before Expense Waiver.......... 0.58% 0.78% 0.75% 0.72% 0.70%
Ratio of Net Investment Income
to Average Net Assets......... 5.54% 5.71% 5.72% 5.66% 5.56%
Portfolio turnover rate......... 59.73% 48.24% 20.92% 52.79% 22.01%
</TABLE>
19
<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>
Year Ended 3/1/98/1/
5/31/99 to 5/31/98
---------- ----------
<S> <C> <C>
Net Asset Value, Beginning of Period................... $ 10.02 $ 10.00
-------- --------
Income From Investment Operations:
Net Investment Income................................. 0.59 0.15
Net Realized and Unrealized Gain (Loss) On
Investments.......................................... (0.14) 0.02
-------- --------
Total From Investment Operations...................... 0.45 0.17
-------- --------
Less Distributions to Shareholders from:
Net Investment Income................................. (0.59) (0.15)
Net Capital Gains..................................... (0.06) --
-------- --------
Total Distributions................................... (0.65) (0.15)
-------- --------
Net Asset Value, End of Period......................... $ 9.82 $ 10.02
======== ========
Total Return........................................... 4.48% 1.69%
Ratios/Supplemental Data
Net Assets, End of Period (000)....................... $107,149 $101,363
Ratio of Expenses to Average Net Assets
After Expense Waiver.................................. 0.45% 0.45%/2/
Before Expense Waiver................................. 0.62% 0.73%/2/
Ratio of Net Investment Income to Average Net Assets.. 5.82% 5.89%/2/
Portfolio turnover rate................................ 74.94% 10.51%
</TABLE>
- -------------------
/1/Commencement of operations.
/2/Annualized.
20
<PAGE>
For More Information
You'll find more information about the Funds in the following documents:
Annual and semi-annual reports
The Company's annual and semi-annual reports contain more information about each
Fund and a discussion about the market conditions and investment strategies that
had a significant effect on each Fund's performance during the last fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Funds and their policies. By
law, it is incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Funds and make shareholder inquiries by calling 1-800-551-2145 or writing to:
M.S.D. & T. Funds, Inc.
Mutual Fund Administration
20 South Charles Street
Fifth Floor
Baltimore, Maryland 21201
If you buy your shares through a financial institution, you may contact your
institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Funds, including the SAI.
They will charge you a fee for this service. You can also visit the SEC Public
Reference Room and copy the documents while you are there. For information about
the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Funds are also available on the SEC's
website at http://www.sec.gov.
The Company's Investment Company Act File No. is 811-5782.
<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 30, 1999
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of these Funds or determined if this
prospectus is accurate or complete. Anyone who tells you otherwise is committing
a crime.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RISK/RETURN SUMMARY........................................................ 1
Introduction............................................................. 1
Tax-Exempt Money Market Fund............................................. 2
Maryland Tax-Exempt Bond Fund............................................ 4
Intermediate Tax-Exempt Bond Fund........................................ 6
National Tax-Exempt Bond Fund............................................ 8
Fees and Expenses........................................................ 9
Additional Information about Risk........................................ 10
INVESTING IN THE FUNDS..................................................... 10
Getting Your Investment Started.......................................... 10
How To Buy Fund Shares................................................... 11
How To Sell Fund Shares.................................................. 13
Other Purchase and Redemption Information................................ 14
SHAREHOLDER SERVICES....................................................... 15
Exchange Privilege....................................................... 15
Automatic Investment Plan................................................ 15
Systematic Withdrawals................................................... 16
Directed Reinvestments................................................... 16
DIVIDENDS AND DISTRIBUTIONS................................................ 16
TAX INFORMATION............................................................ 16
MANAGEMENT OF THE COMPANY.................................................. 17
Investment Adviser....................................................... 17
FINANCIAL HIGHLIGHTS....................................................... 18
</TABLE>
If You Have Questions
For current yield, purchase and redemption information, call 1-800-551-2145.
<PAGE>
RISK/RETURN SUMMARY
Introduction
This Prospectus describes the M.S.D.&T. Tax-Exempt Fixed Income Funds (the
"Funds"), four investment portfolios offered by M.S.D.&T. Funds, Inc. (the
"Company"). On the following pages, you will find important information about
each Fund, including:
. The Fund's investment objective and the principal investment
strategies used by the Fund's investment adviser in trying to
achieve that objective;
. The principal risks associated with an investment in the Fund;
. The Fund's past performance measured on both a year-by-year and
long-term basis; and
. The fees and expenses you will pay as an investor in the Fund.
The Tax-Exempt Money Market Fund may be appropriate for investors who want
a way to earn money market returns that are generally exempt from federal
income tax. The Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and
National Tax-Exempt Bond Funds may be appropriate for investors who are
looking for income that is generally exempt from federal income tax and who
can accept fluctuations in price and yield. The Maryland Tax-Exempt Bond Fund
is best suited to residents of Maryland who are also looking for income that
is exempt from Maryland state income tax. The Funds are not appropriate
investments for tax-deferred retirement accounts, such as IRAs, because their
returns before taxes are generally lower than those of taxable funds.
Before investing in a Fund, you should carefully consider:
. Your investment goals;
. Your investment time horizon; and
. Your tolerance for risk.
The Investment Adviser
Mercantile-Safe Deposit and Trust Company ("Mercantile" or the "Adviser")
is the investment adviser for each Fund. Mercantile, which has its main office
at Two Hopkins Plaza, Baltimore, Maryland 21201, is the lead bank of
Mercantile Bankshares Corporation, a multi-bank holding company organized in
1969. Mercantile and its predecessors have been in the business of managing
the investments of fiduciary and other accounts in the Baltimore area since
1864. As of June 30, 1999, Mercantile had approximately $15 billion in assets
under management.
An investment in the Funds is not a deposit of Mercantile-Safe Deposit and
Trust Company and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Tax-Exempt
Money Market Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund. You could also
lose money by investing in the other Tax-Exempt Fixed Income Funds.
<PAGE>
Tax-Exempt Money Market Fund
Investment Objective
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 ("municipal obligations") the interest on which, in the opinion of
counsel to the issuer or bond counsel, is exempt from regular federal income
tax.
Principal Investment Strategies
During normal market conditions, at least 80% of the Fund's total assets
will be invested in short-term municipal obligations that pay interest which
is exempt from federal income tax. Municipal obligations purchased by the Fund
may include general obligation securities, revenue securities and private
activity bonds. General obligation securities are secured by the issuer's full
faith, credit and taxing power. Revenue obligation securities are usually
payable only from revenues derived from specific facilities or revenue
sources. Private activity bonds are usually revenue obligations since they are
typically payable by the private user of the facilities financed by the bonds.
The interest on private activity bonds may be subject to the federal
alternative minimum tax. Investments in private activity bonds will not be
treated as investments in municipal obligations for purposes of the 80%
requirement stated above.
Because the Fund is a "money market fund," municipal obligations purchased
by it must meet strict requirements as to investment quality, maturity, and
diversification. The Fund will only buy a municipal obligation if it has the
highest rating (or one of the two highest ratings if the municipal obligation
is a bond) from at least two nationally recognized statistical rating
organizations, such as Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., or one such rating if only one organization has rated the
security. If the security is not rated, the Adviser must determine that it is
of comparable quality to eligible rated securities. The Fund generally does
not invest in securities with maturities of more than 397 days (subject to
certain exceptions) and the average maturity of all securities held by the
Fund must be 90 days or less. Prior to purchasing a municipal obligation for
the Fund, the Adviser must determine that the obligation carries very little
credit risk.
[Sidebar:]
Municipal Obligations
State and local governments issue municipal obligations to raise money to
finance public works, to repay outstanding obligations, to raise funds for
general operating expenses and to make loans to other public institutions.
Some municipal obligations, known as private activity bonds, are issued to
finance projects for private companies. Municipal obligations, which can be
issued as bonds, notes or commercial paper, usually have fixed interest rates,
although some have interest rates that change from time to time.
Principal Risks of Investing in the Fund
The yield paid by the Fund will vary with changes in interest rates.
Although credit risk is very low because the Fund only invests in high
quality obligations, if an issuer fails to pay interest or repay principal,
the value of your investment could decline. The ability of a state or local
government issuer to make payments can be affected by many factors, including
economic conditions, the flow of tax revenues and changes in the level of
federal, state or local aid. Some municipal obligations are payable only from
limited revenue sources or by private entities.
The Adviser evaluates the rewards and risks presented by all securities
purchased by the Fund and how they may further the Fund's investment
objective. It is possible, however, that these evaluations will prove to be
inaccurate.
There's no guarantee the Fund will be able to preserve the value of your
investment at $1.00 per share.
2
<PAGE>
Fund Performance
The bar chart and table below show the Fund's annual returns and long-term
performance, thereby giving some indication of the risk of investing in the
Fund. The bar chart shows how the performance of the Fund has varied from year
to year. The table shows the Fund's average annual total returns for one year,
five years and since inception. Both the bar chart and the table assume
reinvestment of all dividends and distributions. The Fund's past performance
does not necessarily indicate how it will perform in the future.
[Bar Chart]
- --------------------------------------------------------------------------------
[Sidebar:]
Best quarter: Calendar Year Total Returns
1.45% for the ------------------------------------------------------
quarter ended 1990 1991 1992 1993 1994 1995 1996 1997 1998
December 31, ----- ----- ----- ----- ----- ----- ----- ----- -----
1989
5.61% 4.07% 2.59% 2.03% 2.47% 3.45% 3.07% 3.23% 3.07%
Worst quarter:
0.47% for the
quarter ended
March 31, 1993 ------------------------------------------------------
Year-to-date total return for the six
months ended June 30, 1999: 1.34%
- --------------------------------------------------------------------------------
Average Annual Total Returns (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Exempt Money Market Fund.................... 3.07% 3.06% 3.40%
- --------------------------------------------------------------------------------
</TABLE>
* July 21, 1989
To obtain the Fund's current 7-day yield please call 1-800-551-2145.
3
<PAGE>
Maryland Tax-Exempt Bond Fund
Investment Objective
The Fund's investment objective is to seek a high level of interest income
that is exempt from federal and Maryland state and local income taxes.
Principal Investment Strategies
The Fund normally invests at least 80% of its net assets in municipal
obligations the interest on which is exempt from federal income tax, and at
least 65% of its total assets in municipal obligations 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.
Municipal obligations purchased by the Fund may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from
specific facilities or revenue sources. Private activity bonds are usually
revenue obligations since they are typically payable by the private user of
the facilities financed by the bonds. The interest on private activity bonds
may be subject to the federal alternative minimum tax. Investments in private
activity bonds will not be treated as investments in municipal securities for
purposes of the 80% requirement stated above.
The Fund will invest only in investment grade municipal obligations. These
are obligations which have one of the four highest ratings assigned by a
nationally recognized statistical rating organization, such as Standard &
Poor's Ratings Group or Moody's Investors Service, Inc., or are unrated
securities determined by the Adviser to be of comparable quality. Short-term
municipal obligations purchased by the Fund, such as municipal notes and tax-
exempt commercial paper, will have one of the two highest ratings assigned by
a nationally recognized statistical rating organization or will be unrated
securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Fund may be downgraded
below the minimum required rating. If that happens, the Fund does not have to
sell the security unless the Adviser determines that under the circumstances
the security is no longer an appropriate investment for the Fund.
[Sidebar:]
Maturity
The maturity of a debt security, such as a municipal obligation, is the
date when the issuer must repay the security's entire principal amount to an
investor, such as a 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.
The Fund will sell a portfolio security when, as a result of changes in
the economy or the performance of the security or other circumstances, the
Adviser believes that holding the security is no longer consistent with the
Fund's investment objective.
Principal Risks of Investing in the Fund
The prices of debt securities, including municipal obligations, tend to
move in the opposite direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are falling, the prices of
debt securities tend to rise. Generally, the longer the time until maturity,
the more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates also may cause certain municipal obligations
held by the Fund to be paid off much sooner or later than expected, which
could adversely affect the Fund's value. In the event that a security is paid
off sooner than expected because of a decline in interest rates, the Fund may
be unable to recoup all of its initial investment and may also suffer from
having to reinvest in lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the value of the
obligation will decrease, and the Fund may suffer from the inability to invest
in higher-yielding securities.
4
<PAGE>
The value of debt securities also depends on the ability of issuers to
make principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. Debt securities which have the lowest of the top four
ratings assigned by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. have speculative characteristics. Changes in the economy are
more likely to affect the ability of issuers of these securities to make
payments of principal and interest than is the case for higher-rated
securities. The ability of a state or local government issuer to make payments
can be affected by many factors, including economic conditions, the flow of
tax revenues and changes in the level of federal, state or local aid. Some
municipal obligations are payable only from limited revenue sources or by
private entities.
The Fund is not diversified, which means that it can invest a large
percentage of its assets in a small number of issuers. As a result, a change
in the value of any one investment held by the Fund may affect the overall
value of the Fund more than it would affect a diversified portfolio that holds
more investments. Because the Fund invests primarily in Maryland municipal
obligations, it also is likely to be especially susceptible to economic,
political and regulatory events that affect Maryland.
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they further the Fund's investment objective. It
is possible, however, that these evaluations will prove to be inaccurate.
[Sidebar:]
Portfolio Manager
The Fund is managed by Kingsley Wood, Jr., Vice President of Mercantile.
Prior to joining Mercantile in 1998, Mr. Wood was an institutional tax-exempt
bond trader at ABN-AMRO Bank in Chicago, Illinois. Mr. Wood has eight years of
investment experience and has managed the Fund since 1998.
Fund Performance
The bar chart and table below show the Fund 's annual returns and long-
term performance, thereby giving some indication of the risk of investing in
the Fund. The bar chart shows how the performance of the Fund has varied from
year to year. The table shows how the Fund's average annual total returns for
one year, five years and since inception compared to those of a broad-based
market index. Both the bar chart and the table assume reinvestment of all
dividends and distributions. The Fund's past performance does not necessarily
indicate how it will perform in the future.
[Bar Chart]
- --------------------------------------------------------------------------------
[Sidebar:]
Best quarter: Calendar Year Total Returns
6.08% for the ------------------------------------------------------------
quarter ended 1993 1994 1995 1996 1997 1998
March 31, 1995 ------ ------- ------ ----- ----- -----
Worst quarter: 12.56% (7.05)% 14.57% 3.12% 8.57% 5.56%
(5.65)% for the
quarter ended
March 31, 1994 ------------------------------------------------------------
Year-to-date total return for the six
months ended June 30, 1999: (1.12)%
- --------------------------------------------------------------------------------
Average Annual Total Returns (for the periods ended December 31, 1998)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Maryland Tax-Exempt Bond Fund................... 5.56% 4.71% 6.22%
Lehman Brothers Municipal Bond Index............ 6.48% 6.22% 7.27%
- --------------------------------------------------------------------------------
</TABLE>
* June 2, 1992 for the Fund; May 31, 1992 for the Lehman Brothers Municipal
Bond Index.
[Sidebar:]
The Lehman Brothers Municipal Bond Index is an unmanaged index that tracks the
performance of municipal bonds.
5
<PAGE>
Intermediate Tax-Exempt Bond Fund
Investment Objective
The Fund's investment objective 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's investment objective may be changed by the Company's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Fund normally invests at least 80% of its total assets in municipal
obligations that pay interest which is exempt from federal income tax.
Municipal obligations purchased by the Fund may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from
specific facilities or revenue sources. Private activity bonds are usually
revenue obligations since they are typically payable by the private user of
the facilities financed by the bonds. The interest on private activity bonds
may be subject to the federal alternative minimum tax. Investments in private
activity bonds will not be treated as investments in municipal obligations for
purposes of the 80% requirement stated above.
The Fund will invest only in investment grade municipal obligations. These
are obligations which have one of the four highest ratings assigned by a
nationally recognized statistical rating organization, such as Standard &
Poor's Ratings Group or Moody's Investors Service, Inc., or are unrated
securities determined by the Adviser to be of comparable quality. Short-term
municipal obligations purchased by the Fund, such as municipal notes and tax-
exempt commercial paper, will have one of the two highest ratings assigned by
a nationally recognized statistical rating organization or will be unrated
securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Fund may be downgraded
below the minimum required rating. If that happens, the Fund does not have to
sell the security unless the Adviser determines that under the circumstances
the security is no longer an appropriate investment for the Fund.
[Sidebar:]
Average weighted maturity gives you the average time until all debt
obligations, including municipal obligations, in a Fund come due or mature. It
is calculated by averaging the time to maturity of all debt obligations held
by a Fund with each maturity "weighted" according to the percentage of assets
which it represents.
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 and will have an average weighted maturity of
between three and ten years.
The Fund will sell a portfolio security when, as a result of changes in
the economy or the performance of the security or other circumstances, the
Adviser believes that holding the security is no longer consistent with the
Fund's investment objective.
Principal Risks of Investing in the Fund
The prices of debt securities, including municipal obligations, tend to
move in the opposite direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are falling, the prices of
debt securities tend to rise. Generally, the longer the time until maturity,
the more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates also may cause certain municipal obligations
held by the Fund to be paid off much sooner or later than expected, which
could adversely affect the Fund's value. In the event that a security is paid
off sooner than expected because of a decline in interest rates, the Fund may
be unable to recoup all of its initial investment and may also suffer from
having to reinvest in lower-yielding securities. In the event of a later than
6
<PAGE>
expected payment because of a rise in interest rates, the value of the
obligation will decrease, and the Fund may suffer from the inability to invest
in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to
make principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. Debt securities which have the lowest of the top four
ratings assigned by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. have speculative characteristics. Changes in the economy are
more likely to affect the ability of issuers of these securities to make
payments of principal and interest than is the case for higher-rated
securities. The ability of a state or local government issuer to make payments
can be affected by many factors, including economic conditions, the flow of
tax revenues and changes in the level of federal, state or local aid. Some
municipal obligations are payable only from limited revenue sources or by
private entities.
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they further the Fund's investment objective. It
is possible, however, that these evaluations will prove to be inaccurate.
[Sidebar:]
Portfolio Manager
The Fund is managed by Kingsley Wood, Jr., Vice President of Mercantile.
Prior to joining Mercantile in 1998, Mr. Wood was an institutional tax-exempt
bond trader at ABN-AMRO Bank in Chicago, Illinois. Mr. Wood has eight years of
investment experience and has managed the Fund since 1998.
Fund Performance
The Fund commenced operations on March 1, 1998. As a result, the Fund has
a performance record of less than one full calendar year.
7
<PAGE>
National Tax-Exempt Bond Fund
Investment Objective
The Fund's investment objective 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's investment objective may be changed by the Company's Board of
Directors without shareholder approval. Shareholders will be given at least 30
days' written notice before any such change occurs.
Principal Investment Strategies
The Fund normally invests at least 80% of its total assets in municipal
obligations that pay interest which is exempt from federal income tax.
Municipal obligations purchased by the Fund may include general obligation
securities, revenue securities and private activity bonds. General obligation
securities are secured by the issuer's full faith, credit and taxing power.
Revenue securities are usually payable only from revenues derived from
specific facilities or revenue sources. Private activity bonds are usually
revenue obligations since they are typically payable by the private user of
the facilities financed by the bonds. The interest on private activity bonds
may be subject to the federal alternative minimum tax. Investments in private
activity bonds will not be treated as investments in municipal obligations for
purposes of the 80% requirement stated above.
The Fund will invest only in investment grade municipal obligations. These
are obligations which have one of the four highest ratings assigned by a
nationally recognized statistical rating organization, such as Standard &
Poor's Ratings Group or Moody's Investors Service, Inc., or are unrated
securities determined by the Adviser to be of comparable quality. Short-term
municipal obligations purchased by the Fund, such as municipal notes and tax-
exempt commercial paper, will have one of the two highest ratings assigned by
a nationally recognized statistical rating organization or will be unrated
securities that the Adviser has determined to be of comparable quality.
Occasionally, the rating of a security held by the Fund may be downgraded
below the minimum required rating. If that happens, the Fund does not have to
sell the security unless the Adviser determines that under the circumstances
the security is no longer an appropriate investment for 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.
The Fund will sell a portfolio security when, as a result of changes in
the economy or the performance of the security or other circumstances, the
Adviser believes that holding the security is no longer consistent with the
Fund's investment objective.
Principal Risks of Investing in the Fund
The prices of debt securities, including municipal obligations, tend to
move in the opposite direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are falling, the prices of
debt securities tend to rise. Generally, the longer the time until maturity,
the more sensitive the price of a debt security is to interest rate changes.
Changes in interest rates also may cause certain municipal securities held
by the Fund to be paid off much sooner or later than expected, which could
adversely affect the Fund's value. In the event that a security is paid off
sooner than expected because of a decline in interest rates, the Fund may be
unable to recoup all of its initial investment and may also suffer from having
to reinvest in lower-yielding securities. In the event of a later than
expected payment because of a rise in interest rates, the value of the
obligation will decrease, and the Fund may suffer from the inability to invest
in higher-yielding securities.
The value of debt securities also depends on the ability of issuers to
make principal and interest payments. If an issuer can't meet its payment
obligations or if its credit rating is lowered, the value of its debt
securities will fall. Debt securities which have the lowest of the top four
ratings assigned by Standard & Poor's Ratings
8
<PAGE>
Group or Moody's Investors Service, Inc. have speculative characteristics.
Changes in the economy are more likely to affect the ability of issuers of
these securities to make payments of principal and interest than is the case
for higher-rated securities. The ability of a state or local government issuer
to make payments can be affected by many factors, including economic
conditions, the flow of tax revenues and changes in the level of federal,
state or local aid. Some municipal obligations are payable only from limited
revenue sources or by private entities.
The Adviser evaluates the risks and rewards presented by all securities
purchased by the Fund and how they further the Fund's investment objective. It
is possible, however, that these evaluations will prove to be inaccurate.
[Sidebar:]
Portfolio Manager
The Fund is managed by Kingsley Wood Jr., Vice President of Mercantile.
Prior to joining Mercantile in 1998, Mr. Wood was an institutional tax-exempt
bond trader at ABN-AMRO Bank in Chicago, Illinois. Mr. Wood has eight years of
investment experience and has managed the Fund since 1998.
Fund Performance
The Fund commenced operations on March 1, 1998. As a result, the Fund has
a performance record of less than one full calendar year.
Fees and Expenses
The following table shows the fees and expenses you may pay when you buy
and hold shares of the Funds.
<TABLE>
<CAPTION>
Tax-Exempt Maryland Intermediate National
Money Tax-Exempt Tax-Exempt Tax-Exempt
Market Fund Bond Fund Bond Fund Bond Fund
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses:
(as a percentage of net
assets)
Management Fees/1/ ............ 0.25% 0.50% 0.50% 0.50%
Distribution (12b-1) Fees...... None None None None
Other Expenses/1/ ............. 0.24% 0.37% 0.26% 0.24%
Total Fund Operating
Expenses/1/ .................. 0.49% 0.87% 0.76% 0.74%
</TABLE>
Example
This example is intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 for the time periods shown, reinvest all of your
dividends and distributions, and then sell all of your shares at the end of
those periods. The example also assumes that your investment has a 5% return
each year and the Funds' operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market Fund.................... $49 $154 $271 $ 616
Maryland Tax-Exempt Bond Fund................... $87 $274 $481 $1,094
Intermediate Tax-Exempt Bond Fund............... $76 $240 $420 $ 956
National Tax-Exempt Bond Fund................... $74 $233 $409 $ 931
</TABLE>
- -------------------
/1/Management Fees, Other Expenses and Total Fund Operating Expenses for the
Funds for the current fiscal year are expected to be less than the amounts
shown above because the Adviser and the Administrator are voluntarily
waiving a portion of their fees. These fee waivers are being made in order
to keep the annual fees and expenses for the Funds at a certain level.
Management Fees for the Tax-Exempt Money Market, Maryland Tax-Exempt Bond,
Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds, after
taking these fee waivers into account, are expected to be 0.22%, 0.13%,
0.22% and 0.22%, respectively. Other Expenses for the Tax-Exempt Money
Market, Maryland Tax-Exempt Bond,
9
<PAGE>
Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds, after taking
these fee waivers into account, are expected to be 0.155%, 0.32%, 0.23% and
0.23%, respectively. Total Fund Operating Expenses for the Tax-Exempt Money
Market, Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National
Tax-Exempt Bond Funds, after taking these fee waivers into account, are
expected to be 0.375%, 0.45%, 0.45% and 0.45%, respectively. These fee
waivers may be revised or cancelled at any time.
Additional Information about Risk
The principal risks of investing in each of the Funds have been described
above. The following supplements that discussion.
Temporary Defensive Positions
Each Fund may temporarily hold investments that are not part of its
principal investment strategy to try to avoid losses during unfavorable market
conditions. These investments may include cash (which will not earn any
income). In addition, the Maryland Tax-Exempt, Intermediate Tax-Exempt Bond
and National Tax-Exempt Bond Funds may hold short-term taxable money market
instruments, securities issued by other investment companies which invest in
taxable or tax-exempt money market instruments and U.S. Government
obligations. This strategy could prevent a Fund from achieving its investment
objective.
Other Types of Investments
This prospectus describes each Fund's principal investment strategies and
the particular types of securities in which each Fund principally invests.
Each Fund may, from time to time pursue other investment strategies and make
other types of investments in support of its investment objective. These
supplemental investment strategies and the risks involved are described in
detail in the Statement of Additional Information ("SAI"), which is referred
to on the back cover of this prospectus.
Year 2000 Risks
As with other mutual funds, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by Mercantile and the Funds' other service providers
don't properly process and calculate date-related information and data from
and after January 1, 2000. This possibility is commonly known as the "Year
2000" or "Y2K" problem. Mercantile is taking steps to address the Y2K problem
with respect to the computer systems that it uses and to obtain assurances
that comparable steps are being taken by the Funds' 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 Funds. The Y2K problem
could have a negative impact on the issuers of securities in which the Funds
invest, which could hurt the Funds' investment returns.
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.
Customers of Mercantile-Safe Deposit and Trust Company and its affiliated
and correspondent banks (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.
10
<PAGE>
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.
To Open an Account To Add to an Account
By Mail . Complete a New Account . Make your check payable to
Application and mail it M.S.D. & T. Funds, Inc.
along with a check payable and mail it to the address
to M.S.D. & T. Funds, Inc. on the left.
to:
M.S.D. & T. Funds, Inc. . Please indicate the
P.O. Box 182028 Columbus, particular Fund in which
Ohio 43218-2028 you are investing.
To obtain a New Account . Please include your
Application, call 1-800- account number on your
551-2145 check.
- -------------------------------------------------------------------------------
By Wire . Before wiring funds, . Instruct your bank to wire
please call 1-800-551-2145 Federal funds to:
for complete wiring Huntington Bank, Columbus,
instructions. OH 43219, Bank Routing
#044000024, M.S.D. & T.
. Promptly complete a New Concentration A/C
Account Application and #01899622436.
forward it to:
. Be sure to include your
M.S.D. & T. Funds, Inc. name and your Fund account
P.O. Box 182028 Columbus, number.
Ohio 43218-2028
. 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.
- -------------------------------------------------------------------------------
. Explanation of Sales Price. The public offering price for shares of a
Fund is based upon net asset value. A Fund will calculate its net asset value
per share by adding the value of the Fund's investments, cash and other
assets, subtracting the Fund's liabilities, and then dividing the result by
the number of shares of the Fund that are outstanding. This process is
sometimes referred to as "pricing" a Fund's shares.
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
11
<PAGE>
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 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.
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 each Bond Fund, as of the close of
regular trading hours on the Exchange (currently 4:00 p.m. Eastern Time) on
each weekday, in each case with the exception of those holidays on which the
Exchange, the Federal Reserve Bank of Cleveland, the purchasing Bank (if
applicable) or the Funds' Adviser, transfer agent or custodian 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 BISYS Fund Services Ohio, Inc., 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 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.
12
<PAGE>
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 182028, Columbus, Ohio 43218-
2028.
. Your written request must
--be signed by each account holder;
--state the number or dollar amount of shares
to be redeemed and identify the specific
Fund;
--include your account number.
. Signature guarantees are required
--for all redemption requests over $100,000;
--for any redemption request where the
proceeds are to be sent to someone other
than the shareholder of record or to an
address other than the address of record.
- -------------------------------------------------------------------------------
By Wire . Call 1-800-551-2145. You will need to provide
(available only the account name, account number, name of
if you checked Fund and amount of redemption ($1,000 minimum
the appropriate per transaction).
box on the New
Account . If you have already opened your account and
Application) would like to have the wire redemption
feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 182028, Columbus,
Ohio 43218-2028. The request must be signed
(and signatures guaranteed) by each account
owner.
