<PAGE>
As filed with the Securities and Exchange Commission on September 1, 2000
Registration Nos. 33-27491
811-5782
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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. 27 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 28 [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
18/th/ 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):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 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.
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Prospectus
Growth & Income Fund
Equity Income Fund
Equity Growth Fund
International Equity Fund
Diversified Real Estate Fund
SEPTEMBER 1, 2000
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
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<S> <C>
RISK/RETURN SUMMARY........................................................ 1
Introduction............................................................. 1
Growth & Income Fund..................................................... 2
Equity Income Fund....................................................... 4
Equity Growth Fund....................................................... 7
International Equity Fund................................................ 9
Diversified Real Estate Fund............................................. 11
Fees and Expenses........................................................ 13
Additional Information about Risk........................................ 14
INVESTING IN THE FUNDS..................................................... 14
Getting Your Investment Started.......................................... 14
How To Buy Fund Shares................................................... 14
How To Sell Fund Shares.................................................. 17
Other Purchase and Redemption Information................................ 19
SHAREHOLDER SERVICES....................................................... 20
Retirement Plans......................................................... 20
Exchange Privilege....................................................... 20
Automatic Investment Plan................................................ 20
Systematic Withdrawals................................................... 21
Directed Reinvestments................................................... 21
DIVIDENDS AND DISTRIBUTIONS................................................ 21
TAX INFORMATION............................................................ 22
MANAGEMENT OF THE COMPANY.................................................. 24
Investment Adviser....................................................... 24
Sub-Adviser.............................................................. 24
FINANCIAL HIGHLIGHTS....................................................... 25
</TABLE>
<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 & 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. As of June 30, 2000,
Mercantile had approximately $15 billion in assets under management, of which
approximately $1 billion represented the assets of an institutional real estate
pension fund.
An investment in the Funds is not a deposit of Mercantile-Safe Deposit & 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>
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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.
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Portfolio Manager
Manind V. Govil, CFA, Vice President, with the guidance of Brian B. Topping,
serves as the primary portfolio manager of the Fund. Mr. Govil has managed
institutional portfolios at Mercantile since 1994. Mr. Topping, a former Vice
Chairman of Mercantile, has managed institutional portfolios at Mercantile
since 1976 and has participated in the management of the Fund since 1995. Mr.
Govil has assisted in the management of the fund since 1994 and has been the
primary portfolio manager of the Fund since April, 1996. They are assisted by
a team of Mercantile equity investment professionals. See "Management of the
Company" below for information on the members of the team.
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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.
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 equity and debt securities of foreign issuers,
either directly or through American Depository Receipts, European Depository
Receipts and Global Depository Receipts. There is no minimum credit rating
requirement with respect to the Fund's investments in convertible securities.
However, the Fund's investments in convertible securities rated at the time of
purchase in the fourth highest category or lower by one or more nationally
recognized statistical rating organizations (each a "Rating Agency") are
limited to 10% of the Fund's total assets.
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.
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
2
<PAGE>
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Best quarter:
22.18% for the quarter ended December 31, 1998
Worst quarter:
(9.81)% for the quarter ended September 30, 1998
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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.
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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.
Foreign investments may be riskier than U.S. investments because of factors
such as less stringent foreign government regulations; less stringent
accounting and disclosure standards; 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 may advance the Fund's investment objective.
It is possible, however, that these evaluations will prove to be inaccurate.
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/1/. 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. The Fund's past performance does not necessarily indicate how it
will perform in the future.
[GRAPH]
Calendar Year Total Returns
1992 8.14%
1993 10.33%
1994 2.41%
1995 24.14%
1996 20.09%
1997 34.15%
1998 26.20%
1999 16.12%
Year-to-date total return for the six months ended June 30, 2000: 5.47%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
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<S> <C> <C> <C>
Growth & Income Fund............................ 16.12% 23.99% 17.10%
S&P 500 Index................................... 21.05% 28.56% 19.73%
---------------------------------------------------------------------------------
</TABLE>
*February 28, 1991 for the Fund and the S&P 500 Index.
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/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
3
<PAGE>
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Current income includes both dividends from stocks and interest income from
fixed income securities less Fund expenses.
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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.
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 to 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 equity and
debt securities of foreign issuers, either directly or through American
Depository Receipts, European Depository Receipts and Global Depository
Receipts. There is no minimum credit rating requirement with respect to the
Fund's investments in convertible securities. However, the Fund's investments
in convertible securities rated at the time of purchase in the fourth highest
category or lower by one or more Rating Agencies are limited to 10% of the
Fund's total assets.
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.
4
<PAGE>
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Portfolio Manager
George S. Michaels, CFA, Senior Vice President, is the primary manager for the
Fund. Mr. Michaels has managed institutional equity portfolios at Mercantile
for 20 years and prior to that served as an equity research analyst. He is
assisted by a team of Mercantile equity investment professionals. Mr. Michaels
and the team have managed the portfolio since March, 2000. See "Management of
the Company" below for information on the members of the team.
--------------------------------------------------------------------------------
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.
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.
Foreign investments may be riskier than U.S. investments because of factors
such as less stringent foreign securities regulations; less stringent
accounting and disclosure requirements; 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 may advance the Fund's investment objective.
It is possible, however, that these evaluations will prove to be inaccurate.
5
<PAGE>
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Best quarter:
11.21% for the quarter ended June 30, 1999
Worst quarter:
(7.90)% for the quarter ended September 30, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Russell 1000 Value Index measures the performance of the 1,000 largest U.S.
companies based on total market capitalization, with lower price-to-book ratios
and lower forecasted growth values.
--------------------------------------------------------------------------------
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./1/ 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.
The Fund's past performance does not necessarily indicate how it will perform
in the future.
[GRAPH]
Calendar Year Total Return
1999 3.75%
Year-to-date total return for the six months ended June 30, 2000: (10.00)%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
1
Year Since Inception*
--------------------------------------------------------------------------------
<S> <C> <C>
Equity Income Fund....................................... 3.75% 6.93%
Russell 1000 Value Index................................. 7.35% 9.40%
--------------------------------------------------------------------------------
</TABLE>
*March 1, 1998 for the Fund; February 28, 1998 for the Russell 1000 Value
Index.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
6
<PAGE>
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Growth stocks offer strong revenue and earnings potential and accompanying
capital growth, with less dividend income than value stocks.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Portfolio Manager
Christopher G. Frink, CFA, Vice President, is the primary manager for the Fund.
Mr. Frink has managed institutional equity and balanced portfolios at
Mercantile since 1997. From 1995 to 1997, Mr. Frink was completing his Masters
of Business Administration. Prior to that, Mr. Frink was a portfolio manager at
Oxford Capital Management. Mr. Frink has nine years of investment experience.
He is assisted by a team of Mercantile equity investment professionals, Mr.
Frink served as co-manager of the Fund from September, 1999 until March, 2000.
Mr. Frink and the team have managed the Fund since March, 2000. See "Management
of the Company" below for information on members of the team.
--------------------------------------------------------------------------------
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.
Principal Investment Strategies
The Fund invests primarily in common stocks 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 equity and
debt securities of foreign issuers, either directly or through American
Depository Receipts, European Depository Receipts and Global Depository
Receipts. There is no minimum credit rating with respect to the Fund's
investments in convertible securities. However, the Fund's investments in
convertible securities rated at the time of purchase in the fourth highest
category or lower by one or more Rating Agencies are limited to 10% of the
Fund's total assets.
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.
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
7
<PAGE>
--------------------------------------------------------------------------------
Best quarter:
24.83% for the quarter ended December 31, 1999
Worst quarter:
(8.63)% for the quarter ended September 30, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Russell 1000 Growth Index measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth values.
--------------------------------------------------------------------------------
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.
Foreign investments may be riskier than U.S. investments because of factors
such as less stringent foreign securities regulations; less stringent
accounting and disclosure standards; 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 may advance the Fund's investment objective.
It is possible, however, that these evaluations will prove to be inaccurate.
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./1/ 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.
The Fund's past performance does not necessarily indicate how it will perform
in the future.
[GRAPH]
Calendar Year Total Return
1999 25.94%
Year-to-date total return for the six months ended June 30, 2000: 0.93%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year Since Inception*
--------------------------------------------------------------------------------
<S> <C> <C>
Equity Growth Fund..................................... 25.94% 25.50%
Russell 1000 Growth Index.............................. 33.16% 32.09%
--------------------------------------------------------------------------------
</TABLE>
*March 1, 1998 for the Fund; February 28, 1998 for the Russell 1000 Growth
Index.
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/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
8
<PAGE>
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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.
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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
The Fund invests primarily in foreign common stocks, warrants and rights.
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 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 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.
Investing in securities of foreign issuers may be riskier than investing in
securities of U.S. issuers due to factors such as less stringent foreign
securities regulations; less stringent accounting and disclosure standards;
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 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.
9
<PAGE>
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Best quarter:
24.25% for the quarter ended December 31, 1999
Worst quarter:
(15.44)% for the quarter ended September 30, 1998
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 may advance the Fund's investment objective.
It is possible, however, that these evaluations will prove to be inaccurate.
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./1/ 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. The Fund's past performance does not necessarily indicate how it
will perform in the future.
[GRAPH]
Calendar Year Total Returns
1994 4.66%
1995 7.97%
1996 10.19%
1997 4.08%
1998 11.98%
1999 38.00%
Year-to-date total return for the six months ended June 30, 2000: (6.22)%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
--------------------------------------------------------------------------------
<S> <C> <C> <C>
International Equity Fund...................... 38.00% 13.86% 13.45%
MSCI All Country World ex-US Index............. 31.79% 12.10% 12.08%
--------------------------------------------------------------------------------
</TABLE>
*July 2, 1993 for the Fund; June 30, 1993 for the MSCI All Country World ex-US
Index.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
10
<PAGE>
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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.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Portfolio Manager
The Fund is co-managed by Robert M. Law and David E. Ferguson, CFA. Mr. Law
has overseen the Institutional Real Estate Department since joining Mercantile
in 1994 and is Chairman of the Trust Real Estate Committee. Mr. Law has
managed the fund since it commenced operations in 1997. Mr. Ferguson, Vice
President, is responsible for equity security selection, with 17 years of
investment experience, and has assisted in managing the Fund since June, 1998.
Before joining Mercantile in 1998, Mr. Ferguson was Director of Financial
Analysis for USF&G Realty Advisors. Mr. Ferguson has been co-manager of the
Fund since September, 1999.
-------------------------------------------------------------------------------
Diversified Real Estate Fund
Investment Objective
The Fund's investment objective is to seek current income and capital growth.
Principal Investment Strategies
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 Adviser 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 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.
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
emphasizes investments 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
11
<PAGE>
--------------------------------------------------------------------------------
Best quarter:
13.04% for the quarter ended June 30, 1999
Worst quarter:
(9.32)% for the quarter ended September 30, 1998
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Wilshire Real Estate Securities Index is an unmanaged index generally
representative of the U.S. REIT market.
--------------------------------------------------------------------------------
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. In addition, like mutual funds,
REITs pay fees and expenses.
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.
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./1/ 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 and since inception compared to those of a broad-based market index.
The Fund's past performance does not necessarily indicate how it will perform
in the future.
[GRAPH]
Calendar Year Total Return
1998 (13.57)%
1999 1.44%
Year-to-date total return for the six months ended June 30, 2000:12.89%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year Since Inception*
--------------------------------------------------------------------------------
<S> <C> <C>
Diversified Real Estate Fund.......................... 1.44% (2.07)%
Wilshire Real Estate Securities Index................. (3.18)% (5.57)%
--------------------------------------------------------------------------------
</TABLE>
*August 1, 1997 for the Fund; July 31, 1997 for the Wilshire Real Estate Index.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
12
<PAGE>
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 Diversified
Income Income Growth International Real Estate
Fund Fund Fund Equity Fund Fund
-------- ------ ------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Annual Fund Operating Expenses:
(expenses that are deducted from Fund
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........../.. 0.20% 0.20% 0.25% 0.32% 0.54%
---- ---- ---- ---- ----
Total Annual Fund Operating
Expenses/1.............../.. 0.80% 0.80% 0.85% 1.12% 1.34%
</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............................ $ 82 $255 $444 $ 990
Equity Income Fund.............................. $ 82 $255 $444 $ 990
Equity Growth Fund.............................. $ 87 $271 $471 $1,049
International Equity Fund....................... $114 $356 $617 $1,363
Diversified Real Estate Fund.................... $136 $425 $734 $1,613
</TABLE>
--------
/1/ Management Fees, Other Expenses (except for the Growth & Income and Equity
Income Funds) 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
Funds' Adviser and 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, Other Expenses, and
Total Fund Operating Expenses for the Funds, after taking these fee waivers
into account, are set forth below. These fee waivers may be revised or
cancelled at any time. The Funds' Adviser and administrator have the right to
be reimbursed by the Funds for such amounts prior to the end of any fiscal
year.
<TABLE>
<CAPTION>
Growth & Equity Equity Diversified
Income Income Growth International Real Estate
Fund Fund Fund Equity Fund Fund
-------- ------ ------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Management Fees.............. 0.49% 0.49% 0.49% 0.73% 0.66%
Distribution (12b-1) Fees.... None None None None None
Other Expenses............... 0.21% 0.21% 0.21% 0.27% 0.34%
---- ---- ---- ---- ----
Total Annual Fund Operating
Expenses.................... 0.70% 0.70% 0.70% 1.00% 1.00%
</TABLE>
13
<PAGE>
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 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.
INVESTING IN THE FUNDS
Getting Your Investment Started
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 & 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. The Company generally requires a minimum initial
investment of $25,000 ($2,000 for IRA accounts), which may be allocated among
one or more of the Company's investment portfolios, including the
14
<PAGE>
Funds. The minimum initial investment in a particular Fund is $500 and the
minimum for subsequent investments is $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 . Make your check
Account payable to M.S.D.
Application and & T. Funds, Inc.
mail it along with and mail it to the
a check payable to address on the
M.S.D. & T. Funds, left.
Inc. to:
. Please indicate
M.S.D. & T. Funds, the particular
Inc. P.O. Box Fund in which you
182028 Columbus, OH are investing.
43218-2028
. Please include
your account
number on your
check.
To obtain a New
Account
Application, call
1-800-551-2145
--------------------------------------------------------------------------------
By Wire . Before wiring . Instruct your bank
funds, please call to wire Federal
1-800-551-2145 for funds to:
complete wiring Huntington Bank,
instructions. Columbus, OH
43219, Bank
Routing
#044000024, M.S.D.
& T. Concentration
A/C #01899622436.
. Promptly complete
a New Account
Application and
forward it to:
M.S.D. & T. Funds, Be sure to include
Inc. P.O. Box your name and your
182028 Columbus, OH Fund account
43218-2028 number.
. 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.
15
<PAGE>
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, 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 the Funds' transfer agent.
Purchase orders will be accepted by the Funds' transfer agent only on a day on
which the shares of a Fund are priced (referred to as a "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 Funds' transfer
agent on a timely basis. If the Funds' 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. Payment for orders which are not
received or accepted will be returned after prompt inquiry.
If you purchase shares of a Fund directly through the Company and if your
purchase order, in proper form (including all necessary documentation and
signature guarantees, where required) and accompanied by payment, is received
by the Funds' 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 Funds' transfer agent receives your purchase order in
proper form with the required payment.
16
<PAGE>
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.
A Fund may hold foreign securities that trade on weekends or other days when
the Fund does not price its shares. Therefore, the value of such securities may
change on days when shareholders will not be able to purchase or redeem shares.
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 only redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you can redeem shares using 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 the account
(available only name, account number, name of Fund and amount of
if you checked redemption ($1,000 minimum per transaction).
the appropriate
box on the New
Account
Application)
. If you have already opened your account and would like to
add 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.
--------------------------------------------------------------------------------
17
<PAGE>
By Telephone . Call 1-800-551-2145. You will need to provide the account
(automatic name, account number, name of Fund and amount of
unless you redemption.
checked the
appropriate box
on the New
Account
Application)
. If you have already opened your account and would like to
add the telephone redemption feature, send a written
request to: M.S.D. & T. Funds, Inc., P.O. Box 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
(including all necessary documentation and signature guarantees, where
required) by the Funds' 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 Funds' transfer agent. The
Automated Clearing House ("ACH") system may also be utilized for payment of
redemption proceeds. The Company normally pays redemption proceeds in cash, but
it also has the right to deliver readily marketable portfolio securities having
a market value equal to the redemption price. When you sell these portfolios
securities, you'll pay brokerage charges.