. To change bank instructions, send a written
request to the above address. The request
must be signed (and signatures guaranteed) by
each account owner.
- -------------------------------------------------------------------------------
By Telephone . Call 1-800-551-2145. You will need to provide
(available only the account name, account number, name of
if you checked Fund and amount of redemption.
the appropriate
box on the New . If you have already opened your account and
Account would like to add the telephone redemption
Application) feature, send a written request to: M.S.D. &
T. Funds, Inc., P.O. Box 182028, Columbus,
Ohio 43218-2028. 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.
13
<PAGE>
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 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.
14
<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 mailing your request to M.S.D. & T. Funds, Inc., P.O. Box 182028, Columbus,
Ohio 43218-2028, or by telephoning your request to 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.
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.
15
<PAGE>
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
fifteenth day of each month 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 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
Federal taxes. It is expected that each Fund will distribute dividends
derived from interest earned on exempt securities, and these "exempt interest
dividends" will be exempt income for shareholders for federal income tax
purposes. However, distributions, if any, derived from net capital gains of
each Fund will generally be taxable to you as capital gains. Dividends, if
any, derived from short-term capital gains or taxable interest income will be
taxable to you as ordinary income. You will be notified annually of the tax
status of distributions to you.
In the case of the Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond
and National Tax-Exempt Bond Funds, you should note that if you purchase
shares just prior to a taxable distribution, the purchase price will reflect
the amount of the upcoming distribution, but you will be taxed on the entire
amount of the distribution received, even though, as an economic matter, the
distribution simply constitutes a return of capital. This is known as "buying
into a dividend."
You will recognize taxable gain or loss on a sale, exchange or redemption
of your shares, including an exchange for shares of another Fund, based on the
difference between your tax basis in the shares and the amount you receive for
them. (To aid in computing your tax basis, you generally should retain your
account statements for the periods during which you held shares.) Any loss
realized on shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends that were received on
the shares. If you receive an exempt-interest dividend with respect to any
share and the share is held by you for six months or less, any loss on the
sale or exchange of the share will be disallowed to the extent of such
dividend amount.
16
<PAGE>
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of each Fund generally will not be deductible for federal income tax
purposes.
You should note that a portion of the exempt-interest dividends paid by
each Fund may constitute an item of tax preference for purposes of determining
federal alternative minimum tax liability. Exempt-interest dividends will also
be considered along with other adjusted gross income in determining whether
any Social Security or railroad retirement payments received by you are
subject to federal income taxes.
State and local taxes. Dividends paid by the Tax-Exempt Money Market,
Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds that are
attributable to interest earned by the Funds may be taxable to shareholders
under state or local law.
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. In addition, any gain
realized by a shareholder upon a redemption or exchange of Fund shares will be
subject to Maryland taxation. Interest on indebtedness incurred (directly or
indirectly) by a shareholder of the Fund to purchase or carry shares of the
Fund will not be deductible for Maryland state and local income tax purposes
to the extent such interest is allocable to exempt-interest dividends.
Miscellaneous: The foregoing is only a summary of certain tax
considerations under current law, which may be subject to change in the
future. You should consult your tax adviser for further information regarding
federal, state and/or local tax consequences relevant to your specific
situation.
MANAGEMENT OF THE COMPANY
Investment Adviser
Mercantile, subject to the general supervision of the Company's Board of
Directors, manages the investment portfolio of each Fund in accordance with
its investment objective and policies. This includes selecting portfolio
investments and placing purchase and sale orders for each Fund.
In exchange for these services, Mercantile is entitled to investment
advisory fees from the Funds that are calculated daily and paid monthly. For
the fiscal year ended May 31, 1999, the Funds paid Mercantile advisory fees as
follows:
<TABLE>
<CAPTION>
Investment Advisory Fees
Fund as a % of net assets
---- ------------------------
<S> <C>
Tax-Exempt Money Market Fund...................... 0.220%
Maryland Tax-Exempt Bond Fund..................... 0.128%
Intermediate Tax-Exempt Bond Fund................. 0.220%
National Tax-Exempt Bond Fund..................... 0.222%
</TABLE>
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables shown below are intended to help you
understand the Funds' financial performance for the past five years (or, if
shorter, the period since a particular Fund began operations). Certain
information reflects the financial performance of a single Fund share. The
total returns in the tables represent the rate that an investor would have
earned (or lost) on an investment in each Fund, assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report, along with
the Funds' financial statements, are included in the Company's Annual Report
to Shareholders and are incorporated by reference into the SAI. The Annual
Report to Shareholders and SAI are available free of charge upon request.
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
Ended Ended Ended Ended Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
-------- -------- -------- -------- --------
<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....... 0.0285 0.0318 0.0304 0.0321 0.0303
Net Realized Gain on
Investments................ -- -- -- -- --
-------- -------- -------- -------- --------
Total From Investment
Operations................. 0.0285 0.0318 0.0304 0.0321 0.0303
-------- -------- -------- -------- --------
Less Distributions to
Shareholders from:
Net Investment Income....... (0.0285) (0.0318) (0.0304) (0.0321) (0.0303)
Net Capital Gains........... -- -- -- -- --
-------- -------- -------- -------- --------
Total Distributions......... (0.0285) (0.0318) (0.0304) (0.0321) (0.0303)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return................. 2.89% 3.22% 3.09% 3.26% 3.08%
Ratios/Supplemental Data
Net Assets, End of Period
(000)...................... $143,221 $ 89,965 $ 79,492 $ 50,137 $ 69,100
Ratio of Expenses to Average
Net Assets
After Expense Waiver........ 0.38% 0.43% 0.43% 0.43% 0.43%
Before Expense Waiver....... 0.49% 0.50% 0.53% 0.51% 0.52%
Ratio of Net Investment
Income to Average Net
Assets..................... 2.80% 3.17% 3.05% 3.22% 3.01%
</TABLE>
18
<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
Ended Ended Ended Ended Ended
5/31/99 5/31/98 5/31/97 5/31/96 5/31/95
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................ $ 10.82 $ 10.38 $10.20 $ 10.40 $ 10.25
------- ------- ------ ------- -------
Income From Investment Operations:
Net Investment Income............. 0.45 0.48 0.50 0.49 0.49
Net Realized and Unrealized Gain
(Loss) on Investments............ (0.04) 0.44 0.18 (0.20) 0.15
------- ------- ------ ------- -------
Total From Investment Operations.. 0.41 0.92 0.68 0.29 0.64
------- ------- ------ ------- -------
Less Distributions to Shareholders
from:
Net Investment Income............. (0.45) (0.48) (0.50) (0.49) (0.49)
Net Capital Gains................. -- -- -- -- --
------- ------- ------ ------- -------
Total Distributions............... (0.45) (0.48) (0.50) (0.49) (0.49)
------- ------- ------ ------- -------
Net Asset Value, End of Period..... $ 10.78 $ 10.82 $10.38 $ 10.20 $ 10.40
======= ======= ====== ======= =======
Total Return....................... 3.81% 9.03% 6.80% 2.84% 6.48%
Ratios/Supplemental Data
Net Assets, End of Period (000)... $26,565 $14,980 $8,298 $10,186 $12,360
Ratio of Expenses to Average Net
Assets
After Expense Waiver.............. 0.45% 0.49% 0.55% 0.62% 0.62%
Before Expense Waiver............. 0.87% 1.03% 1.13% 1.04% 0.97%
Ratio of Net Investment Income to
Average Net Assets............... 4.12% 4.49% 4.84% 4.74% 4.83%
Portfolio turnover rate............ 22.78% 55.95% 28.11% 20.58% 36.80%
</TABLE>
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 each of the periods
indicated:
<TABLE>
<CAPTION>
Intermediate
Tax-Exempt National Tax-
Bond Fund Exempt Bond Fund
---------------- ------------------
Year 3/1/981 Year 3/1/981
Ended to Ended to
5/31/99 5/31/98 5/31/99 5/31/98
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.............................. $ 10.01 $ 10.00 $ 10.05 $ 10.00
------- ------- -------- --------
Income From Investment Operations:
Net Investment Income............... 0.38 0.10 0.44 0.11
Net Realized and Unrealized Gain
(Loss) on Investments.............. 0.07 0.01 -- 0.05
------- ------- -------- --------
Total From Investment Operations.... 0.45 0.11 0.44 0.16
------- ------- -------- --------
Less Distributions to Shareholders
from:
Net Investment Income............... (0.38) (0.10) (0.44) (0.11)
Net Capital Gains................... (0.08) -- (0.12) --
------- ------- -------- --------
Total Distributions................. (0.46) (0.10) (0.56) (0.11)
------- ------- -------- --------
Net Asset Value, End of Period....... $ 10.00 $ 10.01 $ 9.93 $ 10.05
======= ======= ======== ========
Total Return......................... 4.58% 1.07% 4.43% 1.64%
Ratios/Supplemental Data
Net Assets, End of Period (000)..... $90,895 $93,992 $178,067 $178,116
Ratio of Expenses to Average Net
Assets
After Expense Reimbursement and
Waiver............................. 0.45% 0.45%/2/ 0.45% 0.45%/2/
Before Expense Reimbursement and
Waiver............................. 0.76% 0.88%/2/ 0.74% 0.86%/2/
Ratio of Net Investment Income to
Average Net Assets................. 3.80% 3.84%/2/ 4.36% 4.49%/2/
Portfolio turnover rate.............. 149.02% 10.13% 123.30% 7.37%
</TABLE>
- -------------------
/1/Commencement of operations.
/2/Annualized.
19
<PAGE>
For More Information
You'll find more information about the Funds in the following documents:
Annual and semi-annual reports
The Company's annual and semi-annual reports contain more information about each
Fund and a discussion about the market conditions and investment strategies that
had a significant effect on each Fund's performance during the last fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Funds and their policies. By
law, it is incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about the
Funds and make shareholder inquiries by calling 1-800-551-2145 or writing to:
M.S.D. & T. Funds, Inc.
Mutual Funds Administration
20 South Charles Street
Fifth Floor
Baltimore, Maryland 21201
If you buy your shares through a financial institution, you may contact your
institution for more information.
You can write to the Securities and Exchange Commission (SEC) Public Reference
Section and ask them to mail you information about the Funds, including the SAI.
They will charge you a fee for this service. You can also visit the SEC Public
Reference Room and copy the documents while you are there. For information about
the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Funds are also available on the SEC's
website at http://www.sec.gov.
The Company's Investment Company Act File No. is 811-5782.
<PAGE>
M.S.D. & T. FUNDS, INC.
Statement of Additional Information
September 30, 1999
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
- ------------------------------------------------
<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND RISKS................................1
FUNDAMENTAL LIMITATIONS.................................................36
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..........................39
NET ASSET VALUE.........................................................40
ADDITIONAL INFORMATION CONCERNING TAXES..............
...................42
MANAGEMENT OF THE COMPANY...............................................45
INDEPENDENT ACCOUNTANTS.................................................54
COUNSEL.................................................................55
ADDITIONAL INFORMATION CONCERNING SHARES................................55
PERFORMANCE INFORMATION.................................................57
MISCELLANEOUS...........................................................65
FINANCIAL STATEMENTS....................................................66
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 30, 1999 for the Prime Money
Market Fund, Government Money Market Fund, Tax-Exempt Money Market Fund, Growth
& Income Fund, Equity Income Fund, Equity Growth Fund, International Equity
Fun
d, 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 Limited Partnership, 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 and Tax-Exempt Money
Market Fund will attempt to maintain their net asset value at $1.00 per share,
it is possible to lose money by investing in these Funds. You could also lose
money by investing in one of the other Funds. In additi
on, 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.
<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 three money market portfolios (the Prime Money Market Fund, Government Money
Market Fund and Tax-Exempt Money Market Fund, 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, also referred to herein as the "Equity Funds"); 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, also referred to herein as the "Bond Funds"). These portfolios may
also be referred to herein individually as a "Fund" and collectively as the
"Funds." The Equity Funds and Bond Funds may at times be referred to herein as
the "Non-Money Market Funds."
INVESTMENT OBJECTIVES, POLICIES AND RISKS
- -----------------------------------------
The investment objective, principal investment strategies and
principal risks of each Fund are described in the Prospectus for that Fund. The
following information supplements the description of the Funds' investment
objectives, policies and risks as set forth in the Prospectuses.
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 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 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.
Prime Money Market Fund
The Prime Money Market 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;
<PAGE>
. 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.
See Appendix A for a description of applicable debt security ratings.
Government Money Market Fund
The Government Money Market Fund invests in a portfolio of direct Treasury
obligations, other obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and repurchase agreements relating to such
obligations.
Tax-Exempt Money Market Fund
The Tax-Exempt Money Market Fund invests primarily in:
. municipal notes, including variable rate demand notes, rated at the
time of purchase within the highest rating category assigned by
one or more Rating Agencies;
. tax-exempt commercial paper rated at the time of purchase within the
highest rating category assigned by one or more Rating Agencies;
. 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.
See Appendix A for a description of applicable debt security ratings.
-2-
<PAGE>
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.
Growth & Income, Equity Income and Equity Growth Funds
During normal market and economic conditions, each of the Growth & Income,
Equity Income and Equity Growth Funds 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 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 each 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 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
Appendix A for a description of applicable debt security ratings.
International Equity Fund
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. The Fund may also purchase the securities of issuers
located in the United States, although it has no present intention of doing so.
The Fund may also invest in the securities of foreign issuers in the form of
ADRs, EDRs and GDRs as described below under "Additional Information on
Investment Policies and Risks."
-3-
<PAGE>
Diversified Real Estate Fund
The Diversified Real Estate Fund invests primarily in domestic equity
securities of companies principally engaged in the real estate business.
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.
The Fund invests primarily in shares of REITs during normal market and
economic conditions. 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
"Additional Information Concerning Taxes" below. Equity REITs can also realize
capital gains by selling properties that have appreciated in value.
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, Equity
Income and Equity Growth Funds" 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.
Limited Maturity Bond Fund
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.
Total Return Bond Fund
The Fund invests substantially all 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; and money market instruments.
-4-
<PAGE>
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.
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 uncollateralized interest payments; and
any uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the "residual risk").
Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt
Bond Funds
As a matter of fundamental policy, except during temporary defensive periods
as a result of adverse, market , economic, political or other conditions, at
least 80% of the net assets of each of the Maryland Tax-Exempt Bond Fund,
Intermediate Tax-Exempt Bond Fund and National Tax-Exempt Bond Fund will be
invested in securities the interest on which is exempt from regular federal
income tax.
Each 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
-5-
<PAGE>
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 "Additional Information on
Investment Policies and Risks." Investments by a 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. Each
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
each Fund.
Risk Factors
Market Risk.
-----------
To the extent that a Fund invests in equity securities, the Fund is
subject to market risk. That is, the possibility exists that common stocks will
decline over short or even extended periods of time. Both the U.S. and foreign
equity markets tend to be cyclical, experiencing both periods when stock prices
generally increase and periods when stock prices generally decrease. Therefore,
the net asset value of each Non-Money Market Fund, particularly each Equity
Fund, may fluctuate with movements in the equity markets.
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 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 of the Maryland Tax-
Exempt Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds may
purchase zero-coupon bonds (i.e., discount debt obligations that do not make
periodic interest payments). Zero-coupon bonds are subject to greater market
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. Debt securities with
longer maturities, which tend to produce higher yields, are subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities. Changes in the financial strength of an issuer or changes in
the ratings of any particular security may also affect the value of these
investments. Fluctuations in the market value of fixed income securities
subsequent to their acquisition will not affect cash income from such securities
but will be reflected in a Fund's net asset value.
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<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 dividends or
principal and interest on foreign securities. 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 have adopted a single European currency, the
euro. On January 1, 1999, the euro became legal tender for all countries
participating in the Economic and Monetary Union ("EMU"). A new European Central
Bank has been created to manage the monetary policy of the new unified region.
On the same date, the exchange rates were 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 additional risks in pursuing its investment objective. These risks,
which include, but are not limited to, uncertainty
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<PAGE>
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, 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.
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 "Additional Information Concerning Taxes" below.
Derivative Instruments
----------------------
The Non-Money Market Funds 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, participation certificates, custodial receipts, futures contracts, options,
forward foreign currency contracts and structured debt obligations (including
collateralized mortgage obligations and other types of mortgage-related
securities, "stripped" securities and various floating rate instruments).
-8-
<PAGE>
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.
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 and other considerations relating to
the investments of the Maryland Tax-Exempt Bond Fund are summarized below. This
information is derived principally from official statements released on or
before February 24, 1999, relating to issues of State of Maryland general
obligations and does not purport to be a complete description.
The State of Maryland has a population of approximately 5.1 million,
with employment based largely in services, trade, and government. Those sectors,
along with finance, insurance, and real estate, were the largest contributors to
the gross state product, according to the most recent Census. Population is
concentrated around the Baltimore and Washington, D.C. PMSAs, and proximity to
Washington D.C. influences the above average percentage of employees in
government. Manufacturing, on the other hand, is a much smaller proportion of
employment than for the nation as a whole. Annual unemployment rates have been
below those of the national average for each of the last 20 years except 1979
and 1997. The unemployment figure for 1998 was 4.5% compared to a national rate
for the same period of 4.5%. Total employment increased by 8.3% between 1991 and
1998. The State's personal income per capita
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<PAGE>
was the fifth highest in the nation in 1997, according to the U.S. Department of
Commerce, Bureau of Economic Analysis, at 113.3% of the national average.
The State's total expenditures for the fiscal years ending June 30,
1996, June 30, 1997 and June 30, 1998 were $12,824 billion, $13,386 billion and
$13,566 billion, respectively. The State Constitution mandates a balanced
budget. The State enacts its budget annually. Revenues are derived largely from
certain broad-based taxes, including state-wide income, sales, motor vehicle,
and property taxes. Non-tax revenues are largely from the federal government for
transportation, health care, welfare and other social programs. General fund
revenues on a budgetary basis realized in the State's fiscal year ended June 30,
1998, exceeded estimates by about $105.1 million, or 1.3%. The State ended
fiscal 1998 with a $419.8 million general fund balance on a budgetary basis, of
which $302.7 million was designated to fund fiscal year 1999 operations; this
balance reflects a $391.9 million increase compared to the balance projected at
the time the 1998 budget was enacted. In addition, there was a balance in the
Revenue Stabilization Account of $617.9 million. On a GAAP basis, the fiscal
1998 unreserved general fund balance was $230.2 million, compared with $49.2
million at the end of the fiscal 1997. The total GAAP fund balance for fiscal
year 1998 was $1,595.2 million compared with a total fund balance of $1,059.1
million for fiscal year 1997.
Estimates for fiscal 1999 project a total budget of $16.9 billion, a
$1.4 billion increase over fiscal 1998. The general fund accounts for
approximately $8.5 billion, of which the largest expenditures are for health and
education, which together represent nearly two-thirds of total general fund
expenditures. General fund expenditures exclude transportation, which is funded
with special fund revenues from the Transportation Trust Fund.
Reserve funds consist of the Revenue Stabilization Fund and other
reserve accounts, which together totaled $699 million at the end of fiscal 1998.
The Revenue Stabilization Fund was established to retain State revenues for
future needs and to reduce the need for future tax increases. Current estimates
for the close of fiscal 1999 project a total reserve balance of $730 million, of
which $646 million is projected to be in the Revenue Stabilization Fund. The
projected balance in the Revenue Stabilization Fund represents 7.8% of estimated
General Fund Revenues.
The public indebtedness of the State of Maryland and its
instrumentalities is divided into three basic types. The State issues general
obligation bonds, to the payment of which the State ad valorem property tax is
exclusively pledged, for capital improvements and for various State-sponsored
projects. In addition, the Maryland Department of Transportation issues for
transportation purposes its limited, special obligation bonds payable primarily
from specific, fixed-rate excise taxes and other revenues related mainly to
highway use. Certain authorities issue obligations payable solely from specific
non-tax, enterprise fund revenues and for which the State has no liability and
has given no moral obligation assurance. The State and certain of its agencies
also have entered into a variety of lease purchase agreements to finance the
acquisition of capital assets. These lease agreements specify that payments
thereunder are subject to annual appropriation by the General Assembly.
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<PAGE>
At least since the end of the Civil War, the State has paid the
principal of and interest on its general obligation bonds when due. There is no
general debt limit imposed by the State Constitution or public general laws.
Although the State has the authority to make short-term borrowings in
anticipation of taxes and other receipts up to a maximum of $100 million, the
State in the past 20 years has not issued short-term tax anticipation notes or
made any other similar short-term borrowings for cash flow purposes. The State
has not issued bond anticipation notes except in connection with a State program
to ameliorate the impact of the failure of certain State-chartered savings and
loans in 1985; all such notes were redeemed without the issuance of debt.
There can, of course, be no assurance that the factors mentioned above
will remain unchanged or that particular bond issues may not be adversely
affected by changes in state or local economic or political conditions.
Other Risk Considerations Concerning Municipal Obligations
----------------------------------------------------------
Each of the Tax-Exempt Money Market, Maryland Tax-Exempt Bond,
Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds 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 each 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.
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.
Additional Information on Investment Policies and Risks
Quality and Maturity - Money Market Funds
----------------------------------------
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<PAGE>
All securities acquired by the Money Market Funds will be determined
at the time of purchase by the Adviser, pursuant to guidelines approved by the
Company's Board of Directors, to present minimal credit risks and will be
"Eligible Securities" as defined by the Securities and Exchange Commission
("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 Appendix A 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.
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, 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. Examples of the
types of U.S. Government obligations that may be acquired by the Funds include,
in addition to U.S. Treasury bonds, notes and bills, the obligations of the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association, Federal National Mortgage Association, Federal Financing
Bank, General Services Administration, Student Loan Marketing Association,
Central Bank for Cooperatives, Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks,
Federal Farm Credit Banks, Maritime Administration, Tennessee Valley Authority,
Washington D.C. Armory Board, International Bank for Reconstruction and
Development (the "World Bank"), and Resolution Trust Corporation. 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
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<PAGE>
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.
Certain U.S. Government obligations held by the Money Market Funds may
be variable or floating rate instruments. Others 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.
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 thirteen months or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits issued or supported by U.S. or foreign
banks that have total assets of more than $1 billion at the time of purchase
(the assets of a bank or savings institution will be deemed to include the
assets of its domestic and foreign branches). 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 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. 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 each Fund 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.
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 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
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<PAGE>
agreement to demand payment of the instrument, and for this and other reasons a
loss could occur with respect to the instrument.
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 variable and floating rate instruments and, if the
obligation is subject to a demand feature, will monitor their financial ability
to meet payment on demand. In determining average weighted portfolio maturity,
a variable rate instrument will usually be deemed to have a maturity equal to
the longer of the period remaining to the next interest rate adjustment or the
time the Fund can recover payment of principal as specified in the instrument.
A floating rate instrument will usually be deemed to have a maturity equal to
the date on which the principal amount must be paid, or the date on which the
redemption payment must be made, in the case of an instrument called for
redemption. A floating rate instrument that is subject to a demand feature will
usually be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand. An instrument that is issued
or guaranteed by the U.S. Government or any agency thereof which has a variable
rate of interest readjusted no less frequently than 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 a 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.
Municipal Obligations
---------------------
The Tax-Exempt Money Market, Maryland Tax-Exempt Bond, Intermediate
Tax-Exempt Bond and National Tax-Exempt Bond Funds will invest primarily in
municipal obligations. The Equity Income Fund, Equity Growth Fund, Prime Money
Market Fund, Limited Maturity Bond Fund and Total Return Bond Fund (each a
"taxable Fund") may invest from time to time in municipal obligations. Municipal
obligations 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. Municipal obligations may be advantageous for a taxable 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 taxable Fund that come
from interest on municipal obligations will be taxable to shareholders.
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<PAGE>
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. 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. 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 Tax-Exempt Money Market, Maryland Tax-
Exempt Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt Bond 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."
The Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and
National Tax-Exempt Bond Funds 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.
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<PAGE>
In many cases, the Internal Revenue Service has not ruled on whether
the interest received on a municipal obligation is tax-exempt and, accordingly,
the purchase of such securities is based on the opinion of bond counsel or
counsel to the issuers of such instruments. The Company and the Adviser rely on
these opinions and do not intend to review the bases for them.
Municipal obligations purchased by the 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
"Government Obligations and Money Market Instruments," foreign letters of credit
and guarantees involve certain risks in addition to those of domestic
obligations.
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.
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 Fund 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."
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<PAGE>
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on, and principal of, its municipal obligations may be
materially adversely affected by litigation or other conditions.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. For example, under federal tax legislation
enacted in 1986, interest on certain private activity bonds must be included in
an investor's federal alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference (see
"Additional Information Concerning Taxes"). Moreover, with respect to Maryland
municipal obligations, the Maryland 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 equal to
their amortized cost value plus interest. 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
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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 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 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
-----------------------
The Prime Money Market Fund, Limited Maturity Bond Fund and Total
Return Bond 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
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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 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.
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.
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 a 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."
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
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<PAGE>
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-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.
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.
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
-20-
<PAGE>
from the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA, are not backed by or entitled to
the full faith and credit of the United States and are supported by the right of
the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private shareholders. Fannie Maes are guaranteed
as to timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC")
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "Pcs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Although certain mortgage-related securities are guaranteed by a third
party or are otherwise similarly secured as described above, the market value of
the security, which may fluctuate, is not secured. To the extent that 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").
--------------------------------------------
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
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<PAGE>
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.
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.
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 of 1940, as amended (the "1940 Act").
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
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<PAGE>
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.
Reverse Repurchase Agreements
-----------------------------
Each Fund may borrow money for temporary purposes by entering into
reverse repurchase agreements. Under these agreements, a Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be 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 1940 Act.
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.
When-Issued Purchases and Forward Commitments
---------------------------------------------
Each Fund (other than the Growth & Income and International Equity
Funds) may purchase securities on a "when-issued" basis and may enter into a
"forward commitment" to purchase or sell securities. 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. The Funds do not
intend to engage in when-issued and forward commitment transactions for
speculative purposes.
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 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
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<PAGE>
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 connection with the management of its daily cash position, 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. In addition, each Non-Money Market Fund may invest in securities
issued by other non-money market investment companies that invest in the types
of securities in which the Fund itself is permitted to invest. 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.
The Funds may invest in securities issued by other investment
companies within the limits prescribed by the 1940 Act. Each Fund currently
intends to limit its investments so that, as determined immediately after a
securities purchase is made: (a) not more than 5% of the value of its total
assets will be invested in the securities of any one investment company; (b) not
more than 10% of the value of its total assets will be invested in the aggregate
in securities of
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<PAGE>
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.
Lending Portfolio Securities
----------------------------
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,
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.
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. 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.
Standard & Poor's Depository Receipts, Standard & Poor's MidCap 400
-------------------------------------------------------------------
Depository Receipts and The Dow Industrials DIAMONDS.
- ----------------------------------------------------
The Growth & Income, Equity Income and Equity Growth Funds may invest
in Standard & Poor's Depository Receipts ("SPDRS"), Standard & Poor's MidCap 400
Depository Receipts ("MidCap SPDRS") and the Dow Industrials DIAMONDS
("DIAMONDS"). SPDRS represent ownership in the SPDR Trust, a long-term unit
investment trust which holds a portfolio of common stocks that is intended to
track the performance and dividend yield of the Standard & Poor's 500 Composite
Stock Price Index. MidCap SPDRS represent ownership in the MidCap SPDR Trust, a
long-term unit investment trust which holds a portfolio of common stocks that is
intended to tract the performance and dividend yield of the Standard & Poor's
MidCap 400 Index. DIAMONDS represent ownership in the DIAMONDS Trust, a long-
term unit investment trust which holds a portfolio of common stocks that is
intended to track the performance and yield of the Dow Jones Industrial Average.
Because investments in SPDRS, MidCap SPDRS and DIAMONDS represent investments in
unit investment trusts, such investments are subject to the 1940 Act's
limitations on investments in other investment companies.
American, European and Global Depository Receipts.
-------------------------------------------------
The International Equity Fund may invest up to 100% of its total
assets, and the Growth & Income, Equity Income, Equity Growth, Limited Maturity
Bond and Total Return Bond Funds 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
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<PAGE>
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 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 Growth & Income, Equity Income, Equity Growth, International
Equity, Limited Maturity Bond and Total Return Bond Funds may from time to time
enter into forward foreign currency exchange contracts to hedge against
movements in the value of foreign currencies (including the European Currency
Unit) relating to the U.S. dollar in connection with specific portfolio
transactions or with respect to portfolio positions. 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 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.
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<PAGE>
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."
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 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
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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.
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.
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
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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 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.
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
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<PAGE>
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 any Fund.
Transactions in options on securities and indices also involve
additional risks. 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.
Futures and Related Options
---------------------------
The Equity Income, Equity Growth, Total Return Bond, Intermediate Tax-
Exempt Bond and National Tax-Exempt Bond Funds 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
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<PAGE>
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.
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 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.
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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<PAGE>
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.
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.
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, Tax-Exempt Money Market, Maryland Tax-Exempt
Bond, Prime Money Market, Government Money Market and Limited Maturity Bond
Funds) 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 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
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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, 1997, May 31, 1998 and May
31, 1999.
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, 1997, May 31, 1998 and May 31,
1999, brokerage commissions of $95,896, $89,596 and $226,232, respectively, were
paid by the Growth & Income Fund and brokerage commissions of $315,827, $239,061
and $290,323, respectively, were paid by the International Equity Fund. During
the fiscal period August 1, 1997 (commencement of operations) through May 31,
1998 and the fiscal year ended May 31, 1999, brokerage commissions of $14,747
and $9,546, respectively, were paid by the Diversified Real Estate Fund. During
the fiscal period March 1, 1998 (commencement of operations) through May 31,
1998 and the fiscal year ended May 31, 1999, brokerage commissions of $34,028
and $230,920, respectively, were paid by the Equity Income Fund. During the
fiscal period March 1, 1998 (commencement of operations) through May 31, 1998
and the fiscal year ended May 31, 1999, brokerage commissions of $11,412 and
$58,162, respectively, were paid by the Equity Growth Fund. During such periods
no brokerage commissions were paid to any affiliated person of the Fund.
Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Adviser (or Sub-Adviser in the
case of the International 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, 1997, May 31, 1998 and May 31, 1999, 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 or the fiscal year ended May 31, 1999.
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<PAGE>
The Tax-Exempt Money Market Fund 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 (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. During the fiscal year ended May 31, 1999, the Funds paid the
following soft dollar commissions: the Growth and Income Fund directed $560,500
worth of transactions to brokers because of research services provided and paid
$280 in commissions on those transactions; and the Equity Growth Fund directed
$6,225,344 worth of transactions to brokers because of research services
provided and paid $8,603 in commissions on those transactions.
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
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<PAGE>
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 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
1940 Act) of any of them, except to the extent permitted by the 1940 Act or 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". During the fiscal year ended May 31, 1999,
the Funds held securities issued by the "regular broker/dealers" of the Company
as follows: (1) the Prime Money Market Fund held Bank of America with a value
of $15,000,000, Goldman, Sachs & Co. with a value of $10,000,000 and J.P. Morgan
& Co. with a value of $12,000,000; (2) the Growth & Income Fund held J.P. Morgan
& Co. with a value of $8,414,000; (3) the Equity Income Fund held J.P. Morgan &
Co. with a value of 4,501,000; and (4) the Equity Growth Fund held Securities of
Morgan Stanley Dean Witter with a value of $695,000.
The ratings assigned by each 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.
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<PAGE>
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
commissions and other transaction costs which must be borne by the Fund involved
and ultimately by its shareholders.
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.
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.
There was a significant increase in the portfolio turnover rates for
the Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds for the
fiscal year ended May 31, 1999 from the Funds' annualized portfolio turnover
rates for the fiscal period ended May 31, 1998 largely as a result of portfolio
rebalancing after the March 1, 1998 Common Fund conversion.
FUNDAMENTAL LIMITATIONS
- -----------------------
The investment objective of each of the Growth & Income Fund,
International Equity Fund, Diversified Real Estate Fund, Tax-Exempt Money Market
Fund, Maryland Tax-Exempt Bond Fund, 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 each of the
Equity Income Fund, Equity Growth Fund, Tax-Exempt Bond Fund,
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National Tax-Exempt Bond Fund and 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 are not fundamental and may be changed by the Company's Board of
Directors without shareholder approval.
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 below 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).
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
-37-
<PAGE>
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 Fund) will not purchase portfolio securities while
borrowings (including reverse repurchase agreements and borrowings from banks)
in excess of 5% of such Fund's total assets are outstanding. The Tax-Exempt
Money Market Fund 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 Fund 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 appropriate to its investment objective, purchase
publicly traded securities of companies
-38-
<PAGE>
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 Fund may enter into repurchase
agreements with respect to portfolio securities; (c) each Fund except the Tax-
Exempt Money Market Fund may lend portfolio securities against collateral
consisting of cash or securities which is consistent with the Fund's permitted
investments and is equal at all times to at least 100% of the value of the
securities loaned; and (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.
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.
As a matter of non-fundamental policy and in accordance with current
regulations of the SEC, the Prime Money Market and Tax-Exempt Money Market Funds
intend to subject their entire investment portfolios, 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.
-39-
<PAGE>
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 the Company's distributor, BISYS Fund Services Limited Partnership, which has
agreed to use appropriate efforts to promote the Company and to solicit orders
for the purchase of such shares.
If any portion of the shares to be redeemed represents an investment
made by check, the Funds may delay the payment of the redemption proceeds until
the Transfer Agent is reasonably satisfied that the check has been collected,
which could take up to fifteen days from the purchase date. This procedure does
not apply to shares purchased by money order or wire payment. During the period
prior to the time the shares are redeemed, dividends on such shares will accrue
and be payable.
Under the 1940 Act, the Funds may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Funds may
also suspend or postpone the recordation of the transfer of their shares upon
the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses, the
Company may redeem shares involuntarily to reimburse the Funds for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Prospectuses from time to time.
The Company reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of a
Fund's shares by making payment in 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.
-40-
<PAGE>
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, 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.
-41-
<PAGE>
Non-Money Market Funds
- ----------------------
The Equity 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 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.
The 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, 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, Maryland Tax-Exempt Bond,
Intermediate Tax-Exempt Bond
-42-
<PAGE>
and National Tax-Exempt Bond Funds may be collectively referred to as the "Tax-
Exempt Funds."
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 Fund is 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.
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
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<PAGE>
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.
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.
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.
All Funds
- ---------
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in that month will be
deemed to have been received by
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<PAGE>
the shareholders on December 31 of such year, if the dividends are paid during
the following January.
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 to shareholders to the extent of the Fund's current and accumulated
earnings and profits, and would be eligible for the dividends received deduction
allowed to corporations under the Code.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to backup withholding when required to do so or that they
are "exempt recipients."
MANAGEMENT OF THE COMPANY
- -------------------------
Directors and Officers
- ----------------------
The business of the Company is managed under the general supervision
of the Company's Board of Directors. The Directors and officers of the Company,
their addresses, principal occupations during the past five years, and other
affiliations are as follows:
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<PAGE>
<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: 66 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: 66
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: 56 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: 65 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.
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ------------------------------------ ------------------- --------------------------------------
<S> <C> <C>
GEORGE R. PACKARD, III Director President, U.S. - Japan Foundation,
U.S. Japan Foundation July 1998 to date; Visiting
145 East 32nd Street President, International University
New York City, NY 10016 of Japan, 1994 to date; Former Dean,
Age: 67 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: 55
</TABLE>
___________________
* Messrs. Disharoon and Miller are considered to be "interested persons" of
the Company as defined in the 1940 Act.
_________________________
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 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. For the fiscal year ended May 31, 1999, the Company paid or accrued
for the account of its Directors as a group, for services in all capacities, a
total of $91,000. 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,
1999:
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<PAGE>
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED FROM THE COMPANY AND
COMPENSATION FROM AS PART OF FUND COMPLEX* PAID TO
NAME OF PERSON/POSITION THE COMPANY COMPANY EXPENSES DIRECTORS
<S> <C> <C> <C>
Leslie B. Disharoon $25,000 N/A $25,000
Chairman of the Board of
Directors and President
Decatur H. Miller $17,500 N/A $17,500
Director and Treasurer
Edward D. Miller, M.D.** $15,500 N/A $15,500
Director
John R. Murphy $17,500 N/A $17,500
Director
George R. Packard, III $15,500 N/A $15,500
Director
</TABLE>
* The "Fund Complex" consists solely of the Company.
** Elected a director of the Company on July 24, 1998.
Service Providers
- -------------------
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 and serves as the transfer and dividend disbursing agent for the
Funds. The Funds also have custodians, The Fifth Third Bank, located at 38
Fountain Square Plaza, Cincinnati, Ohio 45263, for each Fund except the
International Equity Fund, and State Street Bank and Trust Company, located at
Two Heritage Drive, North Quincy, Massachusetts 02171, for the International
Equity Fund.
-48-
<PAGE>
Advisory and Sub-Advisory Services
- ----------------------------------
Mercantile serves as investment adviser to the Funds pursuant to an
Advisory Agreement 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.
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; 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; 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; 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; 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. 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 years ended May 31, 1999, May 31, 1998 and May 31,
1997, (i) the Company paid advisory fees, net of waivers, of $1,129,207,
$962,316 and $858,617, respectively, with respect to the Prime Money Market
Fund; $941,416, $825,313 and $697,746, respectively, with respect to the
Government Money Market Fund; and $254,389, $198,496 and $143,084, respectively,
with respect to the Tax-Exempt Money Market Fund; and (ii) the Adviser
voluntarily waived fees of $98,192, $40,097 and $35,776, respectively, with
respect to the Prime Money Market Fund; $128,375, $71,766 and $60,674,
respectively, with respect to the Government Money Market Fund; and $34,689,
$17,260 and $12,442, respectively, with respect to the Tax-Exempt Money Market
Fund.
For the fiscal years ended May 31, 1999, May 31, 1998 and May 31,
1997, (i) the Company paid advisory fees, net of waivers, of $1,938,714,
$767,215 and $541,891, respectively, with respect to the Growth & Income Fund;
$574,593, $610,879 and $571,056, respectively, with respect to the International
Equity Fund; $382,295, $63,788 and $93,699,
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respectively, with respect to the Limited Maturity Bond Fund; and $28,495,
$6,676 and $3,693, respectively, with respect to the Maryland Tax-Exempt Bond
Fund; and (ii) the Adviser voluntarily waived fees of $411,721, $297,277 and
$175,151, respectively, with respect to the Growth & Income Fund; $70,270,
$50,027 and $44,785, respectively, with respect to the International Equity
Fund; $171,586, $88,067 and $60,993, respectively, with respect to the Limited
Maturity Bond Fund; and $83,180, $44,200 and $41,084, respectively, with respect
to the Maryland Tax-Exempt Bond Fund.
For the fiscal year ended May 31, 1999 and the fiscal period August 1,
1997 (commencement of operations) through May 31, 1998 (i) the Company paid
advisory fees, net of waivers, of $22,159 and $0, respectively, with respect to
the Diversified Real Estate Fund; and (ii) the Adviser voluntarily waived fees
of $28,021 and $39,899, respectively, with respect to the Diversified Real
Estate Fund.
For the fiscal year ended May 31, 1999 and the fiscal period March 1,
1998 (commencement of operations) through May 31, 1998, (i) the Company paid
advisory fees, net of waivers, of $1,478,563 and $372,016, respectively, with
respect to the Equity Income Fund; $154,380 and $27,570, respectively, with
respect to the Equity Growth Fund; $235,007 and $50,019, respectively, with
respect to the Total Return Bond Fund; $202,771 and $48,852, respectively, with
respect to the Intermediate Tax-Exempt Bond Fund; and $399,048 and $91,231,
respectively, with respect to the National Tax-Exempt Bond Fund; and (ii) the
Adviser voluntarily waived fees of $353,844 and $129,579, respectively, with
respect to the Equity Income Fund; $73,751 and $26,666, respectively, with
respect to the Equity Growth Fund; $138,868 and $38,983, respectively, with
respect to the Total Return Bond Fund; $258,071 and $73,932, respectively, with
respect to the Intermediate Tax-Exempt Bond Fund; and $501,170 and $130,803,
respectively, with respect to the National Tax-Exempt Bond Fund.
For the fiscal years ended May 31, 1999, May 31, 1998 and May 31,
1997, (i) the Adviser paid the Sub-Adviser sub-advisory fees, net of waivers, of
$323,380, $343,620 and $321,217, respectively, and (ii) the Sub-Adviser waived
sub-advisory fees of $39,355, $28,140 and $25,193, respectively.
Under the Advisory Agreement, the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Company in
connection with the performance of such Agreement, and the Company has agreed to
indemnify the Adviser against any claims or other liabilities arising out of any
such error of judgment or mistake or loss. The Adviser shall remain liable,
however, for any loss resulting from willful misfeasance, bad faith, or
negligence on the part of the Adviser in the performance of its duties or from
its reckless disregard of its obligations and duties under the Advisory
Agreement.
Unless sooner terminated, the Advisory Agreement will continue in
effect through July 31, 2000 and the Sub-Advisory Agreement will continue in
effect until July 20, 2000. The Advisory Agreement and Sub-Advisory Agreement
each 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
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Fund, provided that in either event such Agreement's continuance also is
approved by a majority of the Company's Directors who are not parties to such
Agreement, or "interested persons" (as defined in the 1940 Act) of any such
party, by votes cast in person at a meeting called for the purpose of voting on
such approval. The Advisory Agreement and Sub-Advisory Agreement each 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
Agreement, the Company would be required, at the request of the Adviser, to
change its name to a name not including "M.S.D. & T." or "Mercantile-Safe
Deposit and Trust Company."
Administrator
- -------------
Mercantile serves as the Company's administrator pursuant to an
Administration Agreement dated as of May 28, 1993 (the "Administration
Agreement") and generally assist in all aspects of the Company's operation and
administration. Mercantile has agreed to maintain office facilities for the
Company, prepare reports to shareholders, coordinate federal and state returns,
furnish the Company with statistical and research data, clerical and certain
other services required by the Company, assist in updating the Company's
Registration Statement for filing with the SEC, and perform other administrative
functions.
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.
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.
Custodians
- ----------
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.
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Distributor, Transfer and Dividend Disbursing Agent and Fund Accountant
- -----------------------------------------------------------------------
Shares of the Funds are distributed continuously and without a sales
load by BISYS Fund Services Limited Partnership (the "Distributor"). The
Distributor has agreed to use appropriate efforts to solicit orders for the
purchase of shares. No compensation is payable by the Funds to the Distributor
for distribution services provided.
Unless otherwise terminated, the Distribution Agreement will remain in
effect until July 20, 2000, 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, serves as transfer and dividend disbursing agent for the Funds.
Under its Transfer Agency Agreement, BISYS Ohio 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.
BISYS Ohio also 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 and Dividend Disbursing
- ---------------------------------------------------------------------------
Agent and Fund Accountant
- -------------------------
Mercantile, the Custodians and BISYS Ohio (in its capacity as fund
accountant) 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, BISYS Ohio is entitled to receive an annual fee based on the
number of Funds of the Company, plus out-of-pocket expenses.
For the fiscal years ended May 31, 1999, May 31, 1998 and May 31,
1997, (i) the Company paid fees, net of waivers, of $2,305,354, $1,186,121 and
$842,744, respectively, to Mercantile for administrative services provided to
the Funds; and (ii) Mercantile voluntarily waived fees of $714,858, $573,843 and
$435,208, respectively.
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<PAGE>
Banking Laws
- ------------
The Glass-Steagall Act, among other things, prohibits banks from
engaging to any extent in the business of underwriting securities, although
national and state-chartered banks generally are permitted to purchase and sell
securities upon the order and for the account of their customers. In 1971, the
United States Supreme Court held in Investment Company Institute v. Camp that
------------------------------------
the Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
--------------------------------------------------------------
Company Institute that the Board did not exceed its authority under the Holding
- -----------------
Company Act when it adopted its regulation and interpretation authorizing bank
holding companies and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies.
The Adviser believes, with respect to its activities as required by
the Advisory and Administration Agreements and as contemplated by the
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
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<PAGE>
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.
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.
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.
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<PAGE>
COUNSEL
- -------
Drinker Biddle & Reath LLP, One Logan Square, 18th & Cherry Streets,
Philadelphia, Pennsylvania 19103, 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 and is a
mutual fund of the type known as an "open-end management investment company".
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, (i) no shares of the
Tax-Exempt Money Market Fund (Trust) were outstanding and (ii) the International
Bond Fund had not commenced operations.
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.
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<PAGE>
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held. Shares of all
portfolios of the Company vote together and not by portfolio or class, unless
otherwise required by law or permitted by the Board of Directors. The Company
does not currently intend to hold annual shareholder meetings unless it is
required to do so by the 1940 Act or other applicable law.
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 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
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<PAGE>
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.
PERFORMANCE INFORMATION
- -----------------------
Money Market Funds
- ------------------
The "yield" and "effective yield" of each Money Market Fund 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, 1999, the yield for each of the Money Market Funds was as follows:
Prime Money Market Fund, 4.54%; Government Money Market Fund, 4.53%; and Tax-
Exempt Money Market Fund, 2.84%. For the seven-day period ended May 31, 1999,
the effective yield for each of the Money Market Funds was as follows: Prime
Money Market Fund, 4.65%; Government Money Market Fund, 4.63%; and Tax-Exempt
Money Market Fund, 2.88%.
In addition, the Tax-Exempt Money Market Fund may quote its
standardized "tax-equivalent yield," which is computed by: (a) dividing the
portion of the 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, 1999, the tax-equivalent yield for the Tax-Exempt Money
Market Fund was 4.70% (assuming a federal income tax rate of 39.6%).
The "monthly yield" of each Money Market Fund 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
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<PAGE>
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. 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.
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
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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 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.
-59-
<PAGE>
For the 30-day period ended May 31, 1999, the yield for the Growth &
Income Fund was 0.60%; for the Equity Income Fund was 1.76%; for the Equity
Growth Fund was 0.25%; for the Diversified Real Estate Fund was 5.70%; for the
Limited Maturity Bond Fund was 5.00%; for the Total Return Bond Fund was 5.91%;
for the Maryland Tax-Exempt Bond Fund was 4.05% and the tax-equivalent yield was
6.71%; for the Intermediate Tax-Exempt Bond Fund was 3.59% and the tax-
equivalent yield was 5.94%; and for the National Tax-Exempt Bond Fund was 3.80%
and the tax-equivalent yield was 6.29%.
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:
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.
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<PAGE>
Based on the foregoing calculations, the average annual total returns
for the Growth & Income Fund, International Equity Fund, Limited Maturity Bond
Fund and Maryland Tax-Exempt Bond Fund for the twelve months ended May 31, 1999
were 18.20%, (1.02)%, 4.63% and 3.81%, respectively; for the five years ended
May 31, 1999 were 22.30%, 7.15%, 6.46% and 5.77%, respectively; and for the
period from the commencement of operations through May 31, 1999 were 16.96%,
9.17%, 6.29% and 5.89%, respectively. The aggregate total returns for the Growth
& Income Fund, International Equity Fund, Limited Maturity Bond Fund and
Maryland Tax-Exempt Bond Fund for the one-year period ended May 31, 1999 were
18.20%, (1.02)%, 4.63% and 3.81%, respectively; for the five-year period ended
May 31, 1999 were 173.60%, 41.22%, 36.75% and 32.37%, respectively; and for the
period from the commencement of operations to May 31, 1999 were 264.65%, 68.02%,
65.05% and 49.26%, respectively.
Based on the foregoing calculations, the average annual total returns
for the Diversified Real Estate Fund for the one-year period ended May 31, 1999
and for the period from the commencement of operations through May 31, 1999 were
(1.80)% and 1.33%, 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 one-year period
ended May 31, 1999 were 15.30%, 23.13%, 4.48%, 4.58% and 4.43%, respectively;
and for the period from the commencement of operations through May 31, 1999 were
14.11%, 20.84%, 4.97%, 4.54% and 4.89%, respectively. The aggregate total
returns for the Diversified Real Estate Fund for the one-year period ended May
31, 1999 and for the period from the commencement of operations through May 31,
1999 were (1.80)% and 2.44%, respectively. The aggregate 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 one-year period
ended May 31, 1999 were 15.30%, 23.13%, 4.48%, 4.58% and 4.43%, respectively;
and for the period from the commencement of operations through May 31, 1999 were
17.93%, 26.68%, 6.25%, 5.70% and 6.15%, 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.
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.
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 Fund, Maryland Tax-Exempt Bond Fund, Intermediate
Tax-Exempt Bond Fund or National Tax Exempt Bond Fund may provide certain other
information demonstrating
-61-
<PAGE>
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 Fund, 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 Fund:
<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-$ 25,350 $ 0-$ 42,350 15% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 25,351-$ 61,400 $ 42,351-$102,300 28% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 61,401-$128,100 $102,301-$155,950 31% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$128,101-$278,450 $155,951-$278,450 36% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
Over $278,450 Over $278,450 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 Fund will obtain any particular yields. The 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.
-62-
<PAGE>
For the Maryland Tax-Exempt Bond Fund:
<TABLE>
<CAPTION>
Combined
Federal
and
Maryland
Marginal
Taxable Income Tax Tax-Exempt Yields
Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
Single Return Joint Return Equivalent Taxable Yields
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 3,000-$ 25,350 $ 3,000-$ 42,350 21.22% 5.08% 5.71% 6.35% 6.98% 7.62% 8.25%
$ 25,351-$ 61,400 $ 42,351-$102,300 33.27% 5.99% 6.74% 7.49% 8.24% 8.99% 9.74%
$ 61,401-$128,100 $102,301-$155,950 36.05% 6.25% 7.04% 7.82% 8.60% 9.38% 10.16%
$128,101-$278,450 $155,951-$278,450 40.68% 6.74% 7.59% 8.43% 9.27% 10.11% 10.96%
Over $278,450 Over $278,450 44.02% 7.14% 8.04% 8.93% 9.82% 10.72% 11.61%
</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 4.875%. 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 Talbot 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.
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-$ 25,350 $ 0-$ 42,350 15% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 25,351-$ 61,400 $ 42,351-$102,300 28% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 61,401-$128,100 $102,301-$155,950 31% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$128,101-$278,450 $155,951-$278,450 36% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
Over $278,450 Over $278,450 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
-63-
<PAGE>
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, 1999 were
5.32%, 5.88%, 4.10%, 3.68% and 4.38%, 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 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,
-64-
<PAGE>
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.
MISCELLANEOUS
- -------------
As used in this Statement of Additional Information, 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, 1999, 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. Mercantile may be deemed
to be a controlling person of the Company within the meaning of the 1940 Act by
reason of its record ownership of such shares.
As of July 20, 1999, 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: (1) Government Money
Market Fund: National Asbestos Workers,
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<PAGE>
7200 Wisconsin Avenue, Suite 1001, Bethesda, MD 20814 (5.94%); (2) Tax-Exempt
Money Market Fund: Reliable Liquors, Inc., 2200 Winchester Street, Baltimore, MD
21216 (5.65%); (3) Maryland Tax-Exempt Bond Fund: J. Edward Johnston, Jr.,
S.R.S. 1823 York Road, Timonium, MD 21093 (5.98%); (4) Equity Growth Fund:
Nanticoke Health Services, 801 Middleford Road, Seaford, DE 19973; and (5)
Diversified Real Estate Fund: Mercantile-Safe Deposit and Trust Company Pension,
Two Hopkins Plaza, Baltimore, MD 21201 (63.08%).
If you have any questions concerning the Company or any of the Funds,
please call 1-800-551-2145.
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, 1999 (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 Limited Partnership, 3435 Stelzer Road, Columbus, Ohio
43219-3035.
-66-
<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 having an original maturity of no more than
365 days. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
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 supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be
A-1
<PAGE>
evidenced by many of the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structure with moderate reliance on debt and ample
asset protection; broad margins in earnings 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 supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable ability
for repayment of senior short-term debt obligations. The effect 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 may require 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 the 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 issues as to investment grade. Risk factors are larger and subject to
more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates that
default is a real possibility and that the capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson Financial BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of
A-3
<PAGE>
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 Thomson Financial BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson Financial BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for corporate
and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
A-4
<PAGE>
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to nonpayment.
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action taken, but payments on this obligation
are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
"r" - This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
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
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<PAGE>
or fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat larger
than the "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" are of 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 operating 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.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
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 to be 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 in periods of greater economic stress.
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"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 IBCA for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity.
"BB" - Bonds considered to be speculative. These ratings indicate that there
is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
A-7
<PAGE>
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC", "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have
the highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA ratings
from and including "AA" to "CCC" may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major rating
categories.
Thomson Financial BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation 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.
A-8
<PAGE>
"BBB" - This designation represents the lowest investment-grade category and
indicates an acceptable capacity to repay principal and interest. Issues rated
"BBB" are 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
Financial 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 factors and market access
risks unique to notes due in three years or less. The following summarizes the
ratings used by Standard & Poor's 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 a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity to
pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity to
pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
The following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
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<PAGE>
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with margins of
protection that are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes 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" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
"SG" - This designation denotes speculative quality. Debt instruments in this
category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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<PAGE>
APPENDIX B
----------
As previously stated, 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
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<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 intend to 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
B-2
<PAGE>
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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<PAGE>
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).
B-4
<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
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.
B-5
<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
B-6
<PAGE>
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
B-8
<PAGE>
increase 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).
B-9
<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.
B-10
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits.
(a) (1) 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.
(2) Notice of Change of Resident Agent and Principal Office
Address, dated May 17, 1989 is incorporated herein by
reference to Exhibit (1)(b) of Pos
t-Effective Amendment
No. 19 to the Registrant's Registration Statement filed
on September 26, 1997.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
C1
<PAGE>
(8) 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.
(9) 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 is incorporated herei
n by
reference to Exhibit (1)(i) of Post-Effective Amendment
No. 22 to the Registrant's Registration Statement filed
on July 31, 1998.
(b) (1) 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.
(2) 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.
(3) Amendment to Bylaws adopted July 17, 1991 is
incorporated herein by reference to Exhibit (2)(c) of
Post-Effective Amendment No. 19 to the Regis
trant's
Registration Statement filed on September 26, 1997.
(4) 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.
(c) (1) 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 the Registrant's Registration
Statement filed on September 26, 1997.
(2) 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
C2
<PAGE>
Amendment No. 19 to the Registrant's Registration
Statement filed on September 26, 1997.
(d) (1) 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.
(2) Advisory Agreement dated as of July 24, 1998 between
Registrant and Mercantile Safe-Deposit and T
rust
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 is incorporated herein by reference to Exhibit
5(b) of Post-Effective Amendment No. 22 to the
Registrant's Registration Statement filed on July 31,
1998.
(3) Sub-Advisory Agreement dated as of March 19, 1996
between Mercantile-Safe Deposit and Trust Company and
CastleInternational As
set 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.
(e) (1) 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.
(2) 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 is incorporated herein by reference to
Exhibit
C3
<PAGE>
(6)(c) of Post-Effective Amendment No. 22 to the
Registrant's Registration Statement filed on July 31,
1998.
(f) None.
(g) (1) 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.
(2) Letter Agreement dated July 28, 1997 supplementing the
Custody Agreement between Registrant and Fifth Third
B
ank 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.
(3) Letter Agreement dated February 27, 1998 supplementing
the Custody Agreement between Registrant and Fifth
Third Bank is incorporated herein by reference to
Exhibit (8)(c) of Post-Effective Amendment No. 22 to
the Registrant's Registration Statement filed on July
31, 1998.
(4) 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.
(5) Amendment dated December 18, 1998 to Custodian Contract
dated June 29, 1993 between Registrant and State Street
Bank and Trust Company with respect to the
International Equity Fund.
(h) (1) 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.
(2) Letter Agreement dated June 29, 1993 supplementing the
Transfer Agency and Service Agreement between
Registrant and Stat
e Street Bank and Trust Company is
incorporated herein by reference to Exhibit (9)(b) of
Post-
C4
<PAGE>
Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(3) 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.
(4) 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.
(5) Fee Information for Services as Plan, Transfer and
Dividend Disbursing Agent between Registrant and State
Street Bank and Trust Company effective January 1, 1998
- December 31, 2000.
(6) Letter Agreement dated February 27, 1998 supplementing
the Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company is
incorporated herein by reference to Exhibit (9)(e) of
Post-Effective Amendment No. 22 to the Registrant's
Registration Statement
filed on July 31, 1998.