Banks are responsible for transmitting their customers' redemption orders to
the Funds' 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.
18
<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 Funds' 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 (for example, if the Company believes that telephone
instructions are fraudulent or unauthorized). 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 by Securities and Exchange Commission
("SEC") rules (for examples for any period during which the Exchange is closed,
other than customary weekend and holiday closings, or during which trading on
the Exchange is restricted).
If you attempt to sell shares you recently purchased with a personal check, the
Company may delay processing your request until it collects payment for those
shares. This process may take up to 15 days, so if you plan to sell shares
shortly after purchasing them, you may want to consider purchasing shares with
a certified check or via electronic transfer to avoid delays.
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.
For current yield, purchase and redemption information, call 1-800-551-2145.
19
<PAGE>
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 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.
20
<PAGE>
The Automatic Investment Plan is one way in which you can 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 those months corresponding to your selection of monthly,
quarterly, semi-annual or annual withdrawals, and distributed in cash or
reinvested in shares of another Fund or portfolio offered by the Company. If
the fifteenth day of the month is not a Business Day, then the withdrawal will
be made on the preceding Business Day. 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. 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.
21
<PAGE>
Distribution Schedule
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Dividends Capital Gains
---- --------- -------------
<S> <C> <C>
Growth &
Income Declared and paid monthly Declared and paid semi-annually
Equity Income Declared and paid monthly Declared and paid semi-annually
Equity Growth Declared and paid semi-annually Declared and paid semi-annually
International
Equity Declared and paid semi-annually Declared and paid semi-annually
Diversified
Real Estate Declared and paid quarterly Declared and paid semi-annually
</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. Additionally, any loss realized on a sale or redemption
of shares of a Fund may be disallowed under "wash sale" rules to the extent the
shares disposed of are replaced with other shares of a Fund within a period of
61 days beginning 30 days before and ending 30 days after the shares are
disposed of, such as pursuant to a dividend reinvestment in shares of a Fund.
If disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired.
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 and, to some extent, the
Growth & Income, Equity Income and Equity Growth Funds will be subject to
foreign withholding taxes with respect to dividends or interest received from
22
<PAGE>
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. However, the
Funds other than the International Equity Fund will not be able to make such an
election.
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.
23
<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, 2000, the Funds paid Mercantile advisory fees as follows:
<TABLE>
<CAPTION>
Investment Advisory Fees
Fund as a % of net assets
---- ------------------------
<S> <C>
Growth & Income Fund................................... 0.501%
Equity Income Fund..................................... 0.496%
Equity Growth Fund..................................... 0.475%
International Equity Fund.............................. 0.729%
Diversified Real Estate Fund........................... 0.474%
</TABLE>
Mercantile and its predecessors have been in the business of managing the
investments of fiduciary and other accounts in the Baltimore area since 1864.
The portfolio managers of the Growth & Income, Equity Income and Equity Growth
Funds are assisted by the following Mercantile Equity investment professionals:
Growth & Income Fund
Helen M. Callahan, CFA, Vice President, who has managed institutional
portfolios at Mercantile for 20 years; Christopher G. Frink, CFA, Vice
President, who has nine years of investment experience and has managed
institutional portfolios at Mercantile since 1997; Kevin Laake, Investment
Officer, who joined Mercantile after graduating from college and has one year
of experience; George S. Michaels, CFA, Senior Vice President, who has managed
institutional equity portfolios at Mercantile for 20 years; and Charles G.
Rishell, CFA, Vice President, who has managed institutional equity portfolios
at Mercantile for 27 years.
Equity Income Fund
Helen M. Callahan, CFA, Vice President, who has managed institutional equity
portfolios at Mercantile for 20 years; Christopher G. Frink, CFA, Vice
President, who has nine years of investment experience and has managed
institutional equity portfolios at Mercantile since 1997; Manind V. Govil, CFA,
Vice President, who has seven years experience managing institutional
portfolios at Mercantile; Kevin Laake, Investment Officer, who joined
Mercantile after graduating from college and has one year of experience; and
Charles G. Rishell, CFA, Vice President, who has managed institutional equity
portfolios at Mercantile for 27 years.
Equity Growth Fund
Helen M. Callahan, CFA, Vice President, who has managed institutional
portfolios at Mercantile for 20 years; Manind V. Govil, CFA, Vice President,
who has seven years of experience managing institutional portfolios at
Mercantile; Kevin Laake, Investment Officer, who joined Mercantile after
graduating from college and has one year of experience; George S. Michaels,
CFA, Senior Vice President, who has managed institutional equity portfolios at
Mercantile for 20 years; and Charles G. Rishell, CFA, Vice President, who has
managed institutional equity portfolios at Mercantile for 27 years.
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 is located at 7 Castle Street, Edinburgh, EH2-3AH, Scotland.
BlackRock is an indirect subsidiary of The PNC Financial Group, Inc., which
holds a 70% equity interest in BlackRock, Inc., the parent company of
BlackRock, with the remaining 30% equity interest held by senior BlackRock
professionals and the public. BlackRock had approximately $7 billion in
international equity assets under management at June 30, 2000, and together
with its other asset management affiliates had assets under management of
approximately $177 billion at June 30, 2000. BlackRock (or its predecessor) has
served as sub-adviser to the International Equity Fund since 1996.
24
<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 Ended
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period...................... $ 24.43 $ 21.37 $ 18.25 $ 14.58 $ 13.42
-------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income....... 0.13 0.18 0.20 0.23 0.33
Net Realized and Unrealized
Gain (Loss) on
Investments................ 2.75 3.62 5.01 4.19 1.89
-------- -------- -------- -------- --------
Total From Investment
Operations................. 2.88 3.80 5.21 4.42 2.22
-------- -------- -------- -------- --------
Less Distributions to
Shareholders from:
Net Investment Income....... (0.16) (0.14) (0.23) (0.25) (0.35)
Net Capital Gains........... (1.65) (0.60) (1.86) (0.50) (0.71)
-------- -------- -------- -------- --------
Total Distributions......... (1.81) (0.74) (2.09) (0.75) (1.06)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period...................... $ 25.50 $ 24.43 $ 21.37 $ 18.25 $ 14.58
======== ======== ======== ======== ========
Total Return................. 12.11% 18.20% 29.40% 31.26% 17.24%
Ratios/Supplemental Data
Net Assets, End of Period
(000)...................... $484,438 $427,038 $373,864 $142,452 $107,233
Ratio of Expenses to Average
Net Assets
After Expense Waiver........ 0.70% 0.70% 0.71% 0.73% 0.73%
Before Expense Waiver....... 0.80% 0.81% 0.88% 0.89% 0.89%
Ratio of Net Investment
Income to Average Net
Assets..................... 0.53% 0.80% 0.99% 1.52% 2.38%
Portfolio turnover rate...... 28.46% 26.48% 24.09% 27.10% 45.15%
</TABLE>
25
<PAGE>
EQUITY INCOME FUND
Financial Highlights for a share of the Equity Income Fund outstanding
throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year 3/1/98/1/
Ended Ended to
5/31/00 5/31/99 5/31/98
-------- -------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........ $ 10.25 $ 10.21 $ 10.00
-------- -------- --------
Income From Investment Operations:
Net Investment Income...................... 0.18 0.17 0.04
Net Realized and Unrealized Gain (Loss) on
Investments............................... (1.22) 1.23 0.19
-------- -------- --------
Total From Investment Operations........... (1.04) 1.40 0.23
-------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income...................... (0.19) (0.17) (0.02)
Net Capital Gains.......................... (1.95) (1.19) --
-------- -------- --------
Total Distributions........................ (2.14) (1.36) (0.02)
-------- -------- --------
Net Asset Value, End of Period.............. $ 7.07 $ 10.25 $ 10.21
======== ======== ========
Total Return................................ (10.98)% 15.30% 2.28%
Ratios/Supplemental Data
Net Assets, End of Period (000)............ $194,948 $314,306 $319,971
Ratio of Expenses to Average Net Assets
After Expense Waiver....................... 0.70% 0.70% 0.70%/2/
Before Expense Waiver...................... 0.80% 0.82% 0.93%/2/
Ratio of Net Investment Income to Average
Net Assets................................ 2.09% 1.77% 1.45%/2/
Portfolio turnover rate..................... 58.67% 24.47% 2.00%
</TABLE>
--------
/1/ Commencement of operations.
/2/ Annualized.
EQUITY GROWTH FUND
Financial Highlights for a share of the Equity Growth Fund outstanding
throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year 3/1/98/1/
Ended Ended to
5/31/00 5/31/99 5/31/98
------- ------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 11.48 $ 10.28 $ 10.00
------- ------- -------
Income From Investment Operations:
Net Investment Income.......................... 0.04 0.04 0.02
Net Realized and Unrealized Gain (Loss) on
Investments................................... 2.01 2.23 0.27
------- ------- -------
Total From Investment Operations............... 2.05 2.27 0.29
------- ------- -------
Less Distributions to Shareholders from:
Net Investment Income.......................... (0.04) (0.05) (0.01)
Net Capital Gains.............................. (0.82) (1.02) --
------- ------- -------
Total Distributions............................ (0.86) (1.07) (0.01)
------- ------- -------
Net Asset Value, End of Period.................. $ 12.67 $ 11.48 $ 10.28
======= ======= =======
Total Return.................................... 17.94% 23.13% 2.89%
Ratios/Supplemental Data
Net Assets, End of Period (000)................ $76,637 $47,521 $34,876
Ratio of Expenses to Average Net Assets
After Expense Waiver........................... 0.70% 0.70% 0.70%/2/
Before Expense Waiver.......................... 0.85% 0.91% 1.02%/2/
Ratio of Net Investment Income to Average Net
Assets........................................ 0.31% 0.38% 0.68%/2/
Portfolio turnover rate......................... 13.66% 62.49% 7.99%
</TABLE>
--------
/1/ Commencement of operations.
/2/ Annualized.
26
<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 Ended
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $ 13.35 $ 13.90 $ 13.18 $ 12.47 $ 11.60
-------- ------- ------- ------- -------
Income From Investment
Operations:
Net Investment Income........... 0.07 0.11 0.12 0.31 0.09
Net Realized and Unrealized Gain
(Loss) on Investments and
Foreign Currency............... 2.89 (0.27) 1.42 0.88 1.51
-------- ------- ------- ------- -------
Total From Investment
Operations..................... 2.96 (0.16) 1.54 1.19 1.60
-------- ------- ------- ------- -------
Less Distributions to
Shareholders from:
Net Investment Income........... (0.07) (0.08) (0.15) (0.24) (0.07)
Net Capital Gains............... (1.34) (0.31) (0.67) (0.24) (0.66)
-------- ------- ------- ------- -------
Total Distributions............. (1.41) (0.39) (0.82) (0.48) (0.73)
-------- ------- ------- ------- -------
Net Asset Value, End of Period... $ 14.90 $ 13.35 $ 13.90 $ 13.18 $ 12.47
======== ======= ======= ======= =======
Total Return..................... 21.73% (1.02)% 12.77% 9.81% 14.27%
Ratios/Supplemental Data
Net Assets, End of Period
(000).......................... $118,382 $81,301 $85,402 $83,313 $75,676
Ratio of Expenses to Average Net
Assets
After Expense Waivers........... 1.00% 1.00% 1.03% 1.05% 1.05%
Before Expense Waiver........... 1.12% 1.14% 1.14% 1.16% 1.17%
Ratio of Net Investments Income
to Average Net Assets.......... 0.50% 0.82% 0.92% 0.97% 0.78%
Portfolio turnover rate.......... 155.72% 67.33% 55.55% 74.15% 53.58%
</TABLE>
DIVERSIFIED REAL ESTATE FUND
Financial Highlights for a share of the Diversified Real Estate Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year 8/1/97/1/
Ended Ended to
5/31/00 5/31/99 5/31/98
------- ------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period............ $ 9.37 $10.13 $10.00
------- ------ ------
Income From Investment Operations:
Net Investment Income.......................... 0.50 0.53 0.35
Net Realized and Unrealized Gain (Loss) on
Investments................................... (0.39) (0.76) 0.09
------- ------ ------
Total From Investment Operations............... 0.11 (0.23) 0.44
------- ------ ------
Less Distributions to Shareholders from:
Net Investment Income.......................... (0.42) (0.52) (0.28)
Return of Capital.............................. (0.07) (0.01) (0.03)
Net Capital Gains.............................. -- -- --
------- ------ ------
Total Distributions............................ (0.49) (0.53) (0.31)
------- ------ ------
Net Asset Value, End of Period.................. $ 8.99 $ 9.37 $10.13
======= ====== ======
Total Return.................................... 1.59% (1.80)% 4.31%
Ratios/Supplemental Data
Net Assets, End of Period (000)................ $12,419 $7,829 $6,677
Ratio of Expenses to Average Net Assets
After Expense Waiver........................... 1.00% 1.00% 1.00%/2/
Before Expense Waiver.......................... 1.34% 1.47% 2.25%/2/
Ratio of Net Investment Income to Average Net
Assets........................................ 5.62% 6.03% 4.17%/2/
Portfolio turnover rate......................... 10.36% 14.35% 0.84%
</TABLE>
--------
/1/ Commencement of operations.
/2/ Annualized.
27
<PAGE>
Service Providers
Management and support services are provided to the Funds by several
organizations.
Investment Adviser and Administrator:
Mercantile-Safe Deposit & Trust Company
Baltimore, Maryland
Sub-Adviser to the International Equity Fund:
BlackRock International, Ltd.
Edinburgh, Scotland
Custodian for each Fund except the International Equity Fund:
The Fifth Third Bank
Cincinnati, Ohio
Custodian for the International Equity Fund:
State Street Bank and Trust Company
North Quincy, Massachusetts
Transfer Agent:
BISYS Fund Services Ohio, Inc.
Columbus, Ohio
Distributor:
BISYS Fund Services Limited Partnership
Columbus, Ohio
<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
Two Hopkins Plaza
Baltimore, Maryland 21201
If you buy your shares through a financial institution, you may contact your
institution for more information.
You may review and obtain copies of the Fund's documents by visiting the SEC's
Public Reference Room in Washington, DC. You may also obtain copies of the
Fund's documents after paying a duplicating fee by writing the SEC's Public
Reference Section, Washington, DC 20549-0102 or by electronic request to
[email protected]. Information on the operation of the public reference room
may be obtained by calling the SEC at (202) 942-8090.
Reports and other information about the Funds are also available on the EDGAR
Database 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.
................................................................................
Prospectus
Prime Money Market Fund
Government Money Market Fund
Limited Maturity Bond Fund
Total Return Bond Fund
September 1, 2000
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
Prime Money Market Fund.................................................. 2
Government Money Market Fund............................................. 4
Limited Maturity Bond Fund............................................... 6
Total Return Bond Fund................................................... 9
Fees and Expenses........................................................ 12
Additional Information about Risk........................................ 13
INVESTING IN THE FUNDS..................................................... 13
Getting Your Investment Started.......................................... 13
How To Buy Fund Shares................................................... 13
How To Sell Fund Shares.................................................. 17
Other Purchase and Redemption Information................................ 18
SHAREHOLDER SERVICES....................................................... 20
Retirement Plans......................................................... 20
Exchange Privilege....................................................... 20
Automatic Investment Plan................................................ 20
Systematic Withdrawals................................................... 21
Directed Reinvestments................................................... 21
DIVIDENDS AND DISTRIBUTIONS................................................ 21
TAX INFORMATION............................................................ 22
MANAGEMENT OF THE COMPANY.................................................. 23
Investment Adviser....................................................... 23
FINANCIAL HIGHLIGHTS....................................................... 24
</TABLE>
<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 & 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. As of June 30, 2000,
Mercantile had approximately $15 billion in assets under management.
An investment in the Funds is not a deposit of Mercantile-Safe Deposit & 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>
-------------------------------------------------------------------------------
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 (which typically includes a
profit for the Fund).
-------------------------------------------------------------------------------
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.
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>
------------------
Best quarter:
1.40% for the quarter ended December 31, 1990
Worst quarter:
0.69% for the quarter ended June 30, 1993
------------------
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./1/ 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, ten years and since inception. The Fund's past performance
does not necessarily indicate how it will perform in the future.