(7) Form of Transfer Agency Agreement between Registrant
and BISYS Fund Services, Ohio, Inc.
(8) 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.
(9) Amendment dated February 27, 1998 to Schedule A of
Administration Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company is
incorporated herein by reference to Exhibit (9)(h) of
Post-Effective Amendment No. 22 to the Registrant's
Registration Statement filed on Ju
ly 31, 1998.
(10) Fund Accounting Agreement between Registrant and The
Winsbury Service Corporation, dated October 1, 1993 is
C-5
<PAGE>
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.
(11) 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) is incorporated herein by
reference to Exhibit (9)(k) of Post-Effective Amendment
No. 22 to the Registrant's Registration Statement filed
on July 31, 1998.
(12) Form of Blue Sky Services Agreement between Registrant
and BISYS Fund Services, Ohio, Inc.
(13) Revolving Credit Agreement dated April 29, 1999 between
Registrant and The Fifth Third Bank.
(i) Opinion and Consent of counsel is incorporated herein
by reference to Exhibit (10) of Post-Effective
Amendment No. 22 to the Registrant's Registration
Statement filed on July 31, 1998.
(j) (1) Consent of PricewaterhouseCoopers LLP.
(2) Consent of Drinker Biddle & Reath LLP.
(k) None.
(l) (1) 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.
(2) 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.
(3) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the Equity Income Fund is incorporated
herein by reference to Exhibit (13)(c) of Post-
Effective Amendment No. 22 to the Registrant's
Registration Statement filed on July 31, 1998.
C6
<PAGE>
(4) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the Equity Growth Fund is incorporated
herein by reference to Exhibit (13)(d) of Post-
Effective Amendment No. 22 to the Registrant's
Registration Statement filed on July 31, 1998.
(5) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the Total Return Bond Fund is incorporated
herein by reference to Exhibit (13)(d) of Post-
Effective Amendment No. 22 to the Registrant's
Registration Statement filed on July 31, 1998.
(6) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the National Tax-Exempt Bond Fund is
incorporated herein by reference to Exhibit (13)(f) of
Post-Effective Amendment No. 22 to the Registrant's
Registration Statement filed on July 31, 1998.
(7) Purchase Agreement between Registrant and BISYS Fund
Services Ohio, Inc. dated February 27, 1998 with
respect to the Intermediate Tax-Exempt Bond Fund is
incorporated herein by reference to Exhibit (13)(g) of
Post-Effective Amendment No. 22 to the Registrant's
Registration Statement fi
led on July 31, 1998.
(m) None.
(n) None.
(o) None.
Item 24. Persons Controlled by or under Common Control
with Registrant.
----------------------------------------------------------------------
Inapplicable.
C7
<PAGE>
Item 25. 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
(d)(1) 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 (d)(3). Indemnification of the Registrant's Administrator is provided
for in Section 4 of the Administration Agreement i
ncorporated herein by
reference as Exhibit (h)(8); and indemnification of Registrant's principal
underwriter is provided for in Section 1.11 of the Distribution Agreement
incorporated herein by reference as Exhibit (e)(1). Section 7.3 of the
Registrant's Articles of Incorporation incorporated herein by reference as
Exhibit (a)(1) provides as follows:
(a) To the fullest extent that limitations on the liability of directors
and officers are permitted by the Maryland General Corporation Law, no
director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a director or
officer of the Corporation whether or not such person is a director or
officer at the time of any proceeding in which liability is asserted.
(b) The Corporation shall indemnify and advance expenses to its currently
acting and its former directors to the f
ullest 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 furth
er 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 (b)(1) provides further as follows:
C8
<PAGE>
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, joi
nt 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 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
C9
<PAGE>
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 26. Business and Other Connections of
Investment Adviser.
--------
- -----------------------------------
(e) Mercantile-Safe Deposit and Trust Company ("Merc-Safe"), the Adviser, is a
Maryland trust company providing a wide range of banking, trust, and
investment services.
To the knowledge of the Registrant, none of the directors or executive
officers of Merc-Safe, except those described below, are or have been, at any
time during the past two years, engaged in any other business, profession,
vocation, or employment of a substantial nature, except that certain directors
and executive officers of Merc-Safe also hold or have held various positions
with the bank and non-bank affiliates of Merc-Safe, including its parent,
Mercantile Bankshares Corporation. Set forth below are the names and principal
business of each director and officer of Merc-Safe who is, or at any time during
the past two fiscal years has been, engaged in any other business, profession,
vocation, or employment of a substantial nature.
<TABLE>
<CAPTION>
Name Pos
ition with Merc-Safe Other Business Connections Type of Business
- ------------------------ --------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
H. Furlong Baldwin Director, Chairman of the Director, Chairman of the Bank Holding Company
Board, President and Chief Board, and Chief Executive
Executive Officer Officer
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director Electricity & Natural Gas
Baltimore Gas &
Electric
Company
P.O. Box 1475
Baltimore, MD 21203
Director Freight Transportation
CSX Transportation
1 James Center
Richmond, VA 23219
</TABLE>
C10
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ------------------------ --------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
Director Manufacturing
GRC International, Inc.
1900 Gallows Road
Plaza 1900
Vienna, VA 22182
Director Insurance
The Saint Paul Companies
385 Westminster Street
St. Paul, MN 55102
Director Private Bank
OFFITBANK
Manhattan Tower
101 East 52nd Street
New York, NY 10022
Director Holding Company
Wills Group, Inc. Wholesale & Retail
P. O. Box E Petroleum Products &
LaPlata, MD 20646 Convenience Stores
Cynthia A. Archer Director Senior Vice President,
Intermodel Service Group,
Consolidated Rail Corp. And
Conrail
2001 Market Street
Philadelphia, PA 19101
Thomas M. Bancroft, Jr. Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Former Ch
airman of the Board Racecourse Management
and Chief Executive
Officer
The New York Racing
Association, Inc.
P.O. Box 90
Jamaica, NY 11417
(prior to January 1990)
Richard O. Berndt Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C11
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business 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 Housing Projects
Municipal Mortgage &
Equity LLC
Suite 500
218 N. Charles St.
Baltimore, MD 21201
William R. Brody, M.D. Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President Universi
ty
The Johns Hopkins
University
Charles & 34th St.
Baltimore, MD 21218
Director Medical Instruments
ALZA Corporation
950 Page Mill Rd.
Palo Alto, CA 94303-0802
Director Medical Instruments
Medtronic, Inc.
700 Central Ave. N.E.
Minneapolis, MN 55432
George L. Bunting, Jr. Director
Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President & Chief Executive Private Financial
Officer Management Company
Bunting Management
Group
Suite 350
9690 Deereco Road
Timonium, MD 21093
(Since July 1991)
</TABLE>
C12
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ------------------------ --------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
Director Medical/Drugs
Guilford Pharmaceuticals,
Inc.
6611 Tributary St.
Baltimore, MD 21224
Director Oil Industry
Crown Central Petroleum
Corp.
1 N. Charles Street
Baltimore, MD 21203
Director Insurance
Baltimore Equitable Society
21 North Eutaw Street
Baltimore, MD 21201
Freeman A. Hrabowski, Director Director Bank Holding Company
III Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President University
University of Maryland
Baltimore County
1000 Hilltop Circle
Baltimore, MD 21250
Director Electricity & Natural Gas
Baltimore 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/Spices
McCormick & Company
18 Loveton Circle
Sparks, MD 21152-6000
Mary Junck Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C13
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ------------------------ --------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
President, Times Mirror
Eastern Newspapers, Executive
Vice President
Times Mirror
501 North Calvert Street
Baltimore , MD 21278
Robert A. Kinsley Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chief Executive Officer Construction
Kinsley Construction, Inc.
2700 Water St.
York, PA 17403-9306
Partner Construction
Various Construction
Ventures
William J. McCarthy
Director Director Bank Holding Company
Mercantile Bankshares
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 Development
the Board and Services
Riparius Corporation
375 Padonia Road West
Timonium, MD 21093
Director Distributor of Auto Parts
CRW Parts, Inc.
7601 Pulaski Highway
Baltimore, MD 21237
Morris W. Offit Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C14
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ------------------------ --------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
Director Medical Products
Cantel Industries, 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 Manufacturer
Hasbro, Inc.
P.O. Box 1059
1027 Newport Ave.
Pawtucket, RI 02862-1059
Martin B. Plant Director Chairman Bank Holding Company
Keywell Corporation
7600 Rolling Mill Road
Baltimore, MD 21224
Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Christian H. Poindexter Directors Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director and Cha
irman of the Electricity & Natural Gas
Board and Chief Executive
Officer
Baltimore Gas & Electric
Company and Subsidiaries
P.O. Box 1475
Baltimore, MD 21203
J. Marshall Reid Director, President & Executive Vice President Bank Holding Company
Chief Operating Officer Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C15
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ------------------------ --------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
Donald J. Shepard Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman of the Board, Insurance
President and Chief Executive
Officer
AEGON USA Inc.
2 East Chase Street
Baltimore, MD 21202
Member of the Executive Board Insurance
AEGON, N.V.
2 East Chase Street
Baltimore, MD 21202
Director Insurance
Health Insurance
Association of America
555 13th Street, N.W.
Washington, DC 20004
Director Insurance
Scottish Equitable PLC
28 St. Andrews Square
Edinburgh, Scotland
EH21YF
Jack E. Steil Director and Chairman - Executive Vice President Bank Holding Company
Credit Policy Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Brian B. Topping Director and Vice Chairman None
of the Board
Kenneth A. Bourne, Jr. Executive Vice President None
Charles E. Siegman Executive Vice President None
Terry L. Troupe Executive Vice President Executive Vice President Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Malcolm C. Wilson Executive Vice President None
</TABLE>
C-16
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ------------------------ --------------------------- ------------------------------ ---------------------------
<S> <C> <C> <C>
Frederic B. Baxter Vice President and None
Treasurer
Alan D. Yarbro General Counsel and General Counsel and Secretary Bank Holding Company
Secretary 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).
Item 27. Principal Underwriter.
----------------------
(f) BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services (formerly
The Winsbury Company Limited Partnership) ("BISYS") acts as distributor for
Registrant. BISYS and its affiliates currently serve as distributor of
Alpine Equity Trust, American Performance Funds, AmSouth Mutual Funds,
Mercantile Mutual Funds, Inc. (formerly known as The ARCH Funds, Inc.), The
BB&T Mutual Funds Group, The Coventry Group, ESC Strategic Funds, The
Eureka Funds, Fifh Third Funds, Governor Funds, Gradison Custodian Trust,
Gradison Growth Trust, Gradison-McDonald Cash Reserves Trust, Gradison-
McDonald Municipal Custodian Trust, Hirtle Callaghan Trust, HSBC Family of
Funds, INTRUST Funds Trust, The Infinity Mutual Funds, Inc., The Kent
Funds, Magna Funds, Meyers Investment Trust, MMA Praxis Mutual Funds,
Pacific Capital Funds, The Parkstone Advantage Funds, Puget Sound
Alternative Investment Series Trust, The Republic Funds Trust, Sefton
Funds, SsgA Liquidity Fund, Summit Investment Trust, Variable Insurance
Funds, The Victory Portfolios, The Victory Variable Insurance Funds and
Vintage Mutual Funds, Inc. each of which is a management investment
company.
(g) To the best of Registrant's knowledge, the partners of BISYS are as
follows:
C17
<PAGE>
<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
150 Clove Road
Little Falls, NJ 07424
</TABLE>
(h) None.
Item 28. 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)
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)
C18
<PAGE>
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
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
(registrant's Articles of Incorporation, Bylaws and
minute books)
Item 29. Management Services.
--------------------
None.
Item 30. 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.
C19
<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 30th day of July, 1999.
M.S.D.&T. FUNDS, INC.
(Registrant)
* Leslie B. Disharoon
---------------------
Leslie B. Disharoon
Pres
ident
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:
SIGNATURE TITLE DATE
- --------- ----- ----
* Leslie B. Disharoon Chairman of the July 30, 1999
- -------------------------- Board and President
Leslie B. Disharoon
* Decatur H. Miller Director and Treasurer July 30, 1999
- -------------------------- (Principal Financial
Decatur H. Miller and Accounting Officer)
* Edward D. Miller Director July 30, 1999
- --------------------------
Edward D. Miller
* John R. Murphy Director July 30, 1999
- --------------------------
John R. Murphy
* George R. Packard, III Director July 30, 1999
- ------------
- --------------
George R. Packard, III
*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, Linda A. Durkin and Cornelia H. McKenna,
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: July 23, 1999
<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, Linda A. Durkin and Cornelia H. McKenna,
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 o
f
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 t
hat each said attorney and agent shall do or cause to be done by
virtue hereof.
/s/ Decatur H. Miller
-------------------------------
Decatur H. Miller
Date: July 23, 1999
<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, Linda A. Durkin and Cornelia H.
McKenna, 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 Cod
e 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 al
l that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ George R. Packard, III
------------------------------------
George R. Packard, III
Date: July 23, 1999
<PAGE>
M.S.D.&T. FUNDS, INC.
POWER OF ATTORNEY
Edward D. Miller, whose signature appears below, does hereby constitute and
appoint W. Bruce McConnel, III, Linda A. Durkin and Cornelia H. McKenna, 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 tha
t each said attorney and agent shall do or cause to be done by
virtue hereof.
/s/ Edward D. Miller
----------------------------
Edward D. Miller
Date: July 23, 1999
<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, Linda A. Durkin and Cornelia H. McKenna, 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
1
986, 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: July 23, 1999
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
(g)(5) Amendment dated December 18, 1998 to Custodian
Contract dated June 29, 1993 between Registrant
and State Street Bank and Trust Company with
respect to the International Equity Fund.
(h)(5) Fee Information for Services as Plan, Transfer and
Dividend Disbursing Agent between Registrant and
State Street Bank and Trust Company effective
Janua
ry 1, 1998 December 31, 2000.
(h)(7) Form of Transfer Agency Agreement between
Registrant and BISYS Fund Services, Ohio, Inc.
(h)(12) Form of Blue Sky Services Agreement between
Registrant and BISYS Fund Services, Ohio, Inc.
(h)(13) Revolving Credit Agreement dated April 29, 1999
between Registrant and The Fifth Third Bank.
(j)(1) Consent of PricewaterhouseCoopers LLP.
(j)(2) Consent of Drinker Biddle & Reath LLP.
<PAGE>
AMENDMENT TO CUSTODIAN CONTRACT
This Amendment to the Custodian Contract is made as of December 18, 1998 by
and between M.S.D.&T. Funds, Inc. (the "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract referred to below.
WHEREAS, the Fund and the Custodian entered into a Custodian Contract dated
as of June 29, 1993 (as amended and in effect from time to time, the
"Contract"); and
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets, and the Fund has made its International Equity Fund subject to
the Contract (such series, together with all other series subsequently
established by the Fund and made subject to the Contract in accordance with the
terms thereof, shall be referred to as a "Portfolio," and, collectively, the
"Portfolios"); and
WHEREAS, the Fund and the Custodian desire to amend certain provisions of
the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund and the Custodian desire to amend and restate certain
other provisions of the Contract relating to the custody of assets of each of
the Portfolios held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter contained, the parties hereby agree to amend the
Contract, pursuant to the terms thereof, as follows:
I. Article 3 of the Contract is hereby deleted, and Articles 4 through 16 of
the Contract are hereby renumbered, as of the effective date of this
Amendment, as Articles 5 through 17, respectively.
II. New Articles 3 and 4 of the Contract are hereby added, as of the effective
date of this Amendment, as set forth below.
<PAGE>
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
----------------------------------------
3.1. DEFINITIONS.
-----------
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means such factors as may be reasonably related to the systemic
risk of holding Foreign Assets in a particular country including, but not
limited to, such country's political environment; economic and financial
infrastructure (including any Mandatory Securities Depositories operating in the
country); prevailing or developing custody and settlement practices; and laws
and regulations applicable to the safekeeping and recovery of Foreign Assets
held in custody in that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
"Foreign Assets" means any of the Portfolios' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Portfolios'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund, on the Portfolio's behalf, determines to place Foreign Assets in a country
outside the United States (i) because required by law or regulation; (ii)
because securities cannot be withdrawn from such foreign securities depository
or clearing agency; or (iii) because maintaining or effecting trades in
securities outside the foreign securities depository or clearing agency is not
consistent with prevailing or developing custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
------------------------------------------------------
The Fund, by resolution adopted by its Board of Directors (the "Board"), hereby
delegates to the Custodian, with respect to the Portfolios, subject to Section
(b) of Rule 17f-5, the responsibilities set forth in this Article 3 with respect
to Foreign Assets of the Portfolios held outside the United States, and the
Custodian hereby accepts such delegation, as Foreign Custody Manager with
respect to the Portfolios.
3.3. COUNTRIES COVERED.
-----------------
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country
-2-
<PAGE>
listed on Schedule A to this Contract, which list of countries may be amended
from time to time by the Fund with the agreement of the Foreign Custody Manager.
The Foreign Custody Manager shall list on Schedule A the Eligible Foreign
Custodians selected by the Foreign Custody Manager to maintain the assets of the
Portfolios which list of Eligible Foreign Custodians may be amended from time to
time in the sole discretion of the Foreign Custody Manager. Mandatory Securities
Depositories are listed on Schedule B to this Contract, which Schedule B may be
amended from time to time by the Foreign Custody Manager. The Foreign Custody
Manager will provide amended versions of Schedules A and B in accordance with
Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by the Fund on behalf of the Portfolios of the
applicable account opening requirements for such country, the Foreign Custody
Manager shall be deemed to have been delegated by the Board on behalf of the
Portfolios responsibility as Foreign Custody Manager with respect to that
country and to have accepted such delegation. Execution of this Amendment by
the Fund shall be deemed to be a Proper Instruction to open an account, or to
place or maintain Foreign Assets, in each country listed on Schedule A in which
the Custodian has previously placed or currently maintains Foreign Assets
pursuant to the terms of the Contract. Following the receipt of Proper
Instructions directing the Foreign Custody Manager to close the account of a
Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country, the delegation by the Board on behalf of the
Portfolios to the Custodian as Foreign Custody Manager for that country shall be
deemed to have been withdrawn and the Custodian shall immediately cease to be
the Foreign Custody Manager of the Portfolios with respect to that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
-----------------------------------
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
----------------------------------------
Subject to the provisions of this Article 3, the Portfolio's Foreign Custody
Manager may place and maintain the Foreign Assets in the care of the Eligible
Foreign Custodian selected by the Foreign Custody Manager in each country listed
on Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
-3-
<PAGE>
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
------------------------------------------
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
----------
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign Custody Manager which is a foreign securities
depository or clearing agency that is not a Mandatory Securities Depository).
In the event the Foreign Custody Manager determines that the custody
arrangements with an Eligible Foreign Custodian it has selected are no longer
appropriate, the Foreign Custody Manager shall notify the Board in accordance
with Section 3.7 hereunder.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
--------------------------------------------------
For purposes of this Article 3, the Board shall be deemed to have considered and
determined to accept such Country Risk as is incurred by placing and maintaining
the Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund, on behalf of the Portfolios, and
the Board shall be deemed to be monitoring on a continuing basis such Country
Risk to the extent that the Board considers necessary or appropriate. The Fund
and the Custodian each expressly acknowledge that the Foreign Custody Manager
shall not be delegated any responsibilities under this Article 3 with respect to
Mandatory Securities Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO.
----------------------------------------------------------
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
-----------------------
The Foreign Custody Manager shall report the withdrawal of the Foreign Assets
from an Eligible Foreign Custodian and the placement of such Foreign Assets with
another Eligible Foreign Custodian by providing to the Board amended Schedules A
or B at the end of the calendar quarter in which an amendment to either Schedule
has occurred. The Foreign Custody Manager
-4-
<PAGE>
shall make prompt (but no less that quarterly) written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Portfolios described in this Article 3 after the occurrence of the material
change.
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17F-5.
-------------------------------------------
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
The Fund represents to the Custodian that the Board has determined that it is
reasonable for the Board to rely on the Custodian to perform the
responsibilities delegated pursuant to this Contract to the Custodian as the
Foreign Custody Manager of the Portfolios.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY MANAGER
--------------------------------------------------------------------------
The Board's delegation to the Custodian as Foreign Custody Manager of the
Portfolios shall be effective as of the date hereof and shall remain in effect
until terminated at any time, without penalty, by written notice from the
terminating party to the non-terminating party. Termination will become
effective thirty (30) days after receipt by the non-terminating party of such
notice. The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Portfolios with
respect to designated countries.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE PORTFOLIOS HELD
-----------------------------------------------------------------------
OUTSIDE THE UNITED STATES.
-------------------------
4.1. DEFINITIONS.
-----------
Capitalized terms in this Article 4, unless otherwise defined in Article 3
hereof, shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution serving as an
Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
------------------
The Custodian shall identify on its books as belonging to the Portfolios the
foreign securities held by each Foreign Sub-Custodian or Foreign Securities
System. The Custodian may hold foreign securities for all of its customers,
including the Portfolios, with any Foreign Sub-Custodian in an account that is
identified as belonging to the Custodian for the benefit of its customers,
provided however, that (i) the records of the Custodian with respect to foreign
- ----------------
securities of the Portfolios which are maintained in such account shall identify
those securities as belonging to the Portfolios and (ii), to the extent
permitted and customary in the market in which the account is maintained, the
Custodian shall require that securities so held by the Foreign Sub-
-5-
<PAGE>
Custodian be held separately from any assets of such Foreign Sub-Custodian or of
other customers of such Foreign Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
--------------------------
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign Sub-
Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
---------------------------------------
4.4.1. DELIVERY OF FOREIGN ASSETS.
--------------------------
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Portfolios held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties. and only in
the following cases:
(i) upon the sale of such foreign securities for the Portfolio in accordance
with commercially reasonable market practice in the country where such
foreign securities are held or traded, including, without limitation: (A)
delivery against expectation of receiving later payment; or (B) in the
case of a sale effected through a Foreign Securities System, in accordance
with the rules governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign securities;
(iii) to the depository agent in connection with tender or other similar offers
for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name of the
Custodian (or the name of the respective Foreign Sub-Custodian or of any
nominee of the Custodian or such Foreign Sub-Custodian) or for exchange
for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for examination or
trade execution in accordance with market custom; provided that in any
--------
such case the Foreign Sub-Custodian shall have no responsibility or
liability for any loss arising from the delivery of such securities prior
to receiving payment for such securities except as may arise from the
Foreign Sub-Custodian's own negligence or willful misconduct;
-6-
<PAGE>
(vii) for exchange or conversion pursuant to any plan of merger, consolidation,
recapitalization, reorganization or readjustment of the securities of the
issuer of such securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary securities
for definitive securities;
(ix) for delivery as security in connection with any borrowing by the
Portfolios requiring a pledge of assets by the Portfolios;
(x) in connection with trading in options and futures contracts, including
delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the foreign securities to be delivered, setting
forth the purpose for which such delivery is to be made, declaring such
purpose to be a proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
4.4.2. PAYMENT OF PORTFOLIO MONIES.
---------------------------
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Portfolio in the following cases only:
(i) upon the purchase of foreign securities for the Portfolio, unless
otherwise directed by Proper Instructions, by (A) delivering money to the
seller thereof or to a dealer therefor (or an agent for such seller or
dealer) against expectation of receiving later delivery of such foreign
securities; or (B) in the case of a purchase effected through a Foreign
Securities System, in accordance with the rules governing the operation of
such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Portfolio;
(iii) for the payment of any expense or liability of the Portfolio, including
but not limited to the following payments: interest, taxes, investment
advisory fees, transfer agency fees, fees under this Contract, legal fees,
accounting fees, and other operating expenses;
-7-
<PAGE>
(iv) for the purchase or sale of foreign exchange or foreign exchange contracts
for the Portfolio, including transactions executed with or through the
Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts, including
delivery as original margin and variation margin;
(vi) for payment of part or all of the dividends received in respect of foreign
securities sold short;
(vii) in connection with the borrowing or lending of foreign securities; and
(viii)for any other proper purpose, but only upon receipt of Proper
--- ----
Instructions specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose to be
a proper corporate purpose, and naming the person or persons to whom such
payment is to be made.
4.4.3. MARKET CONDITIONS: MARKET INFORMATION.
--------------------------------------
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Portfolios and
delivery of Foreign Assets maintained for the account of the Portfolios may be
effected in accordance with the customary established securities trading or
processing practices and procedures in the country or market in which the
transaction occurs, including, without limitation, delivering Foreign Assets to
the purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) with the expectation of receiving later payment for such Foreign Assets
from such purchaser or dealer.
The Custodian shall provide to the Board the information with respect to custody
and settlement practices in countries in which the Custodian employs a Foreign
Sub-Custodian, including without limitation information relating to Foreign
Securities Systems, described on Schedule C hereto at the time or times set
forth on such Schedule. The Custodian may revise Schedule C from time to time,
provided that no such revision shall result in the Board being provided with
substantively less information than had been previously provided hereunder.
4.5. REGISTRATION OF FOREIGN SECURITIES.
----------------------------------
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
Portfolio or in the name of the Custodian or in the name of any Foreign Sub-
Custodian or in the name of any nominee of the foregoing, and the Fund on behalf
of such Portfolio agrees to hold any such nominee harmless from any liability as
a holder of record of such foreign securities. The Custodian or a Foreign Sub-
Custodian shall not be obligated to accept securities on behalf of a Portfolio
under the terms of this Contract unless the form of such securities and the
manner in which they are delivered are in accordance with reasonable market
practice.
4.6. BANK ACCOUNTS.
-------------
-8-
<PAGE>
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Portfolio with a Foreign Sub-Custodian shall be subject only to
draft or order by the Custodian or such Foreign Sub-Custodian, acting pursuant
to the terms of this Contract to hold cash received by or from or for the
account of the Portfolio.
4.7. COLLECTION OF INCOME.
--------------------
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Portfolios shall be entitled and shall credit such income, as collected, to the
applicable Portfolio in the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. SHAREHOLDER RIGHTS.
------------------
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use reasonable commercial efforts to facilitate the exercise of
voting and other shareholder rights, subject always to the laws, regulations and
practical constraints that may exist in the country where such securities are
issued. The Fund acknowledges that local conditions, including lack of
regulation, onerous procedural obligations, lack of notice and other factors may
have the effect of severely limiting the ability of the Fund to exercise
shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
---------------------------------------------
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Portfolios. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund written
information so received by the Custodian from issuers of the foreign securities
whose tender or exchange is sought or from the party (or its agents) making the
tender or exchange offer. The Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Portfolios at any time held by it
unless (i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
------------------------------------------------------------------
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in
-9-
<PAGE>
connection with the Foreign Sub-Custodian's performance of such obligations. The
Fund shall be entitled to be subrogated to the rights of the Custodian with
respect to any claims against a Foreign Sub-Custodian as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent that
the Portfolios have not been made whole for any such loss, damage, cost,
expense, liability or claim.
4.11. TAX LAW.
--------
The Custodian shall have no responsibility or liability for any obligations now
or hereafter imposed on the Fund, the Portfolios or the Custodian as custodian
of the Portfolios by the tax law of the United States or of any state or
political subdivision thereof. It shall be the responsibility of the Fund to
notify the Custodian of the obligations imposed on the Fund with respect to the
Portfolios or the Custodian as custodian of the Portfolios by the tax law of
countries other than those mentioned in the above sentence, including
responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The sole
responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
4.12. LIABILITY OF CUSTODIAN.
----------------------
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to the Fund for any loss, liability, claim or expense
resulting from or caused by anything which is (A) part of Country Risk or (B)
part of the "prevailing country risk" of the Fund and the Portfolios, as such
term is used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as such
term or other similar terms are now or in the future interpreted by the SEC or
by the staff of the Division of Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign Sub-
Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the
Contract prior to this Amendment and this Amendment, the terms of this
Amendment shall prevail. If the Custodian is delegated the
responsibilities of Foreign Custody Manager pursuant to the terms of
Article 3 hereof, in the event of any conflict between the provisions
of Articles 3 and 4 hereof, the provisions of Article 3 shall prevail.
-10-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
/s/ Marc L. Parsons
__________________________
Marc L. Parsons By: /s/ Ronald E. Logue
Associate Counsel ____________________________
Name: Ronald E. Logue
Title: Executive Vice President
WITNESSED BY: M.S.D.&T. FUNDS, INC.
/s/ W. Bruce McConnel, III
__________________________
W. Bruce McConnel, III By: /s/ Leslie B. Disharoon
Secretary ____________________________
Name: Leslie B. Disharoon
Title: President
-11-
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUB-CUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East (as --
delegate of The Hong Kong and
Shanghai Banking Corporation
Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.v. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A --
People's Republic of China The Hongkong and Shanghai Banking --
Corporation Limited, Shanghai and
Shenzhen branches
</TABLE>
-1-
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUB-CUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
Costa Rica Banco BCT S.A. --
Croatia Privredna Banka Zagreb d.d --
Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece, System for
Monitoring Transactions in
Securities in Book-Entry Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
Iceland lcebank Ltd. --
</TABLE>
-2-
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUB-CUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
India Deutsche Bank AG --
The Hongkong and Shanghai Banking
Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques en Cote --
d'Ivoire
Jamaica Scotiabank Jamaica Trust and --
Merchant Bank Ltd.
Japan The Daiwa Bank, Limited Japan Securities Depository Center
The Fuji Bank, Limited
Jordan British Bank of the Middle East (as --
delegate of The Hongkong and
Shanghai Banking Corporation
Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of Korea The Hongkong and Shanghai Banking
Corporation Limited
Latvia JSC Hansabank-Latvija --
</TABLE>
-3-
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUB-CUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Lebanon British Bank of the Middle East (as --
delegate of The Hongkong and
Shanghai Banking Corporation
Limited)
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank Malaysia --
Berhad
Mauritius The Hongkong and Shanghai Banking --
Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
The Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og Kreditkasse --
Oman British Bank of the Middle East (as --
delegate of The Hongkong and
Shanghai Banking Corporation
Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
</TABLE>
-4-
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUB-CUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
Portugal Banco Comercial Portugues --
Romania ING Bank N.V. --
Russia Credit Suisse First Boston AO, --
Moscow (as delegate of Credit
Suisse First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Republic Ceskoslovenska Obchodna Banka, A.S. --
Slovenia Bank Austria d.d. --
South Africa Standard Bank of South Africa --
Limited
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai Banking --
Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad & Tobago Republic Bank Limited --
</TABLE>
-5-
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUB-CUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Tunisia Banque Internationale Arabe de --
Tunisie
Turkey Citibank, N.A. --
Ottoman Bank
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust --
Company, London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme) State Street London Limited
INTERSETTLE (for EASDAQ Securities)
</TABLE>
-6-
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC
Central de Custodia e de Liquidacao Financeira
de Titulos
Bulgaria Central Depository AD
Bulgarian National Bank
Canada The Canadian Depository
for Securities Limited
People's Republic of China Shanghai Securities Central Clearing and
Registration Corporation
Shenzhen Securities Central Clearing Co., Ltd.
Costa Rica Central de Valores S.A. (CEVAL)
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
-1-
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Croatia Ministry of Finance
National Bank of Croatia
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen (the Danish Securities
Center)
Egypt Misr Company for Clearing, Settlement, and
Central Depository
Estonia Eesti Vaartpaberite Keskdepositoorium
Finland The Finnish Central Securities Depository
France Societe Interprofessionnelle pour la
Compensation des Valeurs Mobileres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
(Apothetirion Tition AE)
Hong Kong The Central Clearing and Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing House
(Budapest) Ltd. (KELER) [Mandatory for Gov't
Bonds only; SSB does not use for other
securities]
India The National Securities Depository Limited
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
-2-
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Indonesia Bank Indonesia
Ireland Central Bank of Ireland Securities Settlement
Office
Israel The Tel Aviv Stock Exchange Clearing House Ltd.
Bank of Israel
Italy Monte Titoli S.p.A.
Banca d'Italia
Jamaica The Jamaican Central Securities Depository
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Latvia The Latvian Central Depository
Lebanon The Custodian and Clearing Center of Financial
Instruments for Lebanon and the Middle East
(MIDCLEAR) S.A.L.
The Central Bank of Lebanon
Lithuania The Central Securities Depository of Lithuania
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia
Scripless Securities Trading and Safekeeping
System
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
-3-
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Mauritius The Central Depository & Settlement Co. Ltd.
Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de Valores)
Morocco Maroclear
The Netherlands Netherlands Centraal lnstituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nedertandsche Bank N.V.
New Zealand New Zealand Central Securities Depository
Limited
Norway Verdipapirsentralen (the Norwegian Registry of
Securities)
Oman Muscat Securities Market
Pakistan Central Depository Company of Pakistan Limited
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartosiowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
-4-
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Romania National Securities Clearing, Settlement and
Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Pte) Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
Slovenia Klirinsko Depotna Druzba d.d.
South Africa The Central Depository Limited
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana, Central de Anotaciones en
Cuenta
Sri Lanka Central Depository System
(Pvt) Limited
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central Depository Co.,
Ltd.
Thailand Thailand Securities Depository Company Limited
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
-5-
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Tunisia Societe Tunisienne Interprofessionelle de
Compensation et de Depot de Valeurs Mobilieres
Central Bank of Tunisia
Tunisian Treasury
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
Ukraine The National Bank of Ukraine
United Kingdom The Bank of England, The Central Gilts Office
and The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
Venezuela Central Bank of Venezuela
Zambia Lusaka Central Depository Limited
Bank of Zambia
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
-6-
<PAGE>
SCHEDULE C
MARKET INFORMATION
<TABLE>
<CAPTION>
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
- ----------------------------------------- --------------------------------------------------------
(FREQUENCY)
<S> <C>
The Guide to Custody in World Markets An overview of safekeeping and settlement practices and
- ----------------------------------------- procedures in each market in which State Street Bank
(annually) and Trust Company offers custodial services.
Global Custody Network Review Information relating to the operating history and
- ----------------------------------------- structure of depositories and subcustodians located in
(annually) the markets in which State Street Bank and Trust
Company offers custodial services, including
transnational depositories.
Global Legal Survey With respect to each market in which State Street Bank
- ----------------------------------------- and Trust Company offers custodial services, opinions
(annually) relating to whether local law restricts (i) access of a
fund's independent public accountants to books and
records of a Foreign Sub-Custodian or Foreign
Securities System, (ii) the Fund's ability to recover
in the event of bankruptcy or insolvency of a Foreign
Sub-Custodian or Foreign Securities System, (iii) the
Fund's ability to recover in the event of a loss by a
Foreign Sub-Custodian or Foreign Securities System, and
(iv) the ability of a foreign investor to convert cash
and cash equivalents to U.S. dollars.
Subcustodian Agreements Copies of the subcustodian contracts State Street Bank
- ----------------------------------------- and Trust Company has entered into with each
(annually) subcustodian in the markets in which State Street Bank
and Trust Company offers subcustody services to its US
mutual fund clients.
Network Bulletins (weekly): Developments of interest to investors in the markets in
which State Street Bank and Trust Company offers
custodial services.
Foreign Custody Advisories (as With respect to markets in which State Street Bank and
necessary): Trust Company offers custodial services which exhibit
special custody risks, developments which may impact
State Street's ability to deliver expected levels of
service.
</TABLE>
-1-
<PAGE>
FEE INFORMATION FOR SERVICES AS
Plan, Transfer and Dividend Disbursing Agent
M.S.D.&T. FUNDS
Effective January 1, 1998 - December 31, 2000
Annual Account Service Fees
- ---------------------------
Annual Account Maintenance $15.00/account
Closed Account Fee $2.40/account
Minimum (per Fund) 1st 10 Cusips $18,000
Cusips After 10 $15,000
Fees are billable on a monthly basis at the rate of 1/12 of the annual fee. A
charge is made for an account in the month that an account opens or closes.
Account service fees ar
e the higher of: open account charges plus closed
account charges or the fund minimum.
Investor Record $ 1.80/acct/yr
12b-1 Commissions $ 1.20/acct/yr
Activity Based Fees
- -------------------
New Account Set-up $ 5.00/each
Manual Transactions $ 1.50/each
Telephone Calls $ 1.50/each
Correspondence $ 1.50/each
Banking Services
- ----------------
Checkwriting Setup $ 5.00/each
Checkwriting (per draft) $ 1.00/each
Control Fees (per Fund Group) $ 750/month
- ------------
Other Fees
- ----------
Year 2000/per open acct/per year
1998 1999 2000
TA2000 (Per Open Account) $ .24 $ .20
$ .16
<PAGE>
Out of Pocket Expenses Billed as Incurred
- ----------------------
Out of Pocket expenses include but are not limited to: confirmation statements,
investor statements, postage, forms, audio response, telephone records,
retention, customized programming / enhancements, federal wire, transcripts,
microfilm, microfiche, and expenses incurred at the specific direction of the
fund.
These fees will be subject to an annual Cost of Living Adjustment based on
regional consumer price index.
"IN WITNESS THEREOF, M.S.D.&T. Funds and State Street Bank and Trust Company
have agreed upon this fee schedule and have caused this fee schedule to be
executed in their names and on their behalf through their duly
authorized
officers."
M.S.D.&T. FUNDS STATE STREET BANK & TRUST CO.
By: /s/ Leslie B. Disharoon By: Signature illegible
----------------------- --------------------------------
Title: President Title: Executive Vice President
--------------------------- -----------------------------
Date: January 30, 1998 Date: January 30, 1998
----------------------- ----------------------------
-2-
<PAGE>
TRANSFER AGENCY AGREEMENT
AGREEMENT made this day of , 1999, between M.S.D.&T. FUNDS, INC.
(the "Company"), a Maryland corporation having its principal place of business
at Two Hopkins Plaza, Baltimore, Maryland 21201, and BISYS FUND SERVICES OHIO,
INC. ("BISYS"), an Ohio corporation having its principal place of business at
3435 Stelzer Road, Columbus, Ohio 43219.
WHEREAS, the Company desires that BISYS perform certain services for
each series of the Company (individually referred to herein as a "Fund" and
collectively as the "Funds"); and
WHEREAS, BISYS is willing to perform such services on the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of t
he mutual premises and covenants
herein set forth, the parties agree as follows:
1. Services.
--------
BISYS shall perform for the Company the transfer agent services
set forth in Schedule A hereto. BISYS also agrees to perform for the Company
such special services incidental to the performance of the services enumerated
herein as agreed to by the parties from time to time. BISYS shall perform such
additional services as are provided on an amendment to Schedule A hereof, in
consideration of such fees as the parties hereto may agree.
BISYS may, in its discretion, appoint in writing other parties
qualified to perform transfer agency services reasonably acceptable to the
Company (individually, a "Sub-transfer Agent") to carry out some or all of its
responsibilities under this Agreement with respect to a Fund; provided, however,
that the Sub-transfer Agent shall be the agent of BISYS and not the agent of the
Company or such Fund, and that BISYS s
hall be fully responsible for the acts of
such Sub-transfer Agent and shall not be relieved of any of its responsibilities
hereunder by the appointment of such Sub-transfer Agent.
2. Fees.
----
The Company shall pay BISYS for the services to be provided by
BISYS under this Agreement in accordance with, and in the manner set forth in,
Schedule B hereto. Fees for any additional services to be provided by BISYS
pursuant to an amendment to Schedule A hereto shall be subject to mutual
agreement at the time such amendment to Schedule A is proposed.
<PAGE>
3. Reimbursement of Expenses.
-------------------------
In addition to paying BISYS the fees described in Section 2
hereof, the Company agrees to reimburse BISYS for BISYS' out-of-pocket expenses
in providing services hereunder, including without limitation, the following:
(a) All freight and other delivery and bonding charges
incurred by BISYS in delivering materials to and from the
Company and in delivering all materials to shareholders;
(b) All direct telephone, telephone transmission and telecopy
or other electronic transmission expenses incurred by
BISYS in communication with the Com
pany, the Company's
investment adviser or custodian, dealers, shareholders or
others as required for BISYS to perform the services to be
provided hereunder;
(c) Costs of postage, couriers, stock computer paper,
statements, labels, envelopes, checks, reports, letters,
tax forms, proxies, notices or other form of printed
material which shall be required by BISYS for the
performance of the services to be provided hereunder;
(d) The cost of microfilm or microfiche of records or other
materials;
(e) All systems-related expenses associated with the provision
of special reports pursuant to Schedule C attached hereto;
(f) Sales taxes paid on behalf of the Trust;
(g) Expenses associated with the tracking of "as-of" trades;
and
(h) Any expenses BISYS shall incur at the written direction of
an officer of the Company thereunto duly authorized.
4. Effective Date.
--------------
This Agreement shall become effective as of the date first
written above (the "Effective Date").
5. Term.
----
This Agreement shall continue in effect with respect to a Fund,
unless earlier terminated by either party hereto as provided hereunder, for a
period of one year following the Effective Date (the "Initial Term").
Thereafter, unless otherwise terminated as provided herein, this Agreement shall
be renewed automatically for successive one-year periods ("Rollover Periods").
This Agreement may be terminated without penalty (i) by provision of a notice of
nonrenewal in the manner set forth below, (ii) by mutual agreement of the
parties or (iii) for
2
<PAGE>
"cause," as defined below, upon the provision of 60 days advance written notice
by the party alleging cause. Written notice of nonrenewal must be provided
within 60 days of the end of the Initial Term or any Rollover Period, as the
case may be.
For purposes of this Agreement, "cause" shall mean (a) a
material breach of this Agreement that has not been remedied for thirty (30)
days following written notice of such breach from the non-breaching party; (b) a
final, unappealable judicial, regulatory or administrative ruling or order in
which the party to be terminated has been found guilty of criminal or unethical
behavior in the conduct of its business; or (c) financial difficulties on the
part of the party to be terminated which ar evidenced
by the authorization or
commencement of, or involvement by way of pleading, answer, consent or
acquiescence in, a voluntary or involuntary case under Title 11 of the United
States Code, as from time to time is in effect, or any applicable law, other
than said Title 11, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the rights of
creditors.
After such termination, for so long as BISYS, with the written
consent of the Company, in fact continues to perform any one or more of the
services contemplated by this Agreement or any Schedule or exhibit hereto, the
provisions of this Agreement, including without limitation the provisions
dealing with indemnification, shall continue in full force and effect. Fees and
out-of-pocket expenses incurred by BISYS but unpaid by the Company upon such
termination shall be immediately due and payable upon and notwithstanding such
termination. BISYS shall be entitled to collect from the Comp
any, in addition to
the fees and disbursements provided by Sections 2 and 3 hereof, the amount of
all of BISYS' cash disbursements in connection with BISYS' activities in
effecting such termination, including without limitation, the delivery to the
Company and/or its distributor or investment adviser and/or other parties, of
the Company's property, records, instruments and documents.
If, for any reason other than nonrenewal, mutual agreement of
the parties or "cause," as defined above, BISYS is replaced as transfer agent,
or if a third party is added to perform all or a part of the services provided
by BISYS under this Agreement (excluding any Sub-transfer Agent appointed by
BISYS as provided in Section 1 hereof), then the Company shall make a one-time
cash payment, in consideration of the fee structure and services to be provided
under this Agreement, and not as a penalty, to BISYS equal to the balance due
BISYS for the remainder of the then-current term of this Agreement, assuming for
purposes of calculation of the payment that such balance shall be based upon the
average number of Company shareholder accounts for the twelve months prior to
the date BISYS is replaced or a third party is added.
In the event the Company is merged into another legal entity
in part or in whole pursuant to any form of business reorganization or is
liquidated in part or in whole prior to the expiration of the then-current term
of this Agreement, the parties acknowledge and agree that the liquidated damages
provision set forth above shall be applicable in those instances in which BISYS
is not retained to provide transfer agency services consistent with this
Agreement, including the level of assets subject to such services. The one-time
cash payment referenced above shall be due and payable on the day prior to the
first day in which BISYS is replaced or a third party is added.
3
<PAGE>
The parties further acknowledge and agree that, in the event
BISYS is replaced, or a third party is added, as set forth above, (i) a
determination of actual damages incurred by BISYS would be extremely difficult,
and (ii) the liquidated damages provision contained herein is intended to
adequately compensate BISYS for damages incurred and is not intended to
constitute any form of penalty.
6. Uncontrollable Events.
---------------------
BISYS assumes no responsibility hereunder, and shall not be
liable for any damage, loss of data, delay or any other loss whatsoever caused
by events beyond its reasonable control.
7. Legal Advice.
------------
BISYS sha
ll notify the Company at any time BISYS believes that
it is in need of the advice of counsel (other than counsel in the regular employ
of BISYS or any affiliated companies) with regard to BISYS' responsibilities and
duties pursuant to this Agreement; and after so notifying the Company, BISYS, at
its discretion, shall be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Company or
Funds unless relating to a matte involving BISYS' willful misfeasance, bad
faith, gross negligence or reckless disregard with respect to BISYS'
responsibilities and duties hereunder and BISYS shall in no event be liable to
the Company or any Fund or any shareholder or beneficial owner of the Company
for any action reasonably taken pursuant to such advice.
8. Instructions.
------------
Whenever BISYS is requested or authorized to take action
hereunder pursuant to instructions from a shareholder, or a properly author
ized
agent of a shareholder ("shareholder's agent"), concerning an account in a Fund,
BISYS shall be entitled to rely upon any certificate, letter or other instrument
or communication, believed by BISYS to be genuine and to have been properly
made, signed or authorized by an officer or other authorized agent of the
Company or by the shareholder or shareholder' agent, as the case may be, and
shall be entitled to receive as conclusive proof of any fact or matter required
to be ascertained by it hereunder a certificate signed by an officer of the
Company or any other person authorized by the Company's Board of
Trustees/Directors (hereafter referred to as the "Directors") or by the
shareholder or shareholder's agent, as the case may be.
As to the services to be provided hereunder, BISYS may rely
conclusively upon the terms of the Prospectuses and Statement of Additional
Information of the Company relating to the Funds to the extent that such
services are described therein unless BISYS receiv
es written instructions to the
contrary in a timely manner from the Company.
9. Standard of Care; Reliance on Records and Instructions;
--------------------------------------------------------
Indemnification.
---------------
4
<PAGE>
BISYS shall use its best efforts to ensure the accuracy of all
services performed under this Agreement, but shall not be liable to the Company
for any action taken or omitted by BISYS in the absence of bad faith, willful
misfeasance, negligence or from reckless disregard by it of its obligations and
duties. The Company agrees to indemnify and hold harmless BISYS, its employees,
agents, directors, officers and nominees from and against any and all claims,
demands, actions and suits, whethe groundless or otherwise, and from and against
any and all judgments, liabilities, losses, damages, costs, charges, counsel
fees and other expenses of every nature and character arising out of or in any
way relating to BISYS' actions taken or nonactions wit
h respect to the
performance of services under this Agreement or based, if applicable, upon
reasonable reliance on information, records, instructions or requests given or
made to BISYS by the Company, the investment adviser and on any records provided
by any fund accountant or custodian thereof; provided that this indemnification
shall not apply to actions or omissions of BISYS in cases of its own bad faith,
willful misfeasance, negligence or from reckless disregard by it of its
obligations and duties; and further provided that prior to confessing any claim
against it which may be the subject of this indemnification, BISYS shall give
the Company written notice of and reasonable opportunity to defend against said
claim in its own name or in the name of BISYS.
10. Record Retention and Confidentiality.
------------------------------------
BISYS shall keep and maintain on behalf of the Company all books
and records which the Company or BISYS is, or may be, require
d to keep and
maintain pursuant to any applicable statutes, rules and regulations, including
without limitation Rules 31a-1 and 31a-2 under the Investment Company Act of
1940, as amended (the "1940 Act"), relating to the maintenance of books and
records in connection with the services to be provided hereunder. BISYS further
agrees that all such books and records shall be the property of the Company and
to make such books and records available for inspection by the Company or by the
Securities and Exchange Commission (the "Commission") at reasonable times and
otherwise to keep confidential all books and records and other information
relative to the Company and its shareholders, except when requested to divulge
such information by duly-constituted authorities or court process, or requested
by a shareholder or shareholder's agent with respect to information concerning
an account as to which such shareholder has either a legal or beneficial
interest or when requested by the Company, the shareholder, or share
holder's
agent, or the dealer of record as to such account.
11. Reports.
-------
BISYS will furnish to the Company and to its properly-authorized
auditors, investment advisers, examiners, distributors, dealers, underwriters,
salesmen, insurance companies and others designated by the Company in writing,
such reports at such times as are prescribed in Schedule C attached hereto, or
as subsequently agreed upon by the parties pursuant to an amendment to Schedule
C. The Company agrees to examine each such report or copy promptly and will
report or cause to be reported any errors or discrepancies therein.
12. Rights of Ownership.
-------------------
5
<PAGE>
All computer programs and procedures developed to perform
services required to be provided by BISYS under this Agreement are the property
of BISYS. All records and other data except such computer programs and
procedures are the exclusive property of the Company and all such other records
and data will be furnished to the Company in appropriate form as soon as
practicable after termination of this Agreement for any reason.
13. Return of Records.
-----------------
BISYS may at its option at any time, and shall promptly upon the
Company's demand, turn over to the Company and cease to retain BISYS' files,
records and documents created and maintained by BISYS pursuant to this Agreement
which are no longe
r needed by BISYS in the performance of its services or for
its legal protection. If not so turned over to the Company, such documents and
records will be retained by BISYS for six years from the year of creation. At
the end of such six-year period, such records and documents will be turned over
to the Company unless the Company authorizes in writing the destruction of such
records and documents.
14. Bank Accounts.
-------------
The Company and the Funds shall establish and maintain such bank
accounts with such bank or banks as are selected by the Company, as are
necessary in order that BISYS may perform the services required to be performed
hereunder. To the extent that the performance of such services shall require
BISYS directly to disburse amounts for payment of dividends, redemption proceeds
or other purposes, the Company and Funds shall provide such bank or banks with
all instructions and authorizations necessary for BISYS to effect such
disbursements.
15. Representations of the Company.
------------------------------
The Company certifies to BISYS that: (a) as of the close of
business on the Effective Date, each Fund which is in existence as of the
Effective Date has authorized unlimited shares, and (b) by virtue of its
Declaration of Trust or Articles of Incorporation, shares of each Fund which are
redeemed by the Company may be sold by the Company from its treasury, and (c)
this Agreement has been duly authorized by the Company and, when executed and
delivered by the Company, will constitute a legal, valid and binding obligation
of the Company, enforceable against the Company in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting the rights and remedies of creditors and secured
parties.
16. Representations of BISYS.
------------------------
BISYS represents and warrants that:
(a) BISYS has been in, and
shall continue to be in, substantial compliance with all provisions of law,
including Section 17A(c) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), required in connection with the performance of its duties under
this Agreement; and (b) the various procedures and systems which BISYS has
implemented with regard to safekeeping from loss or damage attributable to fire,
theft or any other cause of the blank checks, records, and other data of the
Company and
6
<PAGE>
BISYS' records, data, equipment, facilities and other property used in the
performance of its obligations hereunder are adequate and that it will make such
changes therein from time to time as are required for the secure performance of
its obligations hereunder.
17. Insurance.
---------
BISYS shall notify the Company should its insurance coverage with
respect to professional liability or errors and omissions coverage be canceled
or reduced. Such notification shall include the date of change and the reasons
therefor. BISYS shall notify the Company of any material claims against it with
respect to services performed under this Agreement, whether or not they may be
covered by insurance, and shall notify the Company f
rom time to time as may be
appropriate of the total outstanding claims made by BISYS under its insurance
coverage.
18. Information to be Furnished by the Company and Funds.
----------------------------------------------------
The Company has furnished to BISYS the following:
(a) Copies of the Declaration of Trust or Articles of
Incorporation of the Company and of any amendments
thereto, certified by the proper official of the state in
which such Declaration or Articles has been filed.
(b) Copies of the following documents:
1. The Company's By-Laws and any amendments thereto;
2. Certified copies of resolutions of the Directors
covering the following matters:
A. Approval of this Agreement and authorization of a
specified officer of t
he Company to execute and
deliver this Agreement and authorization for
specified officers of the Company to instruct BISYS
hereunder; and
B. Authorization of BISYS to act as Transfer Agent for
the Company on behalf of the Funds.
(c) A list of all officers of the Company, together with
specimen signatures of those officers, who are authorized
to instruct BISYS in all matters.
(d) Two copies of the following (if such documents are
employed by the Company):
1. Prospectuses and Statement of Additional Information;
2. Distribution Agreement; and
7
<PAGE>
3. All other forms commonly used by the Company or its
Distributor with regard to their relationships and
transactions with shareholders of the Funds.
(e) A certificate as to shares of beneficial interest or
common stock of the Company authorized, issued, and
outstanding as of the Effective Date of BISYS' appointment
as Transfer Agent (or as of the date on which BISYS'
services are commenced, whichever is the later date) and
as to receipt of full consideration by the Company for all
shares outstanding, such statement to be certified by the
Treasurer of the Company.
19. Information Furnished by BISYS.
------------------------------
BISYS has furnished to the Company the following:
(a) BISYS' Articles of Incorporation.
(b) BISYS' Bylaws and any amendments thereto.
(c) Certified copies of actions of BISYS covering the following
matters:
1. Approval of this Agreement, and authorization of a
specified officer of BISYS to execute and deliver this
Agreement;
2. Authorization of BISYS to act as Transfer Agent for the
Company.
(d) A copy of the most recent independent accountants' report
relating to internal accounting control systems as filed
with the Commission pursuant to Rule 17Ad-13 under the
Exchange Act.
20. Amendments to Documents.
-----------------------
The Company shall furnish BISYS written copies of any amendments
to, or changes in, any of the items referred to in Section 18 hereof forthwith
upon such amendments or changes becoming effective. In addition, the Company
agrees that no amendments will be made to the Prospectuses or Statement of
Additional Information of the Company which might have the effect of changing
the procedures employed by BISYS in providing the services agreed to hereunder
or which amendment might affect the duties of BISYS hereunder unless the Company
first obtains BISYS' approval of such amendments or changes.
21. Reliance on Amendments.
----------------------
BISYS may rely on any amendments to or changes in any of the
documents and other items to be provided by the Company pursuant to Sections 18
and 20 of this Agreement and the Company hereby indemnifies and holds harmless
BISYS from and against any and all
8
<PAGE>
claims, demands, actions, suits, judgments, liabilities, losses, damages, costs,
charges, counsel fees and other expenses of every nature and character which may
result from actions or omissions on the part of BISYS in reasonable reliance
upon such amendments and/or changes. Although BISYS is authorized to rely on the
above-mentioned amendments to and changes in the documents and other items to be
provided pursuant to Sections 18 and 20 hereof, BISYS shall be under no duty to
comply with or take any action as a result of any of such amendments or changes
unless the Company first obtains BISYS' written consent to and approval of such
amendments or changes.
22. Compliance with Law.
-------------------
Except for
the obligations of BISYS set forth in Section 10
hereof, the Company assumes full responsibility for the preparation, contents,
and distribution of each prospectus of the Company as to compliance with all
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), the 1940 Act, and any other laws, rules and regulations of governmental
authorities having jurisdiction. BISYS shall have no obligation to take
cognizance of any laws relating to the sale of th Company's shares. The Company
represents and warrants that no shares of the Company will be offered to the
public until the Company's registration statement under the 1933 Act and the
1940 Act has been declared or becomes effective.
23. Notices.
-------
Any notice provided hereunder shall be sufficiently given when
sent by registered or certified mail to the party required to be served with
such notice at the following address: 3435 Stelzer Road, Columbus, Ohio 43219,
or at such other
address as such party may from time to time specify in writing
to the other party pursuant to this Section.
24. Headings.
--------
Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
25. Assignment.
----------
This Agreement and the rights and duties hereunder shall not be assignable
by either of the parties hereto except by the specific written consent of the
other party. This Section 25 shall not limit or in any way affect BISYS' right
to appoint a Sub-transfer Agent pursuant to Section 1 hereof. This Agreement
shall be binding upon, and shall inure to the benefit of, the parties hereto and
their respective successors and permitted assigns.
26. Governing Law.
-------------
This Agreement shall be governed by and provisions shall be
construed in accordance with the laws of the State of Ohio.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
M.S.D.&T. FUNDS, INC.
By:__________________________________
Title: ______________________________
BISYS FUND SERVICES OHIO, INC.
By:__________________________________
Title: ______________________________
10
<PAGE>
SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
M.S.D.&T. FUNDS, INC.
AND
BISYS FUND SERVICES OHIO, INC.
TRANSFER AGENCY SERVICES
1. Shareholder Transactions
------------------------
a. Process shareholder purchase and redemption orders.
b. Set up account information, including address, dividend option, taxpayer
identification numbers and wire instructions.
c. Issue confirmations in compliance with Rule 10b-10 under the Securities
Exchange Act of 1934, as amended.
d. Issue periodic statements for sha
reholders.
e. Process transfers and exchanges.
f. Process dividend payments, including the purchase of new shares, through
dividend reimbursement.