Calendar Year Total Returns
[GRAPH]
1990 8.09%
1991 5.83%
1992 3.45%
1993 2.83%
1994 3.96%
1995 5.71%
1996 5.11%
1997 5.26%
1998 5.24%
1999 4.89%
Year-to-date total return for
the six months ended June 30, 2000: 2.86%
Average Annual Total Returns (for periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Since Inception*
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prime Money Market Fund................ 4.89% 5.24% 5.03% 5.18%
--------------------------------------------------------------------------------
</TABLE>
*July 21, 1989
To obtain the Fund's current 7-day yield please call 1-800-551-2145.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
3
<PAGE>
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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.
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 may 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>
------------------
Best quarter:
1.99% for the quarter ended June 30, 1990
Worst quarter:
0.68% for the quarter ended June 30, 1993
------------------
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./1/ 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. The Fund's past performance does not
necessarily indicate how it will perform in the future.
Calendar Year Total Returns
[GRAPH]
1990 7.95%
1991 5.78%
1992 3.42%
1993 2.80%
1994 3.92%
1995 5.63%
1996 5.09%
1997 5.19%
1998 5.16%
1999 4.83%
Year-to-date total return for the six
months ended June 30, 2000: 2.81%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years Since Inception*
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government Money Market Fund........... 4.83% 5.18% 4.97% 5.12%
--------------------------------------------------------------------------------
</TABLE>
*July 21, 1989
To obtain the Fund's current 7-day yield please call 1-800-551-2145.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
5
<PAGE>
--------------------------------------------------------------------------------
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").
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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.
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.
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.
6
<PAGE>
--------------------------------------------------------------------------------
Portfolio Manager
Mark G. McGlone, Senior Vice President, is the primary portfolio manager for
the Fund. Mr. McGlone has managed institutional fixed income portfolios at
Mercantile for 19 years. He is assisted by the team of John C. Busse,
Investment Officer, who joined Mercantile in 1999 and has two years of
investment experience; Mr. Kevin J. Dachille, Senior Vice President, who has 22
years of investment management experience at Mercantile; and Mira Park,
Investment Officer, who joined Mercantile after graduating from college and has
one year of experience. Mr. McGlone has managed the Fund since 1992.
--------------------------------------------------------------------------------
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.
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 less stringent foreign securities regulations; less stringent
accounting and disclosure standards; 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.
7
<PAGE>
--------------------------------------------------------------------------------
Best quarter: 4.52% for the quarter ended June 30, 1995
Worst quarter: (1.53)% for the quarter ended March 31, 1994
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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.1 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. The Fund's past performance does not necessarily indicate how it will
perform in the future.
Calendar Year Total Returns
[GRAPH]
1992 6.06%
1993 6.33%
1994 (1.26%)
1995 14.41%
1996 3.10%
1997 7.15%
1998 7.11%
1999 1.93%
Year-to-date total return for the six
months ended June 30, 2000: 3.03%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year 5 Years Since Inception*
------------------------------------------------------------------------------
<S> <C> <C> <C>
Limited Maturity Bond Fund.................... 1.93% 6.65% 6.05%
Lehman Brothers Mutual Fund Short 1-5 Year
Government/Corporate Bond Index.............. 2.10% 6.85% 6.59%
------------------------------------------------------------------------------
</TABLE>
*March 14, 1991 for the Fund; February 28, 1991 for the Lehman Brothers Mutual
Fund Short 1-5 Year Government/Corporate Bond Index.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
8
<PAGE>
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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.
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.
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.
9
<PAGE>
--------------------------------------------------------------------------------
Portfolio Manager
Kevin J. Dachille, Senior Vice President, is the primary portfolio manager for
the Fund. Mr. Dachille has managed institutional fixed income portfolios at
Mercantile for 22 years. He is assisted by the team of John C. Busse,
Investment Officer, who joined Mercantile in 1999 and has two years of
investment experience; Mark G. McGlone, Senior Vice President, who has 19 years
of fixed income management experience at Mercantile; and Mira Park, Investment
Officer, who joined Mercantile after graduating from college and has one year
of experience. Mr. Dachille has managed the Fund since it began operations in
1998.
--------------------------------------------------------------------------------
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.
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 less stringent foreign securities regulations; less stringent
accounting and disclosure standards; 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.
10
<PAGE>
--------------------------------------------------------------------------------
Best quarter: 0.82% for the quarter ended September 30, 1999
Worst quarter: (0.24)% for the quarter ended June 30, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Lehman Aggregate Bond Index is an unmanaged index comprised of the Lehman
Brothers Government/Corporate Bond Index, its Mortgage-Backed Securities Index
and its Asset-Backed Securities Index.
--------------------------------------------------------------------------------
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./1/ The bar chart shows the performance of the Fund for 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. The Fund's
past performance does not necessarily indicate how it will perform in the
future.
Calendar Year Total Returns
[GRAPH]
1999 (0.12%)
Year-to-date total return for the six
months ended June 30, 2000: 4.03%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
1 Year Since Inception*
--------------------------------------------------------------------------------
<S> <C> <C>
Total Return Bond Fund................................. (0.12)% 3.62%
Lehman Aggregate Bond Index............................ (0.83)% 3.48%
--------------------------------------------------------------------------------
</TABLE>
*March 1, 1998 for the Fund; February 28, 1998 for the Lehman Aggregate Bond
Index.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
11
<PAGE>
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 Total
Money Money Maturity Return
Market Market Bond Bond
Fund Fund Fund Fund
------ ---------- -------- ------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses:
(expenses that are deducted from Fund
assets)
Management Fees/1/ ......................... 0.25% 0.25% 0.35% 0.35%
Distribution (12b-1) Fees................... None None None None
Other Expenses/1/ .......................... 0.19% 0.19% 0.22% 0.24%
---- ---- ---- ----
Total Annual Fund Operating Expenses/1/ .... 0.44% 0.44% 0.57% 0.59%
</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>
Prime Money Market Fund......................... $45 $141 $246 $555
Government Money Market Fund.................... $45 $141 $246 $555
Limited Maturity Bond Fund...................... $58 $183 $318 $714
Total Return Bond Fund.......................... $60 $189 $329 $738
</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 Funds' Adviser and 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, Other Expenses, and Total Fund Operating Expenses for the Funds, after
taking these waivers into account, are set forth below. These fee waivers may
be revised or cancelled at any time. The Funds' Adviser and administrator have
the right to be reimbursed by the Funds for such amounts prior to the end of
any fiscal year.
<TABLE>
<CAPTION>
Prime Government Limited Total
Money Money Maturity Return
Market Market Bond Bond
Fund Fund Fund Fund
------ ---------- -------- ------
<S> <C> <C> <C> <C>
Management Fees............................ 0.230% 0.220% 0.250% 0.220%
Distribution (12b-1) Fees.................. None None None None
Other Expenses............................. 0.145% 0.155% 0.200% 0.230%
----- ----- ----- -----
Total Annual Fund Operating Expenses....... 0.375% 0.375% 0.450% 0.450%
</TABLE>
12
<PAGE>
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 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.
INVESTING IN THE FUNDS
Getting Your Investment Started
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 & 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. The Company generally requires a minimum initial
investment of $25,000 ($2,000 for IRA accounts), which may be allocated
among one or more of the Company's investment portfolios, including the
Funds. The minimum initial investment in a particular Fund is $500 and the
minimum for subsequent investments is $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.
13
<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 . Make your check
Account payable to M.S.D.
Application and & T. Funds, Inc.
mail it along and mail it to
with a check the address on
payable to M.S.D. the left.
& T. Funds, Inc.
to:
. Please indicate
the particular
Fund in which you
are investing.
M.S.D. & T. Funds,
Inc. P.O. Box
182028 Columbus,
Ohio 43218-2028
. Please include
your account
number on your
check.
To obtain a New
Account
Application, call
1-800-551-2145
--------------------------------------------------------------------------------
By Wire . Before wiring . Instruct your
funds, please bank to wire
call Federal funds to:
1-800-551-2145 Huntington Bank,
for complete Columbus, OH
wiring 43219, Bank
instructions. Routing
#044000024,
M.S.D. & T.
Concentration A/C
# 01899622436.
. Promptly complete
a New Account
Application and
forward it to:
. Be sure to
M.S.D. & T. Funds, include your name
Inc. P.O. Box and your Fund
182028 Columbus, account 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.
--------------------------------------------------------------------------------
14
<PAGE>
. 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 the Funds' transfer agent only on a day on
which shares of a Fund are priced (referred to as a "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 Funds' transfer
agent on a timely basis.
If your purchase order for shares of a Money Market Fund is received by the
Funds' 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
Funds' 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
15
<PAGE>
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 Funds' 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 Funds' transfer agent. If you
purchase shares of a Bond Fund through a Bank and the Funds' 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.
Payments for orders which are not received or accepted will be returned after
prompt inquiry.
If you purchase shares of a Bond Fund directly through the Company and if your
purchase order, in proper form (including all necessary documentation and
signature guarantees, where required) and accompanied by payment, is received
by the Funds' 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 Funds' 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.
A Fund may hold foreign securities that trade on weekends or other days when
the Fund does not price its shares. Therefore, the value of such securities may
change on days when shareholders will not be able to purchase or redeem shares.
16
<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 only redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you can redeem shares using 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 the account
(available only name, account number, name of Fund and amount of
if you checked redemption ($1,000 minimum per transaction).
the appropriate
box on the New . If you have already opened your account and would like to
Account add the wire redemption feature, send a written request
Application) 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 the account
(automatic name, account number, name of Fund and amount of
unless you redemption.
checked the
appropriate box . If you have already opened your account and would like to
on the New add the telephone redemption feature, send a written
Account request to: M.S.D. & T. Funds, Inc., P.O. Box 182028,
Application) Columbus, Ohio 43218-2028. The request must be signed
(and signatures guaranteed) by each account owner.
17
<PAGE>
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
(including all necessary documentation and signature guarantees, where
required) by the Funds' 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 Funds' 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 Funds' transfer agent. The Automated Clearing House ("ACH")
system may also be utilized for payment of redemption proceeds. The Company
normally pays redemption proceeds in cash, but it has the right to deliver
readily marketable portfolio securities having a market value equal to the
redemption price. When you sell these portfolio securities, you'll pay
brokerage charges.
Banks are responsible for transmitting their customers' redemption orders to
the Funds' 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
18
<PAGE>
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 Funds' 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 (for example, if the Company believes that telephone
instructions are fraudulent or unauthorized). 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 by Securities and Exchange Commission
("SEC") rules (for example, for any period during which the Exchange is closed,
other than customary weekend and holiday closings, or during which trading on
the Exchange is restricted).
If you attempt to sell shares you recently purchased with a personal check, the
Company may delay processing your request until it collects payment for those
shares. This process may take up to 15 days, so if you plan to sell shares
shortly after purchasing them, you may want to consider purchasing shares with
a certified check or via electronic transfer to avoid delays.
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.
For current yield, purchase and redemption information, call 1-800-551-2145.
19
<PAGE>
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 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.
20
<PAGE>
The Automatic Investment Plan is one way in which you can 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 those months corresponding to your selection of monthly,
quarterly, semi-annual or annual withdrawals, and distributed in cash or
reinvested in shares of another Fund or portfolio offered by the Company. If
the fifteenth day of the month is not a Business Day, then the withdrawal will
be made on the preceding Business Day. 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 your dividends and
distributions will
21
<PAGE>
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 the 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."
In the case of the Limited Maturity Bond and Total Return Bond Funds, 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. Additionally, any loss realized on a sale or redemption
of shares of a Fund may be disallowed under "wash sale" rules to the extent the
shares disposed of are replaced with other shares of a Fund within a period of
61 days beginning 30 days before and ending 30 days after the shares are
disposed of, such as pursuant to a dividend reinvestment in shares of a Fund.
If disallowed, the loss will be reflected in an adjustment to the basis of the
shares acquired.
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.
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.
22
<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, 2000, 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............................. 0.254%
Total Return Bond Fund................................. 0.220%
</TABLE>
Mercantile and its predecessors have been in the business of managing the
investments of fiduciary and other accounts in the Baltimore area since 1864.
23
<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.
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
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
-------- -------- -------- -------- --------
<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....... 0.0522 0.0486 0.0521 0.0498 0.0532
-------- -------- -------- -------- --------
Total From Investment
Operations................. 0.0522 0.0486 0.0521 0.0498 0.0532
-------- -------- -------- -------- --------
Less Distributions to
Shareholders from:
Net Investment Income....... (0.0522) (0.0486) (0.0521) (0.0498) (0.0532)
-------- -------- -------- -------- --------
Total Distributions......... (0.0522) (0.0486) (0.0521) (0.0498) (0.0532)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return................. 5.34% 4.97% 5.33% 5.10% 5.45%
Ratios/Supplemental Data
Net Assets, End of Period
(000)...................... $514,728 $530,835 $448,751 $368,853 $326,878
Ratio of Expenses to Average
Net Assets
After Expense Waiver........ 0.38% 0.38% 0.42% 0.43% 0.43%
Before Expense Waiver....... 0.44% 0.45% 0.47% 0.48% 0.48%
Ratio of Net Investment
Income to Average Net
Assets..................... 5.22% 4.84% 5.21% 4.98% 5.33%
GOVERNMENT MONEY MARKET FUND
Financial Highlights for a share of the Government Money Market Fund
outstanding throughout each of the periods indicated:
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
-------- -------- -------- -------- --------
<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....... 0.0514 0.0478 0.0515 0.0495 0.0526
-------- -------- -------- -------- --------
Total From Investment
Operations................. 0.0514 0.0478 0.0515 0.0495 0.0526
-------- -------- -------- -------- --------
Less Distributions to
Shareholders from:
Net Investment Income....... (0.0514) (0.0478) (0.0515) (0.0495) (0.0526)
-------- -------- -------- -------- --------
Total Distributions......... (0.0514) (0.0478) (0.0515) (0.0495) (0.0526)
-------- -------- -------- -------- --------
Net Asset Value, End of
Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total Return................. 5.27% 4.89% 5.27% 5.06% 5.39%
Ratios/Supplemental Data
Net Assets, End of Period
(000)...................... $476,890 $445,522 $391,133 $340,809 $264,725
Ratio of Expenses to Average
Net Assets
After Expense Waiver........ 0.38% 0.38% 0.42% 0.43% 0.43%
Before Expense Waiver....... 0.44% 0.45% 0.46% 0.49% 0.48%
Ratio of Net Investment
Income to Average Net
Assets..................... 5.15% 4.76% 5.15% 4.95% 5.27%
</TABLE>
24
<PAGE>
LIMITED MATURITY BOND FUND
Financial Highlights for a share of the Limited Maturity Bond Fund outstanding
throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 10.32 $ 10.45 $ 10.31 $ 10.19 $ 10.43
-------- -------- -------- ------- -------
Income From Investment
Operations:
Net Investment Income......... 0.58 0.58 0.60 0.59 0.59
Net Realized and Unrealized
Gain (Loss) on Investments... (0.24) (0.10) 0.22 0.12 (0.24)
-------- -------- -------- ------- -------
Total From Investment
Operations................... 0.34 0.48 0.82 0.71 0.35
-------- -------- -------- ------- -------
Less Distributions to
Shareholders from:
Net Investment Income......... (0.58) (0.58) (0.60) (0.59) (0.59)
Net Capital Gains............. (0.01) (0.03) (0.08) -- --
-------- -------- -------- ------- -------
Total Distributions........... (0.59) (0.61) (0.68) (0.59) (0.59)
-------- -------- -------- ------- -------
Net Asset Value, End of
Period........................ $ 10.07 $ 10.32 $ 10.45 $ 10.31 $ 10.19
======== ======== ======== ======= =======
Total Return................... 3.42% 4.63% 8.15% 7.12% 3.38%
Ratios/Supplemental Data
Net Assets, End of Period
(000)......................... $161,507 $166,257 $151,922 $43,010 $44,102
Ratio of Expenses to Average
Net Assets
After Expense Waiver.......... 0.45% 0.45% 0.50% 0.60% 0.60%
Before Expense Waiver......... 0.57% 0.58% 0.78% 0.75% 0.72%
Ratio of Net Investment Income
to Average Net Assets........ 5.67% 5.54% 5.71% 5.72% 5.66%
Portfolio turnover rate........ 30.95% 59.73% 48.24% 20.92% 52.79%
</TABLE>
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 Year 3/1/98/1/
Ended Ended to
5/31/00 5/31/99 5/31/98
-------- -------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 9.82 $ 10.02 $ 10.00
-------- -------- --------
Income From Investment Operations:
Net Investment Income....................... 0.60 0.59 0.15
Net Realized and Unrealized Gain (Loss) on
Investments................................ (0.36) (0.14) 0.02
-------- -------- --------
Total From Investment Operations............ 0.24 0.45 0.17
-------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income....................... (0.60) (0.59) (0.15)
Net Capital Gains........................... (0.03) (0.06) --
-------- -------- --------
Total Distributions......................... (0.63) (0.65) (0.15)
-------- -------- --------
Net Asset Value, End of Period............... $ 9.43 $ 9.82 $ 10.02
======== ======== ========
Total Return................................. 2.55% 4.48% 1.69%
Ratios/Supplemental Data
Net Assets, End of Period (000)............. $125,962 $107,149 $101,363
Ratio of Expenses to Average Net Assets
After Expense Waiver........................ 0.45% 0.45% 0.45%/2/
Before Expense Waiver....................... 0.59% 0.62% 0.73%/2/
Ratio of Net Investment Income to Average
Net Assets................................. 6.30% 5.82% 5.89%/2/
Portfolio turnover rate...................... 38.96% 74.94% 10.51%
</TABLE>
--------
/1/ Commencement of operations.
/2/ Annualized.
25
<PAGE>
Service Providers
Management and support services are provided to the Funds by several
organizations.
Investment Adviser and Administrator:
Mercantile-Safe Deposit & Trust Company
Baltimore, Maryland
Custodian:
The Fifth Third Bank
Cincinnati, Ohio
Transfer Agent:
BISYS Fund Services Ohio, Inc.
Columbus, Ohio
Distributor:
BISYS Fund Services Limited Partnership
Columbus, Ohio
<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
Two Hopkins Plaza
Baltimore, Maryland 21201
If you buy your shares through a financial institution, you may contact your
institution for more information.
You may review and obtain copies of the Fund's documents by visiting the SEC's
Public Reference Room in Washington, DC. You may also obtain copies of the
Fund's documents after paying a duplicating fee by writing the SEC's Public
Reference Section, Washington, DC 20549-0102 or by electronic request to
[email protected]. Information on the operation of the public reference room
may be obtained by calling the SEC at (202)942-8090.
Reports and other information about the Funds are also available on the EDGAR
Database 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.
................................................................................
Prospectus
Tax-Exempt Money Market Fund
Maryland Tax-Exempt Bond Fund
Intermediate Tax-Exempt Bond Fund
National Tax-Exempt Bond Fund
September 1, 2000
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........................................ 7
National Tax-Exempt Bond Fund............................................ 10
Fees and Expenses........................................................ 13
Additional Information about Risk........................................ 14
INVESTING IN THE FUNDS..................................................... 14
Getting Your Investment Started.......................................... 14
How To Buy Fund Shares................................................... 14
How To Sell Fund Shares.................................................. 17
Other Purchase and Redemption Information................................ 19
SHAREHOLDER SERVICES....................................................... 20
Exchange Privilege....................................................... 20
Automatic Investment Plan................................................ 21
Systematic Withdrawals................................................... 21
Directed Reinvestments................................................... 21
DIVIDENDS AND DISTRIBUTIONS................................................ 22
TAX INFORMATION............................................................ 22
MANAGEMENT OF THE COMPANY.................................................. 24
Investment Adviser....................................................... 24
FINANCIAL HIGHLIGHTS....................................................... 25
</TABLE>
<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 & 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. As of June 30, 2000,
Mercantile had approximately $15 billion in assets under management.
An investment in the Funds is not a deposit of Mercantile-Safe Deposit & 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>
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 both regular federal income tax and the federal alternative minimum
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. Accordingly, 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.
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.
2
<PAGE>
--------------------------------------------------------------------------------
Best quarter:
1.96% for the quarter
ended September 30, 1990
Worst quarter:
0.47% for the quarter
ended March 31, 1993
--------------------------------------------------------------------------------
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.
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./1/ 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, ten years and since inception. The Fund's past performance
does not necessarily indicate how it will perform in the future.
[GRAPH]
Calendar Year Total Returns
1990 5.61%
1991 4.07%
1992 2.59%
1993 2.03%
1994 2.47%
1995 3.45%
1996 3.07%
1997 3.23%
1998 3.07%
1999 2.86%
Year-to-date total return for the six months ended June 30, 2000: 1.77%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
1 Year 5 Years 10 Years Inception*
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Exempt Money Market Fund................. 2.86% 3.14% 3.24% 3.35%
--------------------------------------------------------------------------------
</TABLE>
*July 21, 1989
To obtain the Fund's current 7-day yield please call 1-800-551-2145.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
3
<PAGE>
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 both regular federal income
tax and the federal alternative minimum 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. Accordingly, 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.
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.
4
<PAGE>
--------------------------------------------------------------------------------
Portfolio Manager
Ronald M. Shostek, CFA, Vice President, is the primary manager for the Fund.
From 1992 to 1999, Mr. Shostek was a portfolio manager, trader, and underwriter
of tax-exempt securities at Student Loan Marketing Association (Sallie Mae) and
its broker/dealer subsidiary, Education Securities, Inc. Mr. Shostek has eight
years of investment experience. Mr. Shostek has managed the fund since
February, 2000.
--------------------------------------------------------------------------------
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.
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 may advance the Fund's investment objective.
It is possible, however, that these evaluations will prove to be inaccurate.
5
<PAGE>
-------------------------------------------------------------------------------
Best quarter:
6.08% for the quarter ended March 31, 1995
Worst quarter:
(5.65)% for the quarter ended March 31, 1994
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
The Lehman Brothers Municipal Bond Index is an unmanaged index that tracks the
performance of municipal bonds.
-------------------------------------------------------------------------------
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./1/ 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. The Fund's past performance does not necessarily indicate how it
will perform in the future.
[GRAPH]
Calendar Year Total Returns
1993 12.56%
1994 (7.05)%
1995 14.57%
1996 3.12%
1997 8.57%
1998 5.56%
1999 (2.12)%
Year-to-date total return for the six months ended June 30, 2000: 3.75%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Maryland Tax-Exempt Bond Fund....................... (2.12)% 5.79% 5.08%
Lehman Brothers Municipal Bond Index................ (2.07)% 6.91% 6.22%
--------------------------------------------------------------------------------
</TABLE>
*June 2, 1992 for the Fund; May 31, 1992 for the Lehman Brothers Muncipal Bond
Index.
--------
/1/Both the bar chart and the table assume reinvestment of all dividends and
distributions.
6
<PAGE>
-------------------------------------------------------------------------------
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.
-------------------------------------------------------------------------------
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 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 both regular federal income
tax and the federal alternative minimum 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. Accordingly, 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
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.
7
<PAGE>
--------------------------------------------------------------------------------
Portfolio Manager
Ronald M. Shostek, CFA, Vice President, is the primary manager for the Fund.
From 1992 to 1999, Mr. Shostek was a portfolio manager, trader, and underwriter
of tax-exempt securities at Student Loan Marketing Association (Sallie Mae) and
its broker/dealer subsidiary, Education Securities, Inc. Mr. Shostek has eight
years of investment experience. Mr. Shostek has managed the fund since
February, 2000.
--------------------------------------------------------------------------------
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.
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 may advance the Fund's investment objective.
It is possible, however, that these evaluations will prove to be inaccurate.
8
<PAGE>
--------------------------------------------------------------------------------
Best quarter:
0.94% for the quarter ended
September 30, 1999
Worst quarter:
(1.18)% for the quarter ended June 30, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Lehman Brothers 7-Year Municipal Bond Index is an unmanaged index that
tracks the performance of municipal bonds with remaining maturities of 7 years
or less.
--------------------------------------------------------------------------------
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./1/ The bar chart shows the performance of the Fund for the 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. The Fund's
past performance does not necessarily indicate how it will perform in the
future.
[GRAPH]
Calendar Year Total Return
1999 0.85%
Year-to-date total return for the six months ended June 30, 2000: 1.93%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
1 Year Inception*
--------------------------------------------------------------------------------
<S> <C> <C>
Intermediate Tax-Exempt Bond Fund........................... 0.85% 3.07%
Lehman Brothers 7-Year Municipal Bond Index................. (0.14)% 2.63%
--------------------------------------------------------------------------------
</TABLE>
*March 1, 1998 for the Fund; February 28, 1998 for the Lehman Brothers 7-Year
Municipal Bond Index.
--------
/1/Both the bar chart and the table assume reinvestment of all dividends and
distributions.
9
<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 both regular federal income
tax and the federal alternative minimum 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. Accordingly, 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.
10
<PAGE>
--------------------------------------------------------------------------------
Portfolio Manager
Ronald M. Shostek, CFA, Vice President, is the primary manager for the Fund.
From 1992 to 1999, Mr. Shostek was a portfolio manager, trader, and underwriter
of tax-exempt securities at Student Loan Marketing Association (Sallie Mae) and
its broker/dealer subsidiary, Education Securities, Inc. Mr. Shostek has eight
years of investment experience. Mr. Shostek has managed the fund since
February, 2000.
--------------------------------------------------------------------------------
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 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 may advance the Fund's investment objective.
It is possible, however, that these evaluations will prove to be inaccurate.
11
<PAGE>
--------------------------------------------------------------------------------
Best quarter:
0.77% for the quarter ended March 31, 1999
Worst quarter:
(1.91)% for the quarter ended June 30, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The Lehman Brothers Municipal Bond Index is an unmanaged index that tracks the
performance of municipal bonds.
--------------------------------------------------------------------------------
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./1/ The bar chart shows the performance of the Fund for the past 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. The Fund's
past performance does not necessarily indicate how it will perform in the
future.
[GRAPH]
Calendar Year Total Return
1999 (1.41)%
Year-to-date total return for the six months ended June 30, 2000: 3.73%
Average Annual Total Returns (for the periods ended December 31, 1999)
<TABLE>
<CAPTION>
Since
1 Year Inception*
--------------------------------------------------------------------------------
<S> <C> <C>
National Tax-Exempt Bond Fund............................... (1.41)% 2.29%
Lehman Brothers Municipal Bond Index........................ (2.07)% 1.72%
--------------------------------------------------------------------------------
</TABLE>
*March 1, 1998 for the Fund; February 28, 1998 for the Lehman Brothers
Municipal Bond Index.
--------
/1/ Both the bar chart and the table assume reinvestment of all dividends and
distributions.
12
<PAGE>
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 Bond Bond Bond
Fund Fund Fund Fund
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses:
(expenses that are deducted from
Fund assets)
Management Fees/1/ ............. 0.25% 0.50% 0.50% 0.50%
Distribution (12b-1) Fees....... None None None None
Other Expenses/1/ .............. 0.21% 0.33% 0.24% 0.22%
---- ---- ---- ----
Total Annual Fund Operating
Expenses/1/ ................... 0.46% 0.83% 0.74% 0.72%
</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.................... $47 $148 $258 $ 579
Maryland Tax-Exempt Bond Fund................... $85 $265 $461 $1,025
Intermediate Tax-Exempt Bond Fund............... $76 $237 $411 $ 918
National Tax-Exempt Bond Fund................... $74 $230 $401 $ 894
</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 Funds' Adviser and 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, Other Expenses, and Total Fund Operating Expenses for the Funds, after
taking these waivers into account, are set forth below. These fee waivers may
be revised or cancelled at any time. The Funds' Adviser and administrator have
the right to be reimbursed by the Funds for such amounts prior to the end of
any fiscal year.
<TABLE>
<CAPTION>
Tax-Exempt Maryland Intermediate National
Money Tax-Exempt Tax-Exempt Tax-Exempt
Market Bond Bond Bond
Fund Fund Fund Fund
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Management Fees................. 0.220% 0.170% 0.220% 0.240%
Distribution (12b-1) Fees....... None None None None
Other Expenses.................. 0.155% 0.280% 0.230% 0.210%
----- ----- ----- -----
Total Annual Fund Operating
Expenses....................... 0.375% 0.450% 0.450% 0.450%
</TABLE>
13
<PAGE>
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 Bond, 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.
INVESTING IN THE FUNDS
Getting Your Investment Started
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 & 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. The Company generally requires a minimum initial
investment of $25,000 ($2,000 for IRA accounts), which may be allocated
among one or more of the Company's investment portfolios, including the
Funds. The minimum initial investment in a particular Fund is $500 and the
minimum for subsequent investments is $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.
14
<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 . Make your check
Account payable to
Application and M.S.D. & T.
mail it along Funds, Inc. and
with a check mail it to the
payable to M.S.D. address on the
& T. Funds, Inc. left.
to:
. Please indicate
M.S.D. & T. the particular
Funds, Inc. P.O. Fund in which you
Box 182028 are investing.
Columbus, OH
43218-2028
. Please include
To obtain a New your account
Account number on your
Application, call check.
1-800-551-2145
--------------------------------------------------------------------------------
By Wire . Before wiring . Instruct your
funds, please bank to wire
call 1-800-551- Federal funds to:
2145 for complete Huntington Bank,
wiring Columbus, OH
instructions. 43219, Bank
Routing
. Promptly complete #044000024,
a New Account M.S.D. & T.
Application and Concentration A/C
forward it to: #01899622436.
M.S.D. & T. . Be sure to
Funds, Inc. P.O. include your name
Box 182028 and your Fund
Columbus, OH account 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.
--------------------------------------------------------------------------------
15
<PAGE>
. 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 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 the Funds' transfer agent only on a day
when the shares of a Fund are priced (referred to as a "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 Funds' transfer
agent on a timely basis.
If your purchase order for shares of the Money Market Fund is received by the
Funds' 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
Funds' 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
16
<PAGE>
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 Funds' 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 Funds' transfer agent. If you
purchase shares of a Bond Fund through a Bank and the Funds' 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.
Payments for orders which are not received or accepted will be returned after
prompt inquiry.
If you purchase shares of a Bond Fund directly through the Company and if your
purchase order, in proper form (including all necessary documentation and
signature guarantees, where required) and accompanied by payment, is received
by the Funds' 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 Funds' 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 only redeem shares in
accordance with the instructions pertaining to that account. If you purchased
your shares directly from the Company, you can redeem shares using 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.
--------------------------------------------------------------------------------
17
<PAGE>
By Wire . Call 1-800-551-2145. You will need to provide the account
(available only name, account number, name of Fund and amount of
if you checked redemption ($1,000 minimum per transaction).
the appropriate
box on the New . If you have already opened your account and would like to
Account add the wire redemption feature, send a written request
Application) 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 the account
(automatic name, account number, name of Fund and amount of
unless you redemption.
checked the
appropriate box . If you have already opened your account and would like to
on the New add the telephone redemption feature, send a written
Account request to: M.S.D. & T. Funds, Inc., P.O. Box 182028,
Application) 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
(including all necessary documentation and signature guarantees, where
required) by the Funds' transfer agent are processed at their net asset
value per share next determined after receipt. On a Business Day when the
Exchange closes early due to a partial holiday or otherwise, the Company
reserves the right to advance the time at which redemption orders must be
received in order to be processed on that Business Day.
Payment for redemption orders with respect to the Money Market Fund which are
received by the Funds' 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
18
<PAGE>
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 Funds' transfer agent. The
Automated Clearing House ("ACH") system may also be utilized for payment of
redemption proceeds. The Company normally pays redemption proceeds in cash, but
it has the right to deliver readily marketable portfolio securities having a
market value equal to the redemption price. When you sell these portfolio
securities, you'll pay brokerage charges.
Banks are responsible for transmitting their customers' redemption orders to
the Funds' 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 Funds' 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 (for example, if the Company believes that telephone
instructions are fraudulent or unauthorized). 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.
19
<PAGE>
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 by Securities and Exchange Commission
("SEC") rules (for example, for any period during which the Exchange is closed,
other than customary weekend and holiday closings, or during which trading on
the Exchange is restricted).
If you attempt to sell shares you recently purchased with a personal check, the
Company may delay processing your request until it collects payment for those
shares. This process may take up to 15 days, so if you plan to sell shares
shortly after purchasing them, you may want to consider purchasing shares with
a certified check or via electronic transfer to avoid delays.