2. Shareholder Information Services
--------------------------------
a. Make information available to shareholder servicing unit and other
remote access units regarding trade date, share price, current holdings,
yields, and dividend information.
b. Produce detailed history of transactions through duplicate or special
order statements upon request.
c. Provide mailing labels for distribution of financial reports,
prospectuses, proxy statements or marketing material to current
shareholders.
A-1
<PAGE>
3. Compliance Reporting
--------------------
a. Prepare and distribute appropriate Internal Revenue Service forms for
corresponding Fund and shareholder income and capital gains.
b. Issue tax withholding reports to the Internal Revenue Service.
4. Dealer/Load Processing (if applicable)
--------------------------------------
a. Provide reports for tracking rights of accumulation and purchases made
under a Letter of Intent.
b. Account for separation of shareholder investments from transaction sale
charges for purchase of Fund shares.
c. Calculate fees due under 12b-1 plans for distribution and marketing
expenses.
d. Track sales and commission statistics by dealer and provide for payme
nt
of commissions on direct shareholder purchases in a load Fund.
5. Shareholder Account Maintenance
-------------------------------
a. Maintain all shareholder records for each account in the Company.
b. Issue customer statements on scheduled cycle, providing duplicate second
and third party copies if required.
c. Record shareholder account information changes.
d. Maintain account documentation files for each shareholder.
A-2
<PAGE>
SCHEDULE B
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
M.S.D.&T. FUNDS, INC.
AND
BISYS FUND SERVICES OHIO, INC.
TRANSFER AGENT FEES
Annual Fee: $ 15,000 per Fund
- ----------
Additional Services:
- -------------------
Additional services such as IRA processing, development of interface
capabilities, servicing of 403(b) and 408(c) accounts, management of cash sweeps
between DDAs and mutual fund accounts and coordination of the printing and
distribution of prospectuses, annual reports and semi-annual reports are subject
to additional fees which
will be quoted upon request. Programming costs or
database management fees for special reports or specialized processing will be
quoted upon request.
Out-of-pocket Expenses:
- ----------------------
BISYS shall be entitled to be reimbursed for all reasonable out-of-pocket
expenses including, but not limited to, the expenses set forth in Section 3 of
the Transfer Agency Agreement to which this Schedule B is attached.
B-1
<PAGE>
SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
M.S.D.&T. FUNDS, INC.
AND
BISYS FUND SERVICES OHIO, INC.
REPORTS
1. Daily Shareholder Activity Journal
2. Daily Fund Activity Summary Report
a. Beginning Balance
b. Dealer Transactions
c. Shareholder Transactions
d. Reinvested Dividends
e. Exchanges
f. Adjustments
g. Ending Balance
3. Daily Wire and Check Registers
4. Monthly Dealer Processing Repor
ts
5. Monthly Dividend Reports
6. Sales Data Reports for Blue Sky Registration
7. Annual report by independent public accountants concerning BISYS'
shareholder system and internal accounting control systems to be filed
with the Securities and Exchange Commission pursuant to Rule 17Ad-13 of
the Securities Exchange Act of 1934, as amended.
8. Such special reports and additional information that the parties may
agree upon, from time to time.
<PAGE>
BLUE SKY SERVICES AGREEMENT
---------------------------
AGREEMENT made this ____ day of August, 1999, between M.S.D.&T. FUNDS,
INC. (the "Company"), a Maryland corporation having its principal place of
business at Two Hopkins Plaza, Baltimore, Maryland 21201 and BISYS FUND SERVICES
OHIO, INC. ("BISYS"), an Ohio corporation having its principal place of business
at 3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219.
WHEREAS, the Company is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Company wishes to retain BISYS to provide services in
connection wi
th the registration and qualification of the Company's shares for
sale in the various states as more particularly described herein;
NOW THEREFORE, in consideration of the mutual premises and covenants herein
set forth, the parties hereby agree as follows:
1. Services. BISYS shall provide the services described in Schedule A
--------
attached hereto.
2. Compensation. BISYS shall be entitled to receive compensation as
------------
described in Schedule B attached hereto.
3. Effective Date. This Agreement shall become effective as of the date
--------------
first written above (the "Effective Date").
4. Term. The initial term of this Agreement (the "Initial Term") shall be
----
for a period commencing on the Effective Date and ending on the date that is one
year after the Effective Date. This Agreement shall be renewed automatically for
successive periods of one year after the Initial Te
rm, unless written notice of
non-renewal is provided by either party at least 60 days prior to the end of the
then current term. Fees incurred by BISYS but unpaid by the Company upon such
termination shall be immediately due and payable upon and notwithstanding such
termination.
5. Indemnification. BISYS shall use its best efforts to ensure the accuracy
---------------
of all services performed under this Agreement. Each party agrees to indemnify
and hold the other party (including its affiliates, partners, employees,
representatives and agents) harmless from and against any liability, cost or
other expense (including, but not limited to, the payment of reasonable
attorney's fees and costs) incurred by the indemnified party as a result of any
claim made by any third party arising out of or relating to the terms and
conditions of this Agreement insofar as such claims are based upon or arise out
of negligence or wrongful acts or failure to act whether by omission or
commission of the non-inde
mnified party, its
<PAGE>
employees, agents, representatives or assigns, in connection with the terms and
conditions of this Agreement.
6. Uncontrollable Events. BISYS assumes no responsibility hereunder and
---------------------
shall not be liable for any damage, loss of data, delay or any other loss
whatsoever caused by events beyond its reasonable control.
7. Confidentiality. All information acquired pursuant to this Agreement by
---------------
BISYS about the Company, or by the Company about BISYS, shall be considered
confidential. Except for use in performance of their respective duties under
this Agreement, neither party shall use such confidential information for any
purpose and all such records of, and data derived from, such use, shall, in
tur
n, be treated as confidential information. Neither BISYS nor the Company
shall give, sell or in any way transfer such confidential information to any
other person or entity except as contemplated hereunder or as required by law,
and shall not permit any other person to obtain, use or gain access to such
confidential information without the other's consent. In no event shall the
Company or BISYS use the other's name, trademark, service mark, logo or other
written materials without the prior written consent of the other.
8. Headings. Paragraph headings in this Agreement are included for
--------
convenience only and are not to be used to construe or interpret this Agreement.
9. Governing Law. This Agreement shall be governed by, and its provisions
-------------
shall be construed in accordance with, the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
fully execute
d as of the day and year first written above.
M.S.D.&T. FUNDS, INC.
By:_______________________
Title: President
BISYS FUND SERVICES OHIO, INC.
By:_______________________
Title:____________________
-2-
<PAGE>
SCHEDULE A
TO THE BLUE SKY SERVICES AGREEMENT
BETWEEN
M.S.D.&T. FUNDS, INC.
AND
BISYS FUND SERVICES OHIO, INC.
SERVICES
--------
BISYS shall provide the following services relating to the qualification of the
Company's shares for sale in the various states:
(1) file initial registrations for new funds/portfolios;
(2) file renewal registrations for existing funds/portfolios;
(3) monitor blue sky fees and conduct fee analysis upon request;
(4) perform monthly random registration audits and annual renewal audits;
(5) maintain internal technical support specialist with responsibility for
maintaining the Blue 2 System and interfacing with the Company's
Transfer Agent when necessary;
(6) maintain internal 1940 Act attorney with responsibility for analyzing
legal issues related to state registration;
(7) communicate relevant changes in state regulations and industry
proposals; and
(8) review and audit the blue sky state files and data provided by the
Company as a one time new client audit to be completed within 30 days
of the Effective Date.
A-1
<PAGE>
SCHEDULE B
TO THE BLUE SKY SERVICES AGREEMENT
BETWEEN
M.S.D.&T. FUNDS, INC.
AND
BISYS FUND SERVICES OHIO, INC.
FEES
----
Annual Fee: BISYS shall be entitled to receive an annual fee for
- ---------- blue sky services equal to $75.00 per state permit.
Initial Start-Up Fee: BISYS shall be entitled to receive a one time
- -------------------- conversion fee in the amount of $3,500 that shall be
due and payable thirty (30) days following the
Effective Date.
State Registration Fees: BISYS shall be reimbursed for actual registration fees
- ----------------------- paid to qualify the Company's shares for sale in each
state.
Check Fee: BISYS shall be entitled to receive the sum of $8.00 per
- --------- check in connection with the payment of registration
fees to the various states.
Out of Pocket Fees: BISYS shall be entitled to be reimbursed for reasonable
- ------------------ out-of-pocket expenses.
B-1
<PAGE>
$25,000,000
REVOLVING CREDIT AGREEMENT
between
M.S.D.&T. FUNDS, INC.
and
FIFTH THIRD BANK
Dated as of April 29, 1999
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Definitions......................... 1
1.1. Specific Definitions................ 1
1.2. GAAP and Uniform Commercial Code.... 3
Section 2. Loan and Term....................... 3
2.1. Revolving Credit Loans.............. 3
2.2. Notes............................... 4
2.3. Principal........................... 4
2.4. Interest............................ 4
2.5. Term of Facility.................... 4
2.6. Making Loans; Accounting............ 5
2.7. Use of Proceeds..................... 5
Section 3. Representations and Warranties...... 6
3.1. Organization and Qualification...... 6
3.2. Due Authorization................... 6
3.3. Litigation.......................... 6
3.4. Margin Stock........................ 6
3.5. Laws and Taxes...................... 6
3.6. Financial Condition................. 6
3.7. Representations in Exhibit 3.7...... 7
3.8. Board and Shareholder Action........ 7
3.9. Millennium Compliance............... 7
Section 4. Financial Statements and Information 7
4.1. Financial Statements............
.... 7
Section 5. Covenants........................... 8
5.1. Existence; Merger................... 8
5.2. Pledge or Encumbrance of Assets..... 8
5.3. Business............................ 8
5.4. Compliance with Law................. 8
5.5. Representations..................... 8
Section 6. Conditions Precedent................ 8
6.1. Conditions to Initial Loan.......... 8
6.2. Conditions to Each Loan............. 9
Section 7. Events of Default and Remedies...... 9
7.1. Events of Default................... 9
7.2. Remedies............................ 10
7.3. Cumulative Remedies.
................ 11
Section 8. Miscellaneous Provisions............ 11
8.1. Delays and Waiver................... 11
-i-
<PAGE>
8.2. Waiver by Borrower.................. 11
8.3. Complete Agreement.................. 11
8.4. Severability........................ 12
8.5. Binding Effect...................... 12
8.6. Notices............................. 12
8.7. Governing Law; Jurisdiction......... 12
8.8. Confession of Judgment.............. 13
8.9. Separate Liability of Funds......... 13
Exhibits
- --------
Exhibit 1.1 - Fund Borrowing Limits
Exhibit 2.1 - List of Authorized Representatives
Exhibit 2.2 - Revolving Note
Exhibit 3.1 - Certificate of Borrower
Exhi
bit 3.7 - Specific Representations
Appendices
- ----------
Appendix A - Pledge and Security Agreement
Appendix B - Report of Pledged Securities
Appendix C - Authorization Letter
-ii-
<PAGE>
REVOLVING CREDIT AGREEMENT
This Revolving Credit Agreement ("Agreement") is entered into as of the
29th day of April, 1999 by and between M.S.D.&T FUNDS, INC., a Maryland
corporation (the "Borrower"), on behalf of the several funds identified herein,
and FIFTH THIRD BANK, an Ohio banking corporation (the "Bank").
Section 1. Definitions.
-----------
1.1. Specific Definitions. The following definitions shall apply:
--------------------
"Authorization Letter" means the Authorization Letter(s) in the form
attached as Appendix C hereto and incorporated herein by reference, as executed
by the Borrower and the Investment Adviser from time to time on behalf of each
Fund, including any and all such documents which may be amended from time to
time hereafter.
"Authorized Representative" means, with regard to each Fund, the name of
the individual(s) whose name is listed as the Authorized Representative(s) for
such Fund on Exhibit 2.1 attached hereto, which list may be modified by Borrower
or the Investment Advisor from time to time and which new list shall be
effective two Business Days after receipt of notice thereof by Bank.
"Borrowing Limit", with respect to each Fund, means the maximum amount
of borrowing that such Fund is permitted to borrow pursuant to Borrower's
Articles of Incorporation and such Fund's current statement of Additional
Information for purposes contemplated by this Agreement as set forth on Exhibit
1.1.
"Business Day" shall mean any day on which Bank and the Investment
Adviser shall be open to the public in Cincinnati, Ohio and Baltimore, Maryland,
respectively, for the transaction of its normal banking business.
"Custodian" means Bank's Mutual Fund Services Department.
"Custody Agreement" means that certain Custody Agreement by and between
the Custodian and Borrower dated as of May 28, 1993 and all amendments thereto.
"Default" means any event that, with the giving of notice or the passage
of time, or both, would be an Event of Default.
"Event of Default" has the meaning set forth in Section 7.1.
"Facility" has the meaning set forth in Section 2.1.
"Federal Funds Rate" means, for any period, a fluctuating interest rate
per annum equal for each day during such period to the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds
<PAGE>
brokers on such day, as published by the Federal Reserve Bank of New York on the
Business Day next succeeding such day, provided that (a) if such day is not a
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next Business Day as so published on the next succeeding
Business Day, and (b) if such rate is not so published for any day, the Federal
Funds Rate for such day shall be the average rate charged to Bank on such day on
such transactions as determined by the Bank.
"Funds" mean Growth & Income Fund, Equity Income Fund, Equity Growth
Fund, Diversified Real Estate Fund, Prime Money Market Fund, Government Money
Market Fund, Limited Maturity Bond Fund, Total Return Bond Fund, Tax-Exempt
Money Market Fund, Maryland Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond
Fund and National Tax-Exempt Bond Fund, each of which is a separate investment
portfolio of the Borrower.
"Insolvency Event" means, with respect to a person, any of the
following: a court enters a decree or order for relief in respect to such
person in an involuntary case under any applicable bankruptcy, insolvency or
other similar law then in effect, or appoints a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of such person or
for any substantial part of its property, or orders the wind-up or liquidation
of its affairs; or a petition initiating an involuntary case under any such
bankruptcy, insolvency or similar law is filed against such person; or such
person commences a voluntary case under any applicable bankruptcy, insolvency or
other similar law in effect, or makes any general assignment for the benefit of
creditors, or fails generally to pay its debts as such debts become due, or
takes corporate action in furtherance of any of the foregoing.
"Investment Adviser" means Mercantile - Safe Deposit and Trust Company.
"Lien" means any security interest, mortgage, pledge, assignment, or
voluntary or involuntary lien, charge or other encumbrance of any kind,
including interests of vendors or lessors under conditional sale contracts or
capital leases.
"Loan Documents", with respect to each Fund, means this Agreement, the
Note, the Pledge Agreement and the Authorization Letter executed by the Borrower
and/or the Investment Adviser on behalf of each Fund, including any and all such
documents which may be amended from time to time hereafter.
"Obligation(s)" means all loans, advances, indebtedness and other
obligations of Borrower owed to Bank under this Agreement of every description
whether now existing or hereafter arising and whether direct or indirect,
primary or as guarantor or surety, absolute or contingent, liquidated or
unliquidated, matured or unmatured, secured or unsecured, and all expenses and
attorney's fees incurred by Bank under this Agreement or any other document or
instrument related thereto.
"Person" shall mean and include an individual, business trust,
partnership, corporation, joint stock company, trust, unincorporated
association, joint venture or other entity.
-2-
<PAGE>
"Pledge Agreement", with respect to each Fund, means that Pledge and
Security Agreement by and between Bank and Borrower, on behalf of such Fund, in
the form attached as Appendix A hereto and incorporated herein by reference and
as such form may be amended from time to time thereafter.
"Prime Rate" means the rate of interest per annum announced to be its
prime rate from time to time by Bank at its principal office in Cincinnati,
Ohio, whether or not Bank shall at times lend to borrowers at lower rates of
interest or, if there is no such prime rate, then its base rate or such other
rate as may be substituted by Bank for the prime rate.
"Report of Pledged Securities" means the Report of Pledged Securities in
the form attached as Appendix B hereto, and as such form may be amended from
time to time thereafter, executed on behalf of a Fund upon the making of each
Loan hereunder. With respect to Sections 2.5, 7.1 and 7.2 hereof, the term
"Report of Pledged Securities" shall only mean such Report(s) of Pledged
Securities executed in connection with any Loans that are then outstanding.
"Trust Custody Account", with respect to each Fund, means Borrower's
account established with the Custodian on behalf of such Fund pursuant to the
Custody Agreement.
1.2. GAAP and Uniform Commercial Code. All financial terms used in this
--------------------------------
Agreement, other than those defined in this Section 1, shall have the meanings
given to them by generally accepted accounting principles. All other undefined
terms shall have the meanings given to them in the Uniform Commercial Code then
in effect.
Section 2. Loan and Term.
-------------
2.1. Revolving Credit Loans. (a) Subject to the terms and conditions
----------------------
hereof, Bank hereby extends to Borrower a line of credit facility (the
"Facility") under which Bank may make loans (the "Loans") to any Fund from time
to time during the term of this Agreement, in an amount up to $25,000,000;
provided, however, the Borrower shall not at any time incur borrowings on behalf
of the Funds such that the aggregate Loans then outstanding would exceed
$25,000,000. Notwithstanding the foregoing, in no event may Borrower borrow an
amount on behalf of any Fund that would exceed such Fund's Borrowing Limit on
the day that any Loan is requested hereunder. Bank shall utilize its reasonable
discretion at all times as to whether or not to make any Loans. Borrower may
borrow and reborrow hereunder, provided that the principal amount of all Loans
outstanding at any one time to Borrower, shall not exceed $25,000,000 in the
aggregate.
(b) Borrower or the Investment Adviser must give Bank written notice of
Borrower's intention to borrow under this Agreement by 4:00 p.m. local
Cincinnati time on the proposed date. Bank is authorized to make Loans to a
Fund based on the instructions received from any Authorized Representative for
such Fund as listed on Exhibit 2.1 attached hereto and incorporated herein by
reference, which list may be modified by Borrower from time to time and which
new list shall be effective two business days after its receipt by Bank.
Provided that all conditions precedent to the making of any Loan as set forth in
Sections 6 and 2.1(a) have been satisfied and the procedures set forth in
Section 2.6(a) have been followed, Bank will make
-3-
<PAGE>
Loans by crediting the amount thereof to the demand deposit account at Bank
established by Borrower in accordance with Section 6.1(g) for the particular
Fund on behalf of which the Loan is made or such other account as Bank and
Borrower may agree (the "Fund Deposit Account").
(c) Borrower may repay principal and accrued interest on the Loans upon
the Authorized Representative of the Fund which incurred such borrowing
directing the Custodian to apply cash held by the Custodian for such Fund, on
Borrower's behalf, to the repayment of such amounts. Subject to Section 8.9,
this Section 2.1(c) shall in no way limit the obligation of Borrower to pay the
Loans nor shall the sources of funds from which Borrower may repay the Loans be
limited to the borrowing Fund's Trust Custody Account.
2.2. Notes. On the Closing Date, Borrower shall duly issue and deliver to
-----
Bank on behalf of each Fund a Note in the form of Exhibit 2.2 (the "Notes") in
the maximum principal amount permitted to be borrowed by such Fund in accordance
with Section 2.1(a). Each loan made pursuant to a Note shall be made only to
the Fund that executed such Note, used only for the benefit of such Fund, and
only such Fund shall be obligated for such Loan. Bank shall record each Loan
and payments thereof to each Fund separately on its books and records, which
shall be presumptive evidence of the principal owing and unpaid under such Note.
2.3. Principal. The principal balance of all Loans will be payable in
---------
immediately available funds at the principal office of Bank no later than 2:00
p.m., local Cincinnati time, on the first Business Day following the date any
Loan is made by Bank to Borrower hereunder.
2.4. Interest. All Loans outstanding from time to time shall bear
--------
interest at the Federal Funds Rate in effect on the Business Day that the Loan
is made plus one half of one percent. Interest on each loan will accrue daily,
will be calculated based on a 360 day year and charged for the actual number of
days elapsed, and will be payable in immediately available funds at the
principal office of Bank no later than 2:00 p.m., local Cincinnati time, on the
first Business Day following the date any Loan is made by Bank to Borrower
hereunder. Those amounts, if not timely paid, shall thereupon constitute
Obligations hereunder and shall thereafter accrue interest as provided in this
Agreement.
After the occurrence of an Event of Default, the Loans shall bear interest
at a rate of 2% per annum above the Prime Rate; this provision does not
constitute a waiver of any Event of Default or an agreement by Bank to permit
any late payments whatsoever.
2.5. Term of Facility. Except as otherwise provided in this Section 2.5,
----------------
the term of the Facility shall expire on April 12, 2000, and the entire
outstanding principal balance of the Notes, and all accrued interest, shall
become due and payable not later than that date in the event that any principal
or accrued interest has not been previously repaid. This Facility may be
extended for successive one year terms upon (a) the Bank's executive committee
(or similar committee established from time to time) approving an extension of
the Facility and (b) the Bank giving written notice of such extension to
Borrower no less than thirty days prior to the end of the current or extended
term; provided, however, that the Borrower may elect not to renew the Facility
by giving written notice to the Bank no less than sixty days prior to the end of
the current or extended term. This Facility shall automatically terminate upon
the termination of the Custody
-4-
<PAGE>
Agreement except upon the simultaneous execution by Bank and Borrower of a
substantially identical custody agreement in replacement thereof. Until all
Obligations have been fully repaid and this Agreement has terminated, Bank shall
retain its security interest in all collateral, then existing or arising
thereafter, pledged to Bank pursuant to the Pledge Agreements and as identified
in the Reports of Pledged Securities.
2.6. Making Loans; Accounting.
------------------------
(a) The Custodian shall between 1:00 and 2:30 p.m. on each Business Day
determine whether the cash position of any Fund, in the Custodian's best
estimate, will be negative at the close of business on that Business Day. In
the event that the Custodian so estimates that the cash position of a particular
Fund will be negative, the Custodian shall no later than 2:30 p.m. so advise an
Authorized Representative of such Fund. If it appears that $100,000 or more
will be necessary to meet the cash needs of such Fund, the Authorized
Representative may request a Loan on behalf of such Fund in accordance with
Section 2.1 hereof by delivering a fully executed Report of Pledged Securities
on behalf of such Fund to Bank evidencing a Collateral Value of Pledged
Securities of at least the amount of the Loan requested. Upon receipt of such a
completed form by Bank no later than 4:00 p.m., Bank shall promptly determine
whether the amount of the Loan requested is available in accordance with the
maximum available amount set forth in Section 2.1(a). If such amount is so
available and Bank makes the Loan pursuant to its discretion under Section 2.1
hereof, Bank shall then credit the appropriate Fund Deposit Account, notify the
Custodian the Loan has been made and confirm to the Authorized Representative
the making and the amount of the Loan and the interest rate that will apply to
such Loan no later than 5:00 p.m. All times set forth in this subsection (a)
shall be local Cincinnati time. Bank and Borrower agree that written notices
under this subsection (a) may be given by facsimile.
(b) After the end of each calendar month, Bank will render to Borrower a
statement of Borrower's loan account with Bank hereunder, which statement shall
be considered correct and to have been accepted by Borrower and shall be
conclusively binding upon Borrower unless Borrower notifies Bank in writing of
any discrepancy within thirty (30) Business Days from the mailing of such
statement. Such monthly statement shall reflect all borrowings incurred by
Borrower on behalf of each Fund under the Facility during the calendar month to
which such statement relates and the interest rates charged therefore.
2.7. Use of Proceeds. The proceeds of the Loans will be used only for a
---------------
Fund's daily cash needs as a temporary measure for extraordinary or emergency
purposes, or for the clearance of transactions, including without limitation the
payment of redemptions occurring after such Fund's cash funds have already been
committed to overnight investments and which might otherwise require the
untimely disposition of the Fund's portfolio securities. Upon disbursement of a
Loan in accordance with Section 2.1(b), an Authorized Representative of such
Fund may authorize the Custodian, by telephone or otherwise, to apply all or any
portion of such Loan proceeds to the uses specified in this Section 2.7.
-5-
<PAGE>
Section 3. Representations and Warranties.
------------------------------
Borrower hereby warrants and represents to Bank the following:
3.1. Organization and Qualification. Borrower is duly organized, validly
------------------------------
existing and in good standing under the laws of the State of Maryland has the
power and authority to carry on its business and to enter into and perform this
Agreement, the Notes, the Pledge Agreements and the Authorization Letter and is
qualified and licensed to do business in each jurisdiction in which such
qualification or licensing is required. All information set forth in Exhibit
3.1 hereto, the Certificate of Borrower, and in all attachments thereto, is true
and correct.
3.2. Due Authorization. The execution, delivery and performance by
-----------------
Borrower of this Agreement, the Notes, the Pledge Agreements and the
Authorization Letter have been duly authorized and approved by all necessary
action, and will not contravene any law or any governmental rule or order
binding on Borrower, or the Articles of Incorporation or Bylaws of Borrower, nor
violate any agreement or instrument by which Borrower is bound nor result in the
creation of a Lien on any assets of Borrower except the Lien to Bank granted
herein. Borrower has duly executed and delivered this Agreement, the Notes, the
Pledge Agreements and the Authorization Letter and they are valid and binding
obligations of Borrower enforceable according to their terms except as limited
by equitable principles and by bankruptcy, insolvency or similar laws affecting
the rights of creditors generally. No notice to or consent by any government
body is needed in connection with this transaction.
3.3. Litigation. There are no material suits or proceedings pending or
----------
threatened against or affecting Borrower, and no proceedings before any
governmental body pending or threatened against Borrower. For purposes of this
Section 3.3, a suit or proceeding shall be deemed material if the amount of
damages claimed or sought by a third party against Borrower exceeds $250,000.
3.4. Margin Stock. The making of the Loans and the performance of the
------------
Loan Documents will not violate Regulations U and X of the Board of Governors of
the Federal Reserve System. If requested by Bank, Borrower will furnish to Bank
statements in conformity with the requirements of Federal Reserve Form U-1.
3.5. Laws and Taxes. Borrower has all approvals, authorizations and other
--------------
rights under the Investment Company Act of 1940 necessary to conduct its
business as currently conducted. To the best of Borrower's knowledge, (a)
Borrower is in material compliance with all laws applicable to it, (b) has filed
all required tax returns, (c) has paid all taxes shown to be due and payable on
those returns, and (d) no taxing authority has asserted or assessed any
additional tax liabilities against Borrower.
3.6. Financial Condition. All financial statements and information
-------------------
relating to Borrower which have been or may hereafter be delivered by Borrower
to Bank are true and correct and have been prepared in accordance with generally
accepted accounting principles consistently applied. To the best of Borrower's
knowledge, (a) Borrower does not have any material obligations or liabilities of
any kind not disclosed in that financial information, and (b)
-6-
<PAGE>
there has been no material adverse change in the financial condition of Borrower
since the submission of such financial information to Bank.
3.7. Representations in Exhibit 3.7. The representations and warranties
------------------------------
set forth in Exhibit 3.7, the Specific Representations Exhibit, are true and
correct. Except as otherwise permitted hereunder, neither Borrower nor any Fund
shall change its name, the state of its formation, or transfer its executive
offices to any location other than as specified in that Exhibit.
3.8. Board and Shareholder Action. The Board of Directors of the Borrower
----------------------------
has adopted all resolutions necessary to authorize the Borrower to enter into
the Loan Documents and to carry out the transactions contemplated thereby. No
action on the part of the Borrower's shareholders is required in connection
therewith.
3.9. Millennium Compliance.
---------------------
(a) Borrower shall be "Millennium Compliant." As set forth herein,
Millennium Compliant means that software, hardware, embedded microchips and
other processing capabilities utilized by, and material to, the business
operations ("Systems") of Borrower function accurately and consistently accept
date input, provide date output and perform calculations on dates before, during
and after January 1, 2000 without interruption and without any change in
operations associated with the advent of the year 2000.
(b) Upon request by Bank, Borrower shall provide to Bank its plan to
become Millennium Compliant and status reports on the implementation of the
same, or such other information which is sufficient to demonstrate that Borrower
will be Millennium Compliant.
Section 4. Financial Statements and Information.