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.
For current yield, purchase and redemption information, call 1-800-551-2145.
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.
20
<PAGE>
Automatic Investment Plan
One easy way to pursue your financial goals is to invest money regularly. The
Company offers an Automatic Investment Plan--a convenient service that lets you
transfer money from your bank account into your Fund account automatically on a
regular basis. At your option, your bank account will be debited in a
particular amount ($100 minimum) that you have specified, and Fund shares will
automatically be purchased on the 15th day of each month or, if that day is not
a Business Day, on the preceding Business Day. Your bank account must be
maintained at a domestic financial institution that is an ACH member. You will
be responsible for any loss or expense to the Funds if an ACH transfer is
rejected. To select this option, or for more information, please call 1-800-
551-2145.
The Automatic Investment Plan is one way in which you can use "Dollar Cost
Averaging" in making investments. Dollar Cost Averaging can be useful in
investing in portfolios such as the Maryland Tax-Exempt Bond, Intermediate Tax-
Exempt Bond and National Tax-Exempt Bond Funds whose price per share
fluctuates. Instead of trying to time market performance, a fixed dollar amount
is invested in Fund shares at predetermined intervals. This may help you to
reduce your average cost per share because the agreed upon fixed investment
amount allows more shares to be purchased during periods of lower share prices
and fewer shares during periods of higher prices. In order to be effective,
Dollar Cost Averaging should usually be followed on a sustained, consistent
basis. You should be aware, however, that shares bought using Dollar Cost
Averaging are made without regard to their price on the day of investment or to
market trends. In addition, while you may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if you ultimately redeem your shares at
a price which is lower than their purchase price.
Systematic Withdrawals
The Company offers a convenient way of withdrawing money from your Fund
account. You may request regular monthly, quarterly, semi-annual or annual
withdrawals in any amount of $100 or more. The withdrawal will be made on the
fifteenth day of those months corresponding to your selection of monthly,
quarterly, semi-annual or annual withdrawals, and distributed in cash or
reinvested in shares of another Fund or portfolio offered by the Company. If
the fifteenth day of the month is not a Business Day, then the withdrawal will
be made on the preceding Business Day. 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.
21
<PAGE>
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."
In the case of the Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and
National Tax-Exempt Bond Funds, 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. Additionally, any loss realized on a sale
or redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other
22
<PAGE>
shares of a Fund within a period of 61 days beginning 30 days before and ending
30 days after the shares are disposed of, such as pursuant to a dividend
reinvestment in shares of a Fund. If disallowed, the loss will be reflected in
an adjustment to the basis of the shares acquired.
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 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 tax-exempt obligations
issued by the State of Maryland or its political subdivision, agencies,
instrumentalities and authorities; and
. 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.
23
<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, 2000, 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.......................... 0.170%
Intermediate Tax-Exempt Bond Fund...................... 0.220%
National Tax-Exempt Bond Fund.......................... 0.240%
</TABLE>
Mercantile and its predecessors have been in the business of managing the
investments of fiduciary and other accounts in the Baltimore area since 1864.
24
<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
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
-------- -------- ------- ------- -------
<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......... 0.0317 0.0285 0.0318 0.0304 0.0321
-------- -------- ------- ------- -------
Total From Investment
Operations................... 0.0317 0.0285 0.0318 0.0304 0.0321
-------- -------- ------- ------- -------
Less Distributions to
Shareholders from:
Net Investment Income......... (0.0317) (0.0285) (0.0318) (0.0304) (0.0321)
-------- -------- ------- ------- -------
Total Distributions........... (0.0317) (0.0285) (0.0318) (0.0304) (0.0321)
-------- -------- ------- ------- -------
Net Asset Value, End of
Period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= ======= =======
Total Return................... 3.21% 2.89% 3.22% 3.09% 3.26%
Ratios/Supplemental Data
Net Assets, End of Period
(000)........................ $148,029 $143,221 $89,965 $79,492 $50,137
Ratio of Expenses to Average
Net Assets
After Expense Waiver.......... 0.38% 0.38% 0.43% 0.43% 0.43%
Before Expense Waiver......... 0.46% 0.49% 0.50% 0.53% 0.51%
Ratio of Net Investment Income
to Average Net Assets........ 3.16% 2.80% 3.17% 3.05% 3.22%
MARYLAND TAX-EXEMPT BOND FUND
Financial Highlights for a share of the Maryland Tax-Exempt Bond Fund
outstanding throughout each of the periods indicated:
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
5/31/00 5/31/99 5/31/98 5/31/97 5/31/96
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................ $ 10.78 $ 10.82 $ 10.38 $ 10.20 $ 10.40
-------- -------- ------- ------- -------
Income From Investment
Operations:
Net Investment Income......... 0.45 0.45 0.48 0.50 0.49
Net Realized and Unrealized
Gain (Loss) on Investments... (0.55) (0.04) 0.44 0.18 (0.20)
-------- -------- ------- ------- -------
Total From Investment
Operations................... (0.10) 0.41 0.92 0.68 0.29
-------- -------- ------- ------- -------
Less Distributions to
Shareholders from:
Net Investment Income......... (0.45) (0.45) (0.48) (0.50) (0.49)
-------- -------- ------- ------- -------
Total Distributions........... (0.45) (0.45) (0.48) (0.50) (0.49)
-------- -------- ------- ------- -------
Net Asset Value, End of
Period........................ $ 10.23 $ 10.78 $ 10.82 $ 10.38 $ 10.20
======== ======== ======= ======= =======
Total Return................... (0.87)% 3.81% 9.03% 6.80% 2.84%
Ratios/Supplemental Data
Net Assets, End of Period
(000)........................ $ 31,472 $ 26,565 $14,980 $ 8,298 $10,186
Ratio of Expenses to Average
Net Assets
After Expense Waiver.......... 0.45% 0.45% 0.49% 0.55% 0.62%
Before Expense Waiver......... 0.83% 0.87% 1.03% 1.13% 1.04%
Ratio of Net Investment Income
to Average Net Assets........ 4.37% 4.12% 4.49% 4.84% 4.74%
Portfolio turnover rate........ 60.16% 22.78% 55.95% 28.11% 20.58%
</TABLE>
25
<PAGE>
INTERMEDIATE TAX-EXEMPT BOND FUND
Financial Highlights for a share of the Intermediate Tax-Exempt Bond Fund
outstanding throughout each of the periods indicated:
<TABLE>
<CAPTION>
Year Year 3/1/98/1/
Ended Ended to
5/31/00 5/31/99 5/31/98
-------- -------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 10.00 $ 10.01 $ 10.00
-------- -------- --------
Income From Investment Operations:
Net Investment Income....................... 0.38 0.38 0.10
Net Realized and Unrealized Gain (Loss) on
Investments................................ (0.32) 0.07 0.01
-------- -------- --------
Total From Investment Operations............ 0.06 0.45 0.11
-------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income....................... (0.38) (0.38) (0.10)
Net Capital Gains........................... (0.06) (0.08) --
-------- -------- --------
Total Distributions......................... (0.44) (0.46) (0.10)
-------- -------- --------
Net Asset Value, End of Period............... $ 9.62 $ 10.00 $ 10.01
======== ======== ========
Total Return................................. 0.64% 4.58% 1.07%
Ratios/Supplemental Data
Net Assets, End of Period (000)............. $ 81,498 $ 90,895 $ 93,992
Ratio of Expenses to Average Net Assets
After Expense Waiver........................ 0.45% 0.45% 0.45%/2/
Before Expense Waiver....................... 0.74% 0.76% 0.88%/2/
Ratio of Net Investment Income to Average
Net Assets................................. 3.85% 3.80% 3.84%/2/
Portfolio turnover rate...................... 140.28% 149.02% 10.13%
--------
/1/ Commencement of operations.
/2/ Annualized.
NATIONAL TAX-EXEMPT BOND FUND
Financial Highlights for a share of the National Tax-Exempt Bond Fund
outstanding throughout each of the periods indicated:
<CAPTION>
Year Year 3/1/98/1/
Ended Ended to
5/31/00 5/31/99 5/31/98
-------- -------- ---------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period......... $ 9.93 $ 10.05 $ 10.00
-------- -------- --------
Income From Investment Operations:
Net Investment Income....................... 0.45 0.44 0.11
Net Realized and Unrealized Gain (Loss) on
Investments................................ (0.51) -- 0.05
-------- -------- --------
Total From Investment Operations............ (0.06) 0.44 0.16
-------- -------- --------
Less Distributions to Shareholders from:
Net Investment Income....................... (0.45) (0.44) (0.11)
Net Capital Gains........................... (0.04) (0.12) --
-------- -------- --------
Total Distributions......................... (0.49) (0.56) (0.11)
-------- -------- --------
Net Asset Value, End of Period............... $ 9.38 $ 9.93 $ 10.05
======== ======== ========
Total Return................................. (0.55)% 4.43% 1.64%
Ratios/Supplemental Data
Net Assets, End of Period (000)............. $172,920 $178,067 $178,116
Ratio of Expenses to Average Net Assets
After Expense Waiver........................ 0.45% 0.45% 0.45%/2/
Before Expense Waiver....................... 0.72% 0.74% 0.86%/2/
Ratio of Net Investment Income to Average
Net Assets................................. 4.69% 4.36% 4.49%/2/
Portfolio turnover rate...................... 113.69% 123.30% 7.37%
</TABLE>
--------
/1/ Commencement of operations.
/2/ Annualized.
26
<PAGE>
Service Providers
Management and support services are provided to the Funds by several
organizations.
Investment Adviser and Administrator:
Mercantile-Safe Deposit & Trust Company
Baltimore, Maryland
Custodian:
The Fifth Third Bank
Cincinnati, Ohio
Transfer Agent:
BISYS Fund Services Ohio, Inc.
Columbus, Ohio
Distributor:
BISYS Fund Services Limited Partnership
Columbus, Ohio
<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
Two Hopkins Plaza
Baltimore, Maryland 21201
If you buy your shares through a financial institution, you may contact your
institution for more information.
You may review and obtain copies of the Fund's documents by visiting the SEC's
Public Reference Room in Washington, DC. You may also obtain copies of the
Fund's documents after paying a duplicating fee by writing the SEC's Public
Reference Section, Washington, DC 20549-0102 or by electronic request to
[email protected]. Information on the operation of the public reference room
may be obtained by calling the SEC at (202) 942-8090.
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 1, 2000
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND RISKS................. 3
FUNDAMENTAL LIMITATIONS................................... 39
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............ 42
NET ASSET VALUE........................................... 43
ADDITIONAL INFORMATION CONCERNING TAXES................... 44
MANAGEMENT OF THE COMPANY................................. 48
INDEPENDENT ACCOUNTANTS................................... 55
COUNSEL................................................... 55
ADDITIONAL INFORMATION CONCERNING SHARES.................. 56
PERFORMANCE INFORMATION................................... 58
MISCELLANEOUS............................................. 66
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 August 31, 2000 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
Fund, Diversified Real Estate Fund, Limited Maturity Bond Fund, Total Return
Bond Fund, Maryland Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and
National Tax-Exempt Bond Fund of M.S.D. T. Funds, Inc. This Statement of
Additional Information is incorporated by reference in its entirety into the
Prospectuses. Because this Statement of Additional Information is not itself a
prospectus, no investment in shares of any Fund should be made solely upon the
information contained herein. Copies of the Prospectuses may be obtained by
calling 1-800-551-2145 or by writing M.S.D. & T. Funds, Inc., c/o BISYS Fund
Services 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 addition, the dividends paid by
a Fund will go up and down. Mercantile-Safe Deposit and Trust Company serves as
investment adviser and administrator to the Funds, is paid fees for its
services, and is not affiliated with BISYS Fund Services Limited Partnership,
the Funds' distributor.
-2-
<PAGE>
M.S.D. & T. FUNDS, INC.
M.S.D. & T. Funds, Inc. (the "Company") is a Maryland corporation
which commenced operations on July 21, 1989 as a no-load, open-end,
professionally managed investment company. The Company currently offers shares
in 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"); six 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 the Capital
Opportunities Fund, which is described in a separate prospectus and statement of
additional information); 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"). The Money Market Funds, Equity Funds and Bond Funds 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." Each Fund, except the Maryland Tax-Exempt Bond Fund, is
classified as diversified under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Maryland Tax-Exempt Bond Fund is classified as non-
diversified under the 1940 Act.
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);
-3-
<PAGE>
. obligations issued or guaranteed as to principal and interest
by the U.S. Government or by its agencies or instrumentalities;
. commercial paper rated at the time of purchase within the highest
rating category assigned by one or more unaffiliated nationally
recognized statistical rating organizations (each a "Rating Agency")
and corporate bonds rated at the time of purchase within one of the
two highest rating categories assigned by one or more Rating
Agencies;
. unrated commercial paper, corporate bonds and other instruments that
are of comparable quality as determined by the Adviser pursuant to
guidelines approved by the Company's Board of Directors;
. asset-backed securities rated at the time of purchase within the
highest rating category assigned by one or more Rating Agencies;
. obligations issued by state and local governmental bodies; and
. repurchase agreements relating to the above instruments.
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
-4-
<PAGE>
Adviser pursuant to guidelines approved by the
Company's Board of Directors.
See Appendix A for a description of applicable debt security ratings.
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.
-5-
<PAGE>
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."
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
-6-
<PAGE>
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.
Debt securities in which the Fund may invest include 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. Investments by
the Total Return Bond Fund in Brady Bonds are subject to the Fund's limitation
on foreign investments.
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").
-7-
<PAGE>
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 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
-8-
<PAGE>
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.
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
-----------------------------
-9-
<PAGE>
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 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
-10-
<PAGE>
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).
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 usually invests at least 65% of its
total assets among the principal types of investment grade municipal obligations
issued by the State of Maryland, its counties, municipalities, other taxing
districts and agencies. Risks associated with such municipal obligations vary by
type. For example, factors affecting the local economy of a particular county or
city may affect the investment quality of that county or city's general
obligation bonds without necessarily affecting the investment quality of the
general obligation bonds of the State of Maryland. Limited obligation revenue
bonds may fluctuate in investment quality due to economic factors affecting only
the particular revenue stream. For example, a downturn in the Maryland health
care sector or a downturn for a specific healthcare borrower might affect the
investment quality of Maryland hospital revenue bonds generally or might only
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affect a specific health care revenue bond issue. For another example, a sharp
change in prevailing mortgage interest rates could affect the investment quality
of housing mortgage revenue bonds. Risks associated with any type of municipal
obligations may be significantly reduced when such bonds have been pre-refunded,
or if such bonds are insured. Following is a general overview of the types of
municipal bonds held by the Maryland Tax-Exempt Bond Fund, together with a
discussion of some economic risks affecting such bonds.
As of May 31, 2000, the Maryland Tax-Exempt Bond Fund had
significant holdings in:
. General obligation bonds issued by the State of Maryland,
its counties, its two largest cities and certain other
agencies;
. Revenue bonds backed by certain public facility,
transportation or special tax revenue;
. Revenue bonds issued on behalf of private charitable
hospital or healthcare corporations, all of which were pre-
funded or escrowed to maturity;
. Revenue bonds issued on behalf of private colleges and
universities; and
. Housing revenue bonds.
State and local economic conditions affect the investment quality
and value of bonds held by the Maryland Tax-Exempt Bond Fund. Following is a
brief description of state-wide economic conditions derived from official
statements released on or before July 19, 2000, 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 5.2
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. primary
metropolitan statistical area 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 1999 was
3.6% compared to a national rate for the same period of 4.2%. Total employment
increased by 8.3% between 1991 and 1999. The State's personal income per capita
was the fifth highest in the nation in 1999, according to the U.S. Department of
Commerce, Bureau of Economic Analysis, at 112.8% of the national average.
Industry specific conditions may affect the investment quality
and value of revenue bonds. This paragraph discusses some of the major economic
factors affecting the principal types of revenue bonds currently held by the
Maryland Tax-Exempt Bond Fund. Water
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and sewer revenues are affected by trends in population and new construction.
Transportation facility revenues are affected by economic conditions generally
and by special factors such as rising energy prices. Revenues from private
healthcare corporations and hospitals are subject to federal and state
regulatory restrictions, Maryland State rate regulation and fluctuations in
federal and state reimbursement rates for Medicare and Medicaid. As of mid-year
2000, Maryland hospitals and healthcare corporations generally face a more
difficult operating environment than in previous years, due to revenue
constraints imposed by the Maryland Health Services Cost Review Commission. The
revenues of private colleges and universities are affected by enrollment demand
and cost pressures. Enrollment demand fluctuates with changes in the population
of college bound persons and with the state of the economy. Housing revenue
bonds are affected by the pace of housing starts, sales and refinancings, and by
the levels of mortgage rates generally and local housing demand.
To reduce risk, the Maryland Tax-Exempt Bond Fund allocates its
investments among the various types of Maryland municipal obligations, evaluates
the potential risks and rewards of all securities purchased, does not invest in
below-investment grade bonds, and includes some insured and pre-refunded bonds
in its portfolio.
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.
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Additional Information on Investment Policies and Risks
Quality and Maturity - Money Market Funds
-----------------------------------------
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,
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<PAGE>
such as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the entity's
obligations; still others, such as those of the Federal Home Loan Mortgage
Corporation, are backed solely by the issuer's credit. There is no assurance
that the U.S. Government would provide support to a U.S. Government-sponsored
entity were it not required to do so by law.
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 a Money
Market Fund must permit the Fund to demand payment of the principal of the
instrument at least
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<PAGE>
once every 397 days upon not more than 30 days' notice. Because of the absence
of a market in which to resell a variable or floating rate instrument, a Fund
might have trouble selling an instrument should the issuer default or during
periods when the Fund is not permitted by agreement to demand payment of the
instrument, and for this and other reasons a loss could occur with respect to
the instrument.
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
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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.
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.
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<PAGE>
To the extent these securities are illiquid, they will be subject to each Fund's
limitation on investments in illiquid securities.
In many cases, the Internal Revenue Service has not ruled on
whether the interest received on a municipal obligation is tax-exempt and,
accordingly, the purchase of such securities is based on the opinion of bond
counsel or counsel to the issuers of such instruments. The Company and the
Adviser rely on these opinions and do not intend to review the bases for them.
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
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<PAGE>
this Statement of Additional Information. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer."
An issuer's obligations under its municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws,
if any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on, and principal of, its municipal obligations may be
materially adversely affected by litigation or other conditions.
From time to time, proposals have been introduced before Congress
for the purpose of restricting or eliminating the federal income tax exemption
for interest on municipal obligations. For example, under federal tax
legislation enacted in 1986, interest on certain private activity bonds must be
included in an investor's federal alternative minimum taxable income, and
corporate investors must treat all tax-exempt interest as an item of tax
preference (see "Additional Information Concerning Taxes"). Moreover, with
respect to Maryland municipal obligations, the Maryland 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.
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The Funds intend to enter into stand-by commitments only with
banks, brokers or dealers which, in the Adviser's opinion, present minimal
credit risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information. Each
Fund's reliance upon the credit of these banks, brokers and dealers will be
secured by the value of the underlying municipal obligations that are subject to
the commitment.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. The acquisition of a stand-by commitment would not affect the
valuation or assumed maturity of the underlying municipal obligations. Stand-by
commitments acquired by a Fund would be valued 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
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of asset-backed securities differ from traditional debt securities. A major
difference is that the principal amount of the obligations may be prepaid at any
time because the underlying assets (i.e., loans) generally may be prepaid at any
time. The prepayment rate is primarily a function of current market rates and
conditions. In periods of falling interest rates, the rate of prepayment tends
to increase. During such periods, the reinvestment of prepayment proceeds by the
Fund will generally be at a lower rate than the rate on the prepaid obligation.
Prepayments may also result in some loss of the Fund's principal investment if
any premiums were paid. As a result of these yield characteristics, some high-
yielding asset-backed securities may have less potential for growth in value
than conventional bonds with comparable maturities. These characteristics may
result in a higher level of price volatility for these assets under certain
market conditions.
Asset-backed securities 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
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vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
Mortgage-Related Securities
---------------------------
The Diversified Real Estate, Limited Maturity Bond and Total
Return Bond Funds may invest in mortgage-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
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is a wholly-owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA certificates also are supported by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under its
guarantee. Mortgage-related securities issued by the Federal National Mortgage
Association ("FNMA") include FNMA guaranteed Mortgage Pass-Through Certificates
(also known as "Fannie Maes") which are solely the obligations of the FNMA, are
not backed by or entitled to the full faith and credit of the United States and
are supported by the right of the issuer to borrow from the Treasury. FNMA is a
government-sponsored organization owned entirely by private shareholders. Fannie
Maes are guaranteed as to timely payment of the principal and interest by FNMA.
Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation
("FHLMC") include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "Pcs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress, which is owned entirely by
Federal Home Loan Banks. Freddie Macs are not guaranteed by the United States or
by any Federal Home Loan Bank and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by the FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Although certain mortgage-related securities are guaranteed by a third
party or are otherwise similarly secured as described above, the market value of
the security, which may fluctuate, is not secured. To the extent that 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,
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during an economic downturn or a sustained period of rising interest rates,
issuers of high yield securities may be more likely to experience financial
stress, especially if such issuers are highly leveraged. During such periods,
such issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments, or the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of lower-rated securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
Lower-rated securities frequently have call or redemption features
which would permit an issuer to repurchase the security from a Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
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 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
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would, however, expose the Fund to possible loss because of adverse market
action or delays in connection with the disposition of the underlying
obligations. The Adviser (or Sub-Adviser in the case of the International Equity
Fund) will enter into repurchase agreements only with financial institutions it
deems creditworthy, 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
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liquidity and ability to manage its portfolio might be affected when it sets
aside cash or portfolio securities to cover such purchase commitments, the Funds
expect that their commitments to purchase securities on a when-issued or forward
commitment basis will not exceed 25% of the value of their total assets. In the
case of a forward commitment to sell portfolio securities, the Custodian will
hold the portfolio securities themselves in a segregated account while the
commitment is outstanding.
A Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
securities. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund involved
may realize a capital gain or loss.
When a Fund engages in when-issued or forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into account when determining a Fund's net asset value
starting on the day the Fund agrees to purchase the securities. A Fund does not
earn interest on the securities it has committed to purchase until they are paid
for and delivered on the settlement date. When a Fund makes a forward commitment
to sell securities it owns, the proceeds to be received upon settlement are
included in such Fund's assets, and fluctuations in the value of the underlying
securities are not reflected in such Fund's net asset value as long as the
commitment remains in effect.
Other Investment Companies
--------------------------
In 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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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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<PAGE>
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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<PAGE>
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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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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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 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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<PAGE>
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, 1998, May 31, 1999 and May
31, 2000.
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, 1998, May 31, 1999 and May 31,
2000, brokerage commissions of $89,596, $226,232 and $229,237, respectively,
were paid by the Growth & Income Fund and brokerage commissions of $239,061,
$290,323 and $742,166, respectively, were paid by the International Equity Fund.
There was a significant increase in the amount of brokerage commissions paid by
the International Equity Fund for the fiscal year ended May 31, 2000 as compared
to the amounts of brokerage commissions paid by the Fund for the fiscal year
ended May 31, 2000. See the discussion below concerning the increase in the
Fund's portfolio turnover rate as to the reasons for this increase is brokerage
commissions. During the fiscal period August 1, 1997 (commencement of
operations) through May 31, 1998 and the fiscal years ended May 31, 1999 and May
31, 2000, brokerage commissions of $14,747, $9,546 and $18,378, 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 years
ended May 31, 1999 and May 31, 2000, brokerage commissions of $34,028, $230,920
and $576,052, 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 years ended May 31, 1999 and May 31, 2000, brokerage commissions
of $11,412, $58,162 and $32,580, 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, 1998, May 31, 1999 and May 31, 2000, 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 and the fiscal years ended May 31, 1999 and May 31, 2000.
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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, 2000, the Funds paid no soft
dollar commissions.
With respect to the Money Market Funds, the Adviser may seek to obtain
an undertaking from issuers of commercial paper or dealers selling commercial
paper to consider the repurchase of such securities from the Money Market Funds
prior to their maturity at their original cost plus interest (interest may
sometimes be adjusted to reflect the actual maturity of the securities) if it
believes that the Funds' anticipated need for liquidity makes such action
desirable. Certain dealers (but not issuers) have charged, and may in the future
charge, a higher price for commercial paper where they undertake to repurchase
it prior to maturity. The payment of a higher price in order to obtain such an
undertaking reduces the yield which might otherwise be received by the Funds on
the commercial paper. The Adviser may pay a higher price for
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<PAGE>
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, 2000,
the Funds held securities issued by the "regular broker/dealers" of the Company
as follows: (1) the Prime Money Market Fund held securities of Bank of America
with a value of $20,000,000, Merrill Lynch with a value of $12,006,000, Morgan
Stanley with a value of $9,946,000, Goldman, Sachs & Co. with a value of
$9,909,000 and Wachovia with a value of $10,000,000; (2) the Growth & Income
Fund held securities of Goldman, Sachs & Co. with a value of $3,193,000 and
Morgan Stanley with a value of $3,913,000; (3) the Equity Income Fund held
securities of J.P. Morgan & Co. with a value of 3,933,000; and (4) the Equity
Growth Fund held securities of Morgan Stanley with a value of $1,036,000.
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 rate for
the International Equity Fund for the fiscal year ended May 31, 2000 from the
Fund's portfolio turnover rate for the fiscal year ended May 31, 1999 largely as
a result of two factors: (i) a determination by the Sub-Adviser to reduce the
total number of holdings in the portfolio to reflect more accurately the
increasingly concentrated nature of the international indices and to implement
the Sub-Adviser's strategy to manage a more focused and concentrated portfolio
and (ii) unusual market circumstances in which technology-related sectors were
extremely strong for much of the period, but reached a level at which it was
thought appropriate to reduce substantially the exposure to the sectors, which,
at their peak, accounted for over 25% of the Fund's benchmark index.
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<PAGE>
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 Maturity Bond Fund discussed in the relevant prospectus
and 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, National Tax-Exempt Bond Fund and Total Return Bond Fund discussed in the
relevant prospectus and 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 and 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
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<PAGE>
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 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.
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<PAGE>
8. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that (a) this investment limitation shall not
apply to 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 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
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<PAGE>
Agencies or are determined by the Adviser to be of comparable quality. A Fund
may not hold more than one such investment at any one time.
Although the foregoing investment limitations would permit the Growth
& Income, Diversified Real Estate, Limited Maturity Bond and Maryland Tax-Exempt
Bond Funds to invest in options, futures contracts and related options, as
specified above, such Funds do not currently intend to engage in such
transactions. Prior to engaging in such transactions, such Funds would add
appropriate disclosure concerning the Funds' investment in such instruments to
the relevant Prospectuses and this Statement of Additional Information.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Information on how to purchase and redeem a Fund's shares is included
in the Funds' Prospectuses. Shares of each Fund are sold on a continuous basis
by 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
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by Rule 18f-1 under the 1940 Act as a result of which the Company is obligated
to redeem shares, with respect to any one shareholder during any 90-day period,
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund at the beginning of the period.
NET ASSET VALUE
---------------
All Funds
---------
The net asset value per share of a Fund is calculated by dividing the
total value of the assets belonging to the Fund, less the liabilities of the
Fund, by the number of outstanding shares of the Fund. "Assets belonging to" a
Fund consist of the consideration received upon the issuance of shares of the
particular Fund together with all income, earnings, profits, and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, 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
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the extent reasonably practicable any such dilution or unfair results. These
steps may include selling portfolio instruments prior to maturity; shortening
the average portfolio maturity; withholding or reducing dividends; redeeming
shares in kind; reducing the number of outstanding shares without monetary
consideration; or utilizing a net asset value per share determined by using
available market quotations.
Non-Money Market Funds
----------------------
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.
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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 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.
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Growth & Income, Equity Income, Equity Growth, International Equity, Limited
----------------------------------------------------------------------------
Maturity Bond and Total Return Bond Funds
-----------------------------------------
With respect to the Growth & Income, Equity Income, Equity Growth,
International Equity, Limited Maturity Bond and Total Return Bond Funds, some
investments may be subject to special rules which govern the federal income tax
treatment of certain transactions denominated in terms of a currency other than
the U.S. dollar or determined by reference to the value of one or more
currencies other than the U.S. dollar. The types of transactions covered by the
special rules include the following: (1) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury regulations, preferred stock); (2) the accruing of certain
trade receivables and payables; and (3) the entering into or acquisition of any
forward contract, futures contract, option and similar financial instrument, if
such instrument is not subject to the mark-to-market rules under the Code. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules.
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
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<PAGE>
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 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. Moreover, if a Fund were to fail to make sufficient
distributions in a year, the Fund would be subject to corporate income taxes
and/or excise taxes in respect of the shortfall or, if the shortfall is large
enough, the Fund could be disqualified as a regulated investment company.
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
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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:
Principal Occupation
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
---------------- ------------ ----------------------
LESLIE B. DISHAROON* Chairman of the Retired; Director, Baltimore
11321 John Carroll Road Board and Gas & Electric Company; Director,
Owings Mills, MD 21117 President Travelers Inc. (diversified
Age: 67 financial services); Director, GRC
International, Inc. (technology
based services and products);
Director, Aegon USA, Inc. (holding
company-insurance).
DECATUR H. MILLER* Director and Retired.
26 Whitfield Road Treasurer
Baltimore, MD 21201
Age: 67
EDWARD D. MILLER Director Dean/Chief Executive Officer,
Johns Hopkins Medicine John Hopkins Medicine, January
720 Rutland Street 1997 to date; Interim Dean, Johns
Baltimore, MD 21205-2196 Hopkins Medicine, March 1996 to
Age: 57 January 1997; Chairman, Department
of Anesthesiology and Critical
Care Medicine, Johns Hopkins
University, July 1994 to date.
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: 66 Officer, National Geographic
Society May 1996 to March 1998.
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<PAGE>
Principal Occupation
Position with During Past 5 Years
Name and Address the Company and Other Affiliations
---------------- ------------ ----------------------
GEORGE R. PACKARD, III Director President, U.S. - Japan
U.S. Japan Foundation Foundation July 1998 to date;
145 East 32nd Street Visiting President,
York City, NY 10016 International University of
Age: 68 Japan, 1994 to date; Former
Dean, School of Advanced
International Studies at The
Johns Hopkins University;
Director, Offitbank (private
bank).
W. BRUCE McCONNEL Secretary Partner of the law firm of
One Logan Square Drinker Biddle & Reath LLP,
18/th/ & Cherry Streets Philadelphia, Pennsylvania.
Philadelphia, PA 19103-6996
Age: 57
___________________
* 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, 2000, the Company paid or accrued for the
account of its Directors as a group, for services in all capacities, a total of
$107,000. 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, 2000:
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS FROM THE
COMPENSATION ACCRUED AS COMPANY AND
NAME OF FROM THE PART OF FUND COMPLEX*
PERSON/POSITION COMPANY COMPANY PAID TO
EXPENSES DIRECTORS
Leslie B. Disharoon $29,000 N/A $29,000
Chairman of the Board of
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Directors and President
Decatur H. Miller $21,500 N/A $21,500
Director and Treasurer
Edward D. Miller, M.D. $17,500 N/A $17,500
Director
John R. Murphy $21,500 N/A $21,500
Director
George R. Packard, III $17,500 N/A $17,500
Director
* The "Fund Complex" consists solely of the Company.
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" or the "Sub-Adviser")
acts as sub-adviser for the International Equity Fund and is located at 7 Castle
Street, Edinburgh, EH2-3AH, Scotland. 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.
The Company, Adviser and Sub-Adviser have adopted codes of ethics under
Rule 17j-1 of the 1940 Act that permit personnel subject to their particular
code of ethics to invest in securities, including securities that may be
purchased or held by the Funds.
Advisory and Sub-Advisory Services
----------------------------------
Mercantile serves as investment adviser to the Funds pursuant to an
Advisory Agreement dated July 24, 1998. 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
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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, 2000, May 31, 1999 and May 31, 1998, (i)
the Company paid advisory fees, net of waivers, of $1,152,468, $1,129,207 and
$962,316, respectively, with respect to the Prime Money Market Fund; $963,062,
$941,416 and $825,313, respectively, with respect to the Government Money Market
Fund; and $353,220, $254,389 and $198,496, respectively, with respect to the
Tax-Exempt Money Market Fund; and (ii) the Adviser voluntarily waived fees of
$100,215, $98,192 and $40,097, respectively, with respect to the Prime Money
Market Fund; $131,327, $128,375 and $71,766, respectively, with respect to the
Government Money Market Fund; and $48,166, $34,689 and $17,260, respectively,
with respect to the Tax-Exempt Money Market Fund.