------------------------------------
4.1. Financial Statements. So long as any Obligations to Bank are
--------------------
outstanding, Borrower shall maintain a standard and modern system for accounting
in accordance with generally accepted principles of accounting and shall furnish
to Bank:
(a) Within ten Business Days after they are filed by Borrower with the
Securities and Exchange Commission, copies of all prospectuses, statements of
additional information, annual reports, financial information, proxy materials
and other Securities and Exchange Commission filings as reasonably requested by
Bank from time to time; and
(b) copies of all financial information and other reports and documents
distributed by Borrower to the holders of Borrower's securities.
-7-
<PAGE>
Section 5. Covenants.
---------
Borrower hereby covenants to Bank the following:
5.1. Existence; Merger. Borrower and each Fund will maintain its
-----------------
existence and will not change its name, capital structure or state of formation
nor merge or consolidate with any corporation or other entity except upon the
prior written consent of Bank.
5.2. Pledge or Encumbrance of Assets. Borrower will not create, incur,
-------------------------------
assume or permit to continue in existence any Lien on any property or asset now
owned or hereafter acquired by Borrower, except for Liens to Bank and Liens of
governmental entities which secure amounts not at the time due and payable and
which are imposed by law without the consent of Borrower and except as permitted
by the Borrower's Articles of Incorporation. Borrower shall not amend its
Articles of Incorporation to revise the permitted borrowings or authorized
pledge provisions contained therein with respect to any Fund, except upon the
prior written consent of Bank.
5.3. Business. Borrower will engage primarily in business of the same
--------
general character as that now conducted.
5.4. Compliance with Law. Borrower will comply with all federal, state
-------------------
and local laws, regulations and orders applicable to Borrower or its assets, in
all respects material to Borrower's business, assets or prospects, including
without limitation the Investment Company Act of 1940 and all applicable blue
sky laws.
5.5. Representations. Borrower covenants that the representations set
---------------
forth in this Agreement will continue to be correct so long as this Agreement is
in effect. Borrower will, within three business days of its knowledge thereof,
give written notice to Bank of the existence of any event which would prohibit
Borrower from continuing to make the representations set forth in this
Agreement.
Section 6. Conditions Precedent.
---------------------
6.1. Conditions to Initial Loan. Bank shall not make any Loan until
---------------------------
Borrower has delivered to Bank, in addition to this Agreement and the Notes, the
following in form and substance satisfactory to Bank:
(a) the Pledge Agreements;
(b) a favorable opinion of counsel to Borrower satisfactory to Bank;
(c) all appropriate financing statements (Form UCC-1);
(d) a Certificate of Borrower in the form of Exhibit 3.1, and all
attachments thereto;
-8-
<PAGE>
(e) as Bank may require, UCC searches, tax lien and litigation searches,
insurance certificates, notices, filings, acknowledgments or other documents or
control agreements to reflect, perfect, or protect the priority of Bank's
priority Lien in the collateral pledged to Bank pursuant to the Pledge
Agreements and to fully consummate this transaction;
(f) payment by Borrower of all fees and expenses of Bank, including
without limitation, counsel fees incurred by Bank in connection with the
preparation, negotiation, administration and enforcement of this Agreement, and
all recording fees and taxes, if any;
(g) as Bank may require, all documentation needed to establish a demand
deposit account with Bank for each Fund if necessary for administrative and
operational purposes, which account shall be used to receive proceeds of Loans
made hereunder to each respective Fund;
(h) the Authorization Letter; and
(i) such additional information and materials as Bank may reasonably
request.
6.2. Conditions to Each Loan. Bank shall not make any Loan:
------------------------
(a) if there has occurred, and has not been waived, any Default or Event
of Default; or
(b) if Borrower, its Investment Adviser or other Authorized
Representative has not delivered to Bank a Report of Pledged Securities on
behalf of the Fund requesting such borrowing, executed by an Authorized
Representative of such Fund; it being agreed that this Section 6.2(b) shall be
deemed satisfied upon Bank's receipt of a facsimile copy of such executed Report
of Pledged Securities.
Section 7. Events of Default and Remedies.
-------------------------------
7.1. Events of Default. Any of the following events shall be an Event of
------------------
Default:
(a) any representation or warranty made by Borrower herein, or in any
other Loan Document or any document furnished to Bank by Borrower under this
Agreement, is incorrect when made or when reaffirmed; or
(b) Borrower defaults in the payment of any principal or interest on any
Obligation when due and payable, by acceleration or otherwise; or
(c) Borrower fails to deliver to Bank the original executed Report of
Pledged Securities by 2:00 p.m. local Cincinnati time on the first Business Day
following the making of a Loan; or
-9-
<PAGE>
(d) Borrower fails to observe or perform any covenant, condition or
agreement to be observed or performed by Borrower pursuant to the terms hereof;
or
(e) an Insolvency Event occurs with respect to Borrower; or
(f) any of the following occurs: there is a material impairment of the
value or priority of Bank's Lien in collateral pledged to Bank under a Pledge
Agreement and as identified in any Report of Pledged Securities, provided,
however, that no such decline in value shall be an Event of Default so long as
(i) the collateral pledged to Bank by Borrower (including additional Securities
pledged by Pledgor within two Business Days after request by Pledgee) has a
market value at least equal to the greater of (x) the amount of all outstanding
Loans hereunder or (y) 95% of the market value of the collateral as of the date
first pledged to Bank in connection with the then outstanding Loans, and (ii)
the Bank has a first priority Lien in all such collateral; a notice of lien,
levy or assessment is filed against Borrower or an asset of Borrower by any
government authority; or a judgment or other claim becomes a Lien on any
collateral pledged to Bank under a Pledge Agreement and identified in any Report
of Pledged Securities; or any other asset of Borrower of material value is
seized, attached, or otherwise levied upon by a judicial officer; or
(g) any event occurs which might, in Bank's reasonable opinion, have a
material adverse effect on the collateral pledged to Bank under the Pledge
Agreements and as identified in the Reports of Pledged Securities or on
Borrower's financial condition, operations or prospects; or
(h) the Custody Agreement is terminated except upon the simultaneous
execution by Bank and Borrower of a substantially identical custody agreement in
replacement thereof; or
(i) an Event of Default occurs under any Loan Document.
(j) (i) failure of Borrower to be Millennium Compliant (pending full
implementation of Borrower's plan to become Millennium Compliant, Borrower will
not be considered in default under this sub-paragraph until such time as any of
its Systems begins to malfunction as a result of the coming or arrival of the
year 2000), or (ii) if Bank determines, in its sole discretion, that Borrower's
plan to become Millennium Compliant and/or the implementation thereof are
insufficient to ensure that the Borrower will be Millennium Compliant.
7.2. Remedies. If any Event of Default shall occur and be continuing:
---------
(a) Bank may cease advancing money hereunder, and/or declare all
Obligations to be due and payable immediately (and, upon the occurrence of an
Event of Default based on an Insolvency Event, all Obligations shall become
automatically due and payable without a declaration by Bank), whereupon they
shall immediately become due and payable without presentment, demand, protest,
or notice of any kind, all of which are hereby expressly waived by Borrower.
-10-
<PAGE>
(b) Bank may set off against the Obligations owed by a Fund, (i) all
collateral pledged to Bank under the Pledge Agreements of that Fund and as
identified in the Reports of Pledged Securities of such Fund and (ii) all cash
in the Trust Custody Account of that Fund from time to time following the Event
of Default.
(c) Bank may resort to the rights and remedies of a secured party under
the Uniform Commercial Code.
(d) Bank may in its sole discretion pay, purchase, contest or compromise
any encumbrance, charge or lien which in the opinion of Bank appears to be prior
or superior to its Lien, and pay all expenses incurred in connection therewith.
Notwithstanding anything herein to the contrary, no provision of this
Agreement or of any other Loan Document shall be construed to give or vest in
Bank any right of set off against, or any rights to any other assets, property
or securities of any Fund in or under the Bank's control or custody, other than
the cash in the Fund's Trust Custody Account as specified in Section 7.2(b) and
the collateral specifically pledged by Borrower on behalf of the Fund under that
particular Fund's Pledge Agreement and as identified in that particular Fund's
Report of Pledged Securities to the payment of the amounts due hereunder and
under the Note. Moreover, no provision of this Agreement or of any other Loan
Document shall be construed as granting the Bank a security interest in any
collateral for the purpose of paying any attorney's fees constituting any
portion of the Obligations or which may be otherwise due under any such
agreement.
7.3. Cumulative Remedies. No remedy set forth herein is exclusive of any
--------------------
other available remedy or remedies, but each is cumulative and in addition to
every other remedy given under this Agreement or any other agreement or now or
hereafter existing at law or in equity or by statute. Bank may pursue its
rights and remedies concurrently or in any sequence, and no exercise of one
right or remedy shall be deemed to be an election.
Section 8. Miscellaneous Provisions.
-------------------------
8.1. Delays and Waiver. No delay or omission to exercise any right shall
------------------
impair any such right or be a waiver thereof, but any such right may be
exercised from time to time and as often as may be deemed expedient. A waiver
on one occasion shall be limited to that particular occasion.
8.2. Waiver by Borrower. Borrower waives notice of non-payment, demand,
-------------------
presentment or protest; consents to any renewals or extensions of time of
payment with respect to the Notes and any amount due thereunder; and generally
waives any and all suretyship defenses and defenses in the nature thereof.
8.3. Complete Agreement. This Agreement and the Exhibits are the complete
-------------------
agreement of the parties hereto and supersede all previous understandings
relating to the subject matter hereof. This Agreement may be amended only by an
instrument in writing which
-11-
<PAGE>
explicitly states that it amends this Agreement, and is signed by the party
against whom enforcement of the amendment is sought. This Agreement may be
executed in counterparts, each of which will be an original and all of which
will constitute a single agreement.
8.4. Severability. If any part of this Agreement or the application
-------------
thereof to any person or circumstance is held invalid, the remainder of this
Agreement shall not be affected thereby. The section headings herein are
included for convenience only and shall not be deemed to be a part of this
Agreement.
8.5. Binding Effect. This Agreement shall be binding upon and inure to
---------------
the benefit of the respective legal representatives, successors and permitted
assigns of the parties hereto; however, neither Borrower nor Bank may assign any
of its respective rights or delegate any of its respective obligations hereunder
without the prior written consent of the other.
8.6. Notices. Any notices under or pursuant to this Agreement shall be
--------
deemed duly sent when delivered in hand or when mailed by registered or
certified mail, return receipt requested, or when sent by electronic mail, or
when sent by facsimile transmission, addressed as follows:
To Borrower: M.S.D.&T. Funds, Inc.
c/o Mercantile Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21203
Attention: Charles Merrick
Facsimile Number: (410) 237-5690
Electronic Mail: [email protected]
To Bank: Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Attention: Commercial Loan Department
Facsimile Number: (513)579-5226
Electronic Mail: [email protected] or
[email protected]
with a copy to: Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Attention: Mutual Fund Services Department
Facsimile Number: (513) 579-5444
and when confirmed by subsequent telephone conversation. Either party may
change such address by sending notice of the change to the other party.
8.7. Governing Law; Jurisdiction. All acts and transactions
----------------------------
hereunder and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance
-12-
<PAGE>
with the laws of the State of Ohio. Borrower agrees that the state and federal
courts in Hamilton County, Ohio or any other court in which Bank initiates
proceedings have exclusive jurisdiction over all matters arising out of this
Agreement, and that service of process in any such proceeding shall be effective
if mailed to Borrower at its address described in the Notices section of this
Agreement. BANK AND BORROWER HEREBY WAIVE THE RIGHT TO TRIAL BY JURY OF ANY
MATTERS ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
8.8. Confession of Judgment.
-----------------------
(a) Borrower authorizes any attorney of record to appear for it in any
court of record in the State of Ohio, after an Obligation becomes due and
payable whether by its terms or upon default, waive the issuance and service of
process, and release all errors, and confess a judgment against it in favor of
the holder of such Obligation, for the principal amount of such Obligation plus
interest thereon, together with court costs and attorneys' fees. Stay of
execution and all exemptions are hereby waived. If an Obligation is referred to
an attorney for collection, and the payment is obtained without the entry of a
judgment, the obligors shall pay to the holder of such obligation its attorneys'
fees.
(b) Bank shall notify Borrower in writing within one Business Day of
the entry of a judgment pursuant to Section 8.8(a) hereof. Bank may not act
upon or enforce any judgment obtained pursuant to confession under Section
8.8(a) hereof until seven days after such notice to Borrower.
8.9. Separate Liability of Funds. All obligations of the Borrower
---------------------------
under this Agreement, the Pledge Agreements and the Notes shall apply only on a
Fund-by-Fund basis, and no Fund shall be liable for the obligations of another
Fund. Without limiting the generality of the foregoing, any amount owed by the
Borrower to the Bank under this Agreement, the Pledge Agreements or the Notes as
a result of a borrowing hereunder or thereunder shall be secured only by and
paid only out of the assets and property of the particular Fund for which such
borrowing is made.
IN WITNESS WHEREOF, Borrower and Bank have executed this Agreement by their
duly authorized officers as of the date first above written.
-13-
<PAGE>
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER
CAUSE.
M.S.D.&T. FUNDS, INC. FIFTH THIRD BANK
By:/s/ Leslie B. Disharoon By:/s/ Anthony M. Buehler
------------------------------------ ----------------------
Name: Leslie B. Disharoon Name: Anthony M. Buehler
Title: President Title: Assistant Vice President
STATE OF MARYLAND )
) ss:
CITY OF BALTIMORE )
BEFORE ME, a Notary Public, in and for said State, personally appeared
LESLIE B. DISHAROON, the President of M.S.D.&T. Funds, Inc., a Maryland
corporation, who acknowledged that he did sign the foregoing instrument and that
the same is his free act and deed as such officer and is the free act and deed
of said business trust.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal this
19th day of April, 1999.
/s/ Linda A. Meck
-----------------
Notary Public
Linda A. Meck
My commission expires September 1, 2000
STATE OF OHIO )
) ss:
COUNTY OF HAMILTON )
BEFORE ME, a Notary Public, in and for said State, personally appeared
ANTHONY M. BUEHLER, the Assistant Vice President of Fifth Third Bank, a
corporation, who acknowledged that he did sign the foregoing instrument and that
the same is his free act and deed as such officer and is the free act and deed
of said corporation.
-14-
<PAGE>
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal this
28th day of April, 1999.
/s/Megan S. Heisel
------------------
Notary Public
Megan S. Heisel
Notary Public, State of Ohio
My commission expires February 19, 2002
-15-
<PAGE>
EXHIBIT 1.1
-----------
FUND BORROWING LIMITS
No Fund may 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% 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.
-16-
<PAGE>
EXHIBIT 2.1
-----------
LIST OF AUTHORIZED REPRESENTATIVES
In accordance with Section 2.1(b) of that certain Revolving Credit
Agreement dated April __, 1999 between M.S.D.&T. Funds, Inc. (the "Borrower")
and Fifth Third Bank (the "Bank"), Borrower hereby authorizes Bank to act upon
the telephonic and/or written instructions of the following authorized
representatives of Borrower:
Investment Adviser: Cornelia McKenna, (410) 209-4528, [email protected]
Linda Durkin (410) 209-4529, [email protected]
Joseph DiDomenico (410) 209-4510, [email protected]
M.S.D.&T. Funds Administration
20 South Charles Street, 5th Floor
Baltimore, MD 21201
Facsimile: (410) 209-4593
M.S.D.&T. FUNDS, INC.
Date: April __,1999 By: _______________________________________
Name: Leslie B. Disharoon
Title: President
-17-
<PAGE>
[Borrower to execute one note on behalf of each fund]
EXHIBIT 2.2
-----------
REVOLVING NOTE
[Name of Fund]
Cincinnati, Ohio
$25,000,000 April __, 1999
M.S.D.&T. FUNDS, INC., a Maryland corporation (the "Borrower"), for value
received, hereby promises to pay to the order of THE FIFTH THIRD BANK (the
"Bank") at its offices, 38 Fountain Square Plaza, Cincinnati, Ohio 45263, in
lawful money of the United States of America and in immediately available funds,
the principal sum of $25,000,000 or such lesser unpaid principal amount as may
be advanced by Bank pursuant to the terms of the Revolving Credit Agreement of
even date herewith by and between Borrower and Bank, as same may be amended from
time to time (the "Agreement").
Borrower covenants that the funds borrowed by it from Bank as reflected on
this Note shall be used solely on behalf of [Name of Fund]. Borrower further
acknowledges that only securities held by Borrower for [Name of Fund] are or
will be pledged by Borrower to Bank to secure such borrowing.
The principal balance hereof outstanding from time to time shall bear
interest at the Overnight Funds Rate (as defined below) of Bank in effect from
time to time. Interest on each Loan will accrue daily, will be calculated based
on a 360-day year and charged for the actual number of days elapsed. All
outstanding principal and interest will be payable at 2:00 p.m. local Cincinnati
time of the first Business Day following the making of any Loan hereunder.
After the occurrence of an Event of Default, this Note shall bear interest
(computed and adjusted in the same manner, and with the same effect, as interest
hereon prior to maturity), at a rate per annum equal to two percent (2%) above
the Prime Rate, until paid, and whether before or after the entry of judgment
hereon.
Federal Funds Rate means, for any period, a fluctuating interest rate per
annum equal for each day during such period to the weighted average of the rates
on overnight Federal funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers on such day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding such day,
provided that (a) if such day is not a Business Day, the Federal Funds Rate for
such day shall be such rate on such transactions on the next Business Day as so
published on the next succeeding Business Day, and (b) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate charged to Bank on such day on such transactions as determined by the Bank.
-18-
<PAGE>
The Prime Rate means the rate of interest per annum announced to be its
prime rate from time to time by Bank at its principal office in Cincinnati,
Ohio, whether or not Bank shall at times lend to borrowers at lower rates of
interest, or, if there is no such prime rate, then its base rate or such other
rate as may be substituted by Bank for the prime rate.
The principal amount of each loan made by Bank and the amount of each
prepayment made by Borrower shall be recorded by Bank on the schedule attached
hereto or in the regularly maintained data processing records of Bank. The
aggregate unpaid principal amount of all loans set forth in such schedule or in
such records shall be presumptive evidence of the principal amount owing and
unpaid on this Note. However, failure by Bank to make any such entry shall not
limit or otherwise affect Borrower's obligations under this Note or the
Agreement.
This Note is the Note referred to in the Agreement, and is entitled to the
benefits, and is subject to the terms, of the Agreement. The principal of this
Note is prepayable in the amounts and under the circumstances, and its maturity
is subject to acceleration upon the terms, set forth in the Agreement. Except
as otherwise expressly provided in the Agreement, if any payment on this Note
becomes due and payable on a day other than one on which Bank is open for
business (a "Business Day"), the maturity thereof shall be extended to the next
Business Day, and interest shall be payable at the rate specified herein during
such extension period.
In no event shall the interest rate on this Note exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that a court
determines that Bank has received interest and other charges under this Note in
excess of the highest permissible rate applicable hereto, such excess shall be
deemed received on account of, and shall automatically be applied to reduce the
amounts due to Bank from Borrower under this Note, other than interest, and the
provisions hereof shall be deemed amended to provide for the highest permissible
rate. If there are no such amounts outstanding, Bank shall refund to Borrower
such excess.
Borrower and all endorsers, sureties, guarantors and other persons liable
on this Note, if any, hereby waive notice of non-payment, demand, presentment or
protest in connection with the delivery, performance and enforcement of this
Note; consent to one or more renewals or extensions of this Note; and generally
waive any and all suretyship defenses and defenses in the nature thereof.
This Note may not be changed orally, but only by an instrument in writing.
This Note is being delivered in, is intended to be performed in, shall be
construed and enforceable in accordance with, and be governed by the laws of,
the State of Ohio without regard to principles of conflict of laws. Borrower
agrees that the State and federal courts in Hamilton County, Ohio or any other
court in which Bank initiates proceedings have exclusive jurisdiction over all
matters arising out of this Note, and that service of process in any such
proceeding shall be effective if mailed to Borrower at its address described in
the Notices section of the Agreement. BORROWER HEREBY WAIVES THE RIGHT TO TRIAL
BY JURY OF ANY MATTERS ARISING OUT OF THIS NOTE.
-19-
<PAGE>
Each and every obligor hereunder authorizes any attorney of record to
appear for them in any court of record in the state of Ohio, after this Note
becomes due and payable whether by its terms or upon default, waive the issuance
and service of process, and release all errors, and confess a judgment against
them in favor of the holder of this Note, for the principal amount of this Note
plus interest at the Note rate, together with court costs and attorneys' fees.
Stay of execution and all exemptions are hereby waived. If this Note is
referred to any attorney for collection, and the payment is obtained without the
entry of a judgment, the obligors shall pay to Holder its attorneys' fees.
Bank shall notify Borrower in writing within one Business Day of the entry
of a judgment pursuant to the immediately preceding paragraph. Bank may not act
upon or enforce any judgment obtained pursuant to a confession under the
immediately preceding paragraph until seven days after such notice to Borrower.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER
CAUSE.
M.S.D.&T. FUNDS, INC.
[Name of Fund]
ATTEST:
____________________________ By: ____________________________________
Name:
Title:
STATE OF _____________ )
) ss:
COUNTY OF ____________ )
BEFORE ME, a Notary Public, in and for said State, personally appeared
_______________, the ___________________ of M.S.D.&T. Funds, Inc., a Maryland
corporation, who acknowledged that he did sign the foregoing instrument and that
the same is his free act and deed as such officer and is the free act and deed
of said corporation.
IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal this
_____ day of __________ , 1999.
_________________________________
Notary Public
-20-
<PAGE>
LOANS AND PAYMENTS OF PRINCIPAL
-------------------------------
<TABLE>
<CAPTION>
Unpaid
AMOUNT OF PRINCIPAL PRINCIPAL
DATE Loan Paid Balance
- --------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
-21-
<PAGE>
EXHIBIT 3.1
-----------
M.S.D.&T. FUNDS, INC.
CERTIFICATE OF BORROWER
re: $ 25,000,000 Financing
From Fifth Third Bank
The undersigned does hereby certify that he is the duly elected,
qualified and acting Secretary of M.S.D.&T. Funds, Inc., a Maryland
corporation (the "Borrower"), and the undersigned does hereby further
certify as follows:
1. Attached hereto, marked Attachment A, is a true and correct copy
of the current Articles of Incorporation, as in effect on the date
hereof certified by the Secretary of State of Maryland.
2. Attached hereto, marked Attachment B, is a true and correct copy
of the Bylaws of Borrower, as in effect on the date hereof.
3. The following persons are the duly elected officers of Borrower,
holding the office set forth opposite their respective names. Each
officer who has executed or will execute any documents in connection
with this loan transaction has set forth his true and customary
signature opposite his name:
Name Title Signature
Leslie B. Disharoon Chairman & ________
President
W. Bruce McConnel, III Secretary ________
Decatur H. Miller Treasurer ________
4. Each officer whose personal signature appears above has been duly
authorized by resolution of the board of Directors of Borrower to
execute any and all instruments or documents which he may deem
necessary or appropriate in connection with this loan transaction.
5. Borrower is in good standing in the state of its formation.
Attached hereto, marked Attachment C, is a long-form certificate of
good standing issued within the past 30 days by the State of Maryland.
-22-
<PAGE>
IN WITNESS WHEREOF, the undersigned hereby certifies the above to be
true and has executed this certificate this _____ day of April, 1999.
_________________________________
W. Bruce McConnel, III, Secretary
The undersigned does hereby certify that he is the President of
Borrower, and does further certify that W. Bruce McConnel, III, is the
Secretary of Borrower, and that his signature set forth above is his true
and customary signature.
_________________________________
Leslie B. Disharoon, President
-23-
<PAGE>
EXHIBIT 3.7
-----------
Specific Representations
------------------------
1. The exact legal name of Borrower is: M.S.D.&T. Funds, Inc.
2. If Borrower has changed its name since it was established, its past
legal names were: N/A.
-----
3. Borrower uses in its business and owns the following trade names: N/A.
----
4. Borrower was formed on March 7, 1989, under the laws of the State of
Maryland and is in good standing under those laws.
5. Borrower has its chief executive office and principal place of business
at Two Hopkins Plaza, Baltimore, Maryland 21201. Borrower maintains all of
its records with respect to its Accounts at the addresses listed on Annex I
hereto.
6. Borrower also has places of business at: N/A.
----
7. No securities owned by Borrower are located at any other place, nor
were they located at any other place within the past four months, except as
held by Fifth Third Bank, as custodian, and by the agents and sub-
custodians of Fifth Third Bank, except that securities owned by Borrower's
International Equity Fund are held by State Street Bank and Trust Company,
as custodian for such fund, or by the agents and sub-custodians of State
Street Bank and Trust Company.
8. In the past five years Borrower has never maintained its chief
executive office or principal place of business or records with respect to
accounts, nor owned personal property, at any locations except those set
forth above and except as noted in Annex II hereto.
9. The various Funds operated by Borrower are: International Equity Fund,
Growth & Income Fund, Equity Income Fund, Equity Growth Fund, Diversified
Real Estate Fund, Prime Money Market Fund, Government Money Market Fund,
Limited Maturity Bond Fund, Total Return Bond Fund, Tax-Exempt Money Market
Fund, Maryland Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and
National Tax-Exempt Bond Fund.
10. If the name of any Fund has been changed since it was formed, its past
names are: Growth & Income Fund was formerly know as the Value Equity Fund
and Limited Maturity Bond Fund was formerly known as the Intermediate Fixed
Income Fund.
-24-
<PAGE>
ANNEX I
TO EXHIBIT 3.7
--------------
Location of Borrower's 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 are maintained at the offices of:
Mercantile-Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, MD 21201
(records relating to its function as investment adviser)
Mercantile-Safe Deposit and Trust Company
M.S.D. & T. Funds Administration
20 South Charles Street, 5th Floor
Baltimore, MD 21201
(records relating to its function as administrator)
BlackRock International Ltd.
345 Park Avenue
New York, NY 10137
and
7 Castle Street
Edinburgh, Scotland EH3 3AM
(records relating to its function as sub-adviser to
Registrant's International Equity Fund)
Fifth Third Bank
Fifth Third Center
Cincinnati, O H 45263
(records relating to its function 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)
-25-
<PAGE>
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219-3035
(records relating to its function as fund accounting agent)
State Street Bank and Trust Company
One Heritage Drive, P4N
North Quincy, MA 02171
(records relating to its function as custodian with respect
to the International Equity Fund)
BISYS Fund Services Limited Partnership
3435 Stelzer Road
Columbus, OH 43219-3035
(records relating to its function as distributor)
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street, Suite 1100
Philadelphia, PA 19107-3496
(Borrower's Articles of Incorporation, Bylaws and
minute books)
-26-
<PAGE>
ANNEX II
TO EXHIBIT 3.7
--------------
Prior to approximately September 1995, the records maintained by BISYS
Fund Services Ohio, Inc. relating to its function as fund accounting agent
and by BISYS Fund Services Limited Partnership relating to its function as
distributor were located at 1900 East Dublin-Granville Road, Columbus, Ohio
43229.
Prior to March 19, 1996, Dunedin Fund Managers Ltd. served as sub-
adviser to the International Equity Fund and maintained the records
relating to such function at Dunedin House, 25 Ravelston Terrace,
Edinburgh, Scotland EH4 3EX.
Prior to approximately January 1998, the records currently maintained
by BlackRock International, Ltd. at its New York address relating to its
function as sub-adviser to the International Equity Fund were located at
125 South Wacker Drive, Suite 300, Chicago, Illinois 60606.
Prior to December 21, 1998, the records maintained by Mercantile-Safe
Deposit and Trust Company relating to its function as administrator were
located at Two Hopkins Plaza, Baltimore, Maryland 21201.
-27-
<PAGE>
APPENDIX A
TO REVOLVING CREDIT AGREEMENT
<PAGE>
PLEDGE AND SECURITY AGREEMENT
[Name of Fund]
THIS PLEDGE AND SECURITY AGREEMENT ("Agreement"), dated as of April __,
1999 between M.S.D. & T. FUNDS, INC., a Maryland corporation (the "Pledgor")
and FIFTH THIRD BANK, an Ohio banking corporation ("Pledgee").