For the fiscal years ended May 31, 2000, May 31, 1999 and May 31, 1998, (i)
the Company paid advisory fees, net of waivers, of $2,269,935, $1,938,714 and
$767,215, respectively, with respect to the Growth & Income Fund; $747,127,
$574,593 and $610,879, respectively, with respect to the International Equity
Fund; $413,233, $382,295 and $63,788, respectively, with respect to the Limited
Maturity Bond Fund; and $49,354, $28,495 and $6,676, respectively, with respect
to the Maryland Tax-Exempt Bond Fund; and (ii) the Adviser voluntarily waived
fees of $445,855, $411,721 and $297,277, respectively, with respect to the
Growth & Income Fund; $72,803, $70,270 and $50,027, respectively, with respect
to the International Equity Fund; $156,329, $171,586 and $88,067, respectively,
with respect to the Limited Maturity Bond Fund; and $95,499, $83,180 and
$44,200, respectively, with respect to the Maryland Tax-Exempt Bond Fund.
For the fiscal years ended May 31, 2000, May 31, 1999 and the fiscal period
August 1, 1997 (commencement of operations) through May 31, 1998 (i) the Company
paid
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advisory fees, net of waivers, of $44,027, $22,159 and $0, respectively, with
respect to the Diversified Real Estate Fund; and (ii) the Adviser voluntarily
waived fees of $30,336, $28,021 and $39,899, respectively, with respect to the
Diversified Real Estate Fund.
For the fiscal years ended May 31, 2000, 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 $1,299,743, $1,478,563 and $372,016,
respectively, with respect to the Equity Income Fund; $284,474, $154,380 and
$27,570, respectively, with respect to the Equity Growth Fund; $260,561,
$235,007 and $50,019, respectively, with respect to the Total Return Bond Fund;
$192,414, $202,771 and $48,852, respectively, with respect to the Intermediate
Tax-Exempt Bond Fund; and $418,650, $399,048 and $91,231, respectively, with
respect to the National Tax-Exempt Bond Fund; and (ii) the Adviser voluntarily
waived fees of $271,976, $353,844 and $129,579, respectively, with respect to
the Equity Income Fund; $74,714, $73,751 and $26,666, respectively, with respect
to the Equity Growth Fund; $153,968, $138,868 and $38,983, respectively, with
respect to the Total Return Bond Fund; $244,980, $258,071 and $73,932,
respectively, with respect to the Intermediate Tax-Exempt Bond Fund; and
$453,537, $501,170 and $130,803, respectively, with respect to the National Tax-
Exempt Bond Fund.
For the fiscal years ended May 31, 2000, May 31, 1999 and May 31, 1998, (i)
the Adviser paid the Sub-Adviser sub-advisory fees, net of waivers, of $420,259,
$323,380 and $343,620, respectively, and (ii) the Sub-Adviser waived sub-
advisory fees of $40,952, $39,355 and $28,140, 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, 2001 and the Sub-Advisory Agreement will continue in effect
until July 20, 2001. 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 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
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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 assists 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.
The Company has established a line of credit with Fifth Third Bank with
respect to all Funds except the International Equity Fund. The line of credit,
which is in an uncommitted aggregate amount of $25 million, may be accessed by
the Funds for temporary or emergency purposes only. Each Fund may borrow up to
10% of its respective net assets. If a Fund's borrowings under the line of
credit exceed 5% of its net assets that Fund may not purchase additional
securities. Borrowings under the line of credit bear interest at the overnight
Federal Funds rate plus 0.50% per annum.
-53-
<PAGE>
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, 2001, 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 and is responsible for all filings with state
securities commission in connection with the registration qualification of the
Funds' shares ("blue sky services.")
Compensation of Administrator, Custodians, Transfer and Dividend Disbursing
---------------------------------------------------------------------------
Agent and Fund Accountant and Blue Sky Agent
--------------------------------------------
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. As compensation for blue sky
servies provided, BISYS Ohio is entitled to recive an annual fee per state
permit, and a per check fee, plus out-of-pocket expenses.
For the fiscal years ended May 31, 2000, May 31, 1999 and May 31, 1998, (i)
the Company paid fees, net of waivers, of $2,602,469, $2,305,354 and $1,186,121,
respectively, to Mercantile for administrative services provided to the Funds;
and (ii) Mercantile voluntarily waived fees of $594,625, $714,858 and $573,843,
respectively.
-54-
<PAGE>
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 meetings; 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, 2000 Commerce Square, 2001 Market Street, Suite
1700, Philadelphia, Pennsylvania 19103, serve as independent accountants for the
Company. The financial statements which are incorporated by reference into this
Statement of Additional Information have been audited by PricewaterhouseCoopers
LLP, whose report thereon is also incorporated by reference into this Statement
of Additional Information, and have been incorporated by reference herein in
reliance on the report of PricewaterhouseCoopers LLP given upon their authority
as experts in accounting and auditing.
COUNSEL
-------
Drinker Biddle & Reath LLP, One Logan Square, 18th & Cherry Streets,
Philadelphia, Pennsylvania 19103, serves as counsel to the Company and will pass
upon certain legal matters on behalf of the Company.
-55-
<PAGE>
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, 400,000,000 shares are classified as Class O Common Stock representing
shares of the Intermediate Tax-Exempt Bond Fund and 400,000,000 shares are
classified as Class P Common Stock representing shares of the Capital
Opportunities 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.
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.
-56-
<PAGE>
Shareholders of the Funds, as well as those of the Capital Opportunities
Fund and 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 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.
-57-
<PAGE>
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, 2000,
the yield for each of the Money Market Funds was as follows: Prime Money Market
Fund, 6.00%; Government Money Market Fund, 5.85%; and Tax-Exempt Money Market
Fund, 3.84%. For the seven-day period ended May 31, 2000, the effective yield
for each of the Money Market Funds was as follows: Prime Money Market Fund,
6.18%; Government Money Market Fund, 6.02%; and Tax-Exempt Money Market Fund,
3.91%.
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, 2000, the tax-equivalent yield for the Tax-Exempt Money Market Fund was
6.36% (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 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.
-58-
<PAGE>
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 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
-59-
<PAGE>
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.
For the 30-day period ended May 31, 2000, the yield for the Growth &
Income Fund was 0.60%; for the Equity Income Fund was 1.54%; for the Equity
Growth Fund was 0.37%; for the Diversified Real Estate Fund was 6.72%; for the
Limited Maturity Bond Fund was 6.42%; for the Total Return Bond Fund was 6.71%;
for the Maryland Tax-Exempt Bond Fund was 4.86% and the tax-equivalent yield was
8.05%; for the Intermediate Tax-Exempt Bond
-60-
<PAGE>
Fund was 4.65% and the tax-equivalent yield was 7.70%; and for the National Tax-
Exempt Bond Fund was 4.91% and the tax-equivalent yield was 8.13%.
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
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.
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, 2000
were 12.11%, 21.73%, 3.42% and -0.87%, respectively; for the five years ended
May 31, 2000 were 21.42%, 11.26%, 5.32% and 4.27%, respectively; and for the
period from the commencement of operations
-61-
<PAGE>
through May 31, 2000 were 16.42%, 10.90%, 5.97% and 5.02%, 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, 2000 were 12.11%, 21.73%, 3.42% and -0.87%, respectively;
for the five-year period ended May 31, 1999 were 163.88%, 70.50%, 29.59% and
23.23%, respectively; and for the period from the commencement of operations to
May 31, 2000 were 308.81%, 104.52%, 70.70% and 47.95%, 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, 2000
and for the period from the commencement of operations through May 31, 2000 were
1.59% and 1.42%, 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, 2000 were -10.98%, 17.94%, 2.55%, 0.64% and -0.55%, respectively; and for
the period from the commencement of operations through May 31, 2000 were 2.18%,
19.52%, 3.88%, 2.78% and 2.43%, respectively. The aggregate total returns for
the Diversified Real Estate Fund for the one-year period ended May 31, 2000 and
for the period from the commencement of operations through May 31, 2000 were
1.59% and 4.07%, 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,
2000 were -10.98%, 17.94%, 2.55%, 0.64% and -0.55%, respectively; and for the
period from the commencement of operations through May 31, 2000 were 4.98%,
49.41%, 8.96%, 6.38% and 5.57%, respectively.
The Growth & Income Fund commenced operations on February 28, 1991.
The Limited Maturity Bond Fund commenced operations on March 14, 1991. The
Maryland Tax-Exempt Bond Fund commenced operations on June 2, 1992. The
International Equity Fund commenced operations on July 2, 1993. The Diversified
Real Estate Fund commenced operations on August 1, 1997. The Equity Income,
Equity Growth, Total Return Bond, Intermediate Tax-Exempt Bond and National Tax-
Exempt Bond Funds commenced operations on March 1, 1998.
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.
-62-
<PAGE>
Hypothetical Performance Information
------------------------------------
In addition to providing performance information that demonstrates the
actual yield or return of a particular Fund over a particular period of time,
the Tax-Exempt Money Market Fund, Maryland Tax-Exempt Bond Fund, Intermediate
Tax-Exempt Bond Fund or National Tax Exempt Bond Fund may provide certain other
information demonstrating hypothetical yields or returns. For example, the table
below illustrates the approximate yield that a taxable investment must earn at
various income brackets to produce after-tax yields equivalent to those of tax-
exempt investments yielding from 4.00% to 6.50%. The yields below are for
illustration purposes only and are not intended to represent current or future
yields for the Tax-Exempt Money Market 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, 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-$ 26,250 $ 0-$ 43,850 15% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
$ 26,251-$ 63,550 $ 43,851-$105,950 28% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
$ 63,551-$132,600 $105,951-$161,450 31% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
$132,601-$288,350 $161,451-$288,350 36% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
Over $288,350 Over $288,350 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 2000 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.
-63-
<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-$ 26,250 $ 3,000-$ 43,850 21.18% 5.07% 5.71% 6.34% 6.98% 7.61% 8.25%
$ 26,251-$ 63,550 $ 43,851-$105,950 33.24% 5.99% 6.74% 7.49% 8.24% 8.99% 9.74%
$ 63,551-$132,600 $105,951-$161,450 36.02% 6.25% 7.03% 7.81% 8.60% 9.38% 10.16%
$132,601-$288,350 $161,451-$288,350 40.66% 6.74% 7.58% 8.43% 9.27% 10.11% 10.95%
Over $288,350 Over $288,350 43.99% 7.14% 8.03% 8.93% 9.82% 10.71% 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. The fund's yield fluctuates as
market conditions change. The tax brackets and related yield calculations are
based on the 2000 federal marginal tax rates, and assume a federal tax benefit
for state and local taxes. For 2000, the Maryland maximum state tax rate is
4.85%. The Maryland county tax is assumed to be at least one-half the state rate
which is applicable in all counties except Howard County, 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.
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, 2000 were 5.87%,
6.56%, 4.49%, 4.14% and 4.90%, 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
-64-
<PAGE>
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, 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.
-65-
<PAGE>
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 August 11, 2000, 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 August 11, 2000, 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) Equity Growth Fund:
Mercantile-Safe Deposit & Trust, Company Pension, Two Hopkins Plaza, Baltimore,
MD 21201 (6.28%); (2) Diversified Real Estate Fund: Mercantile-Safe Deposit &
Trust, Company Pension, Two Hopkins Plaza, Baltimore, MD 21201 (46.03%) and The
Walters Art Gallery, Attn. Harold Stephens, Controller, 600 North Charles
Street, Baltimore, MD 21201-5118 (7.37%); (3) Limited Maturity Bond Fund: C.R.
Daniels, Inc., Profit Sharing, c/o Mercantile-Safe Deposit & Trust, Two Hopkins
Plaza, Baltimore, MD 21201 (5.83%); (4) Tax-Exempt Money Market Fund: Reliable
Liquors, Inc., 2200 Winchester Street, Baltimore, MD 21216 (6.36%) and Frank E.
Dimick, 1912 Liberty Road, Eldersburg, MD 21784 (6.31%); and (5) Capital
Opportunities Fund: Mercantile-Safe Deposit & Trust, Company Pension, Two
Hopkins Plaza, Baltimore, MD 21201 (70.10%).
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, 2000 (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 opinion of the
creditworthiness of an obligor with respect to financial obligations 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.
Local Currency and Foreign Currency Risks
-----------------------------------------
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign obligations may be
lower than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished from local
A-1
<PAGE>
currency issuer ratings to identify those instances where sovereign risks make
them different for the same issuer.
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 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.
Fitch 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 for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best 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.
A-2
<PAGE>
"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 a
capacity for meeting financial commitments which is highly uncertain and 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 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.
A-3
<PAGE>
"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.
"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.
A-4
<PAGE>
- 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" - The `r' highlights obligations that Standard & Poor's believes have
significant noncredit risks. Examples of such obligations are securities with
principal or interest return indexed to equities, commodities, or currencies;
certain swaps and options; and interest-only and principal-only mortgage
securities. The absence of an `r' symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in total return.
- N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long-
term 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" - Bonds are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
A-5
<PAGE>
"B" - Bonds are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa " - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
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 ratings used by Fitch 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.
A-6
<PAGE>
"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. This is the lowest investment grade category.
"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.
"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" and "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 ratings
from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major
rating categories.
- `NR' indicates the Fitch does not rate the issuer or issue in question.
- `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
A-7
<PAGE>
- RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
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.
"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" - A rating of "BB" suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated "CCC" clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated "CCC" and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in default.
A-8
<PAGE>
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
----------------------
A Standard and Poor's note 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:
"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. Margins of
protection 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.
A-9
<PAGE>
"SG" - This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
A-10
<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 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
B-1
<PAGE>
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 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.
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<PAGE>
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 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.
B-3
<PAGE>
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 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
B-6
<PAGE>
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 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.
B-7
<PAGE>
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 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.
B-8
<PAGE>
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).
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
B-9
<PAGE>
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 Post-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.
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<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 herein by
reference to Exhibit (1)(i) of Post-Effective Amendment
No. 22 to the Registrant's Registration Statement filed
on July 31, 1998.
(10) Articles Supplementary dated March 23, 2000 and
recorded in the State of Maryland on March 27, 2000 are
incorporated herein by reference to Exhibit (a)(10) of
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement filed on April 14, 2000.
(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 Registrant'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
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<PAGE>
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 Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(d) (1) Advisory Agreement dated as of July 24, 1998 between
Registrant and Mercantile-Safe Deposit and Trust
Company with respect to the Prime Money Market Fund,
Government Money Market Fund, Tax-Exempt Money Market
Fund, Growth & Income Fund, International Equity Fund,
Limited Maturity Bond Fund, Maryland Tax-Exempt Bond
Fund, Diversified Real Estate Fund, Equity Income Fund,
Equity Growth Fund, Total Return Bond Fund, National
Tax-Exempt Bond Fund and Intermediate Tax-Exempt Bond
Fund 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.
(2) Addendum No. 1 dated July 5, 2000 to Advisory Agreement
between Registrant and Mercantile-Safe Deposit and
Trust Company with respect to the Capital Opportunities
Fund.
(3) Sub-Advisory Agreement dated as of March 19, 1996
between Mercantile-Safe Deposit and Trust Company and
CastleInternational Asset Management Limited (now
BlackRock International Ltd.) with respect to the
International Equity Fund is incorporated herein by
reference to Exhibit (5)(f) of Post-Effective Amendment
No. 19 to the Registrant's Registration Statement filed
on September 26, 1997.
(4) Sub-Advisory Agreement dated July 5, 2000 between
Registrant and Delaware Management Company with respect
to the Capital Opportunities Fund.
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<PAGE>
(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 (6)(c) of Post-Effective Amendment No. 22 to
the Registrant's Registration Statement filed on July
31, 1998.
(3) Amendment dated July 5, 2000 to Schedule A of
Distribution Agreement between Registrant and BISYS
Fund Services (f/k/a The Winsbury Company) dated
October 1, 1993 with respect to the Capital
Opportunities Fund.
(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) Global Custody Addendum dated June 1, 2000 to Custody
Agreement between Registrant and Fifth Third Bank.
(3) Foreign Custody Manager Addendum dated June 1, 2000 to
Custody Agreement between Registrant and Fifth Third
Bank.
(4) Letter Agreement dated July 28, 1997 supplementing the
Custody Agreement between Registrant and Fifth Third
Bank is incorporated herein by reference to Exhibit
(8)(b) of Post-Effective Amendment No. 19 to the
Registrant's Registration Statement filed on September
26, 1997.
C-4
<PAGE>
(5) 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.
(6) Letter Agreement dated July 5, 2000 supplementing the
Custody Agreement between Registrant and Fifth Third
Bank with respect to the Capital Opportunities Fund.
(7) 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.
(8) 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 is incorporated herein by
reference to Exhibit (g)(5) of Post-Effective Amendment
No. 23 to the Registrant's Registration Statement filed
on July 30, 1999.
(h) (1) Transfer Agency Agreement dated August 23, 1999 between
Registrant and BISYS Fund Services, Ohio, Inc is
incorporated herein by reference to Exhibit (h)(1) of
Post-Effective Amendment No. 24 to the Registrant's
Registration Statement filed on September 28, 1999.
(2) Addendum No. 1 dated July 5, 2000 to Transfer Agency
Agreement between Registrant and BISYS Fund Services,
Ohio, Inc. with respect to the Capital Opportunities
Fund.
C-5
<PAGE>
(3) 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.
(4) 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 July 31, 1998.
(5) Amendment dated July 5, 2000 to Schedule A of
Administration Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company with respect
to the Capital Opportunities Fund.
(6) Fund Accounting Agreement between Registrant and The
Winsbury Service Corporation, dated October 1, 1993 is
incorporated herein by reference to Exhibit (9)(g) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(7) 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.
(8) Amendment dated July 5, 2000 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) with respect to the Capital
Opportunities Fund.
(9) Blue Sky Services Agreement dated August 23, 1999
between Registrant and BISYS Fund Services, Ohio, Inc.
is incorporated herein by reference to Exhibit (h)(9)
of Post-Effective Amendment No. 25 to the Registrant's
Registration Statement filed on April 14, 2000.
C-6
<PAGE>
(10) Revolving Credit Agreement dated April 29, 1999 between
Registrant and The Fifth Third Bank is incorporated
herein by reference to Exhibit (h)(13) of Post-
Effective Amendment No. 23 to the Registrant's
Registration Statement filed on July 30, 1999.
(i) (1) Opinion and Consent of Counsel dated September 28, 2000
is incorporated herein by reference to Exhibit (i) of
Post-Effective Amendment No. 24 to the Registrant's
Registration Statement filed on September 28, 1999.
(2) Opinion and Consent of Counsel dated April 14, 2000, is
incorporated herein by reference to Exhibit (i) of
Post-Effective Amendment No. 25 to Registrant's
Registration Statement filed on April 14, 2000.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(2) Consent of PricewaterhouseCoopers 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.
(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
C-7
<PAGE>
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 filed on July 31, 1998.
(8) Purchase Agreement dated July 3, 2000 between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Capital Opportunities Fund.
(m) None.
(n) None.
(o) None.
(p) (1) Code of Ethics of the Registrant.
(2) Code of Ethics of Mercantile-Safe Deposit & Trust
Company.
C-8
<PAGE>
(3) Code of Ethics of Delaware Management Company, a series
of Delaware Management Business Trust.
(4) Code of Ethics of BlackRock International Ltd.
Item 24. Persons Controlled by or under Common Control
with Registrant.
---------------------------------------------
Inapplicable.
Item 25. Indemnification.
---------------
Indemnification of Registrant's Adviser against certain losses is
provided for in Section 6 of the Advisory Agreement incorporated herein by
reference as Exhibit (d)(1). Indemnification of the Registrant's Administrator
is provided for in Section 4 of the Administration Agreement incorporated herein
by reference as Exhibit (h)(3); 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 fullest extent
permitted by the Maryland General Corporation Law. The Corporation
shall indemnify and advance expenses to its officers to the same
extent as its directors and to such further extent as is consistent
with law. The Board of Directors may by Bylaw, resolution, or
agreement make further provision for indemnification of directors,
officers, employees, and agents to the fullest extent permitted by the
Maryland General Corporation Law.
(c) No provision of this Article shall be effective to protect or
purport to protect any director or officer of the Corporation against
any liability to the Corporation or its security holders to which he
would otherwise be subject by
C-9
<PAGE>
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his
office.
(d) References to the Maryland General Corporation Law in this
Article are to the law as from time to time amended. No further
amendment to the Articles of Incorporation of the Corporation shall
affect any right of any person under this Article based on any event,
omission, or proceeding prior to such amendment.
Section 6.2 of the Registrant's Bylaws incorporated herein by
reference as Exhibit (b)(1) provides further as follows:
Indemnification of Directors and Officers.
-----------------------------------------
(a) Indemnification. The Corporation shall indemnify its directors to
---------------
the fullest extent permitted by the Maryland General Corporation Law.
The Corporation shall indemnify its officers to the same extent as its
directors and to such further extent as is consistent with law. The
Corporation shall indemnify its directors and officers who while
serving as directors or officers also serve at the request of the
Corporation as a director, officer, partner, trustee, employee, agent,
or fiduciary of another corporation, partnership, joint venture,
trust, other enterprise, or employee benefit plan to the same extent
as its directors and, in the case of officers, to such further extent
as is consistent with law. This Article shall not protect any such
person against any liability to the Corporation or any stockholder
thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office
("disabling conduct").
(b) Advances. Any current or former director or officer of the
--------
Corporation claiming indemnification within the scope of this Section
6.2 shall be entitled to advances from the Corporation for payment of
the reasonable expenses incurred by him in connection with the
proceedings to which he is a party in the manner and to the full
extent permissible under applicable state corporation laws, the
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
C-10
<PAGE>
otherwise, both as to action by a director or officer of the
Corporation in his official capacity and as to action by such person
in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators
of such a person.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
Item 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 Position 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, and Chief Executive Board, President and Chief
Officer Executive Officer of
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
Director Public Utilities Holding
Constellation Energy Company
Group, Inc.
P.O. Box 1475
Baltimore, MD 21203
Director Freight Transportation
CSX Corp.
1 James Center
Richmond, VA 23219
Director Insurance
The Saint Paul Companies
385 Westminster Street
St. Paul, MN 55102
Cynthia A. Archer Director Senior Vice President, Specialty Retailer
Williams-Sonoma, Inc.
3250 Van Ness Ave.
San Francisco, CA 94109
Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Richard O. Berndt
Partner Law Firm
Gallagher, Evelius & Jones,
LLP
The Park Charles Building
Suite 400
218 North Charles Street
Baltimore, MD 21201
</TABLE>
C-12
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
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 University
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
Director Medical/Drugs
Guilford Pharmaceuticals,
Inc.
6611 Tributary St.
Baltimore, MD 21224
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
Director Oil Industry
Crown Central Petroleum
Corp.
1 N. Charles Street
Baltimore, MD 21203
Darrell D. Friedman Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President and Chief Charitable Organization
Executive Officer
THE ASSOCIATED:
Jewish Community
Federation of Baltimore
101 W. Mt. Royal Ave.
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 Public Utilities Holding
Constellation Energy Company
Group, Inc.
P.O. Box 1475
Baltimore, MD 21203
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>
C-14
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
President and Chief Diversified Media Company
Operating Officer
Lee Enterprises, Inc.
215 N. Main St.
Davenport, IA 52801
Robert A. Kinsley Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman and Chief General Construction
Executive Officer
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, LLP
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
Mortin B. Plant Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Chairman Stainless Steel Recycling
Keywell Corporation Company
7600 Rolling Mill Road
Baltimore, MD 21224
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
---- ------------------------- -------------------------- ----------------
<S> <C> <C> <C>
Christian H. Poindexter Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director, Chairman of the Public Utilities Holding
Board and Chief Company
Executive Officer
Constellation Energy
Group, Inc.
P.O. Box 1475
Baltimore, MD 21203
J. Marshall Reid Director, President and None
Chief Operating Officer
Donald J. Shepard Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President and Chief Executive Insurance Holding Company
Officer
AEGON USA, Inc.
1111 N. Charles Street
Baltimore, MD 21201
Member of the Executive Board Insurance
AEGON, N.V.
1111 N. Charles Street
Baltimore, MD 21202 21201
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. Siegmann 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>
Terry L. Troupe Chief Financial Officer Chief Financial Officer and Bank Holding Company
Treasurer
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Malcolm C. Wilson Executive Vice President None
Frederica 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 26 with
respect to each director and officer of BlackRock is incorporated herein by
reference to Form ADV and Schedules A and D filed by BlackRock with the
Securities and Exchange Commission (File No. 801-51087).
(c) Delaware Management Company, a series of Delaware Management
Business Trust ("DMBT"), serves as sub-adviser to the Capital Opportunities
Fund. DMBT is a Delaware business trust registered under the Investment Advisers
Act of 1940. The information required by this Item 26 with respect to each
director and officer of DMBT is incorporated herein by reference to Form ADV and
Schedules A and D filed by DMBT with the Securities and Exchange Commission
(File No. 801-32108).
Item 27. Principal Underwriter.
----------------------
(a) BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
("BISYS") acts as distributor for Registrant. BISYS and its affiliates currently
serve as distributor of Alpine Equity Trust, American Independence Funds Trust,
American Performance Funds, AmSouth Funds, The BB&T Mutual Funds Group, The
Coventry Group, The Eureka Funds, Fifth Third Funds, Governor Funds, Hirtle
Callaghan Trust, HSBC Funds Trust and HSBC Mutual Funds Trust, The Infinity
Mutual Funds, Inc., Magna Funds, Mercantile Mutual Funds, Inc. (formerly known
as The ARCH Fund, Inc.), Metamarkets.com, Meyers Investment Trust, MMA Praxis
Mutual Funds, M.S.D. & T. Funds, Pacific Capital Funds, Republic Advisor Funds
Trust, Republic Funds Trust, Summit Investment Trust, USAllianz Funds, USAllianz
Funds Variable Insurance Products Trust, Variable Insurance Funds, The Victory
Portfolios, The Victory
C-17
<PAGE>
Variable Insurance Funds, Vintage Mutual Funds, Inc. and WHATIFI Funds each of
which is a management investment company.
(b) To the best of Registrant's knowledge, the partners of BISYS are as
follows:
Name and Principal Positions and
Business Positions and Offices with
Address Offices with BISYS Registrant
------------------ ------------------ -------------
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
(c) 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 EH3-3AH
(records relating to its functions as sub-adviser to
Registrant's International Equity Fund)
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
(records relating to its functions as sub-adviser to
Registrant's Capital Opportunities Fund)
C-18
<PAGE>
Fifth Third Bank
Fifth Third Center
Cincinnati, Ohio 45263
(records relating to its functions as custodian)
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, Ohio 43219-3035
(records relating to its functions as transfer agent and 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, Pennsylvania 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.
C-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all the requirements for effectiveness of this Post-Effective Amendment
No. 27 to its Registration Statement under Rule 485(b) under the Securities Act
of 1933 and has duly caused this Post-Effective Amendment No. 27 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
1st day of September, 2000.
M.S.D. & T. FUNDS, INC.
(Registrant)
*/s/ Leslie B. Disharoon
------------------------
Leslie B. Disharoon
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 27 to Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*/s/ Leslie B. Disharoon Chairman of the September 1, 2000
-----------------------------
Leslie B. Disharoon Board and President
*/s/ Decatur H. Miller Director and Treasurer September 1, 2000
-----------------------------
Decatur H. Miller (Principal Financial
and Accounting Officer)
*/s/ Edward D. Miller Director September 1, 2000
-----------------------------
Edward D. Miller
*/s/ John R. Murphy Director September 1, 2000
-----------------------------
John R. Murphy
*/s/ George R. Packard, III Director September 1, 2000
-----------------------------
George R. Packard, III
*By: /s/ Linda A. Durkin
--------------------
Linda A. Durkin
Attorney-in-fact
</TABLE>
<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 of
1986, as amended, and any rules, regulations, or requirements of the Securities
and Exchange Commission with respect to the Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Company any and all amendments (including post-effective amendments) to
the Company's Registration Statement(s) pursuant to the Acts filed with the
Securities and Exchange Commission, and any other instruments or documents
related thereto; and each said attorney and agent shall have full power and
authority to do and perform in the name and on behalf of the undersigned
director and/or officer of the Company, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned director and/or officer of the
Company might or could do in person; and the undersigned does hereby ratify and
confirm all that each said attorney and agent shall do or cause to be done by
virtue hereof.
/s/ Decatur H. Miller
-------------------------------
Decatur H. Miller
Date: 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 Code of 1986, as amended, and any rules, regulations, or requirements of
the Securities and Exchange Commission with respect to the Acts, including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign in the name and on behalf of the undersigned as a director
and/or officer of the Company any and all amendments (including post-effective
amendments) to the Company's Registration Statement(s) pursuant to the Acts
filed with the Securities and Exchange Commission, and any other instruments or
documents related thereto; and each said attorney and agent shall have full
power and authority to do and perform in the name and on behalf of the
undersigned director and/or officer of the Company, in any and all capacities,
every act whatsoever requisite or necessary to be done in the premises, as fully
and to all intents and purposes as the undersigned director and/or officer of
the Company might or could do in person; and the undersigned does hereby ratify
and confirm all that each said attorney and agent shall do or cause to be done
by virtue hereof.
/s/ George R. Packard, III
------------------------------
George R. Packard, III
Date: 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 that 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
1986, as amended, and any rules, regulations, or requirements of the Securities
and Exchange Commission with respect to the Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director and/or officer
of the Company any and all amendments (including post-effective amendments) to
the Company's Registration Statement(s) pursuant to the Acts filed with the
Securities and Exchange Commission, and any other instruments or documents
related thereto; and each said attorney and agent shall have full power and
authority to do and perform in the name and on behalf of the undersigned
director and/or officer of the Company, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as the undersigned director and/or officer of the
Company might or could do in person; and the undersigned does hereby ratify and
confirm all that each said attorney and agent shall do or cause to be done by
virtue hereof.
/s/ John R. Murphy
---------------------------
John R. Murphy
Date: July 23, 1999
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
(d)(2) Addendum No. 1 dated July 5, 2000 to Advisory
Agreement between Registrant and Mercantile-Safe
Deposit and Trust Company with respect to the
Capital Opportunities Fund.
(d)(4) Sub-Advisory Agreement dated July 5, 2000 between
Registrant and Delaware Management Company with
respect to the Capital Opportunities Fund.
(e)(3) Amendment dated July 5, 2000 to Schedule A of
Distribution Agreement between Registrant and
BISYS Fund Services (f/k/a The Winsbury Company)
with respect to the Capital Opportunities Fund.
(g)(2) Global Custody Addendum dated June 1, 2000 to
Custody Agreement between Registrant and Fifth
Third Bank.
(g)(3) Foreign Custody Manager Addendum dated June 1,
2000 to Custody Agreement between Registrant and
Fifth Third Bank.
(g)(4) Letter Agreement dated July 5, 2000 supplementing
the Custody Agreement between Registrant and Fifth
Third Bank with respect to the Capital
Opportunities Fund.
(h)(2) Addendum No. 1 dated July 5, 2000 to Transfer
Agency Agreement between Registrant and BISYS Fund
Services, Ohio, Inc. with respect to the Capital
Opportunities Fund.
(h)(5) Amendment dated July 5, 2000 to Schedule A of
Administration Agreement between Registrant and
Mercantile-Safe Deposit and Trust Company with
respect to the Capital Opportunities Fund.
<PAGE>
Exhibit No. Description
----------- -----------
(h)(8) Amendment dated July 5, 2000 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) with
respect to the Capital Opportunities Fund.
(j)(1) Consent of Drinker Biddle & Reath LLP.
(j)(2) Consent of PricewaterhouseCoopers LLP.
(l)(8) Purchase Agreement dated July 3, 2000 between
Registrant and BISYS Fund Services Ohio, Inc. with
respect to the Capital Opportunities Fund.
(p)(1) Code of Ethics of the Registrant.
(p)(2) Code of Ethics of Mercantile-Safe Deposit & Trust
Company.
(p)(3) Code of Ethics of Delaware Management Company, a
series of Delaware Management Business Trust.
(p)(4) Code of Ethics of BlackRock International Ltd.
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