W I T N E S S E T H:
WHEREAS, Pledgor and Pledgee have previously entered into a Custody
Agreement dated May 28, 1993 , as may be amended from time to time hereafter
("the Custody Agreement") pursuant to which Pledgee holds securities as
custodian for Pledgor on behalf of the [Name of Fund], all as more fully set
forth in the Custody Agreement; and
WHEREAS, contemporaneously with the execution of this agreement, on behalf
of [Name of Fund] Pledgor is issuing to Pledgee a promissory note in the
principal amount of $25,000,000 (the "Note") in connection with the execution on
the date hereof by Pledgor on behalf of the Fund and Pledgee of that certain
Revolving Credit Agreement (the "Loan Agreement"); and
WHEREAS, Pledgee is unwilling to execute the Loan Agreement until this
Agreement is executed and delivered by Pledgor whereby Pledgor is agreeing to
pledge certain securities owned by the [Name of Fund] to secure borrowings
incurred by Pledgor on behalf of [Name of Fund] under the Loan Agreement and as
reflected on the Note.
NOW, THEREFORE, in consideration of the premises and to induce Pledgee to
agree to execute the Loan Agreement, it is agreed as follows:
1. Secured Obligations. "Obligation(s)" means all loans, advances,
-------------------
indebtedness and other obligations of Pledgor owed to Pledgee under the Loan
Agreement, as the same may be amended from time to time hereafter, of every
description whether now existing or hereafter arising and whether direct or
indirect, primary or as guarantor or surety, absolute or contingent, liquidated
or unliquidated, matured or unmatured, secured or unsecured, and all expenses
and attorney's fees incurred by Pledgee under this Agreement or any other
document or instrument related thereto; but the term does not include any
liability or other obligation incurred by Pledgor under the Loan Agreement on
behalf of any portfolio of Borrower other than [Name of Fund].
2. Pledge. The Pledgor pledges, mortgages, assigns, transfers, delivers,
------
deposits, sets over and confirms as a first priority pledge to the Pledgee and
its successors and assigns, with full power and discretion as hereinafter
provided, the Securities (as defined below) now or at any time held or
controlled by Pledgee pursuant to the Custody Agreement or by any third party,
whether or not acting on behalf of the Pledgee, as collateral security for
payment and performance by the Pledgor of the Obligations.
<PAGE>
The Pledgor acknowledges and agrees that so long as this Agreement is in
effect, the Pledgee is holding physical possession and/or control of the
Securities for the purpose of perfecting its security interest in the
Securities, as well as for the purposes set forth in the Custody Agreement.
"Securities" shall include, without limitation, whether certificated or
uncertificated, those common and preferred stocks, bonds, call options, put
options, debentures, notes, bank certificates of deposit, banker's acceptances,
mortgage backed securities, U.S. Treasury Securities, money market instruments
or other obligations, repurchase agreements and the underlying collateral,
certificates, receipts, warrants, securities entitlements, securities accounts
or other investment property, instruments or documents, all as owned by the
Pledgor and as identified on the Report of Pledged Securities (as defined in the
Loan Agreement and in the form attached as Appendix B thereto) and incorporated
herein by reference (which Report of Pledged Securities shall be amended from
time to time and such amendments are incorporated herein by reference), and all
additions to the securities identified on the Report of Pledged Securities.
Securities shall also include any rights or other interests therein to receive,
purchase or subscribe for any of the foregoing and all investments and rights
therein. The collateral value of the Securities shall be calculated in
accordance with the procedures set forth in the Report of Pledged Securities on
the date the Loan is made and the Securities shall be selected in accordance
with the priorities listed on the Report of Pledged Securities.
3. Representations and Warranties. The Pledgor represents and warrants
-------------------------------
to the Pledgee that:
(a) As of the date of each Loan, the Pledgor will be the sole
beneficial owner of the Securities free and clear of any security interest,
pledge, or other lien or encumbrance (collectively, "Lien") thereon or affecting
the title thereto, except for Liens to Pledgee and Liens of governmental
entities which secure amounts not at the time due and payable and which are
imposed by law without the consent of Pledgor;
(b) Pledgor has the right and requisite authority to pledge, mortgage,
assign, transfer, deliver, deposit, set over, grant a security interest in and
confirm the Securities to the Pledgee as provided herein;
(c) Pledgor has obtained all permits, consents, approvals,
authorizations or other orders of any person, corporation, partnership, trust,
governmental entity, or other entity required for the execution and delivery of
this Agreement or the delivery of the Securities to the Pledgee as provided
herein; and
(d) Pledgor has good and marketable title to the Securities, and the
Liens granted to the Pledgee pursuant to this Agreement are fully perfected
first priority Liens in and to the Securities assuming that the Pledgee has
physical possession and/or control of the Securities as set forth in Section 2
and that Pledgee makes and continues such UCC-1 financing statement filings as
are necessary to perfect Pledgee's security interest in the Securities.
-2-
<PAGE>
The representations and warranties set forth in this Section 3 shall
survive the execution and delivery of this Agreement and shall be deemed to have
been made anew upon the making of each Loan pursuant to the Loan Agreement as of
the date of the making of such Loan.
4. Covenants. The Pledgor covenants and agrees that until payment in
----------
full of all the Obligations:
(a) Without the prior written consent of the Pledgee, it will not
mortgage, pledge or otherwise encumber any of Pledgor's rights in or to the
Securities or any unpaid dividends or other distributions or payments with
respect thereto, or grant a Lien in any of the above; and
(b) The Pledgor, at Pledgor's expense, will obtain, execute,
acknowledge and deliver all such instruments and take all such action necessary
(or as the Pledgee from time to time may request) in order to ensure the Pledgee
shall have and retain the benefits of the first priority Lien in the Securities
intended to be created by this Agreement, including without limitation the
delivery of all notices and the procurement of all acknowledgments and/or
control agreements required by Article 8 and/or Article 9 of the Uniform
Commercial Code, as adopted by the applicable jurisdiction and as amended from
time to time.
5. Control of Securities. (a) Except as provided in this Agreement, the
---------------------
Pledgor shall have the rights provided to it in the Custody Agreement. The
Pledgor shall have the right, from time to time, to vote and give consents with
respect to the Securities for all purposes not inconsistent with the provisions
of this Agreement or the Custody Agreement. Notwithstanding anything else set
forth in this Agreement, in the event of a conflict between this Agreement and
the Custody Agreement, the provisions of this Agreement shall control.
(b) The Pledgee (itself or through an agent) is hereby authorized and
empowered, at its election, to transfer and register in its name or in the name
of its nominee the whole or any part of the Securities to collect and receive
all cash dividends and other distributions made thereon, to sell in one or more
sales, but without any previous notice or advertisement, the whole or any part
of the Securities and to otherwise act with respect to the Securities as though
the Pledgee was the outright owner thereof. In the event that the value of the
Securities pledged by Pledgor is insufficient to pay the outstanding Obligations
in full, Pledgee may execute in Pledgor's name a Report of Pledged Securities
granting to Pledgee a security interest in additional securities owned by
Pledgor in an amount equal to the unpaid balance of the Obligations. If the
Pledgee should so execute a Report of Pledged Securities in Pledgor's name, the
Pledgee shall promptly send a copy of such Report of Pledged Securities to the
Pledgor by facsimile transmission at the number specified pursuant to Section 11
of this Agreement. In the event that the Pledgor has pledged any of the
Securities identified on such Report of Pledged Securities to any other party,
the Pledgor shall promptly notify the Pledgee in writing and Pledgee may
substitute other securities of the Pledgor in place thereof. The Pledgor hereby
irrevocably constitutes and appoints the Pledgee as the proxy and attorney-in-
fact of the Pledgor, with full power of substitution to do so; provided,
however, the Pledgee shall not have any duty to exercise any such right or to
preserve the same and shall not be liable for any failure to do so for any delay
in doing so. Except as provided in the Authorization Letter (as defined in
-3-
<PAGE>
the Loan Agreement), the Pledgee hereby agrees that it shall not exercise any of
the powers granted in this Section 5(b) unless an Event of Default (as defined
in Section 6) has occurred.
(c) All dividends and other distributions in respect of any of the
Securities, whenever paid or made, shall be delivered to the Pledgee as
contemplated by the Custody Agreement and held by the Pledgee subject to the
Lien created by this Agreement.
6. Events of Default. The following shall each constitute an "Event of
------------------
Default" under this Agreement:
(a) The occurrence of an Event of Default under the terms of the Loan
Agreement or the Note;
(b) Failure by the Pledgor to observe and perform any covenant,
condition, or agreement on the Pledgor's part to be observed or performed under
this Agreement; or
(c) Failure of any representation or warranty of the Pledgor contained
in this Agreement to be true when given.
7. Remedies. (a) If an Event of Default shall occur and be continuing,
---------
then or at any time thereafter, and in addition to the rights and remedies of
Pledgee pursuant to the terms and provisions of the Loan Agreement and the Note,
the Pledgee (itself or through an agent) is hereby authorized and empowered at
its election, to exercise the voting rights with respect to the Securities, to
sell in one or more sales after seven days' notice (which notice the Pledgor
agrees is commercially reasonable) but without any previous notice or
advertisement, the whole or any part of the Securities. Any sale may be either
for cash or upon credit or for future delivery at such price as the Pledgee may
deem fair, and the Pledgee may be the purchaser of the whole or any part of the
Securities so sold and hold the same thereafter in its own right free from any
claim of the Pledgor or any right of redemption. Each sale shall be made to the
highest bidder, but the Pledgee reserves the right to reject any and all bids at
such sale which, in its sole discretion, it shall deem inadequate. Demands of
performance, except as otherwise herein specifically provided for, notices of
sale, advertisements and the presence of property at sale are hereby waived and
any sale hereunder may be conducted by an auctioneer or any officer or agent of
the Pledgee.
(b) If, at the original time or times appointed for the sale of the
whole or any part of the Securities, the highest bid, if there be but one sale,
shall be inadequate to discharge in full all the Obligations, or if the
Securities be offered for sale in lots, if at any of such sales, the highest bid
for the lot offered for sale would indicate to the Pledgee, in its discretion,
the unlikelihood of the proceeds of the sales of all of the Securities being
sufficient to discharge all the Obligations, the Pledgee may, on one or more
occasions, postpone any of said sales by public announcement at the time of sale
or the time of previous postponement of sale, and no other notice of such
postponement or postponements of sale need be given, any other notice being
hereby waived; provided, however, that any sale or sales made after such
postponement shall be after seven days' notice to the Pledgor.
-4-
<PAGE>
(c) In the event of any sale(s) hereunder the Pledgee shall, after
deducting all costs or expenses of every kind (including, to the full extent
permitted by law, attorney's fees and disbursements) for care, safekeeping,
collection, sale, delivery or otherwise, apply the residue of the proceeds of
the sale(s) to the payment or reduction, either in whole or in part, of the
Obligations returning the surplus, if any, to the Pledgor.
(d) If, at any time when the Pledgee shall determine to exercise its
right to sell the whole or any part of the Securities hereunder, such Securities
or the part thereof to be sold shall not be effectively registered, for any
reason whatsoever, under the Securities Act of 1933, as then in effect (or any
similar statute then in effect) (the "Securities Act"), the Pledgee may, in its
discretion (subject only to applicable requirements of law), sell such
Securities or part thereof by private sale in such manner and under such
circumstances as the Pledgee may deem necessary or advisable, but subject to the
other requirements of this Section 7, and shall not be required to effect such
registration or to cause the same to be effected. Without limiting the
generality of the foregoing, in any such event the Pledgee in its discretion (a)
may proceed to make such private sale notwithstanding that a registration
statement for the purpose of registering such Securities or part thereof could
be or shall have been filed under said Securities Act (or similar statute), (b)
may approach and negotiate with a single possible purchaser to effect such sale,
and (c) may restrict such sale to a purchaser who will represent and agree that
such purchaser is purchasing for its own account, for investment and not with a
view to the distribution or sale of such Securities or part thereof. In
addition to a private sale as provided above in this Section 7, if any of the
Securities shall not be freely distributable to the public without registration
under the Securities Act (or similar statute) at the time of any proposed sale
pursuant to this Section 7, then the Pledgee shall not be required to effect
such registration or cause the same to be effected but, in its discretion
(subject only to applicable requirements of law), may require that any sale
hereunder (including a sale at auction) be conducted subject to restrictions (i)
as to the financial sophistication and ability of any person permitted to bid or
purchase at sale, (ii) as to the content of legends to be placed upon any
certificates representing the Securities sold in such sale, including
restrictions on future transfer thereof, (iii) as to the representations
required to be made by each person bidding or purchasing at such sale relating
to that person's access to financial information about the Pledgor and such
person's intentions as to the holding of the Securities so sold for investment,
for its own account, and not with a view to the distribution thereof, and (iv)
as to such other matters as the Pledgee may, in its discretion, deem necessary
or appropriate in order that such sale (notwithstanding any failure so to
register) may be effected in compliance with laws affecting the enforcement of
creditors' rights and the Securities Act and all applicable state or other
jurisdictions' securities laws.
(e) The Pledgor acknowledges that any sale under the circumstances
described in this Section 7 shall be deemed to have been held in a manner which
is commercially reasonable. In the event of any such sale under the
circumstances described in this Section 7, the Pledgee shall incur no
responsibility or liability for selling all or any part of the Securities at a
price which the Pledgee may deem reasonable under the circumstances,
notwithstanding the possibility that a substantially higher price might be
realized if the sales were deferred until after registration as aforesaid.
-5-
<PAGE>
(f) The Pledgor agrees that it will not at any time plead, claim or
take the benefit of any appraisal, valuation, stay, extension, moratorium or
redemption law now or hereafter in force in order to prevent or delay the
enforcement of this Agreement, or the absolute sale of the whole or any part of
the Securities or the possession thereof by any purchaser at any sale hereunder,
and the Pledgor waives the benefit of all such laws to the extent it lawfully
may do so. The Pledgor agrees that it will not interfere with any right, power
and remedy of the Pledgee provided for in this Agreement or now or hereafter
existing at law or in equity or by statute or otherwise, or the exercise or
beginning of the exercise by the Pledgee of any one or more of such rights,
powers or remedies. No failure or delay on the part of the Pledgee to exercise
any such right, power or remedy and no notice or demand which may be given to or
made upon the Pledgor by the Pledgee with respect to any such remedies shall
operate as a waiver hereof, or limit or impair the Pledgee's right to take any
action or to exercise any power or remedy hereunder, without notice or demand,
or prejudice its rights as against the Pledgor in any respect.
8. Waiver. (a) Pledgor waives any right to require Pledgee to: (a)
-------
proceed against or exhaust any security held for the Obligations, or (b) pursue
any other remedy in Pledgee's power whatsoever. Pledgor hereby waives notice of
acceptance of this Agreement, and also presentment, demand, protest and notice
of dishonor of any and all of the Obligations, and promptness in commencing suit
against any party thereto or liable thereon, and in giving notice to or of
making any claim or demand hereunder upon the Pledgor.
(b) No delay on the Pledgee's part in exercising any power of sale,
lien, option or other right hereunder, and no notice or demand which may be
given to or made upon the Pledgor by the Pledgee with respect to any power of
sale, lien, option or other right hereunder, shall constitute a waiver thereof,
or limit or impair the Pledgee's right to take any action or to exercise any
power of sale, lien, option, or any other right hereunder, without notice or
demand, or prejudice the Pledgee's rights as against the Pledgor in any respect.
No act or omission of any kind on Pledgee's part shall in any event affect or
impair this Agreement.
9. Indemnification. The Pledgor agrees to indemnify and hold the Pledgee
----------------
harmless from and against any taxes, liabilities, claims and damages, including
reasonable attorney's fees and disbursements, and other expenses incurred or
arising by reason of the taking or the failure to take action by the Pledgee, in
good faith, under this Agreement and in respect of any transactions effected in
connection with this Agreement, including, without limitation, any taxes payable
in connection with the delivery or registration of any of the Securities as
provided herein. The obligations of the Pledgor under this Section shall
survive the termination of this Agreement.
10. Miscellaneous. (a) The Pledgor agrees to promptly reimburse Pledgee
--------------
for actual out- of-pocket expenses, including, without limitation, reasonable
counsel fees, incurred by the Pledgee in connection with the administration and
enforcement of this Agreement and/or the Note and/or the Loan Agreement;
provided, however, that this Section 10(a) shall not be construed as granting
the Pledgee a security interest in any Securities for the purpose of paying such
counsel fees.
-6-
<PAGE>
(b) This Agreement shall be binding upon the Pledgor and the Pledgor's
assigns, and shall inure to the benefit of, and be enforceable by, the Pledgee
and its successors, transferees and assigns. None of the terms or provisions of
this Agreement may be waived, altered, modified or amended except in writing
duly signed for and on behalf of the Pledgee and the Pledgor.
(c) None of the Securities and none of the proceeds thereof shall be
applied to the liability of any portfolio of the Borrower other than [Name of
Fund].
11. Notices. Any notices under or pursuant to this Agreement shall be
--------
deemed duly sent when delivered by hand or when mailed by registered or
certified mail, return receipt requested, or when sent by facsimile
transmission, addressed as follows:
(a) If to Pledgee, at
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Attention: Commercial Loan Department
Facsimile Number: (513) 579-5226
(b) If to Pledgor, at
M.S.D. & T. Funds, Inc.
c/o Mercantile - Safe Deposit and Trust Company
Two Hopkins Plaza
Baltimore, Maryland 21203
Attention: Charles Merrick
Facsimile Number: (410) 237-5690
Either party may change such address by sending notice of the change to the
other party.
12. Counterparts. This Agreement may be executed in any number of
-------------
counterparts, which shall, collectively and separately, constitute one
agreement.
13. Governing Law; Jurisdiction. All acts and transactions hereunder
----------------------------
and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of Ohio.
Pledgor agrees that the state and federal courts in Hamilton County, Ohio or any
other court in which Pledgee initiates proceedings have exclusive jurisdiction
over all matters arising out of this Agreement, and that service of process in
any such proceeding shall be effective if mailed to Pledgor at its address
described in the Notices section of this Agreement. PLEDGEE AND PLEDGOR HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY OF ANY MATTERS ARISING OUT OF THIS AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Pledge and
Security Agreement to be duly executed as of the date first above written.
WITNESSES: FIFTH THIRD BANK, Pledgee
____________________________ By: _____________________________
Name:
____________________________ Title:
M.S.D. & T. FUNDS, INC., Pledgor
[Name of Fund]
____________________________ By: _____________________________
Name:
____________________________ Title:
-8-
<PAGE>
APPENDIX B
TO REVOLVING CREDIT AGREEMENT
<PAGE>
REPORT OF PLEDGED SECURITIES
Name of Borrower: M.S.D. & T. Funds, Inc.
Name of Fund: __________________________________________________
Amount of Borrowing: ___________________________________________
Date of Borrowing: _____________________________________________
1. The above referenced Borrower hereby requests that Fifth Third Bank
("Bank") loan to Borrower for the benefit of the above referenced Fund on the
date hereof the amount shown above pursuant to that certain Revolving Credit
Agreement dated April __, 1999 between Borrower and Bank ("Loan Agreement").
In consideration of, and as a condition precedent to, the making of such loan as
contemplated by the Loan Agreement, Borrower hereby pledges to Bank pursuant to
that certain Pledge and Security Agreement dated April __, 1999 ("Pledge
Agreement"), the Securities of the Fund (as defined in the Pledge Agreement) set
forth on Schedule A hereto.
2. In selecting the Securities to be pledged to the Bank, Borrower shall
select Securities owned by the Fund in accordance with the priorities listed in
this Paragraph 2 as shown below. Borrower shall pledge all Securities owned by
the Fund within the first priority category before pledging any securities
within the second priority category, and so forth, until sufficient Securities
are pledged so that the aggregate Collateral Value (as defined below) of all
Securities pledged by Borrower equals the amount of the loan requested herein.
The Collateral Value shall equal the actual fair market value of the Securities
as determined by the Borrower in good faith multiplied by the applicable
Collateral Percentage as established in this Paragraph 2 as set forth below.
<PAGE>
Types of Collateral
Priority Securities Percentage
- ---------- -------------------- -----------
First Cash Balances 100%
Second U.S. Treasury 95%
Securities
Third U.S. Government 95%
Agency Securities
Fourth Equity Securities 75%
Fifth Municipal Securities 75%
3. For purposes of this Report of Pledged Securities, the following
capitalized terms shall have the meanings set forth below.
"Cash Balances" means the securities purchased by the Borrower upon
the overnight investment of the Fund's cash balances on the date of this Report
of Pledged Securities and as identified more particularly on Schedule A hereto.
"U.S. Treasury Securities" means a direct obligation of the United
States Treasury, including without limitation U.S. Treasury bills, notes and
bonds, and as identified more particularly on Schedule A hereto.
"U.S. Government Agency Securities" means notes, bonds, and discount
notes issued or guaranteed by United States government agencies or
instrumentalities and backed by the full faith and credit of the United States
Treasury, including without limitation participation certificates of the
Government National Mortgage Association and the Federal National Mortgage
Association, and as identified more particularly on Schedule A hereto.
"Equity Securities" means the capital stock of any corporation
incorporated in the United States and as identified more particularly on
Schedule A hereto.
"Municipal Securities" means any tax-exempt security issued by a
municipality or other political subdivision of any state, including without
limitation industrial development bonds and industrial revenue bonds, and as
identified more particularly on Schedule A hereto.
4. All Securities pledged by Borrower to Bank shall (a) be owned by the
Fund free and clear of all liens except as set forth in the Pledge Agreement,
(b) be held by the Bank as custodian on behalf of the Fund, and (c) have been
acquired by the Fund in its ordinary course of business in accordance with its
investment policies as set forth in its Statement of Additional Information.
-2-
<PAGE>
5. Notwithstanding the foregoing, the Bank may reject in writing any
Securities identified by Borrower on Schedule A to be pledged to Bank if the
Bank reasonably believes that such Securities do not have the values specified
on Schedule A, do not meet the criteria set forth in Paragraph 4 or that the
Bank will not have a valid first priority, perfected security interest therein.
Upon such rejection, Borrower shall immediately pledge different Securities
acceptable to Bank in replacement of the rejected Securities.
IN WITNESS WHEREOF, on behalf of the Borrower, its two authorized
representatives have set their hands this ________ day of ___________, ____.
M.S.D. & T. FUNDS, INC.
By: ____________________________
Name:
Title:
By: ____________________________
Name:
Title:
-3-
<PAGE>
SCHEDULE A
TO REPORT OF PLEDGED SECURITIES
SECURITIES PLEDGED BY BORROWER TO BANK
--------------------------------------
Description Actual Fair Collateral Collateral
Category of Security Market Value Percentage Value
- -------- ----------- ------------ ---------- ----------
I. Cash Balances
II. U.S. Treasury
Securities
III. U.S. Government
Agency Securities
IV. Equity Securities
V. Municipal Securities
TOTAL COLLATERAL VALUE $
===========
M.S.D. & T. FUNDS, INC.
Date: _____________________ By: ____________________________
Name:
Title:
By: ____________________________
Name:
Title:
Name of Fund:________________________
-4-
<PAGE>
APPENDIX C
TO REVOLVING CREDIT AGREEMENT
<PAGE>
AUTHORIZATION LETTER
April __, 1999
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Ladies and Gentlemen:
This letter will serve as a notification that M.S.D. & T. Funds, Inc. and
Mercantile-Safe Deposit and Trust Company have the power and authority to
request and enter into borrowings on behalf of the Growth & Income Fund, Equity
Income Fund, Equity Growth Fund, Diversified Real Estate Fund, Prime Money
Market Fund, Government Money Market Fund, Limited Maturity Bond Fund, Total
Return Bond Fund, Tax-Exempt Money Market Fund, Maryland Tax-Exempt Bond Fund,
Intermediate Tax-Exempt Bond Fund and National Tax-Exempt Bond Fund (the
"Funds") pursuant to that certain Revolving Credit Agreement between M.S.D. & T.
Funds, Inc. and Fifth Third Bank dated as of even date herewith ("Revolving
Credit Agreement"). M.S.D. & T. Funds, Inc. is the Borrower referenced in the
Revolving Credit Agreement. Mercantile-Safe Deposit and Trust Company is the
Investment Adviser for the M.S.D. & T. Funds, Inc. (the "Investment Adviser").
M.S.D & T Funds, Inc. and the Investment Adviser hereby expressly authorize
Fifth Third Bank, through its Mutual Fund Services Department (the "Custodian")
to: (a) act upon the written requests of the Authorized Representative(s) of
any Fund in making Loans to such Fund as contemplated by the Revolving Credit
Agreement, and (b) to immediately apply, without any further oral or written
instruction, when available, the cash held by the Custodian on behalf of the
Fund to the repayment of principal and interest of the amounts due by such Fund
under the Revolving Credit Agreement. Upon such application, we understand that
the Custodian shall promptly report by facsimile to the Fund and the Investment
Adviser, the details of such repayment.
<PAGE>
Fifth Third Bank
April __, 1999
Page 2
M.S.D.&T. Funds, Inc. and the Investment Adviser hereby acknowledge and
agree that certain securities of each Fund are to be pledged as security for any
and all advances made to the Fund under the Revolving Credit Agreement pursuant
to the terms of the Pledge and Security Agreement to be entered into between the
Lender and the Borrower (the Pledge Agreement") and upon the delivery of a
Report of Pledged Securities to the Lender.
M.S.D.&T. Funds, Inc. and the Investment Adviser shall be at all times
responsible for ensuring that the borrowings made by each Fund under the
Revolving Credit Agreement do not violate The Investment Company Act of 1940
(the "1940 Act") or any of the rules and regulations thereunder. Each Fund
shall from time to time promptly inform the Custodian of any applicable
limitations, restrictions and/or prohibitions on borrowings by the Fund.
However, we understand that the Custodian and Fifth Third Bank are responsible
for meeting their obligations under Section 2.6 of the Revolving Credit
Agreement.
To the extent that the Custodian takes any actions contemplated by this
Authorization Letter, the Custodian shall be held to the exercise of reasonable
care and shall be without liability to any Fund for any loss, damage, cost,
expense (including attorneys' fees and disbursements), liability or claim unless
arising from the gross negligence, bad faith or willful misconduct of the
Custodian. The Custodian shall not be under any obligation at any time to
ascertain whether any Fund is in compliance with the 1940 Act, the rules and
regulations thereunder, any other laws, rules or regulations applicable to any
Fund, the provisions of any Fund's charter documents or by-laws, or the Fund's
investment objectives and policies as then in effect.
Nothing contained in this Agreement shall be deemed to modify or amend the
Custody Agreement in effect between the Custodian and M.S.D. & T. Funds, Inc.
The obligations and liabilities of the Lender and the Borrower shall be as set
forth in the Revolving Credit Agreement and related loan documents.
<PAGE>
Fifth Third Bank
April __, 1999
Page 3
M.S.D.&T. Funds, Inc. and the Investment Adviser hereby expressly authorize
the Lender to act upon written instructions of any Authorized Representative of
a Fund in making advances to such Fund under the Revolving Credit Agreement. The
authorizations and designations set forth in this Authorization Letter shall
remain in force as to each Fund until delivery to the Custodian and the Lender
of written notice by M.S.D. & T. Funds, Inc. revoking such authorizations and
designations.
Sincerely yours,
M.S.D. & T. FUNDS, INC.
By: ______________________________
Name:
Title:
MERCANTILE-SAFE DEPOSIT AND
TRUST COMPANY
By: ______________________________
Name:
Title:
Date: ______________ By: ______________________________
Name:
Title:
By: ______________________________
Name:
Title:
Name of Fund: _____________________
<PAGE>
To the Board of Directors of
M.S.D.&T. Funds, Inc.:
We consent to the incorporation by reference in Post-Effective Amendment
No. 23 to the Registration Statement of M.S.D.&T. Funds, Inc. (comprised of the
Prime Money Market Fund, Government Money Market Fund, Tax-Exempt Money Market
Fund, 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 and collectively referred to
as the "Funds") on Form N-1A (File Numbers 32-27491 and 811-5782) of our report
dated July 16, 1999, on our audits of the financial statements and financial
highligh
ts of the Funds, which report is included in the Annual Report to
Shareholders for the year ended May 31, 1999, which is incorporated by reference
in the Registration Statement. We also consent to the reference of our firm
under the caption "Financial Highlights" in the Prospectus and "Independent
Accountants" in the Statement of Additional information.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
July 30, 1999
1
<PAGE>
CONSENT OF COUNSEL
We hereby consent (i) 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 and (ii) to the incorporation by reference therein of our
firm's opinion of counsel filed as an exhibit to Post-Effective Amendment No. 22
to the Registration Statement 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, the references to our firm under such
captions and the incorporation by reference of our firm's opinion, 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 30, 1999
1